Bureau of Internal Revenue Cumulative Bulletin 1940-2

SP CI L, TT NTION s drected t0 cautonary notce on ths page that pub-
_ shed rungs of the ureau do not have the force and effect
of Treasury Decsons and that they are appcabe ony to facts presented n the pubshed case
Treasury Department : : : : : ureau of Interna Revenue
Interna Revenue uetn
Cumuatve uetn 1940-2
ULY-D C M R, 1940
IN T IS ISSU
Page
Introductory Notes I
Contents - II
Rungs Nos. 10305-10548
oard of Ta ppeas 1-14
Income Ta
Part I ( . Interna Revenue Code and 1939 and
1940 cts . 1938 ct) 15-177
Part II (1937 and 193 cts) 178-194
Part III (1935 and 1934 or Pror cts) .... 195-237
mpoyment Ta es 238-281
Msceaneous Ta es
state and Gft Ta es 282-297
Capta Stock Ta es 298-299
Saes Ta es, Stamp Ta es, etc. ...... 300-384
Msceaneous Rungs 385- 00
Inde 01- 15
The ratngs reported d the Interna Revenue uetn are for the nformaton of ta payers and ther coonse as
shovng the trend of offca opnon n the admnstraton of the ureau ot Interna Revenue the rungs other than
Treasury Decsons have none of the force or effect of Treasury Decsons and do not commt the Department to
any nterpretaton of the aw whch has not keen formay approved and promugated by the Secretary of tho
Treasury- ach rung embodes the admnstratve appcaton of the aw and Treasury Decsons to the entro
state of facts upon whch partcuar case rests. If s especay to be noted that the same resut w not neces-
sary be reached n another case uness a the matera facts are dentca wth those of the reported case. s t s
at aways feasbe to pubsh a compete statement of the facts underyng eacb rung, there can be no assurance
tha any new case s dentca wth the reported case. s bearng out ths dstncton, t may be observed that the
rungs pubshed trom tme to tme may appear to reverse rungs prevousy pubshed.
Otucer ef the creau s Interna Revenue are especay cautoned aganst reachng a concuson n any esse
merey on the bass of smarty to a pubshed rung, and shoud base ther |udgment on the appcaton of a per-
tnent provsons of the aw and Treasury Decsons to a the facts n each case. These rungs nhond be used as
ds n stndyng the aw and ts forma constructon as made n the reguatons and Treasury Decsons prevousy
ssued.
In addton to pubshng a Interna Revenue Treasury Decsons, t s the pocy of the ureau of Interna Revenue
a pubsh a rungs and decsons, ncudng opnons of the Chef Counse for the ureau of Interna
Revenue, whch, because they announce a rung or decson upon a nove queston or upon a queston n regard
ta whch there e sts no prevousy pubshed rung or decson, or for other reasons, are of such mportance as
to be of genera nterest It s aso the pocy of the ureau to pubsh a rungs or decsons whch revoke, modfy,
amend, or affect n any manner whatever any pubshed rung or decson. In many nstances opnons of the
Chef Counse for the ureau of Interna Revenue are not of genera nterest because they announce
no new rung or no new constructon of the revenue aws but smpy appy rungs aready made pubc to certan
stuatons of tact whch are wthout speca sgnfcance. It s not the pocy of the ureau to pubsh such opnons.
Therefore, the numbers assgned to the pubshed opnons of the Chef Counse for the ureau of
Interna Revenae are not consecutve. No unpubshed rung or decson w he cted or reed upon by any offcer
r empoyee of the ureau of Interna Revenue as a precedent n the dsposton of other cases- Uness otherwse
tpecfcary ndcated, a pubshed rungs and decsons have receved the consderaton and approva of the
Chef Counse for the ureau of Interna Revenue
UNIT D ST T S GO RNM NT PRINTING O IC : W S INGTON : 1941
Isf asb by tka Superntendent of Documents, Washngton, D. C - m See back of tte for prce
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The Interna Revenue uetn servce for 1941 w consst of
weeky buetns and semannua cumuatve buetns.
The weeky buetns w contan the rungs and decsons to be
made pubc and a Treasury Department decsons (known as Treas-
ury decsons) pertanng to Interna Revenue matters. The sem-
annua cumuatve buetns w contan a rungs and decsons
(ncudng Treasury decsons) pubshed durng the prevous s
months.
The compete uetn servce may be obtaned, on a subscrpton
bass, from the Superntendent of Documents, Government Prntng
Offce, Washngton, D. C, for 3 per year foregn, 4.25. Snge
copes of the weeky uetn, 5 cents each.
New subscrbers and others desrng to obtan the 1919, 1920, and
1021 Income Ta Servce may do so from the Superntendent of Docu-
ments at prces as foows: Dgest of Income Ta Rungs No. 19
(contanng dgests of a rungs appearng n Cumuatve uetns
1 to 5, ncusve), 50 cents per copy: Cumuatve uetns Nos. 1 to 5,
contanng n fu a rungs pubshed snce pr, 1919, to and n-
cudng December, 1921, as foows: No. 1, 30 cents No. 2, 25 cents
No. 3, 30 cents No. 4, 30 cents No. 5, 25 cents.
Persons desrng to obtan the Saes Ta Cumuatve uetns for
anuary- une and uy-December, 1921, may procure them from the
Superntendent of Documents at 5 cents per copy.
Persons desrng to obtan the Interna Revenue uetn servce for
the years 1922 to 1940, ncusve, may do so at prces as foows:
Year.
Cumuatve uetn.
rst months. Second months.
1922
1923
1924
1925
192
1927
1928
1929
1930
1931
1932
1933
1934
1935
193
1937
1938
1939
1940
1-2
II-2
III- 2
I - 2
-2
I-2
II-2
III-2
I -2
-2
I-2
I1-2
I11-2
I -2
-2
1937- 2
1938- 2
1940-1
1939- 2
1940- 2
Persons desrng to obtan the servce n dgest form mav do so at
prces as foows: Dgest No. 13 (1922-1924), 0 cents Dgest No. 17
(1925), 25 cents Dgest No. 21 (192 ), 15 cents Dgest No. 22 (1925-
1927), 35 cents and Dgest (ncome ta rungs ony, pr, 1919, to
December, 1930, ncusve), 1.50.
nqures n regard to these pubcatons and subscrptons shoud
be sent to the Superntendent of Documents, Government Prntng
Offce, Washngton, D. C.
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INTRODUCTORY NOT S.
The Interna Revenue Cumuatve uetn 1940-2, n addton to
a decsons of the Treasury Department (caed Treasury decsons)
pertanng to Interna Revenue matters, contans opnons of the
Chef Counse, and rungs and decsons pertanng to ncome, estate,
gft, saes, capta stock, e cess profts, empoyment, soca securty, and
msceaneous ta es, as ndcated on the tte page of ths uetn, pub-
shed n the weeky uetns (1940, Nos. 27 to 53, ncusve) for the
perod uy 1 to December 31, 940. It aso contans a cumuatve
st of announcements reatng to decsons of the Unted States oard
of Ta ppeas pubshed n the Interna Revenue uetn Servce
from anuary 1 to December 31, 1940.
Income Ta rungs are prnted n three parts. The rungs n
Part I are prnted as Part I, (Interna Revenue Code and Revenue
cts of 1939 and 1940) and (Revenue ct of 1938), the aw-
headngs correspondng wth the sectons of the Code and 1939 and
1938 cts, respectvey, and the reguatons headngs correspondng
wth the secton headngs of Reguatons 103 and the artce headngs
of Reguatons 101. Rungs under the Revenue cts of 1937 and 193
are prnted as Part II, the aw headngs correspondng wth the
secton headngs of those cts and the reguatons headngs corre-
spondng wth the artce headngs of Reguatons 94. Rungs
under the Revenue cts of 1935 and 1934 or pror cts are prnted
as Part III, the aw headngs correspondng wth the secton head-
ngs of the Revenue ct of 1934 and the reguatons headngs cor-
respondng wth the artce headngs of Reguatons 8 .
Rungs under Ttes III and I of the Soca Securty ct and
under Subchapters and C, Chapter 9, of the Interna Revenue
Code n force pror to anuary 1, 1940, are pubshed under artce
headngs of Reguatons 91 and 90, respectvey rungs under Sub-
chapters and C, Chapter 9, of the Code n force on or after anuary
1, 1940, are pubshed under the secton headngs of Reguatons 10
and 107, respectvey rungs under the Carrers Ta ng ct of 1937.
and under Subchapter , Chapter 9, of the Code are pubshed
under the artce headngs of Reguatons 100 and rungs under
Tte III of the Revenue ct of 193 Ta on un|ust enrchment
are coded under the sectons of that ct and the artce headngs
of Reguatons 95.
R I TIONS.
The foowng abbrevatons are used throughout the uetn:
, , C, etc. The names of ndvduas.
. R. M. Commttee on ppeas and Revew memorandum.
. R. R. Commttee on ppeas and Revew recommendaton.
. T. coho Ta Unt.
. T. . oard of Ta ppeas.
C. . Cumuatve uetn.
Ct. D. Court decson.
C. S. T Capta Stock Ta Dvson.
C. T. Ta es on mpoyment by Carrers.
D. C. Treasury Department crcuar.
(IID
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I
. T. state Ta Dvson.
G. C. M. Genera Counse s, ssstant Genera Counse s, or Chef Counse s
memorandum.
T. R. . Interna Revenue uetn,
I. T. -Income Ta Unt.
M, N, , Y, Z, etc. The names of corporatons, paces, or busnesses, accord-
ng to conte t.
Mm. Mmeographed etter.
MS. Msceaneous Dvson.
O. or L. O. Soctor s aw opnon.
O. D. Offce decson.
Op. . G. Opnon of the ttorney Genera.
P. T. Processng Ta Dvson.
S. T. -Saes Ta Dvson.
S. Sver Ta Dvson.
S. M. Soctor s memorandum.
So. Op. Soctor s opnon.
S. R. Soctor s recommendaton.
S. S. T. Ta es on mpoyment by others than Carrers.
T. Tobacco Dvson.
T. . M. dvsory Ta oard memorandum.
T. . R. dvsory Ta oard recommendaton.
T. D. Treasury decson.
and y are used to represent certan numbers, and when used wth the word
doars represent sums of money.
The practce of promugatng Treasury Decsons that embody
court decsons reatng to the nterna revenue has been dscontnued.
ereafter opnons of the courts, wth approprate headnotes for the
nformaton and gudance of ta payers and offcers and empoyees of
the ureau of Interna Revenue, w be pubshed n the Interna
Revenue uetn wthout forma approva and promugaton by the
Secretary of the Treasury.
NNOUNC M NT R L TING TO O RD O T PP LS D CISIONS.
Under the provsons of the recent Revenue cts, reatng to ap-
peas to the oard of Ta ppeas, the Commssoner may acquesce
n the decson of the oard or he may, f the appea was heard by
the oard pror to the passage of the 192 ct, cause to be nsttuted
a proceedng n court for the coecton of any part of a ta deter-
mned by the Commssoner to be due but dsaowed by the oard,
provded that such proceedng s commenced wthn one year after
fna decson of the oard. s to appeas heard by the oard after
the passage of the 192 ct, the Commssoner may, wthn s months
after the oard s decson s rendered, fe a petton for a revew of
the decson by a Crcut Court of ppeas or by the Unted States
Court of ppeas for the Dstrct of Coumba however, as to dec-
sons rendered on and after une 7, 1932, pettons for revew must be
fed wthn three months after the decson s rendered. In order
that ta payers and the genera pubc may be nformed as to whether
or not the Commssoner has acquesced n a decson of the oard of
Ta ppeas dsaowng a ta determned by the Commssoner to be
due, announcement w be made n the weeky uetn at the earest
practcabe date. notce that the Commssoner has acquesced or
has nonacquesced n a oard decson reates, however, ony to the
ssue or ssues decded n favor of the ta payer. Decsons so ac-
quesced n shoud be reed upon by offcers and empoyees of the
ureau of Interna Revenue as precedents n the dsposton of other
cases before the ureau.
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CONT NTS.
Rung.
Treasury decsons:
4975
487
4S77.
4978
4979
4980
4981
4984
4998.
4999..
5000.
5001.
5010...
5011
5012
013
014
015
501
017..
018.
019..
5020..
5021.
5023
024
1459.
14 0.
14 1..
14 3.
14 0..
1470..
1471...
1472..
1473..
1474-.
1475..
1478._
Rur|g No.
Page.
Rung.
Rung No.
Page.
Chef Counse s memoranda:
1940-27-10313
43
21873.
194O-3O-10342
223
1940-27-10314
3 1
2205
1940-27-10308
189
1940-27-10315
377
2211
1940-33-10382
100
1940-28-10317
75
22120
1940-28-10318
98
1940-28-10322
138
22132._
1940-27-10310
333
1940-28-10323
42
221 3..
1940-28-10324
7
1940-29-10.(28
2
221 9
1940-30-1034
328
1910-29-10338
42
22204..
1940-38-10421
81
1910-30-10351
298
22207
1940-32-10375
325
1940-31-103C1
299
22224
1940-34-10394
21
1940-31-103 2
349
22239.
1940-35-10399
105
1940-31-103 3
310
22218 _
1940-3 -10407
192
1940-31-103 4
340
22272
1940-41-10449
214
1940-31-103 5
322
22314
1940-4 -10485
157
1940-31-10355
97
22315
1940-41-10451
332
1940-31-103 8
30
2232
1940-4 -1048
159
1910-31-103 9
92
22383.
1940-49-10507
227
1910-31-10371
317
22393
1940-50-10521
33
1940-32-10378
374
22404
1940-49-10505
204
1940-32-10380
379
22419
1940-51-10527
288
1940-33-10385
282
22454
194O-52-10M2
210
1940-33-1038
295
oard of Ta ppeas:
1940-33-10388
345
59270
1940-30-10340
8
1940-33-10387
300
150
1940-27-10305
2
1940-33-10389
170
75931
1940-40-10434
10
1940-33-1039U
397
77419...
1940-38-10420
1940-34-1039
372
77420.
194O-38-1O420
1910-34-10397
374
81391
1940-38-10420
1940-35-10401
107
81392
1940-38-10420
5
1940-35-10403
419
82231
1940-10-10434
2, 10
1940-3 -10413
424
825 5.
1940-28-1031
10
1940-39-10432
3 8
84192
1940-40-10434
2
1940-39-10433
3 1
84193
1940-10-10434
2
1940-40-10440
28
1940-10-10434
2
1940-40-10442
427
1940-4O-10434
2
1940-40-10441
293
8419
1940-40-104.14
2
1940-11-1044
15
1940-40-10434
2
1910-42-10457
41
85905
1940-48-10493
13
1940-42-10458
42
8 380
1940-4 -10483
,12
1940-43-104 4
428
80394
1940-4 -10483
13.14
1940-44-10473
147
8G395
1940-4 -10483
11, 12.
1940-44-10474
119
13
1940-45-10479
2
8 R04
1940-38-10420
5
1940-45-10482
173
1940-38-10420
1940-47-10490
95
87873
1940-30-10404
14
1940-18-10501
118
87889
1940-50-10515
4
1940-18-10502
350
88048
1940-3 -10404
14
1940-19-10510
275
88151
1940 43-10459
8
1940-50-10520
429
88997
1940-49-10503
14
1940-52-10538
110
891 9
1940-12-10452
1940-53-10547
172
89 50...
1840-3 -10404
14
194O-53-10548
42
89720
194O-2 -1031
13
90391
1940-38-10420
11
90515...
1940 39-10427
13
194O-27-10309
291
9O041
1940-27-10305
2
194O-28-10320
35
90 5
1940-35-10398
3
1940 30-10344
273
90827
1040-29-10327
10
1940-32-10374
435
90974-
1940-39-10427
4
194O-34-10305
313
81170
1840-51-10524
13
1940-3 -10408
19
81171
1940-51-10524
13
1940-39-10431
352
81753
1940-32-10372
4
1940-48-10498
199
81831
1940-32-10372
4,8
1940-48-1049
180
82001
1910-39-10427
11
1940-18-10497
181
92055
1940-39-10427
2
1940-48-10499
225
92245
1940-41-10445
14
1940-18-10500
228
82278
1940-31-10353
1940-49-10512
359
82 29
1940-29-10327
10
194O-50-1O51S
20
82857...
1910-34-10392
1940-50-10519
209
92955
1940-33-10381
5, 12
1940-51-1052
184
9295
194O-33-10381
. 12
1940- 2-10534
211
82057
1940-33-10381
3,11
194O-52-10537
234
82958
1940-33-10381
8.11
1940-52-10530
1940-52-10539
1940-52-10540
233
82959
1940-33-10381
8,11
218
82900
1940-37-10414
11
220
83050
1940-33-10381
,13
( )
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II
Rung.
Rung No.
1910-30-10345
1 40-31-I03.r 8
1940-32-1037
1940-32-10377
1940-3 -10409
1940-3 -10410
1940-37-10418
1940-42-104.5
1940-50-10523
1940-50-1(1522
1940-52-10535
1940-27-10312
1940-31-103
1940-3 -10412
1940-40-10444
1940-45-10481
1940-49-10514
1940-27-10311
1940-31-103 0
1940-35-10402
1940-40-10443
1940-44-10471
1940-49-10513
1940-53-10545
1940-29-10331
1940-29-10332
Page.
830
824
330
320
305
327
81
342
309
315
331
438
439
440
441
44
M
444
444
444
44:,
445
445
44
31
343
Rung.
M Imeographs Contnued
0 7
4075
807
083
SOW)
091
094
8107
8109
121
140
8142
Msceaneous.
Rung No.
1940-29-10333
194O-31-1035
1940-31-10359
1940-31-103 7
1910-33-10383
1940-35-10400
1940-3 -10405
1940-40-10437
1940-40-10439
1940 45 II7S
194O-53-105I3
194O-53-10544
1940-2S-10321
1940-29-10335
1940-29-1033
1940-29-10337
1940-30-10347
1940-30-10348
1940-30-10349
194O-3O-I0352
1940-32-10379
1940-42-10455
1940-43-104 2
1940-43-104 3
1940-44-10470
1940-44-10472
1940-45-10480
1940-47-10491
1940-51-10528
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CONT NTS O CUMUL TI ULL TINS (I. T.) 1 to 5 S. T. O 1920 ND 1921 INT RN L
R NU 1-1, 1-2. II-, 11-2. m-I. III-2. I -1. I -2. -. -2. I-1, -2. II-1, vn-2. I-L
n-2. I -1, I -2. -. -2. I-1, -2. II-1. II-2. III-1. III 2. I -1. 1 -2. -1. -2. U37-L.
1937-2. 1938-1. 1938-2. 1939-1 (P RT 1 ND P RT 2). 19 9-2, 1940-1. ND 1940-2.
Cumuatve uetn.
Income Ta :
December, 1919 (No. 1)
anuary- une, 1920 (No. 2)
uv-December, 1920 (No. 3).
anuary- une, 1921 (No. 4)
uy-December, 1921 (No. 5)
Saes Ta :
1920 (S. T. 1-20)
anuarv- une, 1921
uy-December, 1921 -
Interna Revenue uetn:
anuarv- une, 1922 (No. 1-1)
uv-December, 1922 (No. 1-2)-
anuarv- une, 1923 (No. II-) --
uv-December, 1923 (No. II-2)
anuarv- une, 1924 (No. III-)
uv-December, 1924 (No. I 2) -.
anuarv- une, 1925 (No. I -1)
uy-December, 1925 (No. I -2)
anuarv- une, 192 (No. -)
uy-December, 192 (No. -2)
anuarv- une, 1927 (No. I-1)
uv-December, 1927 (No. I-2)
anuarv- une, 1928 (No. II-1)
uv-December, 1928 (No. II-2)
anuarv- une, 1929 (No. III-1)
uv-December, 1929 (No. III-2) -
uv-December, 1930 (No. I -2)
anuarv- une, 1931 (No. -)
uy-December, 1931 (No. -2)
anuarv- une, 1932 (No. I-1)
uv-December, 1932 (No. I-2)
anuarv- une, 1933 (No. II-1)
uy-December, 1933 (No. II-2)
anuarv- une, 1934 (No. III-1) -.
uy-December, 1934 (No. III-2)
uy-December, 1935 (No. I -2)
anuarv- une, 193 (No. -1)
uv-December, 193 (No. -2)
anuarv- une, 1937 (1937-1)
uy-December, 1937 (1937-2)
anuarv- une, 1938 (1938-1)
uy-December, 1938 (1938-2)-
anuarv- une, 1939 (1939-1 Part 1 and Part 2)
uy-December, 1939 (1939-2)
anuarv- une (1940-1)
uy-December (1940-2) --
( III)
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O RD O T PP LS.
CUMUL TI LIST O NNOUNC M NTS R L TING TO
D CISIONS O T UNIT D ST T S O RD O T
PP LS PU LIS D IN T INT RN L R NU UL-
L TIN S R IC ROM NU RY 1, 1940, TO D C M R
31, 1940, INCLUSI .
nnouncements reatng to the acquescence or nonacquescence of the Commssoner n
decsons of the Unted States oard of Ta pnea s, as pubshed n the weeky Interna
Revenue uetns from December 22, 1924, to December 31, 1931, ncusve, are prnted In
Cumuatve uetn -2, pages 1-10 . Those prnted n weeky uetns from anuary 1,1932,
to December 31, 1939, ncusve, are pubshed In Cumuatve uetn 1939-2, pages 1-73. The
st beow, therefore, contans ony such announcements pubshed n the weeky uetns
from anuary 1,1940, to December 31, 1940, ncusve.
1940-53-10541
The Commssoner acquesces n the foowng decsons of the
Unted States oard of Ta ppeas:
Docket
No.
oard of Ta ppeas.
oume.
Page.
bbott, ohn, e ecutor of estate of Rchard .
Traser 1
ffated nterprses, Inc.1
en, Laura, estate of
mercan Socety of Cnematofrraphers, Inc
nderson, ohn, transferee of estate of rank O.
urrdge
pe rewng Co., Inc
ppeby, ohn S.4
ugustus, zabeth G
.
aker, Inc., mert
echer, arret obrook..
enaga et u ., rthur 8
ack Motor Co., Inc
91958
9 03
89703
9 411
93334
91977
94080
9 0 1
923
94401
94S79
87 38
97232
90452
9048
90487
41
42
40
42
n
40
11
40
40
42
3
41
40
40
228
390
721
75
944
1109
18
1200
554
33
838
300
881
891
ondhoders Commttee
rgps- an Co
rookman, Murray
1 cquescence reates ony to the oard s mathematca formua for apportonment of the dvdend credt
between the estate and the dstrbutees.
1 cquescence reates ony to the ssue, What amounts consttute reasonabe aowance for sendees per-
formed n 1935 and 193 by the wves of the two prncpa offcers of the eorporuon
1 state ta decson.
cquescence reates ony to the ssue, Was the sum of 150 whch was added by the Commssoner to
ohn S. ppeby s ncome, ta abe to hm
1 N onacqueseence pubshed n Cumuatve uetn 1938-1 .page 35, wthdrawn.
cquescence does not reate to ssue respectng bases for deprecaton ofpettoners assets.
Rung No. 10541 ncudes a acquescence and nonacquescence notces pubshed n the Interna Rev-
tune uetn servce from anu ary 1, 1940, to December 31,1940.
(1)
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2
cquf.scences Contnued.
Ta payer.
C.
Caneo, arry .
Carey Trust (Seconc
Carter, Shrey, estate of.
Cavett et a., ., e ecutors of estate of W. T.
aes 1
Cherokee Co
Caborne et a., ustn Legh, e ecutors of the
estate of Laura en
Cohen Testamentary Trust, oe C
Coumba O Gas Co.
Combs Lumber Co
Cook Drng Co.
Cooedge, Norman
Cooper, ugene ., admnstrator of the estate of
Lews . Cooper
Cooper, Lews P., estate of
Cooperatve Insurance
Cooperatve Power Pant
Crabb, Doores
Crawford Musc Corporaton
D.
Daas Tte Guaranty Co. 5
Dashe, C. R.
Davson- oseph Campau Reaty Co., Inc.
Docket
No.
Dean, Mason L.
Dcarng, Roy ., estate of 8
Dearng, R. . estate of, and trust estate
Dcarng, Mrs. R. .8
Dearng et u ., Ws R. 8
Dearng, Ws R., e ecutor of estate of Roy
Dearng
Dearng,
.
fnng, Ws R., e ecutor
estate, of R. . Dcarng 8__
of estate and trust
Deube, George .
Doenz, nton
150
90 41
93 11
93917
93208
939 2
89703
9 231
90 24
91543
82231
92289
94088
94088
95292
95291
95002
85389
88290
904
7505
973
1205
9832
84195
84193
84194
8419
84192
84197
84195
84193
84194
92055
95044
93311
oard of Ta 1
oume.
41
41
40
40
41
40
42
41
41
38
40
40
40
41
41
41
40
40
3
41
35
3
3
3
3
3
3
42
41
cquescence s ony as to the s ue, Do certan dvdends decared and credted on the stock of the
Loca udng and Loan ssocaton and made avaabe to the pettoners n anuary, 1935, but apped
by them acanst the purchase of stock n the I ea edera Savngs and Loan ssocaton nto whch the
budng and oan assocaton was converted, represent Income n 1935 sub|ect to norma ta and surta
state ta decson.
cquescence does not reate to Issue pertanng to aocaton of cost of equpment on the property m
q e c ucsccncc reates ony to the ssue, whether the far market vaue of future o payments, under the
drng and sae of ease contracts, shoud be Incuded n gross ncome of pettoner for the year 193 Pre-
vous acquescence pubshed n Cumuatve uetn 1939-2, page 8, affrmed as to ths Issue ony.
cquescence reates ony to the ssue whether or not pettoner Is an nsurance company as that term
s used n secton 0 c)2 of the Revenue ct of 1934.
Nonacquescence pubshed n Cumuatve uetn 1937-2, page 3 , wthdrawn.
f pror nonacquescence pubshed In Cumuatve uetn 1937-2, page 3 , wthdrawn,
Pror nonacquescence pubshed In Cumuatve uetn 1938-1, page 39, wthdrawn.
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4
:
4

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8
8
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3
3
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3
cquescences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Doar, gnes arr
Doar, . arod, estate of
Doar, Robert II, et a., e ecutors of estate of .
arod Doar. -
.
verson Corporaton 1
usts, ugustus .2
vans, Mary .8
erree, C. .
rst Mortgage onds .
sh, Isaac, estate of
eschmann, Raou _.
.
emng, Mrs. nna Maud
emng- mbe Corporaton
emng, Wam
oreman, rank C
rend, enry, estate of
rend et a., Mton ., trustees of estate of enry
rend
G. . R. O Corporaton
Gardner, . Ws 7 8
Gayord, Inc., Robert
George ros. Co
Gmore, een, estate of, transferee of estate of
rank O. urrdge
Graff, verett D
Grm, Cfford D
Gump, fred S., estate of 10
Gump et a., Came R., e ecutors of estate of -
fred S. Gump 10
97283
98728
972S2
98727
97282
98727
93281
71 37
95527
1542
90452
9048
90487
9 527
90305
92958
94 90
92959
92957
94 89
93915
90 72
91415
90 72
91415
92 04
92115
9 953
93248
93231
92212
93919
90 5
90 5
41
41
41
40
30
42
32
40
42
40
41
41
41
40
40
40
40
41
41
41
40
40
40
42
42
1 cquescence reates ony to the ssue Invovng the far market vaue of certan pedged coatera on
the date of ts surrender.
Pror nonacquescence pubshed n Cumuatve uetn I -2, page SO (1935), wthdrawn.
1 cquescence reates to a Issues e cept as to the deductbty of attorney s fees and abstract fees In-
curred ncdenta to the estabshment of forfeture of a ease and obtanng repossesson of the eased premses.
Nonacquescence pubshed n Cumuatve uetn I -2. page 30 (1935). w thdrawn.
cquescence does not reate to ssue respectng bases for deprecaton of pettoners assets.
cquescence reates ony to the foowng ssues: (a) Dd each of the communtes of ay mbe and
wfe and Wam emng and wfe constructvey receve o payments of 0,848,115 and r 3,401.35, respec-
tvey, for 1934 and 1935 from the ernng- nbe Corporaton, and ( ) was a certan 4,000 reservaton n
connecton wth the transfer by Wam emng n 193 of a easehod nterest n the cter ease,
tc, ta abe to the pettoners
Gft ta decson.
cquescence reates ony to the Issue, If the benefcares of a certan trust be treated as donees, were
the gfts made to them gfts of present nterests or future nterests
1 cquescence s as to resut ony.
state ta decson.
G
e
n
e
r
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d

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2
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1
3
-
0
1
-
2
2

0
4
:
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2
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2
7
/
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3
0
0
0
0
0
8
8
9
3
3
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2
0
P
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#
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e
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
aes, George .1
aea, Mrs. Oneta 1
aes, r., W. T.1
aes, W. T., estate of 1
arrs Trust Savngs ank et a., e ecutors of es-
tate of Isaac sh
awaan Trust Co., Ltd., trustee of oe Cohen
Testamentary Trust
eer, dward . _.
ggns, ugene
rsch, L.
ooper, ames P., estate of54 -
ooper, Mathde ., admnstratr of estate of
ames P. ooper
oover, erbert W
opkns, Wam R
ote stora, Inc. 5
oward et a., George dams, e ecutors of estate of
Grace dams oward
oward, Grace dams, estate of
uey Php ardware Co.-
umme-Ross bre Corporaton
umphreys, Murray
yde, Mdred ., estate of
yde, Suffok erks, Marguerte
yde, Ws O., admnstrator of estate of Mdred
. yde
oe Co
ohnston, . dward
ones, Carre L., estate of 3_
.
93210
93209
93211
93208
9 527
9 231
94794
94795
80052
859 1
95782
8577
8577
90974
91753
97230
99851
99851
92801
93077
87899
95182
81417
93257
95182
9 535
937 8
91831
40
40
40
40
42
42
41
39
42
41
41
42
41
42
42
42
40
40
42
42
40
12
41
41
41
aufmann, oe W 95082 41
aufmann, Mdred 95083 41
eer, Charotte 9302 41
esser O Gas Co 93041 41
esau Petroeum Corporaton 957 0 42
cquescence Is ony as to the Issuo, Do certan dvdends decared and credted on the stock of the
Loca undng and Loan ssocaton and made avaabe to the pettoners n anuary, 1935, but apped
by them aganst the purchase of stock In the Loca edera Savngs and Loan ssocaton nto whch th
budng and oan assocaton was converted, represent ncome n 1035 sub|ect to norma ta and surta
cquescence reates to the Issue pertanng to the trust for the pettoner s mnor son manue.
1 state ta decson.
cquescence reates ony to the determnaton of the vaue of the stock of Wam . ooper Sons
Co. on ugust 3,1933.
cquescence Is as to resut ony.
cquescence on the foowng Issue Is as to resut ony: In determnng the net Income of a trust cur-
renty dstrbutabe to the benefcares, shoud there be Incuded the rent due under a ong-term ease,
the essee havng mproved the premses wth an offce budng whch woud become the essor s property
on forfeture, the trust on the accrua bass havng accrued the rent but aso havng charged t to a reserve
for uncoected rents
G
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n
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r
a
t
e
d

f
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n

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)

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2
0
1
3
-
0
1
-
2
2

0
4
:
4

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p
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a
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2
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2
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3
0
0
0
0
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8
8
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3
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2
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#
p
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e
5
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
mbe, ay 1
mbe, Mrs. ema
nowes, dwn C. ._
Legs , Mdred Sheppard, estate of a_
Letts, r., rthur
Lyon, Incorporated..
M.
MacConaughey, arry
Macon, Dubn Savannah Raroad Co.
Ma|estc O Corporaton
Marborough ouse, Inc., et a.4.
Marborough Investment Co.4.
Marthe, Louse, transferee of estate of rank 0.
urrdge
Martn, Thomas W
McCormac, Gertrude ., trustee for . . Mc-
Cormac, r
McCormac, r., . . (trust)
McLean et u ., Marrs.
Medca Dagnostc ssocaton..
Mbank, Dunevy 5
Mooney ectrc Co.
Moock ectrc Suppy Co., The.
Morton, rthur
Mott, Dee urey 7
Myers, George R
9295
94 74
92955
94 73
91495
89942
92857
93858
9 54
99832
92052
90592
9 380
90452
9048
90487
90452
9048
90487
93333
9391
93920
93920
77419
77420
81391
81392
8G804
8 805
94402
94403
9 5 3
93050
9 07
9 284
91494
71903
94704
41
41
40
40
41
42
41
40
42
40
40
40
40
40
40
41
42
41
42
4 1
41
3. )
42
1 cquescence reates ony to the foowng Issues: (a)
feand Wam emng and wfe constructvey rec
Dd each of the communtes of ay mbe and
o payments of aO.MS.fS and .401.3, , respee-
Irtdy, for 1934 and 1935 from the emng- mbe Conoraton, and (o) was a certan 4,1 10 reservaton n
connecton wth the transfer by Wam emng n 193 of a ease-hod nterest n the Rchter ease,
tc., Unabe to the pettoners
1 state ta decson.
1 cquescence reates to a Issues e cept the Issue, Ts the petonpr entted to a IMf oss deducton for
toe undeprecated cost of certan casng and other ease equpment whch coud not be removed from a certan
o we whch the pettoner ceased to operato, durng that year, because such operaton had become un-
proftabe
1 cquescence does not reate to ssue respectng bases for deprecaton of pettoners assets.
cquescence Is ony wth respect to the ta abty of the Income from the wfe s trust.
cquescence reates ony to the deductbty n It ft of the amount pad to the rst Natona ank of
St. Loua n connecton wth the qudaton of the raukn m rcan Trust Co., such acquescence beng
ny Is the resut.
Nonacquescence pubshed In Cumuatve uetn 1937-1, page 43, wthdrawn.
G
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r
a
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e
d

f
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)

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2
0
1
3
-
0
1
-
2
2

0
4
:
4

G
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:
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a
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7
/
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3
0
0
0
0
0
8
8
9
3
3
7
2
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c tr sc NC S Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
N.
Nchos, . C
Norweb, mery May odcn 1
O.
Ortz, ce duPont
0 Su an Rubber Co., Inc. (n dssouton)
P.
Patton, T.
Peck Peck (New York)
Peck Peck Corporaton, The
Perkns, Raph3
Perce, D. W
Pttsburg Canners, Inc
Punkett, Theodore R
Porter et a., . oward, trustees, dentfed as
Porter Propertes Trustees, Ltd
Porter Propertes Trustees, Ltd
Pupn, Mchae I., estate of4 4
R.
Rosenstock, nna, ndvduay and as e ecutr of
estate of Isaac M. Rosenstock
Rosenstock, Isaac M., estate of
Ross, ndrew .
Rotorte Corporaton
Rowey, dward G., transferee of estate of rank
O. urrdge
8.
Safe Depost Trust Co. of atmore, e ecutor of
estate of Mdred Sheppard Legg 4
St. Lous Unon Trust Co. et a., e ecutors of estate
of Carre L. ones 4
Schey et u ., uan Larcombe
Seavey arshem rokerage Co
Second Carev Trust
Shamrock O Gas Co
Sharp et u ., . Cec
Sheden Land Co.7
Shenandoah aey Natona ank (Shrey Carter
estate)
891 9
92575
93159
97399
93918
99288
99314
9 12
92278
935 0
94017
957 2
957 2
92177
91 8
91 8
9 470
88 0
93332
89942
91831
99404
91 18
93 11
98588
97425
9742
9319
93917
42
41
42
42
40
42
42
41
41
41
41
43
42
38
41
41
41
40
40
40
41
42
41
41
42
42
43
40
Gft ta decson.
1 cquescence reates ony to the ssue, whether the pettoner s entted to any deducton as the resut
of the satsfacton of the defct e stng n her husband s brokerage accounts at the end of the year 1934.
1 cquescence reates ony to the ssue, Was the pettoner entted to a oss on an nvestment of 17.250:n
the ourteenth Carnege Co. for the year 1920
state ta decson.
Pror nonacquescencc pubshed n Cumuatve uetn 1939-1, (Part 1), page 0, wthdrawn.
8 Un|ust enrchment ta decson.
cquescence reates ony to the ssue, whether certan osses suffered by pettoner as the resut of fore-
cosures of propertes owned by the pettoner are deductbe n the year of forecosure or In the year a
whch the equty of redempton e pred.
G
e
n
e
r
a
t
e
d

f
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n

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g

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w

Y
o
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k

U
n
v
e
r
s
t
y
)

o
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2
0
1
3
-
0
1
-
2
2

0
4
:
4

G
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.
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2
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2
7
/
n
u
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3
0
0
0
0
0
8
8
9
3
3
7
2
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#
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cquesce.nces Contnued.
herman, Dor ond
Sver, Ma
Smon, ose, estate of
Smon et a., ose P., e ecutors
Smth, Chares G
Smth, Madene Weder
Smth, arvara Pupn, admnstratr of estate of
Mchae I. Pupn 4
Smyth, r., rancs G., transferee of estate of rank
O. urrdge
Smyth, erbert C., transferee of estate of rank 0.
urrdge
Smvth, erbert C, admnstrator of the estate of
een Gmorc, transferee of estate of rank 0.
urrdge
Spor, Sr., Cypran ., estate of
Sprngford, erbert ._
Staer, ugustus .1
Staev, mma L.1
Staney, Wam . -
Stern, son L. S
Suffok 4 erks, Marguerte yde
Sutana O Corporaton (Deaware) -.
Sunset-Luce Co
Sutcffe Co., The
Swastka O Gas Co -
T.
Tabott et aL, arod ., e ecutors of estate of
atherne . Tabott
Tabott, atherne ., estate of
Terhune, Wesey .
Thatcher, Lester ., transferee of estate of rank
0. urrdge
Tmmerman, Lous _.
Traser, Rchard ., estate of 1
Trevor, my 1
r|.
Unon Guardan Trust Co
Unted States dety fc Guaranty Co.
Unversa Wndng Co
05300
10018
91840
91840
93914
95003
92177
93331
93232
93231
92588
97247
88772
88773
9 558
93134
81417
93257
90078
90079
939 4
94235
908 1
97128
97128
93894
93335
9 317
91958
89820
94 87
91398
87354
41
42
40
40
40
41
38
40
40
40
40
41
41
41
1
40
40
40
42
41
40
42
42
40
40
42
4 1
40
41
40
39
Od ta decson.
1 cquescence reates ony to the year 1935.
1 state ta decson.
1 Pror nonacquescence pubshed n Cumuatve uetn 1939-1 (Part 1), pace 0, wthdrawn.
cquescence reates ony to the ssue, Is the pettoner ta abe on the ncome of a trust whch was
eated for the support and mantenance of hs wfe and mnor chd
cquescence on the foowng Issue s as to resut ony: In detprmnng the net ncome of a trust cur-
RDty dstrbutabe to the benefcares, shoud there be Incuded the rent duo under a one-term ease, the
essee havDg mproved the premses wth an offce budng whch woud become the essor s property on
forfeture, the trust on the accrua bass havng accrued the rent but ao havng charged t to a reserve for
mcoected rents
T cquescence reates ony to the oard s mathematca formua for apportonment of the dvdend credt
between the estate and the dstrbutees.
G
e
n
e
r
a
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e
d

f
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n

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)

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2
0
1
3
-
0
1
-
2
2

0
4
:
4

G
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a
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2
0
2
7
/
n
u
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3
0
0
0
0
0
8
8
9
3
3
7
2
0
P
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a
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,

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o
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#
p
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8
Ta payer.
Docket
No.
oard of Ta| ppeas.
oume.
aey Tractor qupment Co...
W.
Water, Wam
Washngton Raway ectrc Co
Wegeforth, Le S. --
Weder, r., ames
Wheeer, een vans 1
Wnston ros. Co.1
Wnthrop, eekman 1
Wof, dth
Wood, zabeth
Wood, Orrn G.4
Word, nna
Word, T. T
Word Suppy Co., T. T - --
Y.
Young, Du os 9
9587S
97537
991 2
92435
94708
95005
95528
59270
79850
92429
95004
92489
93543
93542
93544
7S3 15
42
42
40
42
41
42
29
3
41
41
40
41
41
41
34
1 cquescence reates to a Issues e cept as to the deductbty of attorney s fees and abstract fees In-
curred ncdenta to the estabshment of forefeture of a ease and obtanng re|wssessoo of t he eased premses.
1 Pror nonacquescence pubshed n Cumuatve uetn III-2. pace 38 (1934), wthdrawn.
Nonacquescence pubshed n Cumuatve uetn 1937-2, page 5 , wthdrawn.
Gft ta decson.
cquescence reates ony to the ssues nvovng (1) the vauaton of 388 shares of rown Paper M
stock, and (2) the queston whether the renqushment of a power to prevent future amendments to a trust
Instrument consttutes a compete gft.
cquescence reates ony to ths ssue: Was the e change of certan certfcates of ownershp n a trust
for underyng portfoo stock represented there by an e change of dteront assets, resutng n acapta oss
Prevous nonacquescence pubshed n Cumuatve uetn -2, page 51 (193 ), wthdrawn wth respect
to ths ssue ony.
G
e
n
e
r
a
t
e
d

f
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L
n

Z
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a
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g

(
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w

Y
o
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k

U
n
v
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s
t
y
)

o
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2
0
1
3
-
0
1
-
2
2

0
4
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9
The Commssoner does NOT acquesce n the foowng decsons of
the Unted States oard of Ta ppeas:
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
bbott, ohn, e ecutor of estate of Rchard .
T raser 1
ffated nterprses, Inc.1
abama sphatc Lmestone Co
en, r., et a., ona ---
en, r., et a., ona, e ecutors
en, . Wadcgh, estate of
en, ohn
en et a., ctor
ng, Noyes ., estate of
ppeby, dgar S., estate of
ppeby et a., dgar T., e ecutors of estate of
dgar 3. ppeby
ppeby, ohn S.
rmour, Lota S
.
e et a., Maude ., e ecutors of estate of Ida .
Whte
ernhemer Co., S. . M.
ngham, Mary Ly ( ager), estate of
ondhoders Commttee 5
onfs, . G., estate of
onfs Trust, . G. --
onfs et a., een G., e ecutors of estate of . G.
onfs
ranch, Caude R
rdgeport Cty Trust Co. et a., The, e ecutors of
estate of Noves . ng
rsto, ennet .7..
rown, ntonette
ruckner, rnod
uck. sworth
urnett, O. L
91958
9 03
91793
93809
93811
93811
93812
93810
8713
9388
9388
94080
88151
93150
93575
88978
94985
90152
9048
90487
91501
93148
91501
94248
8713
9 289
97743
97507
93330
90248
8 77
87378
88 1
97 98
927 5
41
42
41
41
41
41
41
41
41
41
41
40
40
40
40
40
40
41
42
42
4 2
41
40
41
42
40
Carng odng Co
Carte Ms, Inc
Caspersen, reda R
1 Nonacquescence reates ony to that part of the oard s opnon whch hods, wthout supportng ev-
dence, that gans on the sae of corpus of the estate consttuted Income avaabe for dstrbuton to the
benefcares.
1 Nonacqaesoence reates ony to the ssue, s the pettoner sub|ect to surta as a persona hodng com-
pany under sectons 351 of the Revenue ctsof 1934 and 103
state ta decson.
N onacquescence reates to a ssues e cept the ssue wth respect to the 150 added by the Commssoner
to the pettoner s ta abe ncome.
1 N onacquescence reates to Issue pertanng to bases for deprecaton of pettoner s assets.
Prevous acquescence pubshed n Interna Revenue uetn 1840-15, page 1, wthdrawn.
1 t ta decson.
200217 41 2
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10
NON C UI 8C NC 8 Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Cavett et a., ., e ecutors of estate of W. T. aes .
Centra Loan Investment Co.
Chamberan, Park
Chase Natona ank of the Cty of New York,
The, trustee under agreements wth mercan
Depostor Corporaton r.
Coona Trust Co. et a ., e ecutors. --.
Coumba O Gas Co.
Cook Drng Co.4
Corporate Investment Co
Corpus Chrst Termna Co
Covngton et u ., George W
Credt ance Corporaton
Crchton, ate
Cushman, Louse C, transferee of estate of Mary
W. Cushman 5
Cushman, Mary W., estate of .
Daas Tte Guaranty Co. --- --
Deerng, rank C, estate of
Deerng et a., oseph Godfrey, e ecutors of the
estate of rank C. Deerng
Deaware Termna Corporaton
Denhom 4 Mc ay Co
Denver Natona ank et a., trustees u/w . G.
onfs7.. -
Dunnng, enry .
Durkhemer, S.
.
dwards Drng Co.8.
as, dna
mhrst, Dorothy Whtney.
ston Co., Ltd
verson Corporaton
rb et a., rthur L., e ecutors of estate of Ges W.
Mead 10
93208
825 5
880 7
93854
93855
9385
93857
93 48
90 24
82231
783 3
88103
98283
1005 1
97025
92881
92882
92883
904
9599
9599
8 105
89 0
93148
92 29
95209
75931
90827
85040
85880
95298
9 04
93281
975
40
89
41
41
41
41
88
40
88
42
42
42
40
40
40
40
40
40
89
40
41
41
85
41
41
42
40
41
1 Nonacquescence Is ony as to the Issue. Is the cash receved by pettoners n 1935 from the Loca edera
Savngs and Loan ssocaton, whch Ls admtted to be Income, taabe as ordnary Income or as capta
gan
cquescence pubshed n Cumuatve uetn 1939-2, page , wthdrawn.
Nonacquescence reates to Issue pertanng to aocaton of cost of equpment on the property n queston.
Nonacquescence reates ony to the Issue whether the pettoner s entted to deduct the cost ncurred
drng wes. Pror acquescence pubshed n Cumuatve uetn 1939-2, page 8, wthdrawn as to ths
ue ony.
state ta decson.
Nonacquescence reates ony to the Issue Invovng the ta abty of an amount of 40,000 transferred
from Premum reserve account to Undvded profts account pursuant to resouton of tba board
of drectors on uy 5, 1934.
1 Prevous acquescence pubshed In Interna Revenue uetn 1940-IS, page 1, wthdrawn.
Nonacquescence reates ony to the Issue whether the pettoner Is entted to deduct tha costs ncurred
In drng o wes. Pror acquescence pubshed n Cumuatve uetn 1939-1, page 11, wthdrawn m
to ths ssue ony.
Nonacquescence reates ony to the Issue was the ncome resutng from the recept of surrendered
coatera In e tngushment of a debt persona hodng company ncome
u Gft ta decson.
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11
Nonacquescences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
states dmnstraton, Inc., admnstrator
estate of Zachary Smth Reynods 1
vans, Mary .2
wng, Sherman
of
.
. . . O Co-...
acon Co
armers Sc Gnners Cotton O Co-
ret Mortgage onds _
rst Trust Depost Co. et a., guardans .
emng, Mrs. nna Maud
emng- mbe Corporaton
emng, Wam 4
ower et u ., ohn O
razer, rederc
G.
Gadan Co., Ltd
Gardner, . Ws s
Goss Gos , Lucy M.
Goodman, dwn
Greene, . Crawford, guardan of estate of ce .
Lester
Greve, Wam M
Grote et u ., en
.
aes, George .7
aes, Mrs. Oneta7
aes, r., W. T.7
aes, W. T., estate of7
asey, Lan ohnson, e ecutr of estate of Rchard
etnmons asey 1
asey, Rchard emmons, estate of1
artford-Connectcut Trust Co., The, e tr. of estate
of Mary W. Cushman 1
eer, dward .
ercues Motor Corporaton
8 395
95527
93013
929 0
92001
9343
90452
9048
90487
90749
90750
90751
92958
94 90
92959
92957
94 89
911 2
91412
9 05
92115
90391
87799
93404
9 315
97522
94442
94443
93210
93209
93211
93208
9 404
9 404
92882
f 94794
94795
92225
42
42
40
41
41
41
40
41
41
41
41
40
41
42
41
41
41
41
42
41
40
42
42
40
41
40
1 state ta decson.
Nonacquescence reates ony to the deductbty of attorney s fees and abstract fees ncurred Incdenta
to tbe estabshment of forfeture of a ease and obtanng repossesson of the eased premses.
1 Nonacquescence reates to ssue pertanng to bases for deprecaton of pettoner s assets.
Nonacquescence ony wth respect to the hodng that the pettoners woud reaze no ta abe ncome
from the e change of ther o, equpment, and persona property nterest for contngent o payments unt
they recovered the cost of the e changed property from the o payments receved.
Gft ta decson.
Nonacquescence reates ony to the ssue, n the case of a gft of securtes n trust, shoud the trust be
treated as the donee, resutng n ony one e cuson, or shoud the benefcares be treated as donees, resutng
In one e cuson for each benefcary
7 Nonacquescence s ony as to the ssue, Is tbe cash receved by pettoners n 1935 from the Loca edera
arngs and Loan ssocaton, whch s admtted to he ncome, ta abe as ordnary ncome or es capta gan
Nonacquescence reates to the ssue whether pettoner was ta abe on the ncome derved from certan
1 n certan agency accounts wth a bank n pettoner s name as trustee for bs mnor chdren.
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#
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12
Nonacquescknces Contnued.
Ta payer.
oard of Ta ppeas.
oume.
offman, atherne M
offman, W. W
offman et u ., W. W
ooper, ames P., estate of 12
ooper, Mathde ., admnstratr of estate of
ames P. ooper 1
ughes Too Co -
ohnson et a., Thomas M., trustees.
ohnston, atherne S., estate of
onas, Louse
.
eogg, Cornea . W., e ecutr of estate of
rederck R. eogg1
eogg, P. W ----
eogg, rederck R., estate of 1
enan et a., Wam R., r., trustees u/w Mary
Ly ( ager) ngham
mbc, ay 1
mbe, Mrs. ema
yce, . S., estate of
yce, M. P., admnstrator.
napp, George O
L.
Lester, ce ., an ncompetent, estate of
Lpe, Gordon C
Lpe, Suzanne
Lpe, r., Ward C
M.
Ma|estc O Corporaton
Marborough ouse, Inc., et a. .
9 741
9 742
92414
8577
8577
90002
8 77
87378
88 1
8 395
91010
89143
95135
89143
94985
9295
94 74
92955
94 73
90174
90174
91 99
/ 93404
9 315
90750
90751
90749
40
41
41
40
41
42
40
40
42
40
40
41
41
41
41
40
41
41
9 380
42
59
90452
1
904S
1
40
881
90487
90452
1
9048
1
40
881
90487
99559
41
10 4
9844 1
41
1 f
Marborough Investment Co.
Marsha, erbert
McGue, G. Percy, estate of
state ta decson.
Noacquescence reates ony to the ssue, Was the sum of 132,345.73. representng the net proceeds of
oertan fe nsurance poces assgned by the decedent to a certan trust, propery Incudbe n the gross
state and. f so, may the sum of 140,000 be e cuded under the provsons of secton 302(g) of the Revenue
ct of 1920
1 Nonacqescence s ony wth respect to the hodng that the pettoners woud reaze no ta abe ncome
from the e change of ther o, equpment, and persona property nterest for contngent o payments unt
they recovered the cost of the e changed property from the o payments receved.
Gft ta decson.
Nonaequoseence reates ony to the Issue, Is the pettoner entted to a 1935 oss deducton for the unde
predated cost of certan casng and other ease equpment whch coud not be removed from a certan o
we whch the pettoner ceased to operate durng that year, because such operaton had becom unproft-
abe
Nonacquescence reates to ssue pertanng to bases for deprecaton of pettoner s e
G
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1
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13
Docket
No.
oard of Ta ppeas.
oume.
McGue, M. dth, e ecutr of estate of G. Percy
McGue
McGovem, Inc., Patrck
McLean et u ., Marrs 1
Mead, Ges W., estate of 1
Mchgan Sca Co
Mbank, Dunevy 1
Mooney ectrc Co.
Mueer Co., C.
N.
Natona ank of Commerce of San ntono, Te .
Natona ank of Commerce of Seatte
Nebraska rdge Suppy Lumber Co
Newport Industres, Inc
Newton, r., ames
Newton Trust, ames
0.
Ortz, ce duPont
Page O Co.
Pamer, Careton
Perkns, Raph
Phoen State ank Trust Co., trustee under
deed of trust from Mary W. Cushman, as
trustee and transferee7
Prouty, Ove .1
R.
Reaty Operators, Inc
Reynods, R. ., estate of7
Reynods, Zachary Smth, estate of7
Rhodes et a., ugh D., admnstrators of estate of
Mame D. Rhodes7
Rhodes, Mame D., estate of
Rchardson, Lunsford 1
Rubnsten, Wton 1
Rust, r., et a., U. L., e ecutors of estate of . L.
Rust
Rust, . L., estate of
9844
9184
91170
91171
975
9 78
93050
9 072
859 4
9 331
931 4
89720
9084
92331
97325
97324
93159
90515
95 74
9 18
89854
9 12
92883
9 1 4
92387
8 394
8 395
91284
91284
85905
95922
95880
95880
41
40
41
41
41
41
42
40
40
40
40
40
42
42
42
41
40
41
40
41
40
42
42
41
41
39
41
41
41
Gft ta decson.
1 Nonacquescence s ony wth respect to the ta abty of the ncome from the so-caed short term trusts.
1 Nonacquescence reates ony to the Issue, Is the pettoner entted to a credt under secton 2 (c)2 of
the cvenue ct of 193 n the amount of 13,810, representng 2 per cent of the argest amount of bonds at
any one tme outstandng durng 1930
cquescence as to one ssue pubshed In Cumuatve uetn 1939-2, page 2 , wthdrawn.
Nonacquescence reates to a ssues e cept the ssue, whether the pettoner s entted to any deducton
M the resut of the satsfacton of the defct e stng n her husband s brokerage accounts at the end of the
year 1934.
1 Nonacquescence reates ony to the ssue, Dd the pettoner sustan a oss In the amount of 13,9 3.50
oa the sae of second preferred and common stock of the Cutch Machne oundry Co.
state ta decson.
G
e
n
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a
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e
d

f
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2
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1
3
-
0
1
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2
2

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4
:
4

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3
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0
0
0
0
8
8
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3
3
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2
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#
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e
14
Ta payer.
Docket
No.
oard of Ta
oume.
S.
Safe Depost Trust Co. of atmore, trustee
under ws of It. . Reynods, and atherne S.
ohnston, and deed of atherne S. ohnston
Sanford Cotton Ms, Inc.1 --
Shedon Land Co.
Sherman, Dors ond 44
obe, Inc., N -
Spor Co., Inc., C.
Spreckes, doph -- -
Stanart Co., Ltd
Sten, Nathan
Stern, son L. S. ---
Straus, redrch
Straus, Meer
Straus, Mortz
Strong Manufacturng Co., The
Swope, Lorenzo W., estate of
T.
Thompson, Mary ., e ecutr of estate of Wam
G. Thompson
Thompson, Wam G., estate of1
Traser, Rchard ., estate of7
Trco Securtes Corporaton - -
8 394
95218
0319
95300
93822
90354
94 21
95 39
9 0
83178
93134
83181
83180
83179
95 2
93 48
W.
Waker, Wam T.4_
Watson, rchbad R.
Wenger, Mary
West Producton Co
Wheeer, een vans 8 _
Whte, Ida ., estate of.
Wood, Orrn G.4
9 358
9 358
91958
8517
92 00
87873
88048
89 50
92245
88997
95528
93575
92489
42
42
42
41
40
40
41
42
40
40
40
41
41
41
41
41
41
40
42
42
41
42
41
40
state ta decson.
See O. C. M. 22404 (page 204, ths uetn).
1 Nonacquescence reates ony to the ssue whether pettoner s entted to a deducton for an asserted
oss on an aeged sae of certan and to another corporaton.
Gft ta decson.
Nonacquescence reates ony to the year 193 .
Nonacquescence reates ony to the ssue, Where termnaton of a trust coud occur ony at the eecton
of the grantor wth concurrence of attorneys who represented two person nterested In the trust, ts the
Interest of the attorneys a substanta adverse nterest
t Nonacquescence reates ony to that part of the oard s opnon whch hods, wthout supportng
evdence, that gans on the sae of corpus of the estate consttuted ncome avaabe for dstrbuton to the
benefcares.
1 Nonacquescence reates ony to the deductbty of attorney s fees and abstract fees ncurred ncdenta
to the estabshment of forfeture of a ease and obtanng repossesson of the eased premses.
1 Nonacquescence reates ony to the ssue, Is the vaue of fe nsurance poces to t e determned by the
cost to purchase smar contracts as determned by the Commssoner, or s the vaue mted to the cash
urrender vaue as contended by pettoner
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INCOM T RULINGS. P RT I.
. INT RN L R NU COD , ND R NU CTS O 1939 ND 1940.
C PT R I. INCOM T .
SU C PT R . INTRODUCTORY PRO ISIONS.
S CTION 1. PPLIC TION O C PT R.
Secton 19.1-1: Scope of reguatons. 1940-41-1044
( so Secton 11, Secton 19.11-1 Secton 12, Sec- T. D. 5011
tons 19.12-1 and 19.12-2 Secton 13, Sectons
19.13-1, 19.13-5, 19.13- , and 19.13-7 Secton
14, Sectons 19.14-1 and 19.14-2 Secton 15, Sec-
ton 19.15-1 Secton 25, Sectons 19.25-1,19.25-3,
and 19.25-7 Secton 47, Secton 19.47-1 Secton
51, Sectons 19.51-1, 19.51-2, and 19.51-3 Sec-
ton 102, Secton 19.102-1 Secton 104, Secton
19.104-1 Secton 131, Secton 19.131-8 Secton
142, Sectons 19.142-1, 19.142-2, and 19.142-5
Secton 147, Sectons 19.147-1,19.147-2,19.147-3,
19.147-7, and 19.147-8 Secton 1 3, Secton
19.1 3-1 Secton 201(b), Secton 19.201 (b)-
Secton 204(a), Secton 19.204(a)- Secton
207, Secton 19.207-1 Secton 211, Sectons
19.211-1 and 19.211-7 Secton 213, Secton
19.213-1 Secton 214, Secton 19.214-1 Sec-
19.217-2 Secton 219, Secton 19.219-1 Sec-
19.251-1 Secton 2 2, Secton 19.2 2-2 Sec-
ton 3 2, Secton 19.3 2-1 Secton 500, Secton
19.500-1.)
TITL 2 INT RN L R NU C PT R I, SU C PT R , P RT 19.
INCOM T .
Reguatons 103 amended to conform to the Revenue ct of 1940.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. G.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 103 (Part 19, Tte 2 , Code of
edera Reguatons, 1940 Sup.) to the Revenue ct of 1940 (Pubc,
(1 )
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I 19.1-1.
1
No. 5 , Seventy-s th Congress, thrd sesson), approved une 25,
1940, such reguatons are amended as foows:
Paragraph 1. Secton 19.1-1 s amended by nsertng at the end
thereof a new paragraph readng as foows:
s used n these reguatons to descrbe a secton of the Interna Revenue
Code, the term pror to ts amendment has reference ony to amendment by
the Revenue ct of 1939, and the term as amended has reference to amend-
ment by any ct
Par. 2. The frst sentence of secton 19.11-1 s amended to read as
foows:
Chapter 1 of the Interna Revenue Code, whch appes ony to ta abe years
begnnng after December 81, 1938 (see secton 1), mposes an ncome ta on
Indvduas, ncudng a norma ta (secton 11), a surta (secton 12), and a
defense ta for ta abe years begnnng after December 31, 1939, and before
anuary 1, 1945 (secton 15 added by secton 201 of the Revenue ct of 1940).
Par. 3. The foowng s nserted mmedatey precedng secton
19.12-1:
Sec. 2 Surta on Inmvduas. (Revenue ct of 1940, Tte I.)
Secton 12(b) of the Interna Revenue Code s amended to read as
foows:
(b) ates of Surta . There sha be eved, coected, and pad for
each ta abe year upon the surta net ncome of every ndvdua a surta
as foows:
Upon a surta net ncome of 4,000 there sha be no surta : upon
surta net ncomes n e cess of 4,000 and not In e cess of ,000,
4 per centum of such e cess.
80 upon surta net ncomes of ,000 and upon surta net n-
comes n e cess of ,000 and not n e cess of 8,000, per centum
n addton of such e cess.
200 upon surta net ncomes of 8,000 and upon surta net n-
comes n e cess of 8,000 and not In e cess of 10,000, 8 per centum
3 0 upon surta net ncomes of 10,000 and upon surta net
ncomes n e cess of 10,000 and not n e cess of 12,000, 10 per
centum n addton of such e cess.
5 0 upon surta net Incomes of 12,000 and upon surta net
ncomes n e cess of 12,000 and not n e cess of 14,000,12 per centum
800 upon surta net ncomes of 14,000 and upon surta net
ncomes n e cess of 14,000 and not n e cess of 1 ,000, 15 per
1,100 upon surta net ncomes of 1 ,000 and upon surta net
ncomes n e cess of 1 ,000 and not n e cess of 18,000, 18 per
1,4 0 upon surta net ncomes of 18,000 and upon surta net
ncomes n e cess of 1N,000 and not n e cess of 20,000, 21 per
1,880 upon surta net ncomes of 20,000 and upon surta net
ncomes n e cess of L O,00O and not n e cess of 22,000, 24 per
2,3 0 upon surta net ncomes of 22,000 and upon surta net
ncomes n e cess of 22,000 and not n e cess of 2 ,000, 27 per
3,440 upon surta net ncomes of 2 ,000 and upon surta net
ncomes n e cess of 2 ,000 and not n e cess of 32,000, 30 per
ncomes n e cess of 38,000 and not In e cess of 44,000, 3 per
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17
19.1-1.
9,3S0 upon surta net Incomes of 44,000 and upon surta net
Incomes In e cess of 44,000 and not In e cess of 50,000, 40 per
centum In addton of such e cess.
11,780 upon surta net ncomes of 50,000 and upon surta
Det ncomes n e cess of 50,000 and not n e cess of 0,000, 44
per centum n addton of such e cess.
1 ,180 upon surta net ncomes of 0,000 and upon surta
net ncomes n e cess of 0,000 and not n e cess of 70,000, 47 per
31,180 upon surta net ncomes of 90,000 and upon surtn net
ncomes n e cess of 90,000 and not u e cess of 100,000, 5 per
3 ,780 upon surta net ncomes of 100,000 and upon surta net
net ncomes n e cess of 200,000 and not n e cess of 250,000, 2
12 ,780 upon surta net ncomes of 250,000 and upon surta
net ncomes n e cess of 250,000 and. not n e cess of 300,000, 4
net ncomes n e cess of 300,000 and not n e cess of -100,000,
4 7,780 upon surta net ncomes of 750,000 and upon surta
net ncomes n e cess of 750,000 and not In e cess of 1,000,000, 72
47,780 upon surta net Incomes of 1,000,000 and upon surta
net ncomes n e cess of 1,000,000 and not n e cess of 2,000,000,
73 per centum n addton of such e cess.
1,377,7S0 upon surta net ncomes of 2,000,000 and upon surta
net ncomes In e cess of 2,000,000 and not n e cess of 5,000,000,
74 per centum n addton of such e cess.
3,597,780 upon surta net ncomes of 5,000,000 and upon surta
net ncomes n e cess of 5,000,000, 75 per centum n addton of
such e cess.
Sec. 9. Ta abe Yeabs to Whch ppcabe, (Revenue ct or 1040,
Tte I.)
The amendments made by ths tte, e cept the amendments made by
secton 5, sha be appcabe ony wth respect to ta abe years begn-
nng after December 31, 1939.
Par. 4. Secton 19.12-1 s amended by nsertng at the end thereof
the foowng: or the defense ta mposed for ta abe years begn-
nng after December 31, 1939, and before anuary 1, 1945, see secton
19.15-1.
Par. 5. Secton 19.12-2 s amended as foows:
( ) The frst sentence s amended to read: The foowng tabes
show the surta (1) for ta abe years begnnng after December 31,
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19.1-1.
18
1938, and before anuary 1,1940, and (2) for ta abe years begnnng
after December 31, 1939, upon certan specfed amounts of surta net
ncome.
( ) The headng of the surta tabe foowng the fourth sentence
s changed to read:
Tabe I. Ta abe pears begnnng after December SI, 193S, and before
anuary 1, 1040.
(C) There s nserted mmedatey after the e stng tabe the fo-
owng addtona tabe:
Tabe II. Ta abe years begnnng after December SI, 1939.
Surta net ncome.
Per cent.
Tota
0 to 4,000
M.ono to |f.ooo.
1 .000 to 8,000
8,000 to 10.000
10,000 to 12,000
12,000 to 14,000
14,000 to 1 ,000
1 ,000 to 18,01 1
18,000 to 20,000
20,000 to 22,000
22,000 to 2 .000
2 ,000 to 32,000
32,000 to 38.000
38,000 to 44,000
44,000 to 80,000
50,000 to 0.000
0,000 to 70,000
70,000 to 80,000
80,000 to 90,000
90,000 to 100.000
100,000 to 150.000
150,000 to 200,000
21 1.000 to 250,000
250,000 to 300,000
300,000 to 400,01 1
400,000 to 500,000
500,000 to 750,000
750,000 to 1.000.I )...
1,000,000 to 2,000,000.
2,000,000 to 5,000,000.
5,000,000 up
4
S80

s

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0
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U
1.100
1.4 0
It
21
1 -
24
.3 n
37
1.44.1
M
M
n
7.220
..-,
9,380
n
11,780
IS, 180
47
30.880
N
35. M
a
SI.180
5

8 , S
5,7 0
eo
95,780
US, 780
4
158.780
GO
334.780
392,7811
N
10
4 7.780
72
47.780
73
1,377.780
74
. 587,790
75
(D) The ast sentence of the ast paragraph s amended to read
as foows:
ccordngy, the surta due for ta abe years begnnng after December 31,
1939, upon a surta net Income of 3,128 woud be 17, 50.1 , computed as
foows:
Surta on 0,000 from tabe 1 ,180.00
Surta on 3,128 at 47 per cent 1,470.1
Tota 17, 50.1
Par. G. The foowng s nserted mmedatey precedng secton
19.13-1:
Sec. 3. Cokporaton Ta . (Revenue ct of 1940, Tte I.)
(a) Ta on Cobporatonb n Genera. Secton 13(b) of the Interna
Revenue ( ode s amended to read as foows:
(b) Imposton of Ta . There sha be eved, coected, and pad for
each ta abe year upon the norma-ta net ncome of every corporaton
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19.1-1.
the norma-ta net ncome of whch s more than 25,000 (e cept a cor-
poraton sub|ect to the ta mposed by secton 14, secton 231(a),
Suppement G, or Suppement ) whchever of the foowng ta es s the
esser:
(1) Genera bub. ta of 19 per centum of the norma-ta
net ncome or
(2) ternatve ta (corporatons wth norma-ta net ncome
sghty more than 25,ooo). ta of 3,775, pus 33 per centum
of the amount of the norma-ta net ncome n e cess of 25,000.

Sec. 9. Ta abe Tears to Whch ppcabe. (Revenue ct of 1940,
Tte I.)
secton 5, sha be appcabe ony wth respect to ta abe years begnnng
after December 31, 1939.
Par. 7. Secton 19.13-5 s amended by addng at the end thereof
the foowng: or the defense ta mposed for ta abe years be-
gnnng after December 31, 1939, and before anuary 1, 1945, see
secton 19.15-1.
Pah. 8. Secton 19.13- s amended by strkng out 18 per cent,
1 ,470, and 1 ,470, wherever they appear, and nsertng n eu
thereof 19 per cent, 17,385, and 17,385, respectvey.
Par. 9. Secton 19.13-7 s amended by strkng out 3,525, 32
per cent, 3,893, 3,893, 18 per cent, and 4,707, wherever
thev appear, and nsertng n eu thereof 3,775, 33 per cent,
4,154.50, 4,154.50, 19 per cent, and 4,9 8.50, respectvey.
19.14-1:
Sec. 3. Corporaton Ta . (Revenue ct of 1940, Tte I.)

(b) Ta on Speca Casses of Corporatons. Sectons 14 (b) and
(c) (1) of the Interna Revenue Code are amended to read as foows:
(b) Corporatons Wth Norma-Ta Net Incomes of Not More
Than 25,000. If the norma-ta net ncome of the corporaton s not
more than 25,000, and f the corporaton does not come wthn one of the
casses specfed n subsecton (c), (d), or (e) of ths secton, the ta
sha be as foows:
Upon norma-ta net Incomes not n e cess of 5,000, 133 per
centum.
75 upon norma-ta net ncomes of 5,000, and upon norma-
ta net ncomes n e cess of 5,000 and not n e cess of 20,000, 15
2,925 upon norma-ta net ncomes of 20,000, and upon norma-
ta net ncomes n e cess of 20,000, 17 per centum In addton of
such e cess.
(c) oregn Corporatons.
(1) In the case of a foregn corporaton engaged n trade or
busness wthn the Unted States or havng an offce or pace of
busness theren, the ta sha be an amount equa to 19 per centum
of the norma-ta net ncome, regardess of the amount thereof.

Sec. 9. Ta abe Years to Whch ppcabe. (Revenue ct of 1940,
Tte I.)
nng after December 31,1939.
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19.1-1.
20
( ) y strkng out n the tabe foowng the ffth paragraph:
12 o, 14, 1G, S 25, 2.725, and 3,525, and by nsertng n
eu thereof: 18 , 15, 17, 75, 2,925, and 3,755,
ng n eu thereof 1,537.50, 75, 8 2.50, r 1,537.50, 13 per
cent, and 15 per cent, respectvey.
(C) y strkng out n the frst sentence of the ast paragraph 18 per
cent and nsertng n eu thereof 19 per cent.
Par. 12. Secton 19.15-1 s strcken out and there s nserted n eu
thereof the foowng:
Sec. 201. Income Ta . (Revenue ct of 1940. Tte II.)
Chapter 1 of the Interna Revenue Code s amended by nsertng after
secton 14 the foowng new secton:
Seo. 15. Defense Ta fob ve Tears.
In the case of any ta payer, the amount of ta under ths
chapter for any ta abe year begnnng after December 31, 1939,
and before anuary 1, 1945, sha be 10 per centum greater than
the amount of ra computed wthout regard to ths secton. In no
case sha the effect of ths secton be to ncrease the ta computed
wthout regard to ths secton by more than 10 per centum of the
amount by whch the net ncome e ceeds such ta . or the pur-
poses of ths secton, the ta computed wthout regard to ths sec-
ton sha bo such ta before the appcaton of the credt provded
n secton 31 ( foregn ta credt ), and the credt provded n
secton 32 (ta es wthhed at the source).
Sec. 19.15-1. Defense ta . or ta abe years begnnng after December 31,
1939, and before anuary 1, 1945, the ta computed n accordance wth Chapter
1 of the Interna Revenue Code as amended wthout regard to secton 15
(added by secton 201 of the Revenue ct of 1940 ) Is ncreased by 10 per
cent thereof. or the purposes of ths 10 per cent ncrease, the ta whch s
to be ncreased s computed before the appcaton of the foregn ta credt
and the credt for ta es wthhed at the source.
Secton 15 aso provdes that n no case sha ts effect be to Increase the
ta by more than 10 per cent of the amount by whch the net ncome e ceeds
the ta computed wthout regard to secton 15. Ths mtaton appes to
ta payers whose ncome ta , computed wthout regard to the defense ta
provsons, amounts to more than 50 per cent of ther net ncome. It s pro-
vded that such ta payers sha pay a defense ta of not more than 10 per
cent of ther ncome remanng after deducton of ncome ta computed wth-
out regard to the defense ta provsons. Ths mtaton may be Iustrated
by the foowng e ampe:
ampe: The not ncome of an ndvdua entted to the ma mum earned
Income credt and havng no capta gans or osses Is 752,800. e s entted
to credts for persona e empton and dependents amountng to 2,800. s
ta abty computed wthout regard to secton 15 s 497,724. The dfference
between the net ncome and the ta abty s 255,07 . The ta after appy-
ng secton 15 s 197,724 pus 10 per cent of 255,07 , or 523,231. 0. If such
a mtaton had not been provded for, the ta after the appcaton of sec-
ton 15 woud have been 547,49 .40.
further effect of the mtaton on the 10 per cent ncrease Is to prevent any
Increase n the ta of a ta payer who under e stng aw, as amended by Tte I
of the Revenue ct of 1 M0, has no net ncome because he has a net ong-term
capta oss, but Is sub|ect to ta under secton 117(c)2 of the Interna Revenue
Code.
1 Secton 201 ot the Revenue ct of 1939 amended sectons 13, 14, and 15 by enactng
new sectons 13 and 14 Imposnc ta es on the Income of corporatons for ta abe years
begnnng after December 31, 1939, and emnatng secton 15. new secton 15 pro-
vdng for a defense ta , wa added by secton 201 of the Revenue ct of 1940

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21
519.1-1.
19.25-1, reatng to credts of ndvduas aganst net ncome:
Sec. . Persona empton. (Revenue ct or 1940, Tte I.)
(a) Secton 23(b)(1) of the Interna Revenue Code Is amended
to read as foows:
(1) Persona e empton. In the case of a snge person or a
marred person not vng wth husband or wfe, a persona e empton
of 800 or In the case of the head of a famy or a marred person
vng wth husband or wfe, a persona e empton of 2,000.
husband and wfe vng together sha receve but one persona
e empton. The amount of such persona e empton sha be 2,000.
If such husband and wfe make separate returns, the persona e -
empton may be taken by ether or dvded between them.

8 C. 9. Ta abe Years to Whch ppcabe (Revenue ct or 1940,
Tte I.)
Pah. 14. The frst two sentences of secton 19.25-3 are amended to
read as foows:
snge person or a marred person not vng wth husband or wfe Is
entted to a persona e empton of 800 ( 1,000 for a ta abe year begnnng
before anuary 1, 1940) and the head of a famy or a marred person vng
wth husband or wfe, to 2,000 ( 2,500 for a ta abe year begnnng before anu-
ary 1, 1940). husband and wfe vng together have but one persona e emp-
ton, whch s 2,000 ( 2,500 for a ta abe year begnnng before anuary 1,
1940).
Pah. 15. Secton 19.25-7 s amended by addng at the end thereof
the foowng paragraph:
If the change of status shown by the precedng e ampes occurs n any ta abe
year begnnng after December 31, 1939, the apportonment of the persona
e emptons w be based upon an aowance of 800 nstead of 1,000 to a snge
person or a marred person not vng wth husband or wfe, and 2,000 nstead
of 2,500 n the case of a head of a famy or a marred person vng wth husband
or wfe.
Par. 1 . The frst sentence of the e ampe n secton 19.47-1 s
amended to read as foows: ctzen of the Unted States made a
return for a 10-month perod ended October 31, 1939, by reason of
a change n accountng perod.
Pah. 17. The foowng s nserted mmedatey precedng secton
19.51 1, reatng to ndvdua returns:
Se 7. Returns of Income Ta . (Revenue ct of 1940, Tte L)
(a) Indvdua Returns. Secton 51(a) of the Interna Revenue Code
Is amended to read as foows:
(a) Requbement. The foowng ndvduas sha each make under
oath a return statng specfcay the tems of hs gross ncome and the
deductons and credts aowed under ths chapter and such other n-
formaton for the purpose of carryng out the provsons of ths chapter
as the Commssoner wth the approva of the Secretary may by regua-
tons prescrbe.
(1) very ndvdua who Is snge or who s marred but not
vng wth husband or wfe, f havng a gross ncome for the ta abe
year of 800 or over.
(2) very Indvdua who s marred and vng wth husband
or wfe, f no |ont return s made under subsecton (b) and f
( ) Such ndvdua has for the ta abe year a gross ncome
of 2,000 or over, and the other spouse has no gross ncome or
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119.1-1.
22
( ) Such ndvdua and hs spouse each has for the ta abe
year a gross ncome and the aggregate gross ncome s 2,000 or
over.

Tte I.)
secton 5. sha be appcabe ony wth respect to ta abe years begnnng
( ) The headng of the paragraph desgnated as (a) In gen-
era. s changed to read as foows: (a) In genera. or ta abe
years begnnng before anuary 1,1940.
( ) Immedatey precedng the paragraph desgnated as u(b)
ont returns. the foowng s nserted:
( ) In genera. or ta abe years begnnng after December SI, 1939. or
ta abe years begnnng after December 31, 1939, such ndvduas sha make a
return of ncome
(1) If snge or marred but not vng wth husband or wfe for any part
of the ta abe year, and f havng for the ta abe year a gross ncome (as
defned n sectons 22 and 11 ) of 800 or over.
(2) If marred and vng wth husband or wfe for the entre ta abe
year, f no |ont return s made, and f
(a) havng for the ta abe year a gross ncome of 2,000 or over,
and the other spouse has no gross ncome or
( ) such ndvdua and hs or her spouse each has for the ta abe
year a gross ncome and the aggregate gross ncome of the two s 2,000
or over.
(3) If marred and vng wth husband or wfe for any part of the ta -
abe year but not at the cose thereof, or f marred and vng wth hus-
band or wfe at the cose of the ta abe year, but not durng the entre
ta abe year, f no |ont return s made, and f
(a) havng for the ta abe year a gross Income equa to, or n e cess
of, the credt aowed hm or her by secton 25(b) (1) and (3) (com-
puted wthout regard to any credt to whch he or she may be entted
as the head of a famy (see secton 19.25-7)), and the other spouse
has no gross ncome or
( ) such ndvdua and hs or her spouse each has for the ta abe
year a gross ncome, and ther aggregate gross ncome s 2,000 or over,
or s equa to, or n e cess of, the credt aowed them by secton 25(b)
(1) and (3) (computed wthout regard to any credt to whch ether
or both may be entted as the head of a famy (see secton 19.25-7)).
(C) The paragraph now desgnated as ( ) ont returns. s
changed to (c) ont returns.
Par. 19. Secton 19.51-2 s amended by nsertng n the frst sen-
tence after 5,000, the foowng: or, for ta abe years begnnng
after December 31, 1939, f the gross ncome does not e ceed 5,000, .
( ) There are strcken out of the frst sentence the words the
ta abe year, and nserted n eu thereof the foowng: a ta abe
year begnnng before anuary 1, 1940, and for a ta abe year begn-
nng after December 31,1939, f he has a gross ncome of 800 or over,
regardess of the amount of hs net ncome.
( ) There s nserted n the second sentence after 5,000, the fo-
owng: or 800 or over, regardess of the amount of hs net ncome,
for a ta abe year begnnng after December 31, 1939, .
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23
19.1-1-
nng after December 31,1939, and before anuary 1, 1945, see secton
19.15-1.
19.15-1.
Par. 23. Secton 19.131-8 s amended by substtutng for ampe
(2) (wth respect to corporatons), the foowng e ampe:
ampe (2): The net Income for the caendar year 1 40 and the ncome and
profts ta es pad or accrued to foregn countres and possessons of the Unted
States n the case of a domestc corporaton were as foows:
Income
and profts
ta es
(pad or
accrued).
Country.
Net
ncome.
Loss.
Unted States -
200,000
Great rtan
30.000
7,500
1,800
2,400
Canada
20.000
40.000
0.000
raz
rgentne Repubc
None.
Me co
100,000
None.
1,250
Puerto Roo -
10,000
(0,000
20.000
rance (dvdend)
9,000
3,000
rance (branch)
Wthhed.
Net ncome 330,000. 00
Less:
85 per cent on dvdends receved from domestc
corporatons ( 50,000) 42,500.00
Interest on obgatons of the Unted States 25, 000.00
7, 500.00
Norma-ta net ncome 2 2,500.00
Tota foregn net ncome 130,000.00
Unted States ta (not Incudng ta mposed under secton 102)
before aowance of credt for foregn ta es 54, 8 2. 50
The ncome and osses from a foregn countres and possessons of the
Unted States, e cept the dvdend from sources wthn rance, were derved
from branch operatons. Dvdends of 50,000 were receved from a rench
corporaton, a ma|orty of the votng stock of whch was owned by the domestc
corporaton. The rench corporaton pad to rance ncome and profts ta es
on ncome earned by t and In addton a dvdend ta for the account of ts share-
hoders on ncome dstrbuted to them, the atter ta beng wthhed and pad at
the source.
The computaton of the credt s as foows:
Great rtan.
Income and profts ta pad or accrued 7, 500
/ 30,000
Lmtaton under secton 131(b) (1) ( 500 f 54,8 2.50 ,270
Tentatve credt ,270
Canada.
/ 20,000
mtaton under secton 131(b)(1) T ot 54,8 2.50 4,180
Tentatve credt 1,800
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19.1-1. 2
raz.
/ 40,000
Lmtaton under secton 131(b)(1) I 2 2 500 of 54-8 2-50 8,3 0
Tentatve credt 2. 400
rgentne Repubc.
Tentatve credt None
Me co.
Tentatve credt None.
Puerto Rco.
Income and profts ta es pad or accrued 1,250
/ 10,000
Lmtaton under secton 131 (b) (1) ooo of 54 8 2- 0// S-090
Tentatve credt 1,250
rance.
Dvdend ta pad at source 9,000
Income and profts ta es pad or accrued on branch operatons 3,000
Income and profts ta es deemed under secton 131(f) to have been
pad, computed as foows:
Dvdend receved on December 31 of the ta abe year 50,000
Income of rench corporaton earned durng ta abe
year 200,000
Income and profts ta es pad to rance on 200.000 30, 000
ccumuated profts ( 200,000 mnus 30.000) 170,000
rench ta es appcabe to accumuated profts dstrbuted
( S (3S- ))
/ 50,000
Lmtaton under secton 131(f) ( 202 500 of r)4-8 2r, I 10,450
Income and profts ta es deemed to have been pad ( rench
ta es appcabe to accumuated profts dstrbuted to
domestc corporaton, reduced n accordance wth the m-
taton under secton 131(f)) 7,500
Tota ncome and profts ta es pad or accrued and deemed
to have been pad to rance 19, 500
Lmtaton under secton 131(b) (1) (| T t 54,8 2.50 ) 14, 30
Tentatve credt 14, 30
Sum of tentatve credts.
Great rtan ,270
Canada 1. 800
raz 2, 400
Puerto Rco 1,250
rance 14, 30
2 ,350
Lmtaton on sum of tentatve credts under secton 131(b)(2) to
/130.000
determne credt ( 2 , 500 of 54 8 2-50 ) 170
Tota amount of credt aowabe (sum of tentatve credts or
the mtaton under secton 131(b)(2), whchever a the
esser) 2 ,350
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25
19.1-1
19.142-1, reatng to fducary returns:
Sec. 7. Returns of Income Ta . (Revenue ct of 1940, Tte I.)

(b) ducary Returns. Secton 142(a) of the Interna Revenue
Code s amended to read as foows:
(a) Requrement of Return. very fducary (e cept a recever
apponted by authorty of aw n possesson of part ony of the property
of an ndvdua) sha muke under oath a return for any of the foow-
ng ndvduas, estates, or trusts for whch he acts, statng specfcay
the tems of gross ncome thereof and the deductons and credts
aowed under ths chapter and such other nformaton for the purpose
of carryng out the provsons of ths chapter as the Commssoner
wth the approva of the Secretary may by reguatons prescrbe
(1) very ndvdua havng a gross ncome for the ta abe
year of 800 or over, f snge, or If marred and not vng wth
husband or wfe
(2) very ndvdua havng a gross ncome for the ta abe
year of 2,000 or over, f marred and vng wth husband or
wfe
(3) very estate the gross ncome of whch for the ta abe
year s 800 or over
(4) very trust the net ncome of whch for the ta abe year
s 100 or over, or the gross ncome of whch for the ta abe year
s 800 or over, regardess of the amount of the net ncome and
(5) very estate or trust of whch any benefcary s a nonresdent
aen.

Tte I.)
The amendments made by ths tte, e cept the amendments made
by secton . , sha be appcabe ony wth respect to ta abe years begn-
( ) There s strcken out mmedatey after (a) n the para-
graph so desgnated the word or, and there s nserted n eu
thereof the foowng: or ta abe years begnnng before anuary
1, 19 0 Returns for ndvduas. or a ta abe year begnnng
before anuary 1, 1940, for.
( ) There s strcken out mmedatey after ( ) n the para-
graph so desgnated the word or, and there s nserted n eu
thereof the foowng: or ta abe years begnnng before anuary
1,19If Returns for estates and trusts. or a ta abe year begnnng
before anuary 1, 1940, for.
(C) There s nserted mmedatey after the paragraph desgnated
as ( ) the foowng:
(c) or ta abe years bc/nnng after December 31, 1939 Returns for nd-
tduat). or a ta abe year begnnng after December 31, 1 39, for the n-
dvdua whose ncome s n hs charge, f the gross ncome of such ndvdua
s SOO or over, f snge, or f marred and not vng wth husband or wfe for
any part of the ta abe year or f such ndvdua s marred and was vng
wth husband or wfe for any part of the ta abe year but not at the cose
of the ta abe year and hs gross ncome for the ta abe year s equa to, or n
e cess of, the credt aowed hm by secton 25(b) (1) and (3) (computed
wthout regard to hs status as head of a famy) or f such ndvdua s
marred and was vng wth husband or wfe for the entre ta abe year and
the aggregate gross ncome of both husband and wfe s 2.0(10 or over or f
such ndvdua s marred and was vng wth husband or wfe at the cose
of the ta abe year but not durng the entre ta abe year and the aggregate
gross ncome of both husband and wfe s 2,0( 0 or over, or the aggregate
290217 41 3
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I 19.1-1.
2
gross Income of both husband and wfe s equa to, or n e cess of, the credt
aowed them by secton 25(b) (1) and (3) (computed wthout regard to the
status of ether of them as head of a famy), or
(d) or ta abe yearn begnnng after December St. 19.W Returns for estate
and trusts. or a ta abe year begnnng after December 31, 1039, for the
estate for whch he acts f the gross ncome of such estate s 800 or over, and
for the trust for whch he acts f the gross ncome of such trust s 800 or over,
or the net ncome of such trust, ns computed under secton 1 2, s 100 or over,
or f any benefcary of such estate or trust s a nonresdent aen.
(D) The frst and second sentences n the second from the ast
paragraph are changed to read as foows: The return n case (a)
or (c) sna be on orm 1040 or 1040 . In case (b) or (d) a return
s requred on orm 1041.
( ) The ne t to the ast sentence n the second from the ast para-
graph s strcken out and there s nserted n eu thereof the foow-
ng: or a ta abe year begnnng before anuary 1, 1940, f the net
ncome of a decedent from the begnnng of the ta abe year to the
date of hs death was equa to, or n e cess of, the credt aowed hm
by secton 25(b) (1) and (3) (computed wthout regard to hs status
as head of a famy), or f hs gross ncome for the same perod was
5,000 or over, the e ecutor or admnstrator sha make a return for
such decedent. or a ta abe year begnnng after December 31.1939,
f the gross ncome of the decedent from the begnnng of the ta abe
year to the date of hs death was equa to, or n e cess of, the credt
aowed hm by secton 25(b) (1) and (3) (computed wthout regard
to hs status as head of a famy), the admnstrator sha make a
return for such decedent.
Par. 2 . Secton 19.142-2 s amended by strkng out n the frst
sentence and nsertng n eu thereof the foowng: or a
ta abe year begnnng pror to anuary 1, 1940, a, and by addng
after the frst sentence the foowng: or a ta abe year begnnng
after December 31, 1939, such a return must be made f the gross
ncome of such person s equa to, or n e cess of, the credt aowed
hm by secton 25(b) (1) and (3), as so computed.
( ) In the second sentence, of paragraph (b) there s nserted
mmedatey after 21, 00 the foowng: , or more than 24,000
( ) In the thrd sentence of paragraph (b) there s nserted m-
medatey after 21, 00 or ess,1 the foowng: or 24,000 or ess
(C) In the ne t to the ast sentence of paragraph (b) there s
nserted mmedatey after 10 per cent the foowng: , or at
1 1/ . per cent for a ta abe year begnnng after December 31, 1939,
and before anuary 1, 1945, or at 15 per cent for a ta abe year
begnnng after December 31, 1944, .
19.147-1:
Sec. 7. Returns of Income Ta . (Revenue ct of 1340, Tm. I.)

(c) Informaton Returns. Sect nn 147(a) of the Interna Revenue
Code (reatng to nformaton at the source) s amended by strkng
out 1,000 wherever occurrng theren and nsertng n eu thereof
SMMt
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27
19.1-1.
Sec. 9. Ta abe Yeabs to Whch ppcabe. (Revenue ct of 1940,
Tte L)
by secton 5, sha be appcabe ony wth respect to ta abe years
begnnng after December 31, 1939.
Pab. 29. Secton 19.147-1 s amended as foows:
( ) The headng of the secton s amended to read as foows:
Return of nformaton as to payments of 1,000 for 1939, and 800
for years thereafter.
( ) The frst sentence s amended to read as foows:
persons makng payment to another person of f ed or determnabe
Income of 1,000 or more n the caendar year 1939, or of 800 or more n any
subsequent year, must render a return thereof to the Commssoner for such
year on or before ebruary 15 of the foowng year, e cept as specfed In
sectons 19.147-3 to 19.147-5, ncusve.
Pah. 30. Secton 19.147-2 s amended by nsertng mmedatey
after the words are made n the frst sentence the foowng:
u durng the caendar year 1939, or of 800 or over durng a subse-
quent caendar year.
Pah. 31. Secton 19.147-3 s amended as foows:
( ) y nsertng n the frst sentence mmedatey after over
1,000 the foowng: durng the caendar year 1939, or over 800
durng a subsequent caendar year.
( ) The part desgnated as (e) s amended to read as foows:
(e) Payments of rent made to rea estate agents (but the agent must
report payments to the andord f the amount pad durng the caendar
year 1939 was 1,000 or more, or 800 or more durng a subsequent
caendar year) .
(C) The part desgnated as ( ) s amended to read as foows:
( ) Payments of saares, or other compensaton for persona servces
aggregatng ess than 2,500 for the caendar year 1939, or ess than
2,000 for subsequent caendar years, made to a marred ndvdua
(ctzen or resdent) .
Par. 32. The frst sentence of secton 19.147-7 s amended by strkng
out n any ta abe year and by nsertng mmedatey after 1,000
or more the foowng: wthn 1939, or 800 or more wthn a sub-
sequent year.
Par. 33. The second paragraph of secton 19.147-8 s amended by
strkng out 10 per cent mmedatey before the word ta .
Par. 34. Secton 19.1 3-1 s amended by strkng out of 1,000 n
the frst sentence.
Par. 35. Secton 19.201(b)- s amended by addng at the end thereof
19.15-1.
Par. 3 . Secton 19.204 (a)- s amended by addng at the end thereof
19.15-1.
Par. 37. Secton 19.207-1 s amended by addng at the end thereof the
foowng: or the defense ta mposed for ta abe years begnnng
after December 31, 1939, and before anuary 1, 1945, see secton
19.15-1.
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19.1-1.
2S
19.211-1, reatng to ta aton of aens n genera:
Sec. 4. Ta on Nonresdent en Indvduas. (Revenue ct ow
1940, Tte I.)
(a) Ta n Genera. Secton 211(a) (1) ( ) of the Interna Revenue
Code (reatng to ta on nonresdent aen ndvduas not engaged n
trade or busness wthn the Unted States and not havng an offce or
pace of busness theren) s amended by strkng out 10 per centum
and nsertng In eu thereof 15 per centum.
(b) ggregate Recepts More Than 24,000. Secton 211(a)(2) of
the Interna Revenue Code s amended to read as foows:
(2) ggregate more than 24,ooo. The ta mposed by para-
graph (1) sha not appy to any ndvdua f the aggregate amount
receved durng the ta abe year from the sources theren specfed
s more than 24,000.
(c) Ta Where Gross Income of More Than 24,000. Secton 211 (c)
of the Interna Revenue Code (reatng to ta on certan nonresdent
aen ndvduas) s amended by strkng out 21, 00 wherever oc-
currng theren and nsertng n eu thereof 24,000 and by strkng
out 10 per centum and nsertng n eu thereof 15 per centum.
Tte I.)
( ) y nsertng n the frst and thrd paragraphs mmedatey
after 21, 00 wherever t appears the foowng: ( 24,000 durng
a ta abe year begnnng after December 31,1939).
( ) y nsertng n the frst sentence of the thrd paragraph m-
medatey after the words s ta abe at the rate of 10 per cent the
foowng: for a ta abe year begnnng pror to anuary 1, 1940,
at the rate of 1 4 per cent for a ta abe year begnnng after Decem-
ber 31, 1939, and before anuary 1, 1945 (see secton 19.15-1), and
at the rate of 15 per cent thereafter, .
(C) y nsertng n the ne t to the ast sentence n the thrd para-
graph mmedatey after at the rate of 10 per cent the foowng:
, or 15 per cent, or 1 4 per cent, as the case may be, .
(D) The headng of the paragraph desgnated as ( ) s changed
to read as foows: (b) No Unted States busness or offce ggre-
gate more than 1, 00 ( 24,000 for a ta abe year begnnng after
December 31, 1939).
( ) y nsertng n the thrd sentence of the paragraph desgnated
as ( ), and n the frst sentence of the paragraph desgnated as
( ), mmedatey after 10 percent, wherever t occurs, the foow-
ng: , or 15 per cent for a ta abe year begnnng after Decem r
31, 1939, .
( ) y nsertng mmedatey after the second sentence of the
paragraph desgnated as (c) the foowng: or the defense ta
mposed for ta abe years begnnng after December 31, 1939, and
before anuary 1, 1945, see secton 19.15-1.
( ) y changng the headng of subparagraph (2) of the para-
graph desgnated as (a) to read as foows: ggregate more than
21f00 ( 24,000 for a ta abe year begnnng after December 31,
1939):
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29
19.1-1.
( ) y nsertng n the frst sentence of subparagraph (2) of the
paragraph desgnated as (a) mmedatey after 21, 00 the fo-
owng: , or more than 24,000 for a ta abe year begnnng after
December 31, 1939, .
19.214-1:
Sec. . Persona empton. (Revenue ct ok 1940, Tt| I.)

(b) Secton 214 of the Interna Revenue Code (reatng to persona
e empton of nonresdent aen ndvduas) s amended by strkng out
1,000 and nsertng n eu thereof NO0.

Sec. 9. Ta abe Years to Whch ppcabe. (Revenue ct or 1940,
Tte I.)
by secton 5, sha be appcabe ony wth respect to ta abe yeara
( ) y changng the headng n subparagraph (2) of the para-
graph desgnated as (a) to read as foows: ggregate more than
21, 00 ( 24,000 for a ta abe year begnnng after December 31,
1939).
( ) y nsertng n the frst sentence of subparagraph (2) of
paragraph (a) mmedatey after 21, 00 the foowng: , or more
than 24,000 for a ta abe year begnnng after December 31, 1939, .
(C) y nsertng n the frst sentence n paragraph (b) mmedatey
after 1,000, the foowng: or 800 for a ta abe year begnnng
after December 31, 1939, .
( ) y changng the headng n subparagraph (2) of paragraph
(a) to read as foows: ggregate mare than 21/100 ( 24,000 for a
ta abe year begnnng after December 31, 1939).
( ) y nsertng mmedatey after 21, 00 wherever t occurs
n subparagraph (2) of paragraph (a) the foowng: , or more than
24,000 for a ta abe year begnnng after December 31, 1939, .
( ) y changng the headng n subparagraph (2) of paragraph
(a) to read as foows: ggregate more than 21,GOO ( 24,000 for
a ta abe year begnnng after December 31, 1939).
( ) y nsertng n the frst sentence n subparagraph (2) of para-
graph (a) mmedatey after 21, 00 the foowng: , or more than
24,000 for a ta abe year begnnng after December 31, 1939, .
(C) y strkng out n the second sentence n paragraph (b) the
words the ta abe year and by nsertng n eu thereof the foow-
ng: a ta abe year begnnng pror to anuary 1. 1940, or 800
durng a ta abe year begnnng after December 31,1939.
Par. 45. The second sentence of secton 19.219-1 s amended by n-
sertng mmedatey after 21, 00, the foowng: or more than
24,000 for a ta abe year begnnng after December 31,1939, .
Par. 4 . The foowng s nserted mmedatey before secton
19.231-1:
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119.1-1.
30

(c) Ta on Nonresdent oregn Corporatons. Secton 231(a)(1)
of the Interna Revenue Code s amended by strkng out e cept that
n the case of dvdends the rate sha be 10 per centum, and and by
strkng out of 10 per centum.

Tte I.)
( ) The thrd paragraph s amended to read as foows:
The f ed or determnabe annua or perodca ncome from sources wthn
the Unted States, ncudng royates, of a nonresdent foregn corporaton s
ta abe at the rate of 15 per cent, e cept that for ta abe years begnnng after
December 31, 11)39, and before anuary 1, 1945, the rate s 1 -: per cent (see
secton 19.15-1), and e cept further for a ta abe year begnnng before anuary
1, 1940, dvdends are ta abe at the rate of 10 per cent. In the case of dvdends
receved by a nonresdent foregn corporaton organzed under the aws of a
contguous country, the rate sha be reduced to such rate (not ess than 5 per
cent) as may be provded by treaty wth such country.
( ) y strkng out n the fourth sentence of the paragraph
desgnated as ( ), 18 per cent and nsertng n eu thereof w 19
per cent.
(C) y nsertng at the end of the paragraph desgnated as ( )
19.15-1.
19.251-1:
Sec. . ersona empton. (Revenue ct op 1940, Tte I.)

(c) Secton 251(f) of the Interna Revenue Code (reatng to persona
e empton of ctzens entted to benefts of secton 251) s amended
by strkng out 1,000 and Insertng In eu thereof 800.
Tte I.)
after December 31, 193 ).
Par. 49. Secton 19.2 2-2 s amended by substtutng for ampe
(2) the foowng:
ampe (2): ssume that for the caendar year 1940 the facts are the same
as n e ampe (1) e cept that a speca dvdend of 45,100 s dstrbuted on
ebruary 15, 1941. Snce, under secton 13, as amended, the rate of ncome
ta for 1940 s 19 per cent and (by secton 15, added by secton 201, Revenue
ct of 1940) there s added to the ta thus computed 10 per cent thereof, the
ncome ta for such year s .38,000 pus 3,800, or a tota of 41,800. Snce the
speca dvdend ( 45,100) e ceeds the dmnuton of the ncome ta ( 41,800)
on account of the aowance of the speca credt aganst net ncome, the entre
amount of the speca credt s nowabe and the corporaton has no ncome ta
abty for 1940. Snce the speca dvdend e ceeds the amount of the ncome
ta by the sum of 3,300, whch sum equas, the amount of the dmnuton of
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31
19.1-1.
the e cess-profts ta ( 3,000 pus 10 per cent thereof under secton 204, Revenue
ct of 1 M0) on account of the aowance of the speca credt aganst net ncome,
the entre amount of the speca credt ( 200,000) s aowabe for e cess-profts
ta purposes for 1940 and hence the corporaton has no e cess-profts ta abty
for that year.
Pah. 50. The foowng s nserted mmedatey precedng secton
19.3 2-1:

(d) Ta on Mutua Investment Companes. Secton 3 2(b) of the
Interna Revenue Code s amended to read as foows:
(b) Imposton of Ta . There sha be eved, coected, and pad for
each ta abe year upon the Suppement net ncome of every mutua
nvestment company a ta equa to 19 per centum of the amount thereof.
Tte I.)
Par. 51. Secton 19.3 2-1 s amended bv strkng out n the frst
sentence 18 per cent. and nsertng n eu thereof 19 per cent.
( or the defense ta mposed for ta abe years begnnng after De-
cember 31, 1939, and before anuary 1, 1945, see secton 19.15-1.).
19.500-1:
Sec. 203. Persona odng Companes. (Revenue ct of 1940, Tte
ID
Secton 500 of the Interna Revenue Code Is amended by nsertng
(a) Genera Rue. before the frst paragraph and nsertng at the
end thereof the foowng new subsecton:
(b) Defense Ta for ve Years. In the case of every persona
hodng company, the amount of surta under ths subchapter for any
ta abe year begnnng after December 31. 1939, and before anuary 1,
1945, sha be 10 per centum greater than the amount of surta computed
wthout regard to ths subsecton.
Pah. 53. The ast sentence n the frst paragraph of secton 19.500-1
s amended by strkng out the perod at the end thereof and nsertng
n eu thereof the foowng: , e cept that for any ta abe year be-
gnnng after December 31, 1939, and before anuary 1, 1945, such
surta s ncreased 10 per cent.
(Ths Treasury decson s ssued under the authorty contaned n
sectons 1 to 4. ncusve, to 9. ncusve, 201, and 203 of the Revenue
ct of 1940 (Pubc, No. 5 , Seventy-s th Congress, thrd sesson),
and secton 2 of the Interna Revenue Code (53 Stat., 32).)
Gut T. everng,
Commssoner of Interna Revenue.
pproved September 24, 1940.
ohn L. St| van,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster September 2 , 1940, 2.45 p. m.)
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19.11-2.
32
SU C PT R . G N R L PRO ISIONS.
P RT I. R T S O T .
S CTION 11. NORM L T ON INDI IDU LS.
Secton 19.11-1: Income ta on ndvduas.
INT RN L R NU COD .
Reguatons 103, amended. (See T. 1). 5011, page 15.)
Secton 19.11-2: Ctzens or resdents of
the Unted States abe to ta .
( so Secton 211, Secton 19.211-1.)
1940-44-104
I. T. 3419
INT RN L R L N COD .
oregn |ournasts and newspaper correspondents n the Unted
States, wo are natonas of the country of R, can not be granted e -
empton from the payment of the edera ncome ta by reason of
the fact that mercan newspaper correspondents n the country of
II are not requred to pay ncome ta to that country.
dvce s requested whether |ournasts and newspaper correspond-
ents from the country of R, who are n the Unted States, may be
granted e empton from the edera ncome ta on the bass of rec-
procty. It s stated that mercan newspaper correspondents n the
country of R are not requred to pay ncome ta to that country.
There s no provson n the Interna Revenue Code e emptng for-
egn |ournasts or newspaper correspondents n the Unted States,
who are natonas of the country of R, from the payment of edera
ncome ta on the bass of recprocty, and there s no treaty betweeen
the Unted States and that country whch contans a provson for that
purpose. ournasts or newspaper correspondents from the country
of R who are n the Unted States are, therefore, abe for the edera
ncome ta .
foregn |ournast or newspaper correspondent n the Unted
States who s a resdent of the Unted States s abe for the ta wth
respect to hs ncome from sources wthn and wthout the Unted
States. owever, f such ndvdua s a nonresdent aen (1) who s
temporary present n the Unted States for a perod or perods not
e ceedng 90 days durng the ta abe year, and (2) whose compensa-
ton does not e ceed 3,000 n the aggregate for servces performed
wthn the Unted States as an empoyee of, or under contract wth, a
nonresdent aen, foregn partnershp, or foregn corporaton, not en-
gaged n trade or busness wthn the Unted States, he s not sub|ect
to Unted States ncome ta on such condensaton. If, however, such
tests are not met, ncome ta abty attaches to hs ncome from
Unted States sources, ncudng hs earned ncome from such sources.
(Sectons 119(a)3 and 211(a) of the Interna Revenue Code.)
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33 19.13-7.
S CTION 12. SU T ON INDI IDU LS.
Secton 19.12-1: Surta .
INT RN L R NU COD .
Reguatons 103, amended. (See T. D. 5011, page 15.)
Secton 19.12-2: Computaton of surta .
INT RN L R NU COD .
S CTION 13. T ON CORPOR TIONS IN
G N R L.
Secton 19.13-1: Ta on corporatons n genera Ta abe
years begnnng n 1939.
nterna revenue code.
Secton 19.13-5: Ta on corporatons n genera Ta abe
years begnnng after December 31, 1939.
Secton 19.13- : Ta under genera rue Ta abe years
Secton 19.13-7: ternatve ta (corporatons wth
norma-ta net ncomes sghty more than
25,000) Ta abe years begnnng after Decem-
ber 31, 1939.
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15
34
S CTION 14. T ON SP CI L CL SS S
O CORPOR TIONS.
Secton 19.14-1: Ta on speca corporatons Ta abe
years begnnng n 1939.
INT RN L R NU COD .
Secton 19.14-2: Ta on speca corporatons Ta abe
years begnnng after December 31, 19.,9.
S CTION 15. D NS T OR I Y RS.
( so Secton 500, Secton 19.500-1.) 1940-3 -10405
Mm. 5091
INCOM T .
Computaton of defense ta provded by secton 15 of the Interna
Revenue Code, as added by secton 201 of the Revenue ct of 1940,
nud secton 500 of the Interna Revenue Code, as amended by sec-
ton 203 of such ct returns (fna) coverng ta abe years begn-
Treasury Department.
Offce of Commssoner of Interna Revenue.
Washngton, D. C, ugust 10, 10 ,f .
Coectors of Interna Revenue, Interna Revenue gents n Charge
and Others Concerned:
1. ttenton s nvted to secton 201 of the Revenue ct of 1940,
approved une 25, 1940 (Pubc, No. C5 , Seventy-s th Congress,
thrd secton), whch amends Chapter 1 of the Interna Revenue Code
by addng the foowng new secton:
Sec. 15. Defense Ta fob ve Years.
In the case of any ta payer, the amount of ta under ths chapter for any
ta abe year begnnng after December 31, 1039, and before anuary 1, 1945,
sha be 10 per centum greater than the amount of ta computed wthout regard
to ths secton. In no case sha the effect of ths secton be to ncrease the ta
computed wthout regard to ths secton by more than 10 per centum of the
amount by whch the net ncome e ceeds such ta . or the purposes of ths
secton, the ta computed wthout regard to ths secton sha be such ta efore
the appcaton of the credt provded n secton 31 ( foregn ta credt ),
and the credt provded n secton 32 (ta es wthhed at the source).
2. Secton 203 of the Revenue ct of 1940 amends secton 500 of the
Interna Revenue Code by addng (n part) the foowng new
subsecton:
(h) Defense Ta or ve Years. In the case of every persona hodng
company, the amount of surta under ths subchapter for any ta abe year
begnnng after December 31, 1939, and before anuary 1, 1945, sha be 10 per
centum greater than the amount of surta computed wthout regard to ths
subsecton.
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35
15.
3. Income ta return forms (ncudng persona hodng company
return forms) for the caendar year 1940 and for fsca years endng
n 1941 w be prepared and prnted n due course. Unt such forms
are made avaabe, n the case of ta abe years begnnng after Decem-
ber 31, 1939, return forms for 1939 w be utzed by addng the de-
fense ta of 10 per cent to the ncome ta computed w thout regard to
secton 201 and secton 203 of the Revenue ct of 1940. It shoud
be noted that the defense ta s 10 per cent of the ncome ta before
aowance of credt for foregn ta es or ta es wthhed at the source.
pproprate notatons shoud be nserted wth a typewrter or pen
and nk so that the amount of ta abty on each return w appear
as foows:
orm 1040:
Lne 31. Tota ta (Item 30, or If you had a net ong-term capta
gan or oss, enter ne 1 , Schedue ) (Defense tu , )
orm 1040 :
Lne 17. Income ta (4 per cent of tem 1 ) (Defense ta ,
)
orm 1040 :
Lne 34. Tota ta (tem 33, or f you had a net ong-term capta
gan or oss, enter ne 1 , Schedue ) (Defense ta , )
orm 1040N :
Lne 2. Tu abty (10 per cent of tem 1) (or 5 per cent of tem
1 If resdent of Canada) (Defense ta , f not resdent of Canada,
)
orm 104() -n :
Lne 27. Tota ta (tem 2 or 10 per cent of tem 9, -whchever
s arger) (Defense ta , )
orm 1040C:
Lne 2. Ta abty (10 per cent of tem 1) (5 per cent of tem 1
f resdent of Canada) (Defense ta , f not resdent of Canada,
)
or
Lne 1 . Tota ta (tem .r . or 10 per cent of ne 20, Schedue C,
whchever s arger) (Defense ta , )
or
Lne 29. Tota ta (tems 27 and 28) (Defense ta , )___
orm 1040D:
Lne 2. stmated ta abty (10 per cent of tem 1) (5 per cent
of tem 1 f resdent of Canada) (Defense ta , f not resdent of
Canada, )
or
Lne 1 . stmated tota ta (tem 15, or 10 per cent of ne 20,
Schedue C, whchever s arger) (Defense ta , )
or
Lne 29. stmated tota ta (tems 27 and 28) (Defense ta ,
)
orm 1041:
Lne 2 . Tota ta (tem 25, or f you had a net ong-term capta
gan or oss, enter ne 14, Schedue ) (Defense ta , )
orm 1120:
Lne 33. Tota ncome ta (ne 54, Schedue ) (Defense ta ,
)
orm 1120 :
Lne 47. Tota ncome ta (tota ta n coumn 3 of tems 44, 45,
and 40) (Defense ta , )
orm 1120 :
Lne 20. Tota surta n tems 18 and 19 (Defense ta , ).
orm 1120L:
Lne 20. Income ta (1 per cent of Item 19) (Defense ta ,
)
or
Lne 24. Income ta , foregn company (G /| per cent of tem 23)
(Defense ta , )
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19.22(a)- .
3
orm 1120N :
Lne 3. Ta abty on tem 1 (15 per cent of tem 1) (Defense
ta , )
Lne 4. Tu abty on tem 2 (10 per cent of tem 2) (or, If
corporaton s organzed under aws of Canada, 5 per cent of
tem 2) (Defense ta , f corporaton s not organzed under aws
of Canada, )
4. The returns referred to n paragraph 3 above w be gven a
premnary e amnaton n the coectors offces for the purpose of
ascertanng whether the defense ta provded by sectons 201 and 203
s correcty computed. The assessments w be made n the usua
manner.
5. Correspondence reatng to the provsons of ths mmeograph
shoud refer to ts number and the symbos IT: TM.
Gut T. everno,
Cam m ssone r.
S CTION 15. CORPOR T T S CTI
OR TWO T L Y RS:
Secton 19.15-1: Purpose and effect of secton 15.
INT RN L R NU COD .
P RT II. COMPUT TION O N T INCOM .
S CTION 22(a). GROSS INCOM : G N R L
D INITION.
Secton 19.22 (a )-: What ncuded n gross 1940-38-10423
ncome. I. T. 3407
INT RN L R NU COD .
Certan and, budngs, machnery, equpment, and other fac-
tes are beng eased by the Y Corporaton, whch Is whoy owned
by Ihe O Government, to the N Company for the purpose of manu-
facturng certan war matera for that Government. such
property, sub|ect to the ease, s to reman the property of the
Y Corporaton. No renta, e cept ta es and nsurance, s to be
pad by the essee. The ease w termnate upon the one hundred
and eghteth day after the N Compnny ceases to be obgated to
dever such war matera to the O Government under a contract
entered nto between them, or upon the one hundred and eghteth
day after the cessaton of the natona emergency decared by the
Presdent of the Unted States on September 8, 1931), to e st,
whchever date s ater.
ed, for edera ncome ta purposes, no ncome w be reazed
by the N Company as the resut of the mere e ecuton of the ease
or from the mere occupaton and use of the eased property durng
the term of the ease.
dvce s requested whether the N Company w reaze ncome,
for edera ncome ta purposes, as the resut of the mere e ecuton
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37
19.22(a)- .
of a ease or the mere occupaton and use of eased property under
the crcumstances heren set forth.
The provsons of the ease consttutng factors n a determnaton
of the ssue are as foows:
The Y Corporaton, a domestc corporaton whch s whoy owned
by the O Government, s easng to the N Company for use by t n
manufacturng war matera certan and, budngs, machnery,
equpment, and other factes for a perod to commence on the date
of the e ecuton of the ease and to termnate upon the one hundred
and eghteth day after the N Company sha cease to be under ob-
gaton to dever any such war matera to the O Government under
a contract entered nto between them, or upon the one hundred and
eghteth day after the cessaton of the natona emergency decared
by the Presdent of the Unted States on September 8, 193 9, to e st,
whchever date s ater. s a consderaton for the ease of sad
factes (ncudng and, budngs, machnery, and equpment),
whch factes under the provsons of the contract are and sha be
at a tmes the property of the Y Corporaton sub|ect ony to the
terms of the ease, the N Company agrees to pay as rent oca drect
property ta es when due and assessed aganst such factes for the
caendar year 1940 and succeedng caendar years, e cept for the ca-
endar year n whch such ease termnates, for whch year of termna-
ton the N Company w pay an amount proportonate to that part
of the year for whch the term of the ease sha e tend.
urther provsons of the ease are that the N Company w, at ts
e pense, nsure a of the factes aganst fre and such other hazards
as t normay carres wth respect to ts own property of smar
nature, such nsurance to be for the beneft of the Y Corporaton and
the N Company n proporton to ther respectve nterests. ny
nsurance money thus receved by the Y Corporaton for oss or n|ury
to any of the factes w be pad over to the N Company to be
e pended by the atter for repacement of the n|ured or ost fac-
tes, such new factes to be the property of the Y Corporaton and
sub|ect to the ease n the same manner as the ost or n|ured factes
so repaced. Durng the term of the ease, the N Company w have
compete charge and contro of a the factes and the rght to use
them for the manufacture of certan specfed war matera, t beng
understood that such eased factes, or factes owned by the N
Company of substantay equvaent productve capacty, w be
devoted to performng the contract mentoned. Wth respect to any
factes whch may not yet have been acqured by the Y Corporaton
at the effectve date of the ease, t s provded that ts terms sha
become effectve mmedatey as to such factes upon ther acqus-
ton by that corporaton.
ased upon the foregong, t s hed that no ta abe ncome wthn
the meanng of sectons 21 and 22 of the Interna Revenue Code, w
be reazed by the N Company as a resut of the mere e ecuton of the
ease or from the mere occupaton and use of the eased property
durng the term of the ease.
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19.22(a)- .
3S
Secton 19.22(a)-: What ncuded n gross 1940-38-1042
ncome. I. T. 3409
INT RN L R NU COD .
or edera ncome ta purposes, no ncome w be reazed by
the M Company as the resut of the recept of funds from the
O Government to be used In e pandng manufacturng and process-
ng factes and pant capacty to an e tent not |ustfed by present
or otherwse antcpated busness n order to compete a contract
for the devery of war matera to that Government, a factes
to be acqured wth such funds to be the property of the Y Corpo-
raton, whch s whoy owned by the O Government.
dvce s requested whether, for edera ncome ta purposes, n-
come w be reazed by the M Company as the resut of the recept
of funds from the O Government to be used for pant e panson n
connecton wth a contract for war matera under the crcumstances
heren set forth.
The M Company (herenafter referred to as the seer ), organ-
zed under the aws of the State of R, and the O Government (here-
nafter referred to as the purchaser ) are enterng nto a contract
for the producton and devery of certan war matera. The factors
reevant n the determnaton of the present ssue are as foows:
The seer agrees to cause to be manufactured by the N Com-
pany, a whoy-owned subsdary of the seer, and to be dev-
ered to the purchaser, and the purchaser agrees to accept
and pay for, sub|ect to the terms and condtons set forth n the
contract, certan war matera. In order to manufacture and dever
to the purchaser such matera sod under the contract, t w be
necessary to e pand the manufacturng and processng factes and
pant capacty of the N Company to an e tent not |ustfed by the
present or antcpated voume of the N Company. Such pant e pan-
son must be effected n order to meet the devery requrements under
the contract. The purchaser has provded the funds,n an amount
aggregatng 2G.r doars, for ncreasng the productve capacty to
meet the productve requrements referred to above, and the seer
agrees to e pend the same as the agent of the purchaser n acqur-
ng the necessary and, budngs, equpment, and machnery for such
ncreased producton, a of whch sha beong to and be owned by
the Y Corporaton, a domestc corporaton organzed by the pur-
chaser, whch sha ssue a of ts capta stock to the purchaser
or ts nomnee n e change therefor, such propertes are to be eased
to the N Company by the Y Corporaton by a ease n the form anne ed
to the contract. The tota amount of 2 .c doars sha be pad by the
purchaser to the seer by depostng on specfed dates to the
credt of the seer s account n the Z ank the amounts set out n
the contract.
urther provsons of the contract are that n the event of termna-
ton by the purchaser n accordance wth the provsons of the
contract, the seer w dscontnue as soon as practcabe that
porton of the program for e panson of manufacturng and process-
ng factes and pant capacty whch s not then competed and
whch s not requred by the seer to compete the manufacture
of the war matera desgnated by the purchaser to be competed
n accordance wth the contract. Upon such dscontnuance, the
seer sha be under no further obgaton to contnue the pant
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39
5 19.22(a)- .
e panson program. If the e pendtures made for the purchaser
by the seer for the tems sted n the contract aggregate ess
than the tota of a payments by the purchaser to the seer
under the provsons of the contract, the e cess of such aggregate
payments over such aggregate e pendtures sha be refunded by the
seer to the purchaser. factes, ncudng and, bud-
ngs, machnery, and equpment purchased by the seer for the
purchaser n accordance wth the provsons of the contract are and
sha be at a tmes the property of the Y Corporaton, sub|ect ony
to the terms of the ease to be e ecuted and anne ed to the contract.
ased upon the foregong, t s hed that under the contract n
queston, no ta abe ncome, wthn the meanng of sectons 21 and 22
of the Interna Revenue Code, w be reazed by the M Company as
a resut of the recept of the funds so advanced.
Secton 19.22(a)-: What ncuded n gross 1940-4 -10484
ncome. I. T. 3425
INT RN L R NU COD .
The S cents per gaon credt on certan fortfed wne, provded
for n Pubc, No. 55 (Seventy-s th Congress, thrd sesson), Is
ncudbe n gross ncome as of une 30, 1940, by ta payers entted
to such credt who keep ther books on the accrua bass. Ta -
payers keepng ther books on the cash recepts and dsbursements
bass who are entted to the credt shoud ncude t n gross ncome
as of the date of recept of the Commssoner s certfcate therefor.
dvce s requested as to the treatment, for edera ncome ta
purposes, of the credt of 5 cents per gaon on certan fortfed wne,
provded for n Pubc, No. G55 (Seventy-s th Congress, thrd ses-
son ), approved une 24, 1940.
The pertnent provsons of Pubc, No. 55, supra, read as foows
Sec. 4. Upon the fng of a cam therefor by the propretor of any bonded
wnery or bonded storeroom n whch there was stored on une 30, 1940, or to
whch there was n transt on that date, wne awfuy fortfed wth brandy
or wne sprts, and contanng more than 14 per centum of absoute acoho by
voume, and not e ceedng 24 per centum of absoute acoho by voume, the
Commssoner of Interna Revenue s authorzed to ssue to such propretor
sutabe documents enttng such propretor to a credt of 5 cents per gaon n
respect of each gaon of such fortfed wne whch the Commssoner sha fnd
was on such propretor s bonded wnery or bonded storeroom premses on une
30, 1940, or n transt thereto. The amount of such credt sha be aowed n
whoe or n part n the purchase of wne stamps. The cam sha be supported
by an nventory, prepared, and fed by the propretor n such form and manner
as the Commssoner of Interna Revenue sha prescrbe by reguatons, ap-
proved by the Secretary of the Treasury, and by such other proof as the Com-
mssoner may from tme to tme requre. The aforesad credt to the pro-
pretor may be transferred by the propretor to whom ssued to the propretor
of any other bonded wnery or bonded storeroom. cams under ths secton
must be fed on or before October 1, 1940.
It s hed that the tota amount of ths credt s ta abe ncome for
edera ncome ta purposes to the propretor of the bonded wnery
or bonded storeroom entted thereto and s ncudbe n hs gross
ncome, upon the accrua bass, as of une 30, 1940, when hs rght to
the credt became f ed, the amount thereof coud be determned
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19.22(a)-3.
40
appro matey, and there was reasonabe certanty that the rght
woud be converted nto money or ts equvaent or, upon the cash
recepts and dsbursements bass, as of the date he receves the Com-
mssoner s certfcate for the credt, such certfcate beng appcabe
by hm to the purchase of wne stamps or transferabe to another such
propretor for such use or transfer.
Secton 19.22(a)-3: Compensaton pad other 1940-44-104 7
than n cash. L T. 3420
INT RN L R NU COD .
The vnne of subsstence and quarters furnshed femae members
of the rmy Nurse Corns and Navy Nurse Corps does not consttute
ta abe ncome.
dvce s requested whether the vaue of subsstence and quarters,
desgnated aowances, furnshed femae members of the rmy
Nurse Corps and the Navy Nurse Corps consttutes ta abe ncome
under secton 19.22(a)-3, Reguatons 103, whch provdes n part as
foows:
The vaue of quarters furnshed to the commssoned offcers, chef
warrant offcers, warrant offcers, and ensted personne of the rmy, Navy,
Coast Guard, Coast and Geodetc Survey, and Pubc eath Servce, or amounts
receved by them as commutaton of quarters, are to be e cuded from gross
ncome.
Secton 13 of the ct of une 10, 1922 (42 Stat., 25), s entted
n ct to read|ust the pay and aowances of the commssoned and
ensted personne of the rmy, Navy, Marne Corps, Coast Guard,
Coast and Geodetc Survey, and Pubc eath Servce, and provdes:
Sec. 13. That, commencng uy 1, 1922, the annua pay of femae nurses of
the rmy and Navy sha be as foows: Durng the frst three years of servce,
840 from the begnnng of the fourth year of servce unt the competon
of the s th year of servce, 1,080 from the begnnng of the seventh year of
servce unt the competon of the nnth year of servce, 1,380 from the begn-
nng of the tenth year of servce, 1,5 0. Superntendents of the Nurse Corps
sha receve a money aowance at the rate of 2,500 a year, assstant supern-
tendents, drectors, and assstant drectors at the rate of 1,500 a year, and
chef nurses at the rate of 000 a year, n addton to ther pay as nurses. Nurses
sha be entted to the same aowance for subsstence as s authorzed n sec-
ton 5 of ths ct for offcers recevng the pay of the frst perod, and to
the same aowance for renta of quarters as s authorzed n secton of ths
ct for offcers recevng the pay of the frst perod.
It appears that femae members of the rmy Nurse Corps and the
Navy Nurse Corps are accorded the reatve rank of offcers wth
respect to aowances for renta of quarters, subsstence, and trave,
and that they are rated nether as cvan empoyees nor as ensted
personne. (Sectons 41 and 42 of Tte 34, U. S. C. ., and sectons
1 1, 1 4. 937, and 938 of Tte 10, U. S. C. .)
It s hed, therefore, that the vaue of subsstence and quarters
(aowances) furnshed the femae members of the rmy Nurse Corps
and the Navy Nurse Corps does not consttute ta abe ncome for
edera ncome ta purposes. (Cfford L. one v. Unted States,
0 a. Cs., 552 T. D. 3724, C. . I -2, 13 (1925).)
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41
19.22(a)-8.
Secton 19.22(a)-8: Sae of stock and rghts. 194047-104S9
I. T. 342
INT RN L R NU COD .
The M Company s proposed method of dentfcaton of secur-
tes sod, by enterng each sae aganst an arbtrary seected pur-
chase as shown n the edger account, does not consttute sutccnt
dentfcaton of the securtes n determnng, for edera ncome
ta purposes, the gan or oss resutng from ther sae. Where
the dentty of securtes can not be determned by ther certfcate
numbers, the frst-n, frst-out rue of dentfcaton s appcabe.
dvce s requested whether the dentty of securtes sod from
ute purchased at dfferent dates or at dfferent prces may be de-
termned, for edera ncome ta purposes, by the method heren
set forth.
The M Company s a arge hoder of securtes, prncpay Gov-
ernment bonds, acqured for nvestment. It has been the practce of
the M Company to determne gan or oss upon dsposton of such
securtes through the appcaton of the frst-n, frst-out rue.
ffectve anuary 1,1940, the ta payer desres to change ths practce
and thereafter to dentfy the securtes sod wth those acqured on
specfc purchases because of the enactment of secton 212 of the
Revenue ct of 1939, whch amended secton 117(d) of the Interna
Revenue Code reatng to mtaton on capta osses. y reason of
the change made n secton 117(d) of the Interna Revenue Code, t
w be necessary to make a dstncton between ong-term and
short-term capta gans.
The method now proposed to be empoyed s outned as foows:
purchases w be posted n the nvestment edger. Ths s an
orgna record and part of the basc records of the M Company.
Postngs theren must be made concurrenty wth the transactons to
whch they reate, and once made can not be changed. The edger
w gve descrpton, date, par vaue, prce, cost, and accrued nter-
est of each separate purchase. ach sae w he posted n the edger
aganst a partcuar purchase or purchases, the sae beng descrbed
by date, prce, etc., and gan or oss w be cacuated accordngy.
In addton, each sae order and devery tcket w be marked to
show that the securtes beng sod were acqured on a partcuar date,
and f more than one ot of the partcuar ssue was purchased on
that date at dfferent prces, the sae order and devery tcket w
ndcate the partcuar ot beng sod. Such book entres and records
w consttute a defnte and rrevocabe record of an ntenton to
se certan specfc securtes.
It s hed that the above-descrbed method does not consttute a
suffcent dentfcaton of the securtes n determnng, for edera
ncome ta purposes, the gan or oss resutng from the sae thereof.
Ths rung s based prmary on the fact that, under the method
proposed, there w be on hand unsod securtes whch, n so far
as the nvestment edger s concerned, were dsposed of severa
months prevousy. It foows that where specfc dentfcaton by
certfcate numbers can be made, the actua cost of such certfcates
shoud be used n determnng gan or oss upon ths sae. In cases
where the dentty of the securtes by certfcate numbers can not
be determned, the frst-n, frst-out rue of dentfcaton s ap-
pcabe.
290217 41
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19.22(a)-13.
42
Secton 19.22(a)-13: Improvements bv essees. 1940-28-10323
T.D. 4980
TITL 2 INT RN L R NU C PT R I. SU C PT R , P RT 19.
INCOM T .
Reguatons 103 amended. Improvements by essee.
Washngton, D. C.
Secton 19.22(a)-13 of Reguatons 103 Part 19, Tte 2 , Code of
edera Reguatons, 1940 Sup. s amended to read as foows:
Improvements by essee. If budngs are erected or other mprovements are
made by a essee, the essor sha ncude n gross ncome as of the date he acqures
possesson or contro of the rea estate wth such mprovements thereon, at the
termnaton of the ease by forfeture or otherwse, an amount equa to the e cess
of the vaue as of such date of the rea estate wth such mprovements thereon over
the vaue as of such date of the rea estate wthout such mprovements.
If for ta abe years endng pror to anuary 1, 1940, other than the year n
whch the ta payer acqured possesson or contro of the rea estate wth the
mprovements thereon, there has been ncuded n gross ncome the vaue of such
mprovements or the severa parts thereof f ed by reference to an opton
granted n any ncome ta reguatons, then such ncuson sha not be dsturbed
and the ta payer, for n ta abe years subsequent to (he one n whch there was
frst so ncuded any of such ncome, may contnue to return ncome wth respect
to such property on such bass, f wthn 90 days after the approva of ths
Treasury decson, or wthn such ater perod as may be acceptabe to the Com-
mssoner, he fes orm 90S, n dupcate, wth the Commssoner of Interna
Revenue, Washngton, D. C, ttenton Income Ta Unt, Records Dvson, sg-
nfyng hs eecton to have ncome n respect of such property for a ta abe years
determned upon the bass heretofore empoyed, and e pressy wavng any
rght whch he mght have had to cam or receve any refund, credt, or other
ta advantage whch woud resut from the e cuson of such tems from ncome
for the years for whch ncuded.
The rue stated n the frst paragraph of secton 19.22(a)-13 of
Reguatons 103, as amended by ths Treasury decson, sha be app-
cabe wth respect to ta abe years begnnng pror to anuary 1,
1939, uness the ta payer fes orm 9 8 pursuant to secton 19.22 (a)-13
of Reguatons 103, as amended by ths Treasury decson, n whch
case the rue stated heren sha be dsregarded and the rue stated n
pror reguatons sha be appcabe.
(Ths Treasury decson s prescrbed pursuant to sectons 22(a). 2,
and 3791 (b) of the Interna Revenue Code ( S Stat., 9,32,4 7), and the
correspondng provsons of pror nterna revenue aws.)
Gut T. everno,
pproved uy 2, 1940.
ohn L. Suvan,
( ed wth the Dvson of the edera Regster uy 5, 1940, 12.52 p. m.)
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43
522(b).
S CTION 22(b) GROSS INCOM : CLUSIONS
ROM GROSS INCOM .
1940 27-10313
T. D. 4975
TITL 20 INT RN L R NU . C PT R L SU C PT R . T RT 25.
INCOM T .
Reguatons affectng the ta aton of nonresdent aen ndvd-
uas, resdents of Sweden, and of Swedsh corporatons under the
ta conventon between the Unted States and Sweden, procamed
bv the Presdent of the Unted States December 12, 1939, effectve
anuary 1, 1940.
Washngton, D. G.
Tabe of Contents.
Secton.
25.0. Introductory.
25.1. Scope of reguatons.
25.2. Defntons.
23.3. Scope of conventon wth respect to determnaton of ndustra and
commerca profts 1 of a nonresdent aen ndvdua resdent of
Sweden or of a Swedsh corporaton or other entty carryng on a
Swedsh enterprse n the Unted States,
(a) Genera.
( ) No Unted States permanent estabshment.
(c) Unted States permanent estabshment.
25.4. Contro of a domestc enterprse by a Swedsh enterprse.
25.5. Income from operaton of shps or arcraft.
25. . Income from rea property.
25.7. Mnera royates.
25.8. Patent and copyrght royates.
25.9. Dvdends and nterest.
25.10. Capta gans.
25.11. Wages, saares and smar compensaton, pensons and fe annutes.
25.12. Compensaton for abor or persona servces.
25.13. Remttances.
25.14. Scope of rtce I .
(a) Genera.
( ) Credt for Swedsh ncome ta es.
25.15. Recproca admnstratve assstance.
25.1 . Informaton to be furnshed n the ordnary course.
25.17. Informaton n specfc cases.
25.18. Mutua assstance In the coecton of ta es.
Secton 25.0. Introductory. The ta conventon and protoco
between the Unted States and Sweden, herenafter referred to as the
conventon, procamed by the Presdent of the Unted States on
December 12,1939, and effectve anuary 1, 1940, provdes as foows:
rtce I.
The ta es referred to n ths conventon are:
(o) In the case of the Unted States of merca:
(1) The edera ncome ta es, ncudng surta es and e cess-profts ta es.
(2) The edera capta stock ta .
( ) In the case of Sweden:
(1) The natona ncome and property ta , ncudng surta .
(2) The natona speca property ta .
(3) The communa ncome ta .
1 SvvMons 25.0 to 25.18 Issued nnn r the authorty contaned In secton 2 of the In-
terna Revenue Code (53 Stat., 32) and the ta conventon between the Unted States
and Sweden (54 Stat., ).
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22(b).
44
It s mutuay agreed that the present conventon sha aso appy to any other
or (dtona ta es mposed by ether contractng State, subsequent to the date
of sgnature of ths conventon, upon substantay the same bases as the ta -
enumerated heren.
The benefts of ths conventon sha accrue ony to ctzens nd resdents of
the Unted States of merca, to ctzens and resdents of Sweden and to Unted
States or Swedsh corporatons and other enttes.
rtce II.
n enterprse of one of the contractng States s not sub|ect to ta aton by
the other contractng State n respect of ts ndustra and commerca profts
e cept n respect of such profts aocabe to ts permanent estabshment n the
atter State. The ncome thus ta ed n the atter State sha be e empt from
ta aton n the former State.
No account sha be taken, n determnng the ta n one of the contractng
States, of the mere purchase of merchandse effected theren by an enterprse
of the other State
The competent authortes of the two contractng States may ay down rue
by agreement for the apportonment of ndustra and commerca profts.
rtce III.
When nn enterprse of one of the contractng States, by reason of ts partc-
paton n the management or capta of an enterprse of the other contractng
State, makes or mposes on the atter n ther commerca or fnanca reatons
condtons dfferent from those whch woud be made wth an ndependent enter-
prse, any profts whch shoud normay have appeared n the baance sheet
of the atter enterprse but whch have been n ths manner dverted to the
former enterprse may, sub|ect to appcabe measures of appea, be ncor-
porated n the ta be profts of the atter enterprse. In such case consequent
rectfcatons may be made n the accounts of the former enterprse.
rtce I .
Income whch an enterprse of one of the contractng States derves from the
operaton of shps or arcraft regstered n that State s ta abe ony n the
State n whch regstered. Income derved by such an enterprse from the
operaton of shps or arcraft not so regstered sha be sub|ect to the provsons
of rtce II.
rtce .
Income of whatever nature derved from rea property, ncudng gans de-
rved from the sae of such property, but not ncudng nterest from mortgages
or bonds secured by rea property, sha be ta abe ony n the contractng State
n whch the rea property s stuated.
rtce I.
Royates from rea property or n respect of the operaton of mnes, quarres,
or other natura resources sha be ta abe ony, n the contractng State n
whch such property, mnes, quarres, or other natura resources are stuated.
Other royates and amounts derved from wthn one of the contractng
States by a resdent or by a corporaton or other entty of the other contractng
State as consderaton for the rght to use copyrghts, patents, secret processes
and formuas, trade-marks and other anaogous rghts, sha be e empt from
ta aton n the former State.
rtce II.
1. Dvdends sha be ta abe ony In the contractng State n whch the share-
hoder s resdent or, f the sharehoder s a corporaton or other entty, n the
contractng State n whch such corporaton or other entty s created or organ-
zed : provded, however, that each contractng State reserves the rght to
coect and retan (sub|ect to appcabe provsons of ts revenue aws) the
ta es whch, under ts revenue aws, are deductbe at the source, but not n
e cess of 10 per centum of the amount of such dvdends. or the purposes of
ths artce the natona Income and property ta mposed by Sweden sha be
deemed to be a ta deducted at the source.
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45
22(b).
2. Notwthstandng the provsons of rtce II of ths conventon, the
provsons of ths artce may be termnated by ether of the contractng States
at the end of two years from the date upon whch ths conventon enters nto
force or at any tme thereafter, provded at east s months pror notce of
termnaton s gven, such termnaton to become effectve on the 1st day of
anuary foowng the e praton of such -month perod. In the event the
provsons of ths artce are termnated, the provsons of
(1) rtce III(2), n so far as they reate to the s eca property tu
mposed by Sweden upon shares n a corporaton
(2) rtce I (b)(2), reatng to the aowance of an addtona deduc-
ton from ta es on dvdends and
(3) rtce I, n so far as they reate to e change of Informaton wth
respect to dvdends,
w kewse termnate.
rtce III.
Interest on bonds, notes, or oans sha be ta abe ony n the contractng
State n whch the recpent of such nterest s a resdent or, n the case of a
corporaton or other entty, n the State n whch the corporaton or other entty
s created or organzed provded, however, that each contractng State reserves
the rght to coect and retan (sub|ect to appcabe provsons of ts revenue
aws) the ta es whch, under ts revenue aws, are deductbe at the source.
rtce I .
Gans derved n one of the contractng States from the sae or e change of
capta assets by a resdent or a corporaton or other entty of the other con-
tractng State sha be e empt from ta aton n the former State, provded such
resdent or corporaton or other entty has no permanent estabshment n the
former State,
rtce .
Wages, saares and smar compensaton and pensons pad by one of the
contractng States or by the potca subdvsons or terrtores or possessons
thereof to ndvduas resdng n the other State sha be e empt from ta aton
n the atter State.
Prvate pensons and fe annutes derved from wthn one of the contractng
States and pad to ndvduas resdng n the other contractng State sha be
e empt frota ta aton n the former State.
rtc|: I.
(a) Compensaton for abor or persona servces, ncudng the practce of
the bera professons, sha be ta abe ony n the contractng State n whch
such servces are rendered.
( ) The provsons of paragraph (a) nre, however, sub|ect to the foowng
e ceptons:
resdent of Sweden sha be e empt from Unted States ta upon compensa-
ton for abor or persona servces performed wthn the Unted States of mer-
ca f he fas wthn ether of the foowng cassfcatons:
1. e s temporary present wthn the Unted States of merca for a
perod or perods not e ceedng a tota of 180 days durng the ta abe year
and hs compensaton s receved for abor or persona servces performed
as an empoyee of, or under contract wth, a resdent or corporaton or other
entty of Sweden or
2. e s temporary present n the Unted States of merca for a perod
or perods not e ceedng a tota of 90 days durng the ta abe year and the
compensaton receved for such servces does not e ceed 3,000 n the
aggregate.
In such cases Sweden reserves the rght to the ta aton of such ncome.
(c) The provsons of paragraph (b) of ths artce sha appy, mutats
mutands, to a resdent of the Unted States of merca dervng compensaton
for persona servces performed wthn Sweden.
( ) The provsons of paragraphs (b) and (c) of ths artce sha have no
appcaton to the professona earnngs of such ndvduas as actors, artsts,
muscans and professona athetes.
(e) The provsons of ths artce sha have no appcaton to the ncome to
whch rtce reates.
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122(b).
40
rtce II.
Students or busness apprentces from one contractng State resdng In the
other contractng State e cusvey for purposes of study or for acqurng busness
e perence sha not be ta abe by the atter State n respect of remttances
receved by them from wthn the former State for the purposes of ther mante-
nance or studes.
rtce III.
In the ease of ta es on property or ncrement of property the foowng pro-
vsons sha be appcabe:
(1) If the property conssts of:
(a) Immovabe property and accessores appertanng thereto
( ) Commerca or ndustra enterprses, ncudng martme shppng
and ar transport undertakngs
the ta may be eved ony n that contractng State whch s entted under the
precedng artces to ta the ncome from uch property.
(2) In the case of a other forms of property, the ta may be eved ony In
that contractng State where the ta payer has hs resdence or, n the case of
a corporaton or other entty, n the contractng State where the corporaton
or other entty has been created or organzed.
The same prncpes sha appy to the Unted States capta stock ta wth
respect to corporatons of Sweden havng capta or other property n the Unted
States of merca.
rtce I .
It s agreed that doube ta aton sha be avoded n the foowng manner:
(o) Notwthstandng any other provsons of ths conventon, the Unted States
of merca n determnng the ncome and e cess-profts ta es, ncudng a
surta es, of ts ctzens or resdents or corporatons, may ncude n the bass
upon whch such ta es are mposed a tems of ncome ta abe under the revenue
aws of the Unted States of merca as though ths conventon had not come
nto effect. The Unted States of merca sha, however, deduct the amount
of the ta es specfed n rtce 1(b) (1) and ( ) of ths conventon or other
ke ta es from the ncome ta thus computed but not n e cess of that porton
of the ncome ta abty whch the ta payer s net ncome ta abe n Sweden
bears to hs entre net ncome.
( ) (1) Notwthstandng any other provson of ths conventon, Sweden, n
determnng the graduated ta on ncome and property of ts resdents or corpo-
ratons or other enttes, may ncude n the bass upon whch such ta s mposed
a tems of ncome and property sub|ect to such ta under the ta aton aws
of Sweden. Sweden sha, however, deduct from the ta so cacuated that por-
ton of such ta abty whch the ta payer s ncome and property e empt from
ta aton n Sweden under the provsons of ths conventon bears to hs entre
ncome and property.
(2) There sha aso he aowed by Sweden from Its natona ncome and
property ta a deducton offsettng the ta deducted at the source n the Unted
States of merca, amountng to not ess than 5 per centum of the dvdends
from wthn the Unted States of merca and sub|ect to such ta n Sweden.
It s agreed that the Unted States of merca sha aow a smar credt aganst
the Unted States ncome ta abty of ctzens of Sweden resdng n the
Unted States of merca.
rtck .
Wth a vew to the more effectve mposton of the ta es to whch the present
conventon reates, each of the contractng States undertakes, sub|ect to rec-
procty, to furnsh such nformaton n the matter of ta aton, whch the author-
tes of the State concerned have at ther dsposa or are n a poston to obtan
under ther own aw, as may be of use to the authortes of the other State In
the assessment of the ta es n queston and to end assstance n the servce of
documents n connecton therewth. Such Informaton and correspondence reat-
ng to the sub|ect matter of ths artce sha be e changed between the com-
petent authortes of the contractng States n the ordnary course or on demand.
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47
22(b).
rtce I.
1. In accordance wth the precedng artce, the competent authortes of the
Unted States of merca sha forward to the competent authortes of Sweden
as soon as practcabe after the cose of each caendar year the foowng nfor-
maton reatng to such caendar year:
(a) The names and addresses of a addressees wthn Sweden dervng from
sources wthn the Unted States of merca, dvdends, Interest, royates, pen-
sons, annutes, or other f ed or determnabe annua or perodca ncome,
showng the amount of such ncome wth respect to each addressee
( ) ny partcuars whch the competent Unted States authortes may obtan
from banks, savngs banks or other smar nsttutons concernng assets beong-
ng to ndvduas resdent n Sweden or to Swedsh corporatons or other
enttes
(c) ny partcuars whch the competent Unted States authortes may obtan
from nventores n the case of property passng on death concernng debts con-
tracted wth ndvduas resdent n Sweden or Swedsh corporatons or other
enttes.
2. The competent authortes of Sweden sha forward to the competent au-
thortes of the Unted States of merca as soon as practcabe after the cose
of each caendar year the foowng nformaton reatng to such caendar year:
(o) The partcuars contaned n the forms devered to the Swedsh author-
tes n connecton wth the payment to ndvduas or corporatons or other
enttes whose addresses are wthn the Unted States of merca of dvdends on
shares n a corporaton or partcpaton certfcates n cooperatve socetes, and
nterest on bonds or other smar securtes
( ) The partcuars contaned n permts accorded to ndvduas resdent n
the Unted States of merca or to Unted States corporatons or other enttes
to enabe them to acqure for busness purposes mmovabe property stuated n
Sweden
(c) ny partcuars whch the centra Swedsh authortes may obtan from
banks, savngs banks or other smar nsttutons concernng assets beongng
to ndvduas resdent n the Unted States of merca or to Unted States cor-
poratons or other enttes
(d) ny partcuars whch the centra Swedsh authortes may obtan from
nventores n the case of property pnssng on death, concernng debts contracted
wth ndvduas resdent n the Unted States of merca, or Unted States cor-
poratons or other enttes
(p) st of the names and addresses of a Unted States ctzens resdent
In the Unted States of merca who have made decaratons to the centra com-
mttee n Stockhom n charge of the ta aton of ta payers not resdent n
Sweden for purposes of the Swedsh ta on ncome and property
(f) Partcuars concernng annutes and pensons, pubc or prvate, pad to
Indvduas resdent n the Unted States of merca.
rtce II.
ach contractng State undertakes, n the case of ctzens or corporatons or
other enttes of the other contractng State, to end assstance and support n
the coecton of the ta es to whch the present conventon reates, together wth
nterest, costs, and addtons to the ta es and fnes nof beng of a pena char-
acter. The contractng State makng such coecton sha be responsbe to
the other contractng Sate for the sums thus coected.
In the case of appcatons for enforcement of ta es, revenue cams of each
of the contractng States whch have been fnay determned sha be accepted
for enforcement by the other contractng State and coected n that State n
accordance wth the aws appcabe to the enforcement and coecton of ts own
ta es. The State to whch appcaton s made sha not be requred to enforce
e ecutory measures for whch there s no provson n the aw of the State makng
the appcaton.
The appcatons sha be accompaned by such documents as are requred by
the aws of the State makng the appcaton to estabsh that the ta es have been
fnay determned.
If the revenue cam has not been fnay determned the State to whch app-
caton Is made may, at the request of the other contractng State, take such
measures of conservancy as are authorzed by the revenue aws of the former
State.
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5 22(b).
48
rtce III.
The competent authorty of each of the contractng States sha be entted
to obtan, through dpomatc channes, from the competent authorty of the
other contractng State, partcuars n concrete cases reatve to the appcaton
to ctzens or to corporatons or other enttes of the former State, of the ta es
to whch the present conventon reates. Wth respect to partcuars n other
cases, the competent authorty of each of the contractng Sates w gve con-
sderaton to requests from the competenet authorty of the other contractng
State.
btce I .
In no case sha the provsons of rtce II, reatng to mutua assstance
n the coecton of ta es, or of rtce III, reatng to partcuars n concrete
cases, be construed so as to mpose upon ether of the contractng States the
obgaton
(1) to carry out admnstratve measures at varance wth the reguatons
and practce of ether contractng State, or
(2) to suppy partcuars whch are not procurabe under ts own egsa-
ton or that of the State makng appcaton.
The State to whch appcaton s made for nformaton or assstance sha
compy as soon as possbe wth the request addressed to t. Nevertheess, such
State may refuse to compy wth the request for reasons of pubc pocy or f
compance woud nvove voaton of a busness, ndustra or trade secret or
practce. In such case t sha nform, as soon as possbe, the State makng
the appcaton.
rtce .
Where a ta payer shows proof that the acton of the revenue authortes of
the contractng States has resuted n doube ta aton n hs case n respect of
any of the ta es to whch the present conventon reates, he sha be entted to
odge a cam wth the State of whch he s a ctzen or, f he s not a ctzen of
ether of the contractng States, wth the State of whch he s a resdent, or,
f the ta payer s a corporaton or other entty, wth the State n whch t s
created or organzed. Shoud the cam be uphed, the competent authorty of
such State may come to an agreement wth the competent authorty of the other
State wth a vew to equtabe avodance of the doube ta aton n queston.
btce I.
The competent authortes of the two contractng States may prescrbe regua-
tons necessary to nterpret and carry out the provsons of ths conventon. Wth
respect to the provsons of ths conventon reatng to e change of nformaton,
servce of documents and mutua assstance n the coecton of ta es, such au-
thortes may, by common agreement, prescrbe rues concernng matters of pro-
cedure, forms of appcaton and repes thereto, converson of currency, dspos-
ton of amounts coected, mnmum amounts sub|ect to coecton and reated
matters.
rtce II.
The present conventon sha be ratfed, n the case of the Unted States of
merca, by the Presdent, by and wth the advce and consent of the Senate, and
n the case of Sweden, by s Ma|esty the ng, wth the consent of the Rksdag.
The ratfcatons sha be e changed at Stockhom.
Ths conventon sha become effectve on the 1st day of anuary foowng the
e change of the nstruments of ratfcaton and sha appy to Income reazed
and property hed on or after that date. The conventon sha reman n force
for a perod of fve years and ndefntey thereafter but may be termnated by
ether contractng State at the end of the 5-year perod or at any tme thereafter,
provded at east s months pror notce of termnaton has been gven, the
termnaton to become effectve on the 1st day of anuary foowng the e pra-
ton of the -month perod.
In wtness whereof the respectve penpotentares have sgned ths conventon
and have aff ed ther seas hereto.
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49
22(b).
Done n dupcate, n the ngsh and Swedsh anguages, both authentc, at
Washngton, ths 23d dny of March, 1939.
or the Presdent of the Unted States of merca :
SUMN R W I.L 8. ( T.).
or s Ma|esty the ng of Sweden:
W. osTROM. (S L.)
PROTOCOL.
t the moment of sgnng the conventon for the avodance of doube ta aton,
and the estabshment of rues of recproca admnstratve assstance n the case
of ncome and other ta es, ths day concuded between the Unted States of
merca and Sweden, the undersgned penpotentares have agreed that the
foowng provsons sha form an ntegra part of the conventon:
1. s used n ths conventon:
(a) The term permanent estabshment ncudes branches, mnes and o
wes, pantatons, factores, workshops, warehouses, offces, agences, nstaa-
tons, and other f ed paces of busness of an enterprse but does not ncude the
casua or temporary use of merey storage factes. permanent estabshment
of a subsdary corporaton sha not be deemed to be a permanent estabshment
of the parent corporaton. When an enterprse of one of the contractng States
carres on busness n the other State through an empoyee or agent, estabshed
there, who has genera authorty to contract for hs empoyer or prncpa, t sha
be deemed to have a permanent estabshment n the atter Stae. ut the fact
that an enterprse of one of the contractng States has busness deangs n the
other State through a bona tde commsson agent, broker or custodan sha not
be hed to mean that such enterprse has a permanent estabshment n the atter
State.
( ) The term enterprse ncudes every form of undertakng whether car-
red on by an ndvdua, partnershp, corporaton, or any other entty.
(c) The term enterprse of one of the contractng States means, as the case
may he, Unted States enterprse or Swedsh enterprse.
(d) The term Unted States enterprse means an enterprse carred on n
the Unted States of merca by a resdent of the Unted States of merca or
by a Unted States corporaton or other entty the term Unted States cor-
poraton or other entty means a partnershp corporaton or other entty
created or organzed n the Unted States of merca or under the aw of the
Unted States of merca or of any State or Terrtory of the Unted States of
merca.
(e) The term Swedsh enterprse s defned n the same manner, mutats
mutands, as the term Unted States enterprse.
2. The term corporaton ncudes assocatons, |ont-stock companes, and
nsurance companes.
3. ctzen of one of the contractng States not resdng n eher sha he
deemed, for the purpose of ths conventon, to be a resdent of the contractng
State of whch he s a ctzen.
When doubt arses wth respect to resdence or wth respect to the ta abe
status of corporatons or other enttes, the competent authortes of the two
contractng States may sette the queston by mutua agreement.
4. The provsons of Swedsh aw concernng the ta aton of the undvded
estates ef deceased persons sha not appy where the benefcares are drecty
abe to ta aton n the Unted States of merca.
5. The term fe annutes referred to n rtce of ths conventon means
a stated sum payabe perodcay at stated tmes durng fe, or durng a specfed
number of years, under an obgaton to make the payments n consderaton
of a ktoss Mm pad for such obgaton.
. The Swedsh so-caed fees ta (bevnngsavgft for vssa offentga fore-
stanngar) based on gross ncome n so far as t affects such ndvduas as
actors, artsts, muscans and professona athetes sha be deemed to be an
ncome ta for the purposes of rtce I (a).
The credt for ta es provded n rtce I sha have no appcaton to ta es
deducted at the source from dvdends and nterest e cept to the e tent pro-
vded n paragraph (b) (2) of that artce.
In the appcaton of the provsons of ths conventon the benefts of secton 131
of the Unted States Revenue ct of 1938, reatng to credts for foregn ta es,
sha be accorded, but the credt provded for In rtce I (a) sha not e tend
to Unted States e cess-profts ta es nor to the surta mposed on persona hodng
companes.
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22(b)
50
7. Ctzens of each of the contractng States resdng wthn the other con-
tractng Sate sha not be sub|ected n the atter State to other or hgher ta es
than are mposed upon the ctzens of such atter State.
8. The provsons of ths conventon sha not be construed to deny or affect
n any manner the rght of dpomatc and consuar offcers to other or addtona
e emptons now en|oyed or whch may hereafter be granted to such offcers, nor
to deny to ether of the contractng States the rght to sub|ect to ta aton ts
own dpomatc and consuar offcers.
9. The provsons of the present conventon sha not be construed to restrct
n any manner any e empton, deducton, credt or other aowance accorded by
the aws of one of the contractng States n the deteremuaton of the ta
mposed by such State.
10. In the admnstraton of the provsons of ths conventon reatng to e -
change of nformaton, servce of documents, and mutua assstance n coecton
of ta es, fees and costs ncurred n the ordnary course sha be borne by the
State to whch appcaton s made but e traordnary costs ncdent to speca
forms of procedure sha be borne by the appyng State.
11. Documents and other communcatons or nformaton contaned theren,
transmtted under the provsons of ths conventon by one of the contractng
States to the other contractng State sha not be pubshed, reveaed or dscosed
to any person e cept to the e tent permtted under the aws of the atter State
wth respect to smar documents, communcatons or nformaton.
12. s used wth respect to revenue cams n rtce II of ths conventon
the term fnay determned sha be deemed to mean:
(a) In-the case of Sweden, cams whch have been fnay estabshed,
even though st open to revson by e ceptona procedure
( ) In the case of the Unted States of merca, cams whch are no
onger appeaabe, or whch have been determned by decson of a competent
trbuna, whch decson has become fna.
13. s used n ths conventon the term competent authorty or competent
authortes means, n the case of the Unted States of merca, the Secretary
of the Treasury and n the ease of Sweden, the nance Mnstry.
14. The term Unted States of merca as used n ths conventon In a
geographca sense ncudes ony the States, the Terrtores of aska and awa,
and the Dstrct of Coumba.
15. Shoud any dffcuty or doubt arse as to the nterpretaton or appcaton
of the present conventon, or ts reatonshp to conventons between one of the
contractng Staes and any other State, the competent authortes of the contract-
ng Staes may sette the queston by mutua agreement.
f. The present conventon and protoco sha not be deemed to affect the
e change of notes between the Unted States of merca and Sweden provdng
reef from doube ncome ta aton on shppng profts, sgned March 31, 1938.
Done at Washngton, ths 23d day of March, 1939.
Sumner Wees , (beak)
W. oST M. (S L.)
nd whereas the sad conventon and the sad protoco have been duy
raf fed on both parts and the ratfcatons of the two Governments were
e changed at Stockhom on the 14th day of November, one thousand nne hundred
and thrty-nne
nd whereas, as s provded In rtce II, the sad conventon sha become
effectve on the 1st day of anuary foowng the e change of the nstruments
of ratfcaton:
Now, therefore, he t known that I, rankt.tn D. Roosevet, Presdent of the
Unted States of merca, have caused the sad conventon and the sad protoco
to be made pubc to the end that the same and every artce, cause and part
thereof may be observed and fufed wth good fath by the Unted States
of merca and the ctzens thereof on and from the 1st day of anuary,
one thousand nne hundred and forty.
In testmony whereof, I have hereunder set my hand and caused the Sea
of the Unted States of merca to be aff ed.
Done at the cty of Washngton ths 12th day of December, n the year of
our Lord one thousand nne hundred and thrty-nne, and of the Independence
of the Unted States of merca the one hundred and s ty-fourth.
(sea) rankn D. Roosevet.
y the Presdent:
CoD r u,
Secretary of State.
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51
22(b).
The Interna Revenue Code provdes n part as foows:
Sec. 22. Gross Income.

(b) cusons fkom Gross Income. The foowng tems sha not
be ncuded n gross ncome and sha be e empt from ta aton under
ths chapter:

(7) Income empt Undkb Tkeatt. Income of any knd, to the e tent
requred by any treaty obgaton of the Unted States
Sec. 2. Ru s and Reguatons.
The Commssoner, wth the approva of the Secretary, sha prescrbe
and pubsh a needfu rues and reguatons for the enforcement of
ths chapter.
Pursuant to secton 2 of the Interna Revenue Code, rtce I
of the conventon, and other provsons of the nterna revenue aws,
the foowng reguatons are hereby prescrbed and a reguatons
nconsstent herewth are modfed accordngy.
Sec. 25.1. Scope of reguatons. The prmary purposes of the conventon, to
be accompshed on a mutuay recproca bass, are the avodance of doube
ta aton, e change of fsca nformaton compementary to those provsons of (he
conventon reatng to avodance of doube ta aton, and mutua assstance n
the coecton of the ta es to whch the conventon reates. These reguatons
dea prmary wth the effect of the conventon upon the determnaton of
ta abe ncome from sources wthn the Unted States of nonresdent aen
ndvduas resdent n Sweden and of Swedsh corporatons and other Swedsh
enttes, and wth the nformaton to be made avaabe to the nance Mnster
of Sweden.
The specfc casses of ncome from sources wthn the Unted States e empt
by reason of the conventon from Unted States ncome ta are:
(a) Industra and commerca profts of a, Swedsh enterprse havng no
permanent estabshment n the Unted States ( rtce II)
(o) Income derved by a Swedsh enterprse from the operaton of shps or
arcraft regstered n Sweden ( rtce I )
(c) Royates and amounts derved by a nonresdent aen ndvdua resdent
n Sweden or by a Swedsh corporaton or other entty as consderaton for
the rght to use copyrghts, patents, secret processes and formuas, trade-marks
and other anaogous rghts ( rtce I)
( f) Gams derved from the sae or e change of capta assets by a nonres-
dent aen ndvdua resdent n Sweden, or by a Swedsh corporaton or other
entty, havng no permanent estabshment n the I nted States ( rtce I )
(e) Wages, saares, and smar compensaton and pensons pad by Sweden
or by a potca subdvson thereof to ndvduas (other than ctzens of the
Unted States) temporary resdng n the Unted States ( rtce )
(f) Prvate pensons and fe annutes pad to nonresdent aen ndvduas
resdng n Sweden ( rtce )
(a) Compensaton for abor or persona servces performed wthn the Unted
States by a nonresdent aen ndvdua resdent n Sweden, such e empton
beng, however, sub|ect to the mtatons set forth n rtce I of the con-
venton and n secton 25.12 of these reguatons
(ft) Remttances from sources wthn Sweden (f and to the e tent that
they consttute gross ncome wthout regard to ths conventon) receved n
the Unted States by a nonresdent aen ndvdua resdent of Sweden who
s temporary resdent n the Unted States for the purposes of study or for
acqurng busness e perence such remttances beng for the purposes of ther
mantenance or studes ( rtce II).
, The conventon does not affect the abty to Unted States ncome ta of
Swedsh ctzens resdent n the Unted States e cept to the e tent such ctzens
are entted to the benefts of rtce I of the conventon. or the purposes
of the conventon, an ndvdua resdent n nether Sweden nor the Unted
States and camng the benefts of the conventon as a ctzen of Sweden sha
be deemed to be a resdent of Sweden f t s shown to the satsfacton of the
Commssoner that he s such ctzen. Wth respect to dvdends and nterest,
see secton 25.9 of these reguatons.
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22(b)
52
cept as to those Items of ncome e pressy e empted by the conventon,
the ncome ta abty of a nonresdent aen ndvdua resdent of Sweden
and of a Swedsh corporaton or other entty s determned n accordance wth
the provsons of the nterna revenue aws of the Unted States and the
reguatons thereunder appcabe generay to the ta aton of nonresdent
aen ndvduas and foregn corporatons.
cept n so far as concerns dvdends, the conventon makes no reference
to rates of ta aton mposed by the Unted States.
Skc. 25.2. Defntons. ny word or term used n these reguatons whch
s defned n the conventon sha be gven the defnton assgned to such
word or term n such conventon. ny word or term used n these regua-
tons whch Is not defned n the conventon but s defned n the Interna
Revenue Code sha be gven the defnton contaned theren.
s used n these reguatons:
(a) The term permanent estabshment ncudes branches, mnes and
o wes, pantatons, factores, workshops, warehouses, offces, agences, n-
staatons and other f ed paces of busness of an enterprse but does not
ncude the casua or temporary use of merey storage factes. Swedsh
parent corporaton havng a subsdary corporaton whch atter corporaton
has a permanent estabshment n the Unted States w not be deemed, by
reason of such fact, to have tsef a permanent estabshment n the Unted
States. Swedsh enterprse as defned n the conventon carryng on busness
n the Unted States through an empoyee or agent, estabshed n the Unted
States, who has genera authorty to contract for hs empoyer or prncpa,
sha be deemed to have a permanent estabshment n the Unted States.
owever, busness deangs n the Unted States by a Swedsh enterprse
through a bona fde commsson agent, broker, or custodan do not consttute
a permanent estabshment n the Unted States.
( ) The term enterprse means any commerca or ndustra under-
takng whether conducted by an ndvdua, partnershp, corporaton, or any
other entty. It ncudes such actvtes as manufacturng, merchandsng,
mnng, bankng, and nsurance. It does not ncude the operaton of, or the
tradng n, rea property ocated In the Unted States. It does not ncude the
rendton of persona servces. ence, a nonresdent aen ndvdua, a res-
dent of Sweden, renderng persona servces wthn the Unted States, s not
merey by reason of such servces, engaged n an enterprse wthn the meanng
of the conventon and hs abty to edera ncome ta s unaffected by
rtce II of the conventon.
(c) The term Swedsh enterprse means an enterprse carred on In
Sweden by a nonresdent aen ndvdua resdent n Sweden or by a Swedsh
corporaton or other entty. The term Swedsh corporaton or other entty
means a partnershp, corporaton, or other entty created or organzed n
Sweden or under the aws of Sweden. or e ampe, an enterprse carred on
whoy wthout Sweden by a nonresdent aen ndvdua resdent n Sweden
s not a Swedsh enterprse wthn the meanng of the conventon.
d) The term ndustra and commerca profts means the profts arsng
from the ndustra, mercante, manufacturng, or ke undertakngs of a
Swedsh enterprse as defned n ths secton. Such term does not ncude
dvdends, nterest, compensaton for abor or persona servces, or ncome
derved from rea property or from any nterest n such property, ncudng
rentas and royates therefrom and gan from the sae or dsposton thereof.
Such atter tems of ncome are not governed by the provsons of rtce
II but are sub|ect to the rues esewhere set forth n the conventon and n
these reguatons wth respect to such specfc tems of ncome. s to gans
from the sae or e change of capta assets, see secton 25.10.
Sec. 25.3. Scope of conventon wth respect to determnaton of ndustra
and commerca profts of a nonresdent aen ndvdua resdent of Sweden
or of a Swedsh corporaton or other entty curryng on a Swedsh enterprse
n the Unted States. (a) Genera. rtce II of the conventon adopts the
prncpe that an enterprse of one of the contractng States sha not be ta -
abe n the other contractng State n respect of ts ndustra and commerca
profts uness t has a permanent estabshment n the atter State. ence, a
Swedsh enterprse s sub|ect to ta upon ts Industra and commerca profts
from sources wthn the Unted States ony f t has a permanent estabshment
wthn the Unted States. rom the standpont of edera ncome ta aton,
the artce has appcaton ony to a Swedsh enterprse and to the ndustra
and commerca ncome thereof from sources wthn the Unted States. It has
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53
22(b).
no appcaton, for e ampe, to compensaton for abor or persona servces
performed n the Unted States nor to ncome derved from rea property
ocated n the Unted States nor to any nterest n such property, ncudng
rentas and royates therefrom, nor to gans from the sae or dsposton thereof
nor to dvdends and nterest. Such atter tems of ncome nre treated sep-
aratey esewhere n these reguatons and are sub|ect to the rues ad down
n the sectons havng specfc reference to the respectve tems of ncome.
s to what s a Swedsh enterprse, a permanent estabshment and
ndustra and commerca profts, see secton 2T.2.
( ) - o Unted States permanent estabshment. nonresdent aen nd-
vdua resdent n Sweden or a Swedsh corporaton or other entty, carryng
on a Swedsh enterprse but havng no permanent estabshment n the Unted
States s not sub|ect to Unted States ncome ta upon ndustra and com-
merca profts from sources wthn the Unted States. or e ampe, f such
Swedsh corporaton ses stock n trade such as ron ore or wood pup through
a bona fde commsson agent or broker n the Unted States, the resutng proft
s, under the terms of rtce II of the conventon, e empt from Unted States
ncome ta . Such Swedsh corporaton, however, remans sub|ect to ta upon
a other tems of ncome from sources wthn the Unted States and not e -
pressy e empted from such ta under the conventon. owever, see sectons
25.8, 25.10, 25.11, and 25.12 of these reguatons.
(c) Unted States permanent estabshment. nonresdent aen ndvdua
resdent n Sweden or a Swedsh corporaton or other entty, carryng on a
Swedsh enterprse havng a permanent estabshment n the Unted States s
sub|ect to ta upon hs or ts ndustra and commerca profts from sources
wthn the Unted States. In the determnaton of the ncome of such resdent
of Sweden or Swedsh corporaton or other entty from sources wthn the
Unted States, a ndustra and commerca profts from sources wthn the
Unted States sha be deemed to be aocabe to the permanent estabshment
wthn the Unted States. The net ncome from sources wthn the Unted
States, ncudng the ndustra and commerca profts, sha be determned n
accordance wth the provsons of secton 119, Interna Revenue Code, and
reguatons thereunder. In determnng such ncome, no account sha be
taken of the mere purchase of merchandse effected n the Unted States by
such Swedsh enterprse.
Sec. 25.4. Contro of a domeste enterprse by a Swedsh enterprse. r-
tce III of the conventon provdes that f a Swedsh enterprse by reason of
ts contro of a domestc busness mposes condtons dfferent from those whch
woud resut from norma barganng between ndependent enterprses, the ac-
counts between the enterprses w be ad|usted so as to ascertan the true net
ncome of the domestc enterprses. The purpose s to pace the controed
domestc enterprse on a ta party wth an uncontroed domestc enterprse
by determnng, accordng to the standard of an uncontroed enterprse, the
true net ncome from the pro|erty and busness of the controed enterprse.
The conventon contempates that f the accountng records do not truy refect
the net ncome from the property and busness of such domestc enterprse the
Commssoner sha ntervene and, by makng such dstrbutons, apporton-
ments, or aocatons as he may deem necessary of gross ncome or deductons
or of any tem of eement affectng net ncome as between such domestc enter-
prse and the Swedsh enterprse by whch t s controed or drected, determne
the true net ncome of the domestc enterprse. The provsons of secton 19.45-1,
Reguatons 103 Part 1 ). Tte 2 , Code of edera Reguatons, 1940 Sup. ,
sha, n so far as appcabe, be foowed n the determnaton of the net ncome
of the domestc busness.
Sec. 25.5. Income from operaton of shps or arcraft. The ncome derved by
a Swedsh enterprse from the operaton of shps or arcraft regstered n
Sweden s e empt from Unted States ncome ta . owever, the profts derved
by such enterprse from the operaton of shps or arcraft not so regstered are
treated as are ndustra and commerca profts generay. See rtce II of
the conventon and secton 25.3 of these reguatons.
Sec. 25. . Income from rea property. Income of whatever nature derved by
a nonresdent aen ndvdua resdent n Sweden or by a Swedsh corporaton
or other entty from rea property stuated n the Unted States, ncudng gans
derved from the sae of such property, s not e empt from ta aton by the
conventon. The treatment of such ncome for ta aton purposes s governed
by those provsons of the Interna Revenue Code appcabe generay to the
ta aton of nonresdent aens and foregn corporatons. Interest derved from
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22(b).
54
mortgages or bonds secured by rea property does not consttute ncome from
rea property wthn the meanng of the conventon but s sub|ect to the pro-
vsons appcabe to nterest generay. See rtce III of the conventon aud
secton 25.9 of these reguatons
Sec. 25.7. Mnera royates. Royates derved by a nonresdent aen nd-
vdua resdent n Sweden or by a Swedsh corporaton or other entty from
rea property or n respect of the operaton of mnes, quarres, tmber or other
natura resources stuated n the Unted States are not e empt from ta aton
under the conventon. Such tems of ncome are sub|ect, to ta aton under
the provsons of the Interna Revenue Code appcabe generay to the ta -
aton of nonresdent aens and foregn corporatons.
Sec. 25.8. Patent and copyryht royates. Royates and amounts derved
from sources wthn the Unted States by a nonresdent aen ndvdua res-
dent n Sweden or by a Swedsh corporaton or other entty (f such cor-
poraton or entty s not a resdent of the Unted States) as consderaton
for te rght to use copyrghts, patents, secret processes and formuas, trnde-
marks and other anaogous rghts are e empt from edera ncome ta aton
under the provsons of rtce I of the conventon. Such tems are there-
fore not sub|ect to the wthhodng provsons of the Interna Revenue Code.
Such e empton does not, however, appy n the case of a Swedsh corporaton
engaged n trade or busness wthn the Unted States or havng an offce
or pace of busness theren. Such corporaton s a resdent Swedsh corpora-
ton and hence the provsons of rtce I (a) are appcabe.
To obvate wthhodng of the ta at the source, the aen ndvdua resdent
n Sweden or Swedsh corporaton or other entty shoud, by etter, notfy
the payor of the ncome that such ncome s e empt from edera ncome
ta aton under the provsons of the conventon. Such etter from such res-
dent of Sweden sha contan hs address and a statement that he s a resdent
of Sweden. The etter from such corporaton or other entty sha contan
the address of ts offce or pace of busness and a statement that t s a cor-
poraton or other entty organzed under the aws of Sweden and sha be
sgned by n offcer of the corporaton or other entty gvng hs offca tte.
The etter of notfcaton or a copy thereof shoud be mmedatey forwarded
by the recpent to the Commssoner of Interna Revenue, Wthhodng Returns
Secton, Washngton, D. C, Unted States of merca.
Sec. .5. . Dvdends and nterest. In genera dvdends derved from sources
wthn the Unted States by a nonresdent aen ndvdua resdent n Sweden
or by a Swedsh corporaton or other entty reman sub|ect to ta aton under the
provsons of the Interna Revenue Code appcabe generay to the ta aton of
nonresdent aen ndvduas and foregn corporatons. See rtce I (a) of
the conventon. owever, for a perod of at east two years begnnng on an-
uary 1, 1940, the ta n the case of such aen ndvdua resdent n Sweden or
such Swedsh corporaton or other entty (nonresdent as to the Unted States)
sha not e ceed 10 per cent of the amount of such dvdends. See rtce II of
the conventon. ence, the hgher rates appcabe generay n the case of
nonresdent aen ndvduas sub|ect to the provsons of secton 211(c), Interna
Revenue Code, are not appcabe to dvdends receved by nonresdent aen
ndvduas who are resdents of Sweden.
The ta aton of nterest derved from sources wthn the Unted States by a
nonresdent aen ndvdua resdent n Sweden or by a Swedsh corporaton or
other entty s not affected by the conventon e cept that n the case of such
ndvdua such nterest s sub|ect ony to the rate of ta mposed by secton
211(a), Interna Revenue Code. ence, nterest, ke dvdends, s e cuded for
the purposes of secton 211(c), from the gross amount of f ed or determnabe
annua or perodca ncome of nonresdent aen ndvduas who are resdents
of Sweden.
Sec. 25.10. Capta gans. Under rtce I of the conventon, gan derved
from the sae or e change of capta assets (other than rea property) wthn
the Unted States by a nonresdent aen ndvdua resdent n Sweden or by a
Swedsh corporaton or other entty s e empt from edera ncome ta uness
such ndvdua, corporaton, or other entty has a permanent estabshment n
the Unted States. Wth respect to rea property, see secton 25.0 of these
reguatons
Sec. 20.11. Waf/es, saares, and smar compensaton, pensons and fe an-
nutes. Under rtce of the conventon wages, saares, and smar com-
pensaton and pensons pad by Sweden or by a potca subdvson thereof to
ndvduas temporary resdng n the Unted States are e empt from edera
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55
22.(b)
ncome ta . y reason, however, of the appcaton of rtce I (a) of the
conventon, such e empton does not appy to recpents of such ncome who
are ether ctzens of the Unted States or aens resdent theren. s to who
are resdent aens, see sectons 19.211-2, 10.211-3 and 19.211-4, Reguatons
103. s to the ta aton generay of the compensaton of empoyees of foregn
governments, see secton 11 (h) of the Interna Revenue Code and secton
19.110-1 of Reguatons 103.
Under the provsons of the same artce of the conventon, prvate pensons
and fe annutes derved from sources wthn the Unted States by nonresdent
aen ndvduas resdng n Sweden are e empt from the edera ncome ta .
Such tems of ncome are. therefore, not sub|ect to the wthhodng provsons
of the Interna Revenue Code. See paragraph 5 of the protoco to the conventon
as to what consttutes fe annutes. See aso secton 25.8 of these reguatons
wth respect to patent and copyrght royates as to requrements necessary to
avod wthhodng of the ta at the source, whch requrements are here aso
appcabe.
Sec. 25.12. Compensaton for abor or persona servces. rtce I of the
conventon adopts the prncpe that eom ensaton for abor or persona servces,
ncudng compensaton reazed n the practce of the bera professons, s sub|ect
to ta ony n the contractng State n whch such servces are rendered. ence,
n genera such compensaton derved by nonresdent aen ndvduas resdng n
Sweden for servces rendered n the Unted States s sub|ect to edera ncome
ta . Such genera rue s, however, sub|ect to the foowng e ceptons under the
provsons of rtce I:
Such nonresdent aen ndvdua s not sub|ect to edera ncome ta upon
compensaton for abor or persona servces performed wthn the Unted States
f the foowng condtons prescrbed by (a) or (fc) are met:
e s temporary present n the Unted States for a perod or perods
(a) (1) Not e ceedng 180 days durng the ta abe year and
(2) hs compensaton s receved for abor or persona servces performed
as an empoyee of, or under contract wth, a resdent of Sweden or a Swedsh
corporaton or other entty or
( ) (1) not e ceedng 90 days durng the ta abe year and
(2) the compensaton receved for such servces does not e ceed 3,000
n the aggregate for such ta abe year even though such compensaton s pad
by a Unted States resdent or by a domestc corporaton or other domestc
entty.
If. therefore, such nonresdent aen ndvdua (1) s temporary present n
the Unted States for a perod or perods n e cess of 90 days durng the ta abe
year, or (2) receves more than 3,000 n the aggregate durng the ta abe
year for abor or persona servces performed wthn the Unted States he s not
e empt under cause ( ), and hs rght to e empton under the conventon w
depend on hs meetng both tests prescrbed under cause (a), of the mmedatey
precedng paragraph.
These e ceptons, however, do not e tend to the professona earnngs of
actors, artsts, muscans, professona athetes, and those enaged n ke actv-
tes. The professona earnngs of such ndvduas resdent n Sweden for
servces rendered wthn the Unted States are sub|ect to the provsons of
the Interna Revenue Code appcabe generay to the ta aton of nonresdent
aen ndvduas.
Sec. 25.13. Remttances. Under rtce II nonresdent aen Indvduas
resdents of Sweden who are temporary resdng n the Unted States e cu-
svey for the purposes of study or acqurng busness e perence and recevng
remttances from Sweden for the purposes of ther mantenance and studes
n the Unted States are e empt from edera ncome ta upon such amounts
f and to the e tent that such amounts consttute gross ncome.
Sec. 25.14. Scope of rtce I (a) Genera. rtce I (a) has an
mportant bearng upon other artces of the conventon. Whe many preced-
ng artces provde n effect that Items of ncome derved by ctzens or
resdents of the Unted States or by domestc corporatons from sources n
Sweden are sub|ect to ta ony n Sweden, rtce I (n) nevertheess per-
mts the mposton of edera ncome ta upon such ncome n the hands
of such ta payers. or e ampe. rtce provdes that ncome from rea
property, ncudng gans derved from the sae or e change of such property,
sha be ta abe ony n the contractng State n whch such property s
stuated. ence, ookng at such artces wthout reference to rtce I a
Unted States ctzen reazng such ncome from rea property stuated wthn
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22(b)
5
Sweden woud not be sub|ect to edera ncome ta upon such ncome. rtce
I (a), however, prescrbes that, notwthstandng rtce or any other art-
ce of the conventon, the edera ncome ta may appy to a tems of
ncome wthout regard to other provsons of the conventon and hence a
tems of ncome from sources wthn Sweden, regardess of ther treatment
n the artces deang respectvey wth such tems of ncome, must be ncuded
n gross ncome of Unted States ctzens, resdents and Corporatons for the
purposes of the edera ncome ta .
( ) Credt for Swedsh ncome tapes. rtce I (a), for the purposes of
avodance of doube ta aton, further provdes that a ctzen or resdent of the
Unted States or a domestc corporaton dervng ncome from sources wthn
Sweden sha be entted to a credt aganst the edera ncome ta abty for
the amount of Swedsh natona ncome and property ta , ncudng surta , and
for the Swedsh communa ncome ta . Such credt s, however, sub|ect to the
mtatons prescrbed n secton 131, Interna Revenue Code (reatng to the
credt for foregn ta es), n that t can not e ceed the same proporton of the
ta aganst whch the credt s taken whch the ta payer s net ncome from
sources wthn Sweden bears to the entre net ncome, n the case of a ta payer
other than a corporaton, or to the norma ta net ncome, n the case of a
corporaton, for the same ta abe year.
In the appcaton of rtce I (a), the provsons of secton 131, Interna
Revenue Code, are n genera appcabe. See paragraph of the protoco to
the conventon.
Sec. 2.r).15. Recproca admnstratve assstance. y rtce of the con-
venton, Unted States and Sweden adopt the prncpe of e change of nforma-
ton and assstance n the servce of documents ncdent to the coecton of
ta es. It Is agreed that such fsca cooperaton sha be carred out n accord-
ance wth the aws of the respectve countres and hence ony such nformaton
as s avaabe to the Commssoner under the revenue aws may be used as a
source from whch to secure the nformaton requred to be submtted to the
nance Mnster of Sweden.
Pursuant to such prncpe, wthhodng ngents sha, n the preparaton of
wthhodng returns, orm 1042, report on such returns, n addton to the tems
of ncome upon whch ta has been wthhed at the source, those tems of ncome
pad to a nonresdent aen ndvdua resdent n Sweden or to a Swedsh cor-
poraton or other entty upon whch tu has not been wthhed at the source.
See secton 23.8 of these reguatons. Such return sha show the same nfor-
maton wth respect to such tems of ncome upon whch ta has not been wth-
hed at the source as s shown wth respect to tems of ncome upon whch
the ta has been wthhed at the source.
nformaton and correspondence reatng to e change of nformaton and
to servce of documents may be transmtted by the Secretary drecty to the
nance Mnster of Sweden.
Sec. 2.r .t. Informaton to be furnshed n the ordnary course. In accordance
wth the provsons of rtce I() (a) and ( ) of the conventon, the Secre-
tary sha forward to the nance Mnster of Sweden, Stockhom, Sweden, as
soon as practcabe after the cose of the caendar year 1040 and of each caendar
year thereafter durng whch the conventon s n effect the foowng nforma-
ton reatng to such precedng caendar year:
(a) (1) The name and address of each person whose address as dscosed on
orms 1012 and 10-12 s n Sweden dervng from sources wthn the Unted
States dvdends, nterest, royates, pensons, annutes, or other f ed or deter-
mnabe annua or perodca ncome, showng the amount of such ncome wth
respect to such person.
t 2) The name and address of each person whose address as dscosed by
orms 1000, 10 7, and 1009 s n Sweden showng the amount of ncome set forth
on such form wth respect to each person.
( ) In accordance wth the provsons of rtce If) (c) of the conventon,
there sha kewse he forwarded any partcuars whch the Commssoner may
obtan ncdent to the determnaton of estate ta abty of any decedent from
nventores of assets of estates of decedents concernng debts contracted wth
ndvduas resdent n Sweden or wth Sweds corporatons or other enttes.
Sec. 2 .17. Informa on n specfc cases. Under the provsons of rtce
III of the conventon and upon request of the nance Mnster of Sweden,
made through dpomatc channes and sub|ect to the provsons of rtce I
of the conventon, the Secretary w furnsh to the nance Mnster of Sweden
partcuars n case of any specfc ta payer who s a ctzen of Sweden or a
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57
19.22(b) (2)-2.
Swedsh corporaton or other entty, reatng to the appcaton of Swedsh
natona Income and property ta and the Swedsh communa ncome ta . In the
case of other specfc ta payers, the Secretary w gve consderaton to requests
of the nance Mnster of Sweden wth a vew to furnshng smar nformaton
concernng such ta payers.
Sec. 25.18. Mutua assstance n the coecton of ta es. Under the provsons
of rtce I of the conventon, the Secretary of the Treasury and the nance
Mnster of Sweden are authorzed to prescrbe rues wth respect to those prov-
sons of the conventon reatng to the e change of nformaton, servce of docu-
ments, and mutua assstance n the coecton of the ta es to whch the conven-
ton reates. Such rues concernng matters of procedure, forms of appcaton
and repes thereto, converson of currency, dsposton of amounts coected, and
reated matters w be made the sub|ect matter of a common agreement between
the competent authortes of the two contractng States concerned and when
consummated w be pubshed.
Gcy T. everno,
Commssoner of Inferna Revenue.
pproved une 25, 1940.
erbert . Gaston,
( ed wth the Dvson of the edera tegsrer une 27, 1040, 10 a. m.)
Secton 19.22(b) (2)-2: nnutes. 1910-3 -1040
I. T. 3402
INT RN L R NU COD , R NU CT O 1938, ND PRIOR R NU CTS.
Ta abe status for edera ncome ta purposes of amounts
receved under a so-caed endowment, Income, and fna sum pocy
whch matured as an endowment n 1931, 20 years after date of
ssuance, the nsured havng survved the endowment perod.
dvce s requested as to the proper treatment for edera ncome
ta purposes of amounts receved by under a so-caed endowment,
ncome, and fna sum pocy whch matured as an endowment n
1931.
Under the terms of the pocy, whch was taken out n May, 1911,
the nsurance company, n consderaton of annua premums of
581.10 unt 20 such premums have been pad or unt the pror
death of , the nsured, promses to pay to the nsured, f he be then
vng, on May , 1931, heren caed the maturty of the endow-
ment, a frst yeary nstament of 500 and a ke yeary sum there-
after unt 20 such payments have been made, and at the end of 20
years from the maturty of the endowment and 1 year after the ast
nstament, a fna sum of 10,000. In the event of the death of the
nsured pror to the maturty of the endowment, hs benefcary s
to receve the amounts the nsured woud have receved f vng.
When the pocy becomes a cam, ether by maturty of te endow-
ment or pror death of the nsured, the benefcary entted thereto
may at that tme, or upon any subsequent annversary, receve n-
stead of such payments the commuted vaue of the unpad nsta-
ments and fna sum. Pror to maturty of the endowment, provded
premums have been fuy pad, the nsured s entted to surrender
the pocy for a commuted vaue of 13,000.
The nsured pad 20 annua premums amountng to 11, 22 and
receved so-caed dvdends n the amount of 1,953.51, thus makng
200217 3
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19.22(b) (2)-2.
5S
the net cost of hs pocy 9, 8.49. avng survved the endowment
perod, and havng nether surrendered hs pocy nor entered nto
any suppementary contract for payment of the proceeds, receved
n 1931 and subsequent years the annua payment of 500. The proper
method of ta ng such payments s the prohem presented.
The pocy s a 20-year endowment pocy payabe n 20 yeary
nstaments of 500 each, and one year after the ast nstament a
fna sum of 10,000, such pocy havng a commuted vaue of 13,000
when a of the stpdated yeary premums have been pad. The
premums or consderaton pad for these benefts amounted to
9,008.49, as heretofore ndcated. The commuted vaue of the pocy,
uness accepted by the benefcary n eu of the yeary nstaments and
fna sum of 10,000, has no bearng on the ta abe status of the
amounts receved under the pocy.
Under secton 22(b)2 of the Revenue ct of 1928, whch was n
effect when the pocy matured n 1931, amounts receved under an
endowment contract by an nsured survvng the maturty of the en-
dowment were not ta abe unt such amounts e ceeded the premums
or consderaton pad for the contract. The same rue was n effect
under the Revenue ct of 1932. owever, such e empton was nap-
pcabe under the Revenue ct of 1934. Secton 22(L )2 of the Rev-
enue ct of 1934, wth respect to annutes, provdes n part as foows:
mounts receved as an annuty under an annuty or endowment eon-
tract sha be ncuded n gross ncome e cept that there sha he e cuded from
gross ncome the e cess of the amount receved n the ta abe year over an amount
equa to 3 per centum of the aggregate premums or consderaton pad for such
annuty (whether or not pad durng such year), unt the aggregate amount
e cuded from gross ncome under ths tte or pror ncome ta aws n respect
of such annuty equas the aggregate premums or consderaton pad for such
annuty.
Correspondng sectons of subsequent Revenue cts and the Interna
Revenue Code contan provsons whch are practcay dentca.
The payment of 500 for each of the years 1931,1932, and 1933, or
the tota of 1,500 receved n those years, was ta -free ncome to ,
the nsured. The consderaton pad for the pocy was 9, 8.49. or
1934 and subsequent years, 290.05 ( 9, 8.49 0.03) of the 500 re-
ceved by the nsured s ta abe ncome, and 209.95 ( 500.00- 290.05)
s e cuded or returnabe to hm ta free. t the end of 1938, ony
2,549.75 ( 1,500 1,049.75 ( 209.95 5)) has been e cuded. There-
fore, for 1939, 290.05 of the 500 receved s ta abe ncome and
209.95 s ta -free.
Secton 19.22(b) (2)-2: nnutes. 1940-40-10435
L T. 3413
INT RN L R NU COD .
Treatment for edera ncome ta purposes of certan payments
made to an nsured under the provsons of a fe ncome, 25-year
endowment pocy ssued by the M Company, whch matured
November 13, 1930.
dvce s requested as to the proper treatment for edera ncome
ta purposes of certan payments made to an nsured under the prov-
sons of a fe ncome, 25-year endowment pocy ssued by the M
Company, whch matured November 13, 1939.
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59
19.22(b) (2)-2.
The pocy was ssued n 1914 and provded for the payment on
maturty of a monthy ncome of 50 to the nsured, f vng, or to
hs wfe as orgna benefcary, for a perod of 20 years and for fe
thereafter of the survvor, n consderaton of the payment of a
premum of 435.50 each year for 25 years. The nsured surrendered
the pocy upon ts maturty as an endowment November 13, 1939, n
e change for a suppementary contract ncome certfcate, whch pro-
vded for the payment of 240 nstament of 50 each on the frst of
each month to the nsured f vng or, f not vng, to hs wfe, the
orgna benefcary. Shoud ether be vng on November 1, 1959,
the company agrees to contnue such payment to the survvor for fe.
Durng the contnuance of the payment of the 240 nstaments, e cess
nterest at the rate decared by the company w be added to the pay-
ments. Whe the 240 payments are beng made, the recpent s
prveged upon notce to the company to receve, nstead of the con-
tnued payments, the commuted vaue of any unpad nstaments.
Provson s made for the payment of such commuted vaue to others
n the event of the death, pror to payment n fu of the 240 nsta-
ments, of the nsured and hs wfe. Durng the term of the pocy
the nsured eected to have the annua dvdends, wth the e cepton
of the dvdend for 1939, apped to the purchase of pad-up add-
tona endowment nsurance. Under the provsons of the pocy, the
nsured was entted to wthdraw at any tme the cash vaue of such
pad-up addtona endowment nsurance. The amount of the dv-
dends thus apped s 2,28 .14. t the tme the pocy matured, the
proceeds of ths pad-up addtona nsurance, amountng to 3,017.54,
and the 1939 dvdend of 82.44 were pad n cash to the nsured.
The questons presented are (1) the amount ta abe, f any, at
maturty of the pocy, and (2) the amount ta abe wth respect to
the nstaments payabe thereunder durng the year 1939 and there-
after. The foowng tems are nvoved:
1. Tota reguar nsurance premums for endowment 10, 5.r 4. 70
2. mount pad to ta payer n November, 1939, as surrender vaue
of 1915-1938 dvdend addtons 3, 017. 54
3. 1939 cash dvdend pad n November, 1939 82. 44
4. Monthy nstaments of 50 each pad n November and Decem-
ber, 1939 100.00
s ndcated, the cash premums pad for the endowment aggre-
gated 10,554.70. The dvdends of 2,28 .14, whch at the nsured s
opton were apped to the purchase of addtona pad-up endowment
nsurance, consttute a return to the nsured of premums of a mutua
nsurance company, whch s kewse true of the 1939 cash dvdend
of 82.44. (Secton 19.22(a)-12 of Reguatons 103.) Consequenty,
8,18 .12 ( 10,554.70- ( 2,28 .14 82.44 ) 2,3 8.58) s regarded as
the consderaton pad for the endowment contract.
On the maturty of the contract n 1939, t yeded an annuty of 50
a month for 20 years certan to the nsured, or to hs wfe as successor
annutant wthn the perod certan, and for the duraton of the sur-
vvor s fe thereafter and the pad-up addtona nsurance yeded
cash proceeds of 3,017.54, or 731.40 ( 3,017.54- 2,28 .14) n e cess
of ts cost. The amount of 731.40, whch s the e cess of the amount
receved over the dvdends used to purchase pad-up addtona en-
dowment nsurance, such addtona endowment nsurance beng pad
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19.22(b) (2)-2.1
0
n cash at maturty, s ta abe ncome to the nsured n the year of
recept.
Secton 22(b)2 of the Interna Revenue Code, wth respect to
annutes, provdes n part as foows:
nnutes, etc. mounts receved as an annuty under an annuty
or endowment contract sha be ncuded n gross ncome e cept that there
sha be e cuded from gross ncome the e cess of the amount receved n the
ta abe year over an amount equa to 3 per centum of the aggregate premums
or consderaton pad for such annuty (whether or not pad durng suc year),
unt the aggregate amount e cuded from gross ncome under ths chapter
or pror ncome ta aws n respect of such annuty equas the aggregate
premums or consderaton pad for such annuty.
Secton 19.22(b) (2)-2 of Reguatons 103 states n part:
nnutes. Such porton of each nstament payment of an an-
nuty sha be ncuded n gross ncome as s not n e cess of 3 per cent of the
aggregate premums or consderaton pad for such annuty, whether or not
pad durng the ta abe year, dvded by 12 and mutped by the number of
months n respect of whch the nstament s pad. s soon as the aggregate
of the amounts receved and e cuded from gross ncome equas the aggregate
premums or consderaton pad for such annuty, the entre amount receved
thereafter n each ta abe year must be ncuded n gross ncome.
ccordngy, 40.94 ( 8,18 .12 .03 245.58 -12 20.47 2) of
the tota annuty payments of 100 receved by the ta payer n 1939
s requred to be ncuded n the gross ncome of the recpent and
59.0 s e cuded as ta -free ncome. ssumng that ke provsons
of the Interna Revenue Code w reman n effect for the caendar
year 1940, 245.58 ( 8.18 .12 .03) woud be ncudbe n gross n-
come n the annutants return for that year and the remander of
the 00 annuty, or 354.42, receved n that year woud be e cuded
from gross ncome.
Durng the perod certan, e cess nterest s added annuay to the
annuty payments, the frst such payment to be made n 1940. ny
such e cess nterest s ta abe n the year of ts recept.
Secton 19.22(b) (2)-2: nnutes. 1940-48-10494
I. T. 3428
INT RN L R NU COD ND R NU CT O 1938.
Dsabty retrement pay receved by a cv servce empoyee
pursuant to secton of the Cv Servce Retrement ct of 1920,
as amended, s ncudbe n gross ncome, for edera ncome ta
purposes, to the e tent and n the manner provded by secton
22(b)2 of the Interna Revenue Code and the Revenue ct of 1938.
dvce s requested whether the dsabty retrement pay receved
by from the Unted States Government s ta abe under secton
22(b)2 of the Interna Revenue Code, or s e empt from ta aton
under secton 22(b)5 of the Code.
was empoyed n the cassfed Unted States cv servce un.
December, 1937, when she became . She was retred on account o
dsabty n 1938 n accordance wth the provsons of secton of the
ct approved May 29, 1930 (chapter 349, 4 Stat., 4 8), entted n
ct to amend the ct entted n ct to amend the ct entted n
ct for the retrement of empoyees n the cassfed cv servce, and
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19.22(b) (2)-2.
for other purposes, approved May 22, 1920, and cts n amendment
thereof, approved uy 3, 192 , as amended. The petnent pro-
vsons of secton , supra, read as foows:
Sec. . ny empoyee to whom ths ct appes who shn have served for a
tota perod of not ess than fve years, and who, before becomng egbe for
retrement under the condtons defned n the precedng sectons hereof, becomes
totay dsabed for usefu and effcent servce n the grade or cass of poston
occuped by the empoyee, by reason of dsease or n|ury not due to vcous habts,
ntemperance, or wfu msconduct on the part of the empoyee, sha upon hs
own appcaton or upon the request or order of the head of the department,
branch, or ndependent offce concerned, be retred on an annuty computed n
accordance wth the provsons of secton 4 hereof .
Secton 22(b) 2 of the Interna Revenue Code, n so far as ap-
pcabe, reads as foows:
mounts receved as an annuty under an annuty or endowment
contract sha be ncuded n gross ncome e cept that there sha be e cuded
from gross ncome the e cess of the amount receved n the ta abe year over
an amount equa to 3 per centum of the aggregate premums or consderaton
pad for such annuty (whether or not pad durng such year), unt the ag-
gregate amount e cuded from gross ncome under ths chapter or pror ncome
ta aws n respect of such annuty equas the aggregate premums or con-
sderaton pad for such annuty.
Secton 22(b)5 of the Interna Revenue Code provdes, among
other thngs, that there sha be e empt from edera ncome
ta aton:
mounts receved, through accdent or heath nsurance or under
workmen s compensaton acts, as compensaton for persona n|ures or
sckness .
The ureau hods that annutes pad to retred empoyees by
the Unted States Government are sub|ect to edera ncome ta
to the e tent and n the mamer provded by secton 22(b)2 of the
Interna Revenue Code and the correspondng sectons of pror Rev-
enue cts. (See secton 19.22(b) (2)-2 of Reguatons 103 T. D.
3112, C. . 4. 7 (1921) and I. T. 2984, C. . -1, 87 (193 ).)
The edera Compensaton ct of September 7, 191 (39 Stat,,
742), provdes, among other thngs, that the Unted States sha pay
compensaton on account of death or dsabty of an empoyee of the
edera Government resutng from a persona n|ury sustaned
whe n the performance of hs duty. Secton 5 of the ct approved
May 22, 1920, supra, provdes that no person sha be entted to
receve an annuty under that ct and compensaton under the ct
of September 7, 191 , supra, coverng the same perod of tme, but
that that provson sha not be so construed as to bar the rght of
any camant to the greater beneft conferred by ether ct for any
part of the same perod of tme,
In I. T. 3281 (C. . 1939-1 (Part 1), 97) t s hed that compen-
saton pad by the Unted States under the provsons of the edera
Compensaton ct of September 7, 191 , supra, on account of ds-
abty or death of an empoyee of the edera Government resutng
from a persona n|ury sustaned by the empoyee whe n the per-
formance of hs duty comes wthn the provsons of secton 22(b)5
of the Revenue ct of 1938 and s, therefore, not sub|ect to edera
ncome ta . The provsons of secton 22(b)5 of the Interna Rev-
enue Code, supra, are the same as those of secton 22(b)5 of the
Revenue ct of 1938. It s stated n I. T. 3281, supra, that the pro-
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19.22(c)- .
2
vsons of the ct of September 7. 191 , are smar n many respects
to those of the so-caed workmen s compensaton acts of the varous
States.
It does not appear that the provsons of the ct approved May
22, 1920, as amended, usuay referred to as the Cv Servce Retre-
ment ct, are smar to those of the so-caed workmen s compensa-
ton acts of the varous States or that the annutes pad thereunder
represent compensaton for persona n|ures or sckness as .contem-
pated n secton 22(b)o of the Code. It s, therefore, hed that
the dsabty retrement pay receved by from the Unted States
Government s sub|ect to edera ncome ta to the e tent and n
the manner provded by secton 22(b)2 of the Interna Revenue
Code and the correspondng secton of the Revenue ct of 1938.
Secton 19.22(b) (4)-: Interest upon State obgatons.
INT RN L R NU COD .
Securtes ssued bv mted dvdend housng corporatons organzed
under the Pubc ousng Law of New York, 1939. (See I. T. 3411,
page 103.)
S CTION 22(c). GROSS INCOM : IN NTORI S.
Secton 19.22 (c)-1 : Need of nventores. 1940-29-10328
T. D. 4981
TITL 20 INT RN L R NU C PT R I, SU C PT R , P RT 19.
INCOM T .
mendng secton 19.22(c)- of Reguatons 103 reatve to need
of nventores nventores of contaners.
Washngton, D. C.
Secton 19.22 (c)- of Reguatons 103 Part 19, Tte 2 , Code of
edera Reguatons, 1940 Sup. s hereby amended to read as
foows:
S -. 19.22 (c)-. ecd of nventores. In order to refect the net ncome cor-
recty, nventores at the begnnng and end of each ta abe year are neces-
sary n every case n whch the producton, purchase, or sae of merchandse
an ncome-producng factor. The nventory shoud ncude a fnshed or
party fnshed goods and, n the case of raw materas and suppes, ony those
whch have been acqured for sae or whch w physcay become a part of
merchandse ntended for sae, n whch cass fa contaners, such as kegs,
bottes, and cases, whether returnabe or not, f tte thereto w pass to the
purchaser of the product to be sod theren. Merchandse shoud be ncuded
n the nventory ony f tte thereto s vested n the ta payer. ccordngy, the
seer shoud ncude n hs nventory goods under contract for sae but not yet
segregated and apped to the contract and goods out upon consgnment, but
shoud e cude from nventory goods sod (ncudng contaners), tte to whch
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19.23(a)- .
fcas passed to the purchaser. purchaser shoud ncude In nventory merchan-
dse purchased (ncudng contaners), tte to whch has passed to hm, athough
such merchandse s n transt or for other reasons has not been reduced to
physca possesson, but shoud not ncude goods ordered for future dev-
ery, transfer of tte to whch has not yet been effected. ( ut see secton
19.22 (d)-.)
sectons 22 and 2 of the Interna Revenue Code (53 Stat., 9, 32).)
Gut T. everng,
pproved uy 3, 1940.
erbert . Gaston,
( ed wth the Dvson of the edera Regster uy 8, 1940, 10.03 a. m.)
S CTION 23(a). D DUCTIONS ROM GROSS
INCOM : P NS S.
Secton 19.23(a)-: usness e penses. 1940-37-10415
I. T. 3403
INT RN L R NU COD .
Deductbty of costs ncdent to the e pense of tranng appren-
tces.
dvce s requested whether costs ncdent to the tranng of ap-
prentces are deductbe from gross ncome for edera ncome ta
purposes.
In the determnaton of ta abe net ncome, the ureau aows as
ordnary and necessary e penses costs ncdent to the tranng of
apprentces, ncudng wages of apprentces and nstructors, cost of
reated nstructon, and the cost of materas used e cusvey n the
program. The aowance of these tems as deductons for edera
ncome ta purposes s authorzed by secton 23(a) of the Interna
Revenue Code, whch reads n part as foows:
In computng net ncome there sha be aowed as deductons:
(a) NS S.
(1) In genera. the ordnary and necessary e penses pad or n-
curred durng the ta abe year n carryng on any trade or busness, n-
cudng a reasonabe aowance for saares or other compensaton for
persona servces actuay rendered .
Sma tems of equpment havng a fe of not more than one year
whch are used e cusvey n the program of tranng apprentces
may be deducted n determnng ta abe ncome under the authorty
of the above-quoted provsons of the Interna Revenue Code. Items
of equpment havng a usefu fe n e cess of one year shoud be
captazed and the cost thereof recovered through deprecaton aow-
ances n accordance wth the provsons of secton 23(1) of the
Interna Revenue Code.
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G4
Secton 19.23(a)-2: Traveng e penses.
1940-30-10341
I. T. 3395
INT RN L R NU COD .
Locomotve engneers and other raroad tranmen, who are re-
qured to reman at away-from-home termnas n order to obtan
necessary rest pror to makng a further run or begnnng a return
run to the home termna, are entted to deduct for edera ncome
ta purposes the cost of room renta and meas whe away from
home on such runs.
dvce s requested whether ocomotve engneers and other ra-
road tranmen are entted to deductons, for edera ncome ta pur-
poses, of ther e penses for room and board whe away from home.
It appears that many ocomotve engneers and other raroad tran-
men are assgned to runs e tendng over dstances of severa hundred
mes. On arrva at away-from-home termnas on such runs, they
are reeased from servce for suffcent tme to secure necessary rest.
Thus, they are requred to pay for room renta and meas from the
tme they eave ther homes unt they return. s they receve no
aowances from ther empoyers for such e penses, payment s made
out of ther persona funds.
Secton 23(a) 1 of the Interna Revenue Code provdes that n
computng net ncome there sha be aowed as deductons
the ordnary and necessary e penses pad or ncurred durng the
ta abe year n carryng on any trade or busness, ncudng traveng
e penses (ncudng the entre amount e pended for meas and odgng) whe
away from home n the pursut of a trade or busness .
Secton 19.23 (a)-2 of Reguatons 103, reatng to traveng
e penses, states n part:
If the trp s soey on busness, the reasonabe and necessary trave-
ng e penses, Incudng meas, and odgng, are busness e penses.
(o) If, then, an ndvdua, whose busness requres hu to trave, receves
a saary as fu compensaton for hs servces, wthout rembursement, for trave-
ng e penses hs traveng e penses, ncudng the entre amount
e pended for meas and odgng, are deductbe from gross ncome.
It s hed that ocomotve engneers and other raroad tranmen,
who are requred to reman at away-from-home termnas n order
to obtan necessary rest pror to makng a further run or begnnng
a return run to the home termna, are entted to deduct for edera
ncome ta purposes the cost of room renta and meas whe away
from home on such runs.
Saares pad by empoyers durng the present emergency to em-
poyees who are absent n the mtary or nava servce, or who are
servng the Government n other ways at a nomna compensaton,
but who ntend to return at the concuson of the emergency, are
aowabe deductons from gross ncome for edera ncome ta
purposes.
dvce s requested whether the M Company, whch ntends to make
payments of saares to empoyees who are caed for mtary servce,
may deduct amounts so pad from gross ncome for edera ncome
ta purposes.
1940-42-10453
I. T. 3417
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19.23(a)-10.
In 1917 and 1918 many empoyers adopted the practce of makng
such payments. t that tme the queston arose whether empoyers
coud deduct the amounts so pad from ther gross ncome. It was
hed that saares pad by empoyers to empoyees who were absent
n the mtary or nava servce or were servng the Government n
other ways at a nomna compensaton, but who ntended to return at
the concuson of such servce, were aowabe deductons from gross
ncome. (See artce 108, Reguatons 45 (1920 edton), promugated
under the Revenue ct of 1918.)
The same rue w appy to saares pad durng the present
emergency.
Secton 19.23(a)-10: Rentas. 1940-30-10350
I. T. 339
INT RN L R NU COD .
or edera ncome and e cess profts ta purposes, the N Com-
pany may amortze over the 8-year perod of u ease the cost of a
budng and permanent equpment to be used for manufacturng
certan artces n connecton wth the natona defense program.
dvce s requested whether, for edera ncome and e cess profts
ta purposes, the N Company, a whoy owned subsdary of the M
Company, may amortze over an 8-year perod the cost of erectng
budngs and purchasng and nstang permanent equpment for the
manufacture of certan artces n connecton wth the natona
defense program.
Wth a vew to enabng the Company to ncrease ts capacty
for the producton of certan artces and factatng the devery
thereof at an acceerated rate of producton, the Reconstructon -
nance Corporaton, or a subsdary of the Reconstructon nance
Corporaton, w acqure tte n fee to a tract of and and w ease
such tract to the Company for a perod of eght years wth a rght
of renewa for a smar perod. The N Company w construct upon
sad tract of and a manufacturng pant, ncudng the erecton of
budngs and the purchase and nstaaton of permanent equpment
theren. In order to fnance the constructon of the pant, the Recon-
structon nance Corporaton has agreed to end to the Company
an amount equa to ts cost, the oan to be repad wthn eght years
from the proceeds of the sae of the artces to be manufactured
theren and to be secured by a mortgage on the budngs and equp-
ment.
The e stng factes of the M Company are modern, effcent, and
desgned to produce artces of the character to be manufactured n
the new pant of the Company n suffcent quanttes to meet the
demand whch e sted for such artces pror to the emergency de-
cared by the Presdent of the Unted States on September 8, 19: .9,
to e st. otwthstandng the fact that the budngs and permanent
equpment of the Company paced upon the tract of and eased
by that company, as essee, woud revert to the Reconstructon -
nance Corporaton, or ts subsdary, as essor, upon the termnaton
of the ease uness the opton of renewa s e ercsed, the facts do not
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19.23(c)- .

show wth reasonabe certanty that the ease w be renewed snce
the present factes of the M Company are suffcent to meet the
demand for such artces whch woud probaby e st f the emer-
gency or the natona defense program shoud end before the e pra-
ton of the orgna term of the ease.
ased upon the foregong facts, t s hed that for edera ncome
and e cess profts ta purposes the N Company w be entted to
amortze the cost of the budngs and permanent equpment referred
to above over the 8-year fe of the ease from the Reconstructon
nance Corporaton or ts subsdary. (Reguatons 103, secton
19.23 (a)-10.)
S CTION 23(c). D DUCTIONS ROM GROSS
INCOM : T S G N R LLY.
Secton 19.23(c)-1: Ta es. 1940-27-1030
I. T. 3388
INT RN L R NU COD .
Property ta es n North Carona, begnnng wth ta es assessed
as of anuary 1, 1940, shoud be accrued as of anuary 1 by ta -
payers whose books are kppt on the accrua bass. Ta es assessed
as of pr 1, 1939 (under the od aw), s . oud be accrued as of
pr 1, 1939, n accordance wth G. C. M. 18929 (C. . 1937-2, 91).
dvce s requested as to the proper ta abe perod n whch accrua
shoud be made, for edera ncome ta purposes, of the property ta es
mposed under the 1939 North Carona Machnery ct.
Sectons 302 and 1401 of the Machnery ct of 1939 (chapter 310 of
the Pubc Laws of North Carona, 1939), effectve pr 3, 1939,
provde:
Sec. 302. Date as of whch assessment s to be made.
property, rea and persona, sha be sted or sted and assessed, as the case
may be, n accordance wth ownershp and vaue as of the 1st day Of pr, one
thousand nne hundred thrty-nne, and thereafter a property sha be sted or
sted and assessed n accordance wth ownershp and vaue as of the 1st day of
anuary each year.
Sec. 1401. Date as of whch en attaches.
The en of ta es eved on property and pos sted pursuant to ths act sha
attach to rea estate as of the day as of whch property s sted, regardess of the
tme at whch abty for the ta may arse or the e act amount thereof be
determned.
In G. C. M. 18929 (C. . 1937-2,91) t was hed that under the North
Carona Machnery ct of 1937 ownershp of property on pr 1
was the event whch determned the abty for ta es thereon and that
North Carona property ta es shoud be accrued as of pr 1 by ta -
payers whose books are kept on the accrua bass. In vew of the
changes made by the enactment of the North Carona Machnery ct
of 1939, t s hed that, begnnng wth ta es whch are assessed as of
anuary 1, 1940, North Carona property ta es shoud be accrued as
of anuary 1 by ta payers whose books are kept on an accrua bass.
Ta es assessed as of pr 1,1939, shoud be accrued as of pr 1,1939,
n accordance wth G. C. M. 18929, supra.
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19.23(c)- .
Secton 19.23(c)-: Ta es. 1940-27-10307
I. T. 3389
INT RN L R NU COD .
The ta on motor fue eved by the State of Te as under chapter
44 of the aws of 1033. as amended through the caendar year 1939,
Is deductbe as a ta n the edera ncome ta return of the con-
sumer who pays It and to whom t s not refunded. owever, the
amount of the tn may not be deducted separatey as a ta f t s
added to or made a part of the busness e penses of the consumer
or s otherwse used to reduce hs net ncome.
dvce s requested whether the motor fue ta mposed by the State
of Te as s deductbe for edera ncome ta purposes by a consumer
n hs return for the year 1939.
Reference s made to I. T. 2G87 (C. . II-1,32 (1933)), whch hed
that the gasone ta mposed under the provsons of an act of the
Te as Legsature effectve May 5, 1931, s deductbe by the consumer
n accordance wth the provsons of secton 23(c) of the Revenue ct
of 1932.
Chapter 98, Genera Laws of Te as, 1931, whch was the bass for
the rung n I. T. 2 87, supra, was repeaed by chapter 44 of the aws
of 1933, effectve March 21, 1933. The motor fue aw has snce been
amended by the Laws of Te as, 1935, effectve May 11, 1935, and by
the Laws of Te as, 1939. The aw mposng a ta on motor fue by
the State of Te as s found n voume 20 of ernon s Te as Cv
Statutes, pages 117 to 142, artces 70 5a- to 70 5a-18. Pertnent
provsons of the aw read as foows:
rt. 70 5a-2. Occupaton or e cse ta rate reports by dstrbutors to
comptroe
(a) There s hereby mposed an occupaton or e cse ta of four (4) cents on
each gaon of motor fue or fractona part thereof. The sad ta sha accrue
and be pad as herenafter provded upon the frst sae n Te as.
(b) The ta sha accrue on the frst sae so that a snge ta ony w be
coected on the same gaon of motor fue, t beng ntended to mpose the ta
at ts source n Te as, or as soon thereafter as such motor fue may be sub|ect
to beng ta ed.

(d) very dstrbutor makng frst sae of motor fue sha pay to the State of
Te as an occupaton or e cse ta equa to four (4) cents per gaon or frac-
tona part thereof, so sod, dstrbuted or used, and such ta sha be due and
payabe at the offce of the comptroer at ustn, Te ., on the 20th day of each
month, the same to be based on such stes or use made durng the caendar month
ne t precedng .
(e) Provded, however, that the ta on 1 per cent of the ta abe gaonage
sha be deducted by the dstrbutor to cover osses and the e pense of compyng
wth the provsons hereof.
(f) If any dstrbutor, or other person, sha e port or ose by fre or other
accdent, any motor fue, so that the same may never be made use of wthn ths
State, after the ta has been pad on such motor fue, cam for refund may be
made . owever, no cam sha be made for such oss due to any one
accdent or e port of ess than one hundred (100) gaons. Provded, however,
that showng must be made that sad ta was pad, and the comptroer sha
deduct from such refund made under the provsons of ths act, the 1 per cent
aowed above.

bt. 70 5a-13. emptons and refunds cense to hande e empt fue pay-
ments nto hghway motor fue ta fund
(a) ny person who purchases motor fue In the State of Te as, and any
dstrbutor who approprates motor fue for use when such motor fue purchased
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I 19.23(c)- .
8
by such person or used by such dstrbutor for operatng or propeng any staton-
ary gas engne or tractor used for agrcutura purposes, motor boats, arcraft, or
for any purpose other than use n a motor vehce operated or ntended to be
operated n whoe or n part upon any of the pubc hghways, roads, or streets
of the State of Te as on whch motor fue ta has been pad, ether drecty or
ndrecty, sha e refunded the amount of such ta es so pad by the dstrbutor,
e cusve of the deducton for evaporaton and oss . The ta actuay
pad by any dstrbutor or person sha be refunded as provded heren on motor
fue not sub|ect to the ta .
Secton 23(c) of the Interna Revenue Code provdes that n com-
putng net ncome there sha be aowed as deductons ta es pad or
accrued wthn the ta abe year, wth certan e ceptons not here
matera. Secton 19.23 (c)- of Reguatons 103 states that n genera
ta es are deductbe ony by persons upon whom they are mposed.
It s cear from the State aw that the dstrbutor s the one to whom
the State ooks for actua payment of the motor fue ta , but the ta
s not mposed upon the dstrbutor nasmuch as, under artce 70 5a-
13(a), t s provded that a refund of the ta sha be made to the
consumer who uses the motor fue for purposes other than n motor
vehces on the pubc hghways. The provsons for refund thus
ndcate the egsatve ntent that the ta s to be pad by the users of
the motor fue.
ccordngy, t s hed that the ta on motor fue eved by the State
of Te as under chapter 44 of the aws of 1933, as amended through
the caendar year 1939, s deductbe as a ta n the edera ncome ta
return of the consumer who pays t and to whom t s not refunded.
owever, the amount of the ta may not be deducted separatey as a
ta f t s added to or made a part of the busness e penses of the
consumer or s otherwse used to reduce hs net ncome.
Secton 19.23(c)-1: Ta es. 1940-28-10323
( so Secton 42, Secton 19.42-1.) I. T. 3390
I. T. 3278 (C. . 1939-1 (Part 1), 7 ), reatng to amounts contrb-
uted by an empoyer to the New York unempoyment nsurance
fund, s modfed, wth respect to the treatment as ta abe ncome to
the empoyer of the amount of credt or refund of such contrbutons,
to accord wth the vews e pressed n G. C. M. 221 3. (See page 7 ,
ths uetn.) Snce I. T. 3278 modfed Mmeograph 45 4 (C. .
1937-1,93), and Mmeograph 3958 (C. . I-2,33 (1932)) as modfed
by Mmeograph 45 4, ths rung has the effect of renstatng those
mmeographs.
Secton 19.23 (c)-1: Ta es. 1940-29-10329
I. T. 3392
INT RN L R NU COD .
The ta mposed by secton 2 of ct No. 142, Pubc cts of
Mchgan, 1013, as amended, upon certan casses of ntangbe
persona property, whch property becomes e empt from further
ta aton, s deductbe for edera Income ta purposes under sec-
ton 23(c) of the Interna Revenue Code.
dvce s requested whether the specfc ta of 5 per thousand face
.vaue mposed by secton 2 of ct No. 142, Pubc cts of Mchgan,
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19.23(c)- .
1913, as amended, upon certan casses of ntangbe persona property
s deductbe for edera ncome ta purposes.
ct No. 142, supra, s entted n act to provde for the assessment
and the coecton of a specfc ta upon secured debts other than debts
secured or evdenced by mortgages and ens upon rea property, and
whch mortgages and ens are recorded n Mchgan . Sec-
ton 4 of that act provdes that secured debts upon whch the specfc
ta has been pad sha be e empt from further genera ta es under
the aws of the State of Mchgan. ct No. 142 was repeaed by ct
No. 301, Pubc and Loca cts of Mchgan, 1939, mposng a ta on
ntangbe persona property for the caendar year 1940 and each year
thereafter. Secton 3(b)2 of ct No. 301 provdes for the e empt-
on of certan ntangbe property on whch the specfc ta was pad,
pror to the effectve date of that act. under the provsons of ct
No. 142, as amended. The ta here n queston was pad n 1939 under
the provsons of ct No. 142, and pror to the effectve date of ct
No. 301.
ta s an enforced contrbuton, e acted pursuant to egsatve
authorty n the e ercse of ta ng power and mposed and coected
for the purpose of rasng revenue to be used for pubc or govern-
menta purposes. In the nstant case. ct No. 142, supra, mposng
the specfc ta provdes that one-haf of the specfc ta coected
sha be credted to the genera fund of the county and that the other
one-haf sha be credted to the genera fund of the State for genera
State purposes. It s apparent that the specfc ta mposed by ct
No. 142 was for the purpose of rasng revenue.
accrued wthn the ta abe year, wth certan e ceptons not here
matera. Secton 19.23(c)- of Reguatons 103, reatng to the
Interna Revenue Code, states that n genera ta es are deductbe
ony by the person upon whom they are mposed.
It s hed, therefore, that the specfc ta mposed by ct No. 142
of the Pubc cts of Mchgan, 1913, s an aowabe deducton for
edera ncome ta purposes as a ta n the return of the owner of
the ntangbe persona property upon whom the ta s mposed and
who pad the ta pror to the effectve date of ct No. 301 of the
Pubc and Loca cts of Mchgan, 1939. The amount may not, how-
ever, be deducted separatey as a ta f t s ncuded as a part of the
busness e pense of the ta payer or otherwse used to reduce hs net
ncome.
Secton 19.23(c)-1: Ta es. 1940-31-10354
I. T. 3397
INT RN L R NU COD .
The ta es on acohoc beverages mposed under the Genera Laws
of Rhode Isand. 1988, chapter 1 7, are deductbe for edera n-
come ta purposes ony by the manufacturers and mporters upon
whom such ta es are mposed.
dvce s requested as to the deductbty for edera ncome ta
purposes of the ta es mposed upon acohoc beverages by the State
of Rhode Isand.
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19.23(c)- .
70
The aw under whch the ta es are mposed s contaned n chapter
1 7 of the Genera Laws of Rhode Isand for 1938. The pertnent
provsons of aw are contaned n sectons 1, 2, 3, 7, 9, 10, and 11
of that chapter.
n e amnaton of the provsons of the aw of the State of Rhode
Isand referred to above dscoses that the egsature ceary n-
tended to mpose the ta es on the manufacturers and mporters of
acohoc beverages n that State.
accrued wthn the ta abe vear, wth certan e ceptons not here ma-
tera. Secton 19.23(c)- f Reguatons 103, reatng to the In-
terna Revenue Code, states that n genera ta es are deductbe ony
by the person upon whom they are mposed.
or edera ncome ta purposes, the ta es mposed on acohoc
beverages by the State of Rhode Isand are deductbe ony n the
return of the manufacturer or mporter of the acohoc beverages.
The amount may not be deducted separatey as a ta f t s ncuded as
a part of the busness e penses of the ta payer or s otherwse used to
reduce hs net ncome. If the one upon whom the ta s mposed
passes t on to and coects the amount thereof from the reta deaer,
such amount must be ncuded n gross ncome. If the ta s passed
on to the reta deaer, the amount s not deductbe by hm as a
ta but forms a part of the cost of goods purchased. If the ta s
passed on to the consumer, the amount thereof s merey addtona
cost of the artce purchased.
Secton 19.23(c)-1 : Ta es. 1940-41-10447
I. T. 3414
INT RN L R NU COD .
Rea property ta es eved by the cty of Pttsburgh, and by
egheny County, Pa., accrue for edera ncome ta purposes on
anuary 1 of the caendar year for whch such ta es are mposed.
dvce s requested as to the accrua date for edera ncome ta
urposes of rea property ta es eved by the cty of Pttsburgh and
y the county of egheny n the State of Pennsyvana.
Under the Pennsyvana statutes, there s no unformy f ed date
for the assessment of property. Pttsburgh s a cty of the second
cass and egheny County s a county of the second cass. In ctes
of the second cass, property s sub|ect to dua assessment one
assessment for county purposes and one for cty and schoo purposes.
cerpts from Purdon s Pennsyvana Statutes, nnotated, Ttes 53
and 72, contanng provsons of aw pertnent to the questons nvoved
read as foows:
Tte 53.
Sec. 10031. nnua evy reports of departments determnaton of rates.
Ta es and water-rents, or rates, n ctes of the second cass sha be eved
and assessed annuay by genera ordnances pror to the 1st day
of December of each year, whch sha f and determne the same for the ensung
fsca year commencng anuary 1st. (1911, May 12, P. h. 295, sec-
ton 1 1915, une 15, P. L. 97 , secton 1.)

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71
19.23(c)- .
Sec. 10211. Tme of begnnng and endng.
ereafter the fsca year u ctes of the second cass shr begn on the 1st
day of anuary, and end on the 31st day of December, of each and every year.
Tte 72.
Skc. 5020-401. Issung of precepts and return of assessments n trenna
years.
(a)
(b) In countes of the second cass, the precepts to make trenna assessments
sha be ssued to the apponted assessors by the hoard for the assessment and
revson of ta es at such tme as the board may prescrbe, and return thereof
to be made on or before the frst Monday of November as provded by e stng
aw reatng to the board tor the assessment and revson of ta es u sad
countes .

Skc. 5020-431. Issung of prevents and return of assessments n nertrennn
years.
(a) In countes of the second cass, the precepts to make assessments n the
years between trenna assessments sha be Issued to the apponted assessors
by the board for the assessment and revson of ta es at such tme as the board
may prescrbe, and return thereof made on or before the frst Monday of November
as provded by e stng aw reatng to the board for the assessment and revson
of ta es In sad countes.
rom the foregong provsons of aw, t appears that the actua
makng of the assessments n Pttsburgh and n egheny County
may be e tended over the greater part of the year. Whe there s no
statutory provson specfyng the date as of whch Pttsburgh or
egheny County rea property ta es accrue or are assessed, or spe-
cfcay provdng for persona abty for such ta es, the courts
of the State have hed that the owner of the property s personay
abe for such ta es and that abty for the ta attaches to the
person ownng the property at the tme the assessment s eved and
the ta s due. Whether that assessment s at the begnnng or the
mdde of the year, the person charged at the tme the ta es are
assessed s abe for the whoe ta . (Theobad v. Syvester, 27 Pa.
Super. Ct., 3 2.)
In Penn yrana Company for Insurances on Lves and Grantng
nnutes v. ergson (159 t., 32) the Superor Court of Pennsy-
vana sad:
It s cear from the prncpes n those cases and the egsatve
decaratons that the owner of and s and shoud be personay abe for ta es
assessed whe he s the owner of the property.
The ta year n Pttsburgh and n egheny County, Pa., s the
caendar year. Inasmuch as t appears that the actua owner of the
property at the tme the assessment s eved and the ta s due
s abe for the ta es coverng the entre caendar year regardess of
change of ownershp, and that abty reverts back to the begnnng
of such year, t s hed that rea property ta es n Pttsburgh and n
egheny County, Pa., accrue for edera ncome ta purposes on
anuary 1 of the caendar year for whch such ta es are mposed.
Secton 19.23 (c)-: Ta es.
INT RN L R NU COD .
Cuban ta es mposed upon saes, e changes or assgnments, and
gross recepts. (See I. T. 3429, page 13G.)
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19.23(c)- .
72
Secton 19.23 (c) -1: Ta es. 1940-50-1051
I. T. 3432
INT RN L R NU COD .
The gasone ta mposed by the State of abama s deductbe
as a ta for edera ncome ta purposes by the dstrbutor,
refner, reta deaer, or storer of the gasone, and the ta on
ubrcatng o s deductbe by the dstrbutor, manufacturer,
reta deaer, or storer thereof. If, however, the ta es are added
to or made a part of the busness e penses of such persons, they are
not deductbe by them separatey as ta es.
dvce s requested reatve to the deductbty for edera n-
come ta purposes of the gasone ta and the ta on ubrcatng o
mposed by the Genera cts of abama for 1935.
putng net ncome there sha be aowed as deductons ta es pad
or accrued wthn the ta abe year, wth certan e ceptons not here
matera. Secton 19.23(c)- of Reguatons 103, reatng to the
Interna Revenue Code, states that n genera ta es are deductbe
ony by the person upon whom they are mposed. Whether a gas-
one ta or a ta on ubrcatng o eved by a State may be de-
ducted by an ndvdua purchaser depends upon the terms of the
State, aw mposng the ta .
The provsons of abama aw mposng the ta on gasone are
contaned n rtce III, chapter 4, of the Genera cts of a-
bama for 1935, approved uy 10, 1935, and effectve ugust 1, 1935.
The ta on ubrcatng o s mposed under rtce III, chapter
1, of that act. The ta on gasone s mposed upon every dstrb-
utor, refner, reta deaer, or storer of gasone, and the ta on
ubrcatng o s mposed upon every dstrbutor, manufacturer, re-
ta deaer, or storer of such o. There s nothng n the statute,
ether by provson for a refund or otherwse, to ndcate an nten-
ton or purpose to mpose the ta es upon the consumer of the gasone
or ubrcatng o.
It s hod, therefore, that the gasone ta mposed by the State
of abama s deductbe as a ta under secton 23(c) of the In-
terna Revenue Code by the dstrbutor, refner, reta deaer, or
storer of the gasone, and the ta on ubrcatng o s deductbe
by the dstrbutor, manufacturer, reta deaer, or storer thereof.
If, however, the ta es are added to or made a part of the busness
e penses of such persons, they are not deductbe by them separatey
as ta es.
The concuson reatve to the deductbty of the gasone ta s
n accord wth the concuson reached n G. C. M 7527 (C. . I -1,
99 (1930)), reatng to the gasone ta mposed by the State of
abama under the act approved ebruary 10, 1923, as amended.
The pertnent provsons of the 1935 act are not materay dfferent
from those of the earer act.
Secton 19.23 (c)-1: Ta es.
INT RN L R NU COD .
Ta es mposed by the mnera fue aw of Cuba. (See I. T. 3433,
page 137.)
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73
19.23(c)- .
Secton 19.23(c)- : Ta es.
1940-52-10530
I. T. 3435
INT RN L R NU COD .
Rea estate ta es In Montgomery County, Md., accrue for
edera Income ta purposes on anuary 1 of the caendar year for
whch they are eved.
dvce s requested as to the date of accrua of rea estate ta es n
Montgomery County, Md., for edera ncome ta purposes.
Secton 11 of artce 81, voume 2, nnotated Code of Maryand
(1939), reads as foows:
cept as herenafter provded, a property drected n ths artce to be
assessed, sha be assessed at the fu cash vaue thereof on the date of
fnaty.
Secton 1(20) of artce 81 defnes the phrase date of fnaty as
the date as of whch ta es are to be eved for the ta abe year n
queston and upon whch assessments become fna for such year .
Secton 2 of artce 81 reads n part as foows:
(a) ordnary State ta es sha be eved for the caendar year.
(b) cept ta es requred to be eved upon assessments made by the State
ta commsson, a ordnary county and cty ta es sha be eved for the same
perod as now prescrbed by oca aw, and a ordnary State, county and cty
ta es sha be eved as of the same date of fnaty as now prescrbed by oca
aw provded (5) that n any county or cty n whch the date of
fnaty s not now specfcay prescrbed by statute, a State, county and cty
ta es sha be eved as of the 1st day of anuary of each year as the date of
fnaty.
Snce a date of fnaty s not specfcay prescrbed by statute for
sessed as of anuary 1.
The ureau has hed that ownershp of property on the date as of
whch assessment s made s the event whch determnes the abty
for ta es, and f the ta payer s books are kept on the acrua bass, he
shoud accrue property ta es as of that date. (See G. C. M. 15305,
C. . I -2, 80 (1935), and decsons cted theren.) That poston
s n accord wth the prncpe ad down by the Unted States Supreme
Court n Unted States v. nderson (2 9 U. S., 422, T. D. 3839, C. .
-, 179 (192 )), wheren t was stated that n advance of the assess-
ment of a ta a the events may occur whch f the amount of the
ta and determne the abty of the ta payer to pay t. It s hed,
therefore, that ta es on rea property n Montgomery County, Md.,
shoud, generay, be accrued for edera ncome ta purposes as of
anuary 1 by ta payers whose books are kept on the accrua bass.
Refunds or credts for State ta es prevousy deducted wthout ta
beneft. (See I. T. 3438, page 44 .)
ta es on rea estate
generay as
Secton 19.23(c)- : Ta es.
INT RN L R NU COD .
290217 11
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5 19.23(c)-3.
74
Secton 19.23(c)-3 : Ta es for oca benefts. 1940-45-1047
I. T. 3423
INT RN L R NU COD .
ront foot beneft charges assessed aganst property n Mont-
gomery County, Md., by the Washngton Suburban Santary Com-
msson for water man and sewer mprovements are ta es
assessed aganst oca benefts of a knd tendng to ncrease the
vaue of the property assessed wthn the meanng of secton
23(c)4 of the Interna Revenue Code. Such charges are not
deductbe for edera ncome ta purposes e cept to the e tent
that they are propery aocabe to mantenance or nterest charges.
dvce s requested whether front foot beneft charges assessed
aganst property n Montgomery County, Md., by the ashngton
Suburban Santary Commsson for water man and sewer mprove-
ments are deductbe for edera ncome ta purposes.
In the Code of Pubc Loca Laws of Maryand. 1930, voume 2,
artce 1 , provson s made for the ncorporaton of the Washngton
Suburban Santary Dstrct, consstng of certan parts of Mont-
gomery and Prnce Georges Countes, Md., ad|acent to Washngton,
D. C. The santary dstrct s under the |ursdcton of the Wash-
ngton Suburban Santary Commsson, whch has charge of the
constructon and acquston of water mans and sewers n those parte
of the countes, and s authorzed to assess front foot beneft
charges aganst abuttng property whch s benefted. The amount
assessed s added to the ta payer s b for State, county, and other
ta es and s desgnated Santary commsson front foot beneft
charge.
Secton 23 of the Interna Revenue Code provdes n part that n
computng net ncome there sha be aowed as deductons:
(c) Ta es Generay. Ta es pad or accrued wthn the ta abe year,
e cept

(4) ta es assessed aganst oca benefts of a knd tendng to ncrease the
vaue of the property assessed but ths paragraph sha not e cude the
aowance as a deducton of so much of such ta es as s propery aocabe
to mantenance or nterest charges. Itacs supped.
It s hed that the front foot beneft charges assessed aganst a
ta payer s property n Montgomery County, Md., by the Washngton
Suburban Santary Commsson for water mans and sewer mprove-
ments, whch charges are assessed aganst ony the property abuttng
upon the water mans and sewers, are ta es assessed aganst oca
benefts of a knd tendng to ncrease the vaue of the property
assessed wthn the meanng of the above-quoted provsons of sec-
ton 23(c)4 of the Interna Revenue Code. They are, therefore,
not deductbe for edera ncome ta purposes e cept to the e tent
that they are propery aocabe to mantenance or nterest charges.
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75
19.23(k)-.
S CTION 23(k). D DUCTIONS ROM GROSS
INCOM : D D TS.
Secton 19.23(k)-: ad debts. 19-10-28-10317
T. D. 4978
TITL 20 INT RN L R NU . C PT R I, SU C PT R , P RTS 3, 9, ND
10. INCOM T .
mendng secton 9.23(k)-1 of Reguatons 103, artce 23(k)-
of Reguatons 101 and 94, and artce 23(k)- of Reguatons 8 ,
and artce 191 of Reguatons 77, both as amended by Treasury
Decson 4(533 C. . -1, 118 (1930) , reatng to the deducton
of bad debts by banks or other corporatons whch are sub|ect to
supervson by edera authortes, or by State authortes man-
tanng substantay equvaent standards.
Washngton, D .C.
To Coectors of Interna Revenue and. Others Concerned:
Paragraph (c) of secton 19.23(k)- of Refatons 103 Part 19,
Tte 2 , Code of edera Reguatons, 1940 Sup. , paragraph (c) of
artce 23(k)- of Reguatons 101 secton 9.23(k)-, Tte 20, Code
of edera Reguatons, 1939 Sup. , the ast paragraph of artce
23(k)- of Reguatons 94 secton 3.23(k)-, Tte 2 . Code of ed-
era Reguatons , and the ast paragraph of artce 23(k)- of Regu-
atons 8 and of artce 191 of Reguatons 77, both as amended by
Treasury Decson 4(533, approved pr 3, 193 C. . -1,
118 (193 ) , are each amended to read as foows the paragraph
desgnaton of (c) not beng ncuded n the amendment of Regua-
tons 94, 8 , and 77 :
(c) Where banks or other corporatons whch are sub|ect to supervson by
edera authortes (or by State authortes mantanng substantay equva-
ent standards) n obedenoe to the specfc orders of such supervsory offcers
charge off debts n whoe or In part, such debts sha be concusvey presumed,
for ncome ta purposes, to be worthess or recoverabe ony n part, as the case
may be, but n order that any amount of the charge-off may be aowed as a
deducton for any ta abe year t must be shown that the charge-off took pace
wthn such ta abe year. ut no such debt sh be so concusvey presumed
to be worthess or recoverabe ony n part, as the case may be, f the amount
so charged off s not camed as a deducton for the ta abe year n whch such
charge-off takes pace. If a ta payer does not cam a deducton n ts return
for such a totay or partay worthess debt for the year n whch such charge-
off takes pace, but cams such a deducton for a ater year, then such eharge-
.off n the pror year w be deemed to have been nvountary and the deducton
sha be aowed for the year for whch camed, f the ta payer produces suf-
fcent evdence to show (1) that the amount camed n such ater year was
ascertaned to be worthess or recoverabe ony n part, as the case may be, n
such year, and (2) that, to the e teut that the deducton camed n the ater
year was not nvountary charged off n pror years, t was charged off u the
ater year.
sectons 23(k) and 2 of the Interna Revenue Code (53 Stat, 13, 32),
and sectons 23 (k) and 2 of the Revenue cts of 1938, 193 , 1934,
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19.23(k)-.
7
nnd 1932 (52 Stat., 4 0, 480. 2 U. S. C, Sup., 23(k), 2 49 Stat.,
1 58. 1 73, 2 U. S. C, Sup., 23 (k), 2 48 Stat., 88, 700, 2 U. S. C,
23 (k), 2 and 47 Stat., 179,191).)
Guy T. evernq,
pproved une 27, 1940 .
erbert . Gaston,
( ed wth the Dvson of the edera Regster une 28, 1940, 4:10 p. n.)
Secton 19.23(k)-: ad debts. 1940-28-10324
G. C. M. 221 3
INT RN L R NU COD , R NU CT OP 1038, ND TRIOR R NU CTS.
n amount recovered upon a dent prevousy charged oft and
aowed as a deducton for edera ncome ta purposes consttutes
ta abe ncome for the year of recovery regardess of whether the
pror aowance of the deducton resuted n a ta beneft to the
ta payer.
G. C. M. 18525 (C. . 1937-1, 80) modfed G. C. M. 20854 (C. .
1939-1 (Part 1), 102) revoked and S. R. 2940 (C. . I -1, 129
(1925)) modfed. Recommended that I. T. 3172 (C. . 1938-1, 150)
and I. T. 325 (C. 15. 1939-1 (Part 1), 172) be revoked that I. T.
3278 (( . . 1939-1 (Part 1), 7 ) be modfed and that the acques-
cence n entra Loan Investment Co. v. Commssoner (39 . T. .,
981, acquescence, O. . 1939-2, ) and the acquescence n The
Natona ank of Commerce of Seatte v. Commssoner (40 . T. .,
72. acquescence, C. . 1939-2, 2 ) be wthdrawn.
Reconsderaton has been Rven to G. C. M. 18525 (C. . 1937-1, 80)
and G. C. M. 20854 (C. . 1939-1 (Part 1), 102), both reatng to bad
debts, wth partcuar attenton to the queston of the proper treatment
for edera ncome ta purposes of recoveres of debts charged off
and camed as deductons n pror years.
The ast paragraph of G. C. M. 18525, supra, reads as foows:
The deductons for bad debts contempated by the cause aowed as a deduc-
ton for ncome ta purposes (as used n (f), (g), (h), and () above) refer
to deductons for bad debts whch accompshed a reducton n ta abty and do
not refer to deductons for bad debts n cases n whch the ta payer, on account
of other aowabe deductons, had no net ncome rrespectve of the deducton for
bad debts.
G. C. M. 18525, supra, was pubshed to ustrate the appcaton of
the provsons of artce 191 of Reguatons 77 and artce 23(k)- of
Reguatons 8 , both as amended by Treasury Decson 4 33 (C. ..
-1,118 (193 )), and the provsons of the hst paragraph of artce
23(k)- of Reguatons 94, whch read as foows:
Where banks or other corporatons whch are sub|ect to supervson by edera
authortes (or by State authortes mantanng substantay equvaent stand-
ards) n obedence to the specfc orders of such supervsory offcers charge off
debts n whoe or n part, such debts sha be concusvey presumed, for Income
ta pnrposos, to be worthess or recoverabe ony n part, as the case may be, but
In order that any amount of the charge-off may be aowed as a deducton for any
ta abe year t must be shown that the charge-off took pace wthn such ta abe
year.
The ast paragraph of G. C. M. 18525, supra, n effect provdes that
there sha be no ad|ustment of the bass of a debt as the resut of the
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19.23(k)-.
pror deducton of such debt n whoe or n part uness such pror
deducton accompshed a reducton n ta abty. The prmary
purpose of the ncorporaton of that paragraph n G. C. M. 18525 was
to set forth the rue that amounts recovered upon debts deducted n
pror years do not consttute ta abe ncome uness such deducton
resuted n a reducton n ta abty. Thereafter, n I. T. 3172
(C. . 1938-1, 150) there was set forth the method for determnng
the e tent of the beneft derved by the deducton of bad debts. That
rung was ater modfed by I. T. 325 (C. . 1939-1 (Part 1), 172),
n accordance wth the recommendaton contaned n G. C. M. 20854,
supra, whch s dscussed n the ne t paragraph of ths memorandum.
G. C. M. 18525, supra, nvoved ony bad debt deductons by banks
or other corporatons sub|ect to supervson of edera or State au-
thortes as a resut of the concusve presumpton of parta or tota
worthessness estabshed by orders of edera or State supervsory
offcers. owever, n G. C. M. 20854, supra, t was hed that the
prncpe stated n G. C. M. 18525, that recoveres of debts prevousy
deducted do not consttute ta abe ncome uness the deducton of
the debts n pror years resuted n a reducton n ta abty, s
equay appcabe n cases of recoveres of debts vountary deducted
by banks or other corporatons sub|ect to edera or State supervson
and to recoveres of debts deducted by other ta payers. It was hed
that n any case n whch a bad debt has been aowed as a deducton
and has had the effect of offsettng ta abe ncome, the ta payer has,
to that e tent, n effect had the beneft of a recovery of capta for
ncome ta purposes, but that amounts receved n recovery of the
debt shoud not be treated as ta abe ncome unt the ta payer has
fuy recovered the capta represented by the debt ether by such
means or party by such means and party by repayment by the
debtor.
In L T. 3278 (C. . 1939-1 (Part 1), 7 ) the prncpe of G. C. M.
20854, supra, was e tended to amounts of State ta es refunded or
credted, and t was hed that the amount refunded or credted
shoud be treated as ta abe ncome ony f and to the e tent that t s
n e cess of the porton of the pror deducton whch dd not have the
effect of offsettng ta abe ncome. That rung (I. T. 3278) modfed
Mmeograph 3958 (C. . I-2, 33 (1932)) and Mmeograph 45 4
(C. . 1937-1, 93), reatng to the ta abe status of refunds of customs
dutes and ta es.
In Centra Loan Investment Co. v. Commssoner (39 . T. .,
981, acquescence, C. . 1939-2, ), the oard of Ta ppeas
apped the rue stated n I. T. 3278, supra, n reference to ta es,
ctng n ts opnon G. C. M. 18525, supra, and G. C. M. 20854, supra.
In The Natona ank of Commerce of Seatte v. Commssoner (40
. T. ., 72, acquescence, C. . 1939-2, 2 , on recovery of bad debt
ssue), the oard apped the sad rue to bad debts, agan ctng the
above-mentoned Genera Counse s memoranda. In nether of these
oard of Ta ppeas decsons dd the oard refer to ts pror
decson n Lake ew Trust Savngs ank v. Commssoner (27
. T. ., 290), n whch t was hed that amounts receved n recovery
of debts aowed as deductons n pror years consttute ta abe ncome
rrespectve of whether such pror deductons had the effect of reduc-
ng the ta payer s ta abe ncome.
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19.23(k)-
78
Secton 19.42-1 of Reguatons 103, reatng to the Interna Revenue
Code, provdes n part as foows:
d debts or accounts charged off subsequent to March 1, 1913,
been use of the fact that they were determned to be worthess, whch are
subsequenty recovered, whether or not by sut, consttute ncome for the year
n whch recovered, regardess of the date when the amounts were charged
off.
Ths reguaton has been n effect n a of the ncome ta regua-
tons of the Treasury Department to the present tme.
Secton 19.23(k)- of Reguatons 103 provdes n part as foows:
ny amount subsequenty receved on account of a bad debt or on
account of a part of such debt prevousy charged off and aowed as a deduc-
ton for ncome ta purposes, must be Incuded n gross ncome for the ta abe
year n whch receved.
Ths reguaton has been n effect n a of the ncome ta regua-
tons of the Treasury Department from artce 151 of Reguatons 2
to the present tme.
Pror to the ssuance of G. C. M. 18525, supra, the ureau had
consstenty hed that any amount subsequenty recovered on account
of a debt prevousy charged off and aowed as a deducton for ncome
ta purposes must be ncuded n gross ncome for the ta abe year n
whch receved, regardess of whether the pror aowance of the
deducton resuted n a beneft to the ta payer. s ponted out hereto-
fore, n the case of Lake ew Trust Savngs ank, supra, decded
pror to G. C. M. 18525, the oard of Ta ppeas sustaned the
ureau practce.
Upon reconsderaton, t s now the opnon of ths offce that the
rue sustaned n the case of Lake ew Trust Savngs ank, supra,
s the correct rue to be foowed. Ths concuson s n accord wTth the
decson of the Supreme Court of the Unted States n urnet v.
Sanford rooks Co. (282 U. S., 359, Ct. D. 277, C. . -, 3 3
(1931)). The ta payer n urnet v. Sanford rooks Co. had
entered nto a dredgng contract wth the Unted States and, after
havng performed for three years at a arge oss, abandoned opera-
tons and sued the Government for breach of warranty as to the
character of the matera to be dredged. udgment was recovered for
192,577.59, of whch 17 ,271.88 was the amount by whch ts e -
penses of operaton under the contract e ceeded recepts from t, and
the baance, 1 ,305.71, represented accrued nterest. Durng the
years of operaton the ta payer had returned as gross ncome the
recepts under the contract and had deducted ts e penses pad
n performng the contract. or a but one of such years the returns
showed net osses. The ta payer faed to return the amount of the
|udgment as ncome n the year of recept, and the Commssoner,
therefore, assessed a defcency. In uphodng the acton of the Com-
mssoner, the Supreme Court sad n part:
the Revenue cts whch have been enacted snce the adopton of the s -
teenth amendment have unformy assessed the ta on the bass of annua
returns showng the net resut of a the ta payer s transactons durng a f ed
accountng perod, ether the caendar year, or, at the opton of the ta payer,
the partcuar fsca year whch he may adopt.
That the recovery made by respondent n 1920 was gross ncome for that year
wthn the meanng of these sectons can not, we thnk, be doubted. The money
receved was derved from a contract entered nto n the course of respondent s
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# 19.23(k)-.
busness operatons for proft. Whe t equaed, and n a oose sense was a
return of, e pendtures made n performng the contract, st, as the oard of
Ta ppeas found, the e pendtures were made n defrayng the e penses n-
curred n the prosecuton of the tfork vnder the contract, for the purpose of
earnng profts. They were not capta nvestments, the cost of whch, f con-
verted, must frst be restored from the proceeds before there s a capta gan
ta abe as ncome. Itacs supped.
Under the prncpe of the Supreme Court s decson n the Sanf ord
rooks Co. case, supra, tems of e pense ncurred n carryng on a
trade or busness do not represent capta nvestment, the cost of
whch, f converted, must frst be restored before there s a capta
gan ta abe as ncome. ad debts charged off n any busness are
deductbe under a specfc provson of the Revenue cts rather than
as ordnary and necessary busness e penses. They are, nevertheess,
under we-estabshed accountng practces, recognzed, as operatng
e penses of the busness deductbe as such n arrvng at the net
operatng gan or oss for the perods nvoved. See nney, Prn-
cpes of ccountng, 1934 dton, oume I, page 37, and ester,
Prncpes of ccountng, ourth dton, pages 4 , 11 , and 554.
Consequenty, the amount represented by debts whch become worth-
ess and are charged off n the carryng on of a trade or busness s
not to be consdered as an nvestment of capta whch must frst be
returned n fu before ta abe ncome s derved. Under ths prn-
cpe, amounts recovered n any ta abe year upon debts prevousy
charged off and aowed as a deducton shoud be treated as ta abe
ncome regardess of whether the pror aowance of the deducton
resuted n a ta beneft to the ta payer.
It s the opnon of ths offce, furthermore, that n the case of a
bad debt owng to a ta payer whch has not arsen n connecton wth
the carryng on of a trade or busness, the recovery of such a debt where
t has been charged off and deducted n a pror year consttutes ta -
abe ncome rrespectve of whether the pror aowance of the de-
ducton resuted n a ta beneft. In Unted States v. Ludey
(274: U. S., 295, T. D. 404 , C. . I-2, 157 (1927)) t was hed
that n ascertanng the bass for computng gan or oss n the
case of the sae of deprecabe or depetabe assets, the orgna bass
thereof must be reduced by the amount of deprecaton and depeton
aowabe as deductons n the years durng whch the property was
hed regardess of whether deductons had|een camed. It s to be
observed that the Revenue ct nvoved n that case dd not contan
a specfc provson requrng such a reducton of bass. It s beeved
that ths case stands for the proposton that, under the broad pur-
poses of the Revenue cts, a ta payer s to be charged wth havng
recovered hs capta to the e tent that the statute permts deductons
from gross ncome on account thereof, regardess of whether the ta -
payer took advantage of the deducton prvege provded n the Rev-
enue cts. See aso ardwck Reaty Co., Inc., v. Commhtoncr (29
. (2d), 498, certorar dsmssed on moton, 279 U. S., 87 ), n whch
t was hed that deprecaton must be deducted n ascertanng the
ad|usted bass of deprecabe property even though deductons for
deprecaton n the years sustaned conferred no ta beneft.
The case of Unted States v. Ludey, supra, woud seem to ndcate
that amounts recovered upon a debt, whether or not ncurred n bus-
ness, consttute ta abe ncome f n any pror year such debt con-
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19.23(k)-. .
80
ttuted an aowabe deducton under the appcabe evenue ct,
even though such deducton was not camed and aowed. See S. R.
2940 (C. . I -1, 129 (1925)), modfed n G. C. M. 20854, supra, n
whch t was hed that under artce 52 of Reguatons 45, artce 51
of Reguatons 2, and artce 50 of Reguatons 5, the amount of a
debt wrtten off and aowabe as a deducton shoud be treated as n-
come for the year n whch actuay recovered. owever, n vew of
the fact that a of the reguatons begnnng wth artce 151 of
Reguatons 2, promugated under the Revenue ct of 1921, have
contaned the provson that any amount subsequenty receved on
account of a bad debt or on account of a part of such debt prevousy
charged off, and aowed as a deducton for ncome ta purposes
tacs supped must be ncuded n gross ncome for the ta abe
year n whch receved, ta payers w not be requred to return as
ncome any amounts receved n recovery of debts e cept to the e tent
that such debts have been prevousy camed and aowed as deduc-
tons. s ndcated above, however, f a debt was aowed as a deduc-
ton n whoe or n part n a pror year, amounts recovered upon such
debt consttute ta abe ncome n the year of the recovery to the
e tent prevousy aowed as a deducton, rrespectve of whether the
aowance of the deducton resuted n a ta beneft to the ta payer.
The foregong s consstent wth the manner n whch the ureau
computes the gan or deductbe e pense to a corporaton upon the
retrement of ts bonds. Secton 19.22(a)-18 of Reguatons 103 pro-
vdes that f bonds are ssued by a corporaton at a dscount, the net
amount of such dscount s deductbe and shoud be prorated or
amortzed over the fe of the bonds. It further provdes that f the
corporaton purchases any of such bonds at a prce n e cess of the
ssung prce pus any amount of dscount aready deducted, the e cess
of the purchase prce over the ssung prce pus any amount of ds-
count aready deducted s a deductbe e pense for the ta abe year.
It s provded, however, that f the corporaton purchases any of such
bonds at a prce ess than the ssung prce pus any amount of dscount
aready deducted, the e cess of the ssung prce, pus any amount of
dscount aready deducted, over the purchase prce s gan or ncome
for the ta abe year. In computng the ncome or deductbe e pense
under the reguatons, the ureau has adopted the vew that t s
mmatera whether the deductons on account of bond dscount re-
suted n a ta beneft to the ta payer.
In vew of the foregong. . C. M. 18525, supra, s modfed by
emnatng the ast paragraph thereof (. C. M. 20854, supra, s
revoked: and S. R. 2940, supra, s modfed to accord wth the vews
e pressed heren. It s recommended that I. T. 3172, supra, and I. T.
325(5, supra, be revoked that I. T. 3278, supra, be modfed and that
the acquescence n Centra Loan d- Investment Co. v. Commssoner,
supra, and the acquescence n The Natona ank of Commerce of
Seatte v. Commssoner, supra, be wthdrawn,
. P. WU C ,
Chef Counse, ureau of Interna Revenue.
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81
19.23(k)-.
Secton 19.23 (k)-: ad debts. 1940-38-10421
G. C. M. 22204
INT RN L R NU COD .
Contrbutons were made to the M Corporaton for fnancng the
natona conventon of the N Organzaton. fter the e penses of
the conventon and certan other obgatons were met, the e cess,
If any, was to be refunded to the contrbutors, each to receve such
proporton of the e cess as hs contrbuton bore to the tota con-
trbutons, sub|ect to certan mtatons. The e penses of the
conventon e ceeded the proceeds and the- contrbutors receved no
refunds whatever. ed, the unrefunded contrbutons are not de-
ductbe as bad debts.
n opnon s requested whether amounts contrbuted to the M
Corporaton, whch were to be refunded under certan condtons,
consttute aowabe deductons as bad debts upon faure of the
contrbutor to receve a refund.
N s a Naton-wde organzaton whch hed ts annua conventon
n the cty of R n 1939. The M Corporaton was formed to make
arrangements for the fnanca obgatons of the conventon. In or-
der to defray the operatng e penses of the conventon, requests
were made for contrbutons to the M Corporaton to be used for
such purposes. t the tme of contrbuton each contrbutor receved
a certfcate entted Contrbutng Membershp Certfcate whch
provded n part as foows:
Ths s to certfy that has contrbuted the sum of doars
to the M Corporaton to be used by t to assst n defrayng the e penses n
connecton wth the N Conventon n the cty of R on une , 193 ), and
gratefu acknowedgment s hereby mude of such contrbuton.
The board of drectors of the M Corporaton s vested wth the soe power
to determne the nature and e tent of ts e penses and ts operatons, the
e penses of and ncdenta to the conventon, and ts decson sha be fna.
If, after such e penses and obgatons have been fuy pad or qudated
and a sum set asde to dssove ths corporaton, there remans any e cess, the
M Corporaton w refund to the hoder of ths certfcate whose name appears
thereon, upon surrender of ths certfcate, such proporton of the e cess as
the face amount of ths certfcate bears to the face amount of a ke cer-
tfcates sad refund not to e ceed the amount of the contrbuton shown
thereon.
Ths certfcate s not negotabe and can not be assgned, and the refund,
f any, payabe hereunder, sha nure ony to the hoder whose name s set
forth hereon.
The e penses of the conventon were n e cess of the recepts and
the contrbutors to the corporaton were not rembursed n any
amount. number of contrbutors camed the contrbutons as bad
debts.
In /. S. Cunan v. Commssoner (19 . T. ., 930), the ta payer
made a contrbuton to a potca campagn commttee, and at or
about the same tme advanced funds to meet obgatons of the cam-
pagn. It was understood and agreed that the ta payer was to be
rembursed for ths advance out of coectons whch the campagn
commttee e pected to make from certan ndvduas whom the com-
mttee had sted as prospectve contrbutors. The ta payer receved
ony a sma amount n rembursement. The oard hed that the
remander dd not consttute such a debt as the statute contempates
naav be deducted. The oard stated n part:
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19.23(10-1.
82
The word debts as used In the statute s to be taken In Its usua
and accepted meanng. debt, accordng to Webster, s that whch s due from
one person to another whether money, goods or servces that whch one person
Is bound to pay to another or to perform for hs beneft that of whch payment
s abe to be e acted due, obgaton, abty. Words and Phrases, rst
Seres, voume 2, 18(14, and cases there cted. debt s defned to be n ts
genera sense a specfc sum of money, whch s due or owng from one person
to another, and denotes not ony the obgaton of the debtor to pay, but the rght
of the credtor to receve and enforce payment. (Campbe v. Cty of Indan-
apos, 57 N. ., 920 155 Ind., 187.)
efore a deducton can be aowed on account of a worthess debt It s essen-
ta that te e stence of a vad debt be estabshed. (Mssour aey rdpe
d Iron Co., 14 . T. ., 11 2.) In the case of edera ue Co. (3 . T. ., 814),
we sad:
If the debtor was not egay abe to the ta payer, then there was no debt
to hecome worthess. It can not become worthess because of nabty to estab-
sh egay the abty for the debt, for n such a case there s not an ascertan-
ment of worthessness of an e stng debt, but an ascertanment of the non-
e stence of such a debt.
The debts whch the statute permts to be charged off when ascer-
taned to be worthess are debts where there s an obgaton of the debtor to
pay and a rght of the credtor to receve and enforce payment.
(See aso secton 19.23(k)- (d) of Reguatons 103, whch provdes
that the term debts means obgatons to pay f ed or
determnabe sums of money . )
In the nstant case the M Corporaton assumed no obgaton to
repay any of the contrbutons uness funds were avaabe after pay-
ment of e penses and after the settng asde of a sum suffcent to
dssove, the corporaton. It does not appear that the contrbutors
ntended to make a oan to the corporaton but to make a contrbuton
of any amount whch t shoud eventuay be determned woud not be
refunded.
In vew of the foregong, t s the opnon of ths offce that the
contrbutons descrbed heren are not deductbe as bad debts.
. P. Wenche,
Secton 19.23(k)-: ad debts. 1940-53-10542
( so Secton 23(c), Secton 19.23(c)- I. T. 3438
Secton 42, Secton 19.42-1.)
INT RN L R NU COD ND R NU CTS O 193 ND 1938.
Lmted retroactve appcaton of G. C. M. 221 3 (page 7 . ths
uetn), reatng to the ncuson n gross ncome of recoveres
upon debts prevousy charged off and aowed as a deducton for
edera ncome ta purposes where there was no ta beneft, and
of I. T. 3390 (page 8, ths uetn), reatng to the ncuson n gross
ncome of refunds or credts for State ta es prevousy deducted
for edera ncome ta purposes where there was no ta beneft.
dvce s requested reatve to the retroactve appcaton of
G. C. M. 221 3 (page 70, ths uetn), promugated uy 8, 1940, n
whch t was hed that an amount recovered upon a debt prevousy
charged off and aowed as a deducton for edera ncome ta pur-
poses consttutes ta abe ncome for the year of recovery even though
the pror aowance of the deducton dd not resut n a ta beneft.
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S3
19.23(k)-.
In the nqury presented, reference s made to G. C. M. 18525 (C. .
1937-1, 80), promugated une 28, 15)37, n whch t was hed that
n the case of banks or other corporatons whch are sub|ect to super-
vson by edera authortes (or by State authortes mantanng
substantay equvaent standards), amounts receved n recovery of
debts deducted for a pror year as the resut of charge-offs at the
drecton of edera or State supervsory offcers do not consttute
ta abe ncome uness such pror deducton accompshed a reduc-
ton n ta abty. It s ponted out that, n reance upon the
provsons of that rung, many banks took deductons for bad debts
n ther ncome ta returns n accordance wth the charge-offs made
at the drecton of bank e amners, even though the deductons dd
not resut n ta benefts due to the fact that the banks had net osses
wthout the beneft of such deductons. Under such crcumstances,
t s contended that the retroactve reversa of the rung contaned n
G. C. M. 18525, supra, s nequtabe, and the request s made that
the rung contaned n G. C. M. 221 3, supra, be not apped to
recoveres on debts deducted durng the tme that G. C. M. 18525
was n effect, that s. from une 28, 1937, to uy 8, 1940.
It s the opnon of the ureau that amounts receved n recovery
of debts prevousy deducted shoud not be treated as ta abe ncome
where the deducton dd not resut n a ta beneft f the deducton
was taken n an ncome ta return fed durng the perod when a
pubshed rung of the ureau was outstandng to the effect that
amounts receved n recovery of debts prevousy deducted do not
consttute ta abe ncome uness the pror deducton resuted n a
ta beneft.
ccordngy, pursuant to authorty contaned n secton 3791(b) of
the Interna Revenue Code, the rung n G. C. M/221 3, supra, w
not be apped to recoveres upon debts charged off and deducted by
banks or other corporatons sub|ect to supervson by edera author-
tes (or by State authortes mantanng substantay equvaent
standards), where such charge-offs were at the drecton of edera or
State supervsory offcers, f the deducton dd not resut n a reducton
of edera ncome ta abty, provded the deducton was taken n
an ncome ta return fed durng the perod une 28, 1937, to uy 8,
1940, durng whch perod G. C. M. 18525, supra, remaned unmodfed.
Lkewse, pursuant to authorty contaned n secton 3791(b) of the
Interna Revenue Code, the rung n G. C. M. 221 3, supra, w not be
apped to recoveres upon debts vountary charged off and deducted
by banks or other corporatons sub|ect to edera or State supervson
or by other ta payers, f the deducton dd not resut n a reducton of
edera ncome ta abty, provded the deducton was taken n an
ncome ta return fed durng the perod that G. C. M. 20854 (C. .
1939-1 (Part 1), 102) was n effect, that s, ebruary 27,1939. to uy 8,
1940. (G. C. M. 20854 e tended the scope of G. C. M. 18525 to recoveres
of debts vountary charged off and deducted by banks or other corpo-
ratons sub|ect to edera or State supervson or by other ta pavers.)
In I. T. 3278 (C. . 1939-1 (Part 1), 7 ), whch was promugated on
ay 15, 1939, the prncpe of G. C. M. 20854, supra, was e tended to
amounts of State ta es refunded or credted. It was hed that f the
deducton of such ta es dd not resut n offsettng ta abe ncome, the
amount refunded or credted n a subsequent year shoud not be treated
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19.24-4.
84
as ta abe ncome. owever, I. T. 3278 was modfed by I. T. 3390
(page G8, ths uetn), promugated uy 8, 1040, to accord wth the
vews e pressed n G. C. M. 221G3, supra. Pursuant to authorty con-
taned n secton 3791(b) of the Interna Revenue Code, the rdng n
I. T. 3390 w not be apped to amounts of State ta es refunded or
credted f the pror deducton of such ta es dd not resut n a reduc-
ton of edera ncome ta abty, provded the deducton was taken
n an ncome ta return fed durng the perod May 15, 1939, to uy 8,
1940, durng whch perod I. T. 3278 remaned unmodfed.
Guy T. everng,
pproved December 11,1940.
ohn L. Suvan,
S CTION 24. IT MS NOT D DUCTI L .
Secton 19.24-4: mounts aocabe to e empt 1940-38-10422
ncome, other than nterest. I. T. 340
INT RN L R NU COD .
Method of determnng what part of a State ncome ta pad by
a State empoyee n 1939 for the year 1113S s attrbutabe to hs
ta -e empt compensaton receved from the State n 1938 n order
to determne the amount of the State ncome ta whch may not be
deducted n the edera ncome ta return for 1939.
dvce s requested as to the method of determnng the amount of
State ncome ta pad n 1939 for the year 1938 whch was attrbut-
abe to the ta -e empt compensaton receved by a State empoyee n
19: 8.
The foowng tems are nvoved n the State ncome ta return for
1938 and the tota amount of State ncome ta pad n 1939 for the
year 1938 was 130:
Compensaton receved from the Stae 5,000
penses n connecton wth such compensaton 1,000
4.000
Dvdends 700
Interest on mortgages , 300
Tota ncome 5,000
Dednctcns:
Contrbutons 500
Ta es on rea estate 100
00
Net ncome 4, 400
Persona e empton 1,000
Ta abe ncome 3,400
In I. T. 3353 (C. . 1940-1, 44) t was hed (syabus) :
State ncome ta es pad n 1S 3D on compensaton receved n 1938 by offcers
or empoyees of a State or any potca subdvson thereof, or any agency or
Instrumentaty of any one or more of the foregong, whch, under the provsons
of the Pubc Saary Ta ct of 19:,9, s not sub|ect to edera ncome ta , are
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85
I 19.25-4.
not deductbe from gross ncome by such offcers and empoyees n ther 1939
edera ncome ta returns.
Secton 19.24- 4 of Reguatons 103 provdes n part as foows:
If an tem s ndrecty attrbutabe both to ta abe ncome and e empt
ncome, a reasonabe proporton thereof, determned n the ght of a the facts
and crcumstances n each ease, sha be aocated to each. pportonments
most n a cases be reasonabe.
In the above e ampe the net ncome receved by the ta payer from
the State durng 1938, 4,000, whch was e empt from edera ta a-
ton, s four-ffths of hs tota ncome of 5,000. The deductons of
500 for contrbutons and 100 for ta es on rea estate are not app-
cabe to any partcuar tem of reported ncome. ppyng the above-
quoted provsons of the reguatons, t s hed that the tota ta s
to be apportoned n the rato that the net saary receved from the
State, 4,000, bears to the tota ncome of 5,000. ccordngy, four-
ffths of 130, or 104, s the part of the State ncome ta whch may
not be deducted n the ndvdua s 1939 edera ncome ta return.
S CTION 25. CR DITS O INDI IDU L
G INST N T INCOM .
Secton 19.25-1: Credts of ndvdua aganst net
ncome.
INT RN L R NU COD .
Secton 19.25-3: mount of persona e empton aowabe.
INT RN L R NU COD .
Secton 19.25-4: Persona e empton of head 1940-39-10428
of famy. I. T. 3410
INT RN L R NU COD .
Certan reatves wth whom a ta payer may be sad to be
cosey connected by bood or marrage wthn the meanng of
secton 19.25- 1 of Reguatons 103.
dvce s requested whether certan reatves of a ta payer may be
sad to be cosey connected wth hm by bood or marrage for
the purpose of secton 19.25-4 of Reguatons 103, pertanng to per-
sona e empton as head of a famy. The reatonshps are:
LOOD R L TIONS IP.
Grandfather Grandmother.
ather Mother.
Son Daughter.
rother Sster.
(whoe or haf bood)
Unce unt
Nephew Nece.
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19.25- .
8
M RRI G .
Step-brother Step-sster.
ather-n-aw Mother-n-aw.
rother-n-aw Sster-n-aw.
Secton 19.25-4 of Reguatons 103 provdes n part as foows:
Persona e empton of head of famy. head of a famy s an ndvdua who
actuay supports and mantans n one househod one or more ndvduas who are
cosey connected wth hm hy hood reatonshp, reatonshp by marrage, or by
adopton, and whose rght to e ercse famy contro and provde for these de-
pendent ndvduas s based upon some mora or ega obgaton.
ta payer s consdered to be cosey connected by bood wth hs
progentors and nea descendants, hs brothers and ssters, whether
by the whoe or haf bood, and wth hs unces, aunts, nephews, and
neces. Irrespectve of any ega obgaton of the ta payer to support
such dependent reatves, there s a mora obgaton to do so.
The ta payer s consdered to be cosey connected by marrage
wth hs step-ssters and step-brothers. Whether the ta payer s rght
to e ercse famy contro and provde for such dependent ndvduas
s based upon some mora or ega obgaton must be decded upon the
facts n the partcuar case.
Wth respect to the status of a ta payer because of support furnshed
to hs father-n-aw, mother-n-aw, brother-n-aw, and sster-n-aw, t
s evdent that he s cosey connected wth them by vrtue of the
reatonshp whch arose out of hs marrage. Lkewse, whether the
ta payer s rght to e ercse famy contro and provde for such de-
pendent ndvduas s based upon a mora or ega obgaton s a
queston to be decded upon the facts n each partcuar case.
Secton 19.25- : Credt for dependents. 1940-43-104 0
I. T. 3418
INT RN L R NU COO .
, an mercan ctzen, who, durng the year 1940, supports a
certan foregn refugee under 18 years of age n accordance wth
an obgaton assumed by hm for such support w be entted to
a credt for a dependent for edera ncome ta purposes.
dvce s requested whether , an mercan ctzen, who has as-
sumed an obgaton to support a certan foregn refugee under 18
years of age durng the year 1940, w be entted to a credt for a
dependent under secton 25 of the Interna Revenue Code. has
furnshed compete nformaton reatve to the e stence of such
obgaton and other pertnent facts reatng to the dependent.
Secton 19.25- of Reguatons 103 provdes n part that the credt
for dependents s based upon actua fnanca dependency and not
mere ega dependency. It may accrue to a ta payer who s not the
head of a famy. or a person to be entted to a credt, for ncome
ta purposes, as head of a famy, t s necessary that he actuay
support n one househod one or more ndvduas who are cosey
connected wth hm by bood reatonshp, reatonshp by marrage,
or by adopton (see secton 19.25 1, Reguatons 103). owever, n
order to be entted to a credt for dependents, t s not necessary that
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19.25-7.
the person supported be a reatve by bood, marrage, or adopton
of the person camng such credt. (See frst paragraph of secton
19.25- , supra.)
In O. D. 139 (C. . 1, 100 (1919)) t was hed that n mercan
ctzen may cam the credt for dependents rrespectve of the
natonatv or pace of resdence of the dependents. In I. T. 2011
(C. . I-1, 30 (1932)) t was hed that whe a ta payer s not
entted to credt as the head of a famy by vrtue of support and
mantenance of a chd who has not been egay adopted, he may
nevertheess be entted to the credt aowed on account of the sup-
port of a dependent. In I. T. 2808 (C. . III-2. 137 (1934)) t
was hed that a naturazed ctzen of the Unted States who was
the soe support of hs mother vng n Germany may be entted
to a credt for a dependent f she was ncapabe of sef-support
because mentay or physcay defectve, even though he was not
entted to persona e empton as head of a famy. The oard of
Ta ppeas hed n Mame S. Tammonrh et a. v. Com m oner (38
. T. ., 4 (1938), acquescence, C. . 1938-2, 14) that The statute
gvng a credt for the support of dependents does not requre that
they ve n the same househod as the ta payer who contrbutes the
support, nor does t requre that those who are supported sha be
egay dependent upon the ta payer.
In vew of the foregong, t s hed that , an mercan ctzen,
whO| under an obgaton assumed by hm, actuay supports a certan
foregn refugee under 18 years of age, s entted to a credt for a
dependent notwthstandng the absence of bood, marrage, or ega
reatonshp, and notwthstandng such refugee s not actuay housed
n hs home.
In such a case, t s necessary that the ta payer sha have assumed
an obgaton for the support durng the ta abe year n queston of
the person wth respect to whom the credt s camed. e must fur-
nsh satsfactory evdence as to the e stence of the obgaton and other
pertnent facts reatng to the dependent. Credt w not be aowed
n those cases where t appears that the support of one or more ndvd-
uas n an nsttuton s m substance merey a contrbuton to the nst-
tuton and, therefore, together wth other contrbutons of the ta payer,
sub|ect to the statutory mtaton on the amount of contrbutons de-
ductbe. (Morre v. Commssoner, 107 ed. (2d), 34.)
The concuson reached heren s aso appcabe where the depend-
ent, regardess of age, s ncapabe of sef-support because men-
tay or physcay defectve. In order that the ta payer may obtan
the beneft of the credt, the dependent must receve more than one-
haf of hs tota support from the ta payer.
Ths rung s aso appcabe n the case of a resdent aen.
Secton 19.25-7: Persona e empton and credt for
dependents where status changes.
INT RN L R NU COD .
.Reguatons 103, amended. (See T. D. 5011, page 15.)
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19.42-1.
88
S CTION 27(b). CORPOR TION DI ID NDS P ID
CR DIT: SIC SURT CR DIT.
Secton 19.27(b)-2: Dvdends pad. 1940-41-10448
I. T. 3415
INT RN L R NU COD .
Dvdends pad credt n oases where a dvdend decared by a
corporaton can not be pad to foregn stockhoders by reason of
ecutve Order No. 8389, dated pr 10, 19-10, as amended.
dvce s requested whether the M Company w be entted to a
dvdends pad credt wth respect to dvdends decared and payabe
to foregn stockhoders, even though the dvdends can not actuay
be pad to them by reason of the freezng order known as ecu-
tve Order No. 8389, dated pr 10, 1940, as amended, f the amount
of such dvdends s paced n a separate bank account pursuant to
corporate resouton earmarkng such account as a dvdend, and
proper credts to the stockhoders accounts are entered on the corpo-
rate books.
It s hed that the credtng of the amount of a dvdend to the
account of a foregn stockhoder, to whom actua transfer thereof s
prohbted by ecutve Order, and the pacng of the amount of the
dvdend n a separate bank account pursuant to corporate resouton
earmarkng such account as a dvdend w be regarded as payment
of the dvdend durng the ta abe year of such acton wthn the
meanng of secton 19.27(b)-2(a) of Reguatons 103, reatng to
when dvdends are consdered pad, provded such separate account
s opened n the name of the stockhoder and the corporaton makes
no restrcton wth respect to payment thereunder. The payment of
such a dvdend may ony be made pursuant to a cense ssued under
ecutve Order No. 8389.
P RT I . CCOUNTING P RIODS ND M T ODS O CCOUNTING.
S CTION 42. P RIOD TN W IC IT MS O
GROSS INCOM INCLUD D.
Secton 19.42-1: When ncuded n gross ncome.
INT RN L R NU COD .
I. T. 3278 (C. . 19U9-1 (Part 1), 7 ) modfed. (See I. T. 3390,
page 8.)
Secton 19.42-1: When ncuded n gross ncome. 1940-44-10408
I. T. 3421
INT RN L R NU COD .
Treatment as ta abe ncome to an empoyer of the amounts
of refunds of soca securty tu es made pursuant to secton 902(a)
and 012(d) of the Soca Securty ct mendments of 1939, where
such ta es have been prevousy deducted for edera ncome ta
purposes.
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19.42-1.
dvce s requested reatve to the proper treatment for edera n-
come ta purposes of refunds of soca securty ta es, receved pursuant
to the provsons of sectons 902(a) 1 and 902(d) of the Soca Securty
ct mendments of 1939, where such ta es have been prevousy de-
ducted from gross ncome.
The ta es n queston were mposed by the Soca Securty ct, ap-
)roved ugust 14,1935, the pertnent provsons of whch read as fo-
ows:
Tte I . Ta on mpoyers of ght ob More.
IMPOSITION O T .
Sec. 901. On fnd after anuary 1, 103 , every empoyer (as defned n secton
907) sha pay for each caendar year an e cse ta , wth respect to havng ndvd-
uas n hs empoy, equa to the foowng percentages of the tota wages (as de-
fned n secton 907) payabe by hm (regardess of the tme of payment) wth
respect to empoyment (as defned n secton 907) durng such caendar year:
(1) Wth respect to empoyment durng the caendar year 193 the rate
sha be 1 per centum
(2) Wth respect to empoyment durng the caendar year 1937 the rate
sha be 2 per centum
(3) Wth respect to empoyment after December 31, 1937, the rate sha be
3 per centum.
CR DIT G INST T .
Sec. 902. The ta payer may credt aganst the ta mposed by secton 901 the
amount of contrbutons, wth respect to empoyment durng the ta abe year,
pad by hm (before the date of fng hs return for the ta abe year) nto an
unempoyment fund under a State aw. The tota credt aowed to a ta payer
under ths secton for a contrbutons pad nto unempoyment funds wth respect
to empoyment durng such ta abe year sha not e ceed 90 per centum of the ta
aganst whch t s credted, and credt sha be aowed ony for contrbutons
made under the aws of States certfed for the ta abe year as provded n secton
903.
The ct entted Soca Securty ct mendments of 1939 (C. .
1939-2, 470). approved ugust 10, 1939, berazed the condtons of
aowance of the credt provded n secton 902 of the Soca Securty
ct, supra, aganst the ta mposed by secton 901 of that ct. It aso
authorzed refund of such ta n specfed nstances. The pertnent
provsons of the amendments read as foows:
Tte I . Msceankous Provsons.
Sec 902. (a) ganst the ta mposed by secton 901 of the Soca Securty ct
for the caendar year 193 , 1937, or 1938, any ta payer sha be aowed credt for
the amount of contrbutons, wth respect to empoyment durng such year, pad
by hm nto an unempoyment fund under a State aw
(1) efore the s teth day after the date of the enactment of ths ct

(d) Refund of the ta (ncudng penaty and nterest coected wth respect
thereto, f any), based on any credt aowabe under subsectons (a)
may be made n accordance wth the provsons of aw appcabe n the case of
erroneous or ega coecton of the ta . No nterest sha be aowed or pad on
the amount of any such refund.
Senate Report No. 734, submtted by the Commttee on nance. Sev-
enty-s th Congress, frst sesson (C. . 1939-2, 5 5, at pages 590 and
591), shows that the reason for enactment of the berazng amend-
ment contaned n secton 902 (a) 1 of the Soca Securty ct mend-
ments of 1939, supra, was that some ta payers pad ther State unem-
200217 41 7
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19.42-4.)
90
poyment fund contrbutons too ate for aowance of the credt
provded by secton 902 of the Soca Securty ct, supra. (See aso
ouse of Representatves Report No. 728. submtted by the Commttee
on Ways and Means, Seventy-s th Congress, frst sesson, C. . 1939-2,
538, at page 5 4.)
It appears cear that, the soca securty ta es for the caendar
years 193 . 1937. and 1938 were egay coected under secton 901 of
the Soca Securty ct, supra, n the frst nstance that they were
proper deductons from gross ncome, for edera ncome ta pur-
poses, for the years n whch the ta es were pad or accrued (I. T.
29 0, C. . -1, 98 (193 )) and that the subsequent refunds
thereof resuted soey from the enactment of sectons 902(a) 1 and
902(d) of the Soca Securty ct mendments of 1939, supra.
The genera rue wth respect to the ta abty of amounts receved
as refunds of ta es egay coected and deducted n edera ncome
ta returns for pror years s set forth n Mmeograph 45 4 (C. .
1937-1, 93, modfed by I. T. 3278. C. . 1939-1 (Part 1), 7 , but ren-
stated by I. T. 3390, page 8, ths uetn), whch reads n part as
foows:
Refunds of ta es egay coected whch hare been taken as deduc-
tons n edera ncome ta returns for a pror year shoud contnue to he
treated n a cases as ncome for the ta abe year n whch the refund s made.
In vew of the foregong, a ta payer operatng upon the cash
recepts and dsbursements bass of accountng shoud treat the re-
funds receved pursuant to the provsons of sectons 902(a) and
902(d) of the Soca Securty ct mendments of 1939 as ta abe
ncome n the year n whch such refunds are receved. In the case
of a ta payer operatng upon an accrua bass of accountng, who
pad hs contrbutons to the State on or before ugust 10, 1939 (the
date of enactment of the amendments), any refunds of edera soca
securty ta es to whch he became entted pursuant to the provsons
of sectons 902(a) and 902(d) of the Soca Securty ct mend-
ments of 1939 shoud be accrued as ta abe ncome as of ugust 10,
1939. If the contrbutons were pad to the State after ugust 10,
1939, the date of enactment of the amendments, and wthn the perod
prescrbed by secton 902 (a) 1, any refunds to whch a ta payer s
entted because of such payments shoud be accrued as ta abe
ncome as of the date on whch the Stat contrbutons were pad.
Secton 19.42-1: When ncuded n gross ncome.
INT RN L R NU COD .
Refunds or credts for State ta es prevousy deducted wthout ta
beneft. (See I. T. 3438, page 82.)
Secton 19.42-4: Long-term contracts. 1940-51-10525
I. T. 3434
INT RN L R NU COD .
Soca securty ta es pad by the M Company wth respect to
saares and wages whch are propery aocabe to a ong-term
contract shoud be aocated to the contract and treated as a part
of the tota deferred e pendtures to be deducted from the gross
Income derved from the contract
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19.51-2.
dvce s requested whether soca securty ta es pad by the M
Company durng the fe of a ong-term contract may be deferred
aong wth the saares and wages to whch they pertan, under the
provsons of secton 19.42-4(b) of Reguatons 103, where the com-
peted contract bass s the ta payer s reguar method of accountng.
Secton 19.42-4( ) of Reguatons 103 provdes that the rross ncome
may be reported for the ta abe year n whch the contract s fnay
competed and accepted f the ta pa| er eects as a consstent practce
so to treat such ncome, provded such method ceary refects the net
ncome, and that f the method s adopted there shoud be deducted
from gross ncome a e pendtures durng the fe of the contract
whch are propery aocated thereto.
Regardng the tme for the takng of deductons, secton 43 of the
Interna Revenue Code provdes n part as foows:
The deductons and credts (other than the corporaton dvdends pad credt
proTded n secton 27) provded for n ths chapter sha be taken for the
ta abe year n whch pad or accrued or pad or ncurred, dependent upon
the method of accountng upon the bass of whch the net ncome s computed,
uness n order to ceary refect the ncome the deductons or credts shoud be
taken as of a dfferent perod.
Snce the saares and wages whch are propery aocabe to a
ong-term contract are ceary ncurred n connecton wth the work
of carryng out and competng such contract, t s hed that n order
ceary to refect the ncome, soca securty ta es pad by the M
Company wth respect to saares and wages whch are propery
aocabe to a ong-term contract shoud kewse be aocated to the
contract and treated as a part of the tota deferred e pendtures to
be deducted from the gross ncome derved from the contract. (Sec-
ton 19.42-4( ), Reguatons 103.)
S CTION 47. R TURNS OR P RIOD O L SS
T N TW L MONT S.
Secton 19.47-1: Returns for perods of ess than
tweve months.
INT RN L R NU COD .
P RT . R TURNS ND P YM NT O T .
S CTION 51. INDI IDU L R TURNS.
Secton 19.51-1: Indvdua returns.
INT RN L R NU COP .
Secton 19.51-2: orm of return.
INT RN L R NU COD .
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92
Secton 19.51-3: Return of ncome of mnor.
INT RN L R NU COD .
Reguatons 103, amended. (See T. D. 5011, page .)
S CTION 52. CORPOR TION R TURNS.
Secton 19.52-1: Corporaton returns.
INT RN L R NU COD .
Computaton of defense ta prescrbed by secton 204 of the Reve-
nue ct of 1940 amendng secton 00 of the Interna Revenue Code
corporaton ncome and e cess-profts ta returns for the fsca years
endng uv 31, 1940, to November 30, 1940, ncusve. (See Mn.
5083, page 1 8.)
S CTION 55. PU LICITY O R TURNS.
1940-31-103 9
T. D. 4991
TITL 2 INT RN L R NU . C PT R I. T RT 403. ST T RT C T RT 458,
SU P RT . INSP CTION O R TURNS.
mendng secton 4030.33 of Treasury Decson 4929 C. .
1989-2, 911, reatng to the nspecton of certan returns made
under the Interna Revenue Code, and artce 3, Part III, of Treas-
ury Decson 4873 C. . 193S-2, 201 , reatng to te nspecton of
certan returns made pursuant to the requrements of the Revenue
ct of 19 8 and pror Revenue cts, so as to provde a dfferent
method for such nspecton by the Dstrct of Coumba, aska,
awa, the Phppne Isands, and Puerto Rco.
Washngton, D. C.
1. Secton 4 3C.33 of Treasury Decson 4929 C. . 1939-2, 91
Part 4G3C, Tte 2 , Code of edera Reguatons, 1939 Sup. s
amended by strkng out Sec. 4 3C.33. and nsertng n eu
thereof Sec. 4 3C.33. (a) and addng at the end of the secton the
foowng:
( ) Inspecton hy Dstrct of Coumba, aska, aca, the Phppne
Isands, and Puerto Rco. ny offca, body, or commsson, awfuy charged
wth te admnstraton of any ta aw of the Dstrct of Coumba, aska,
awa, the Phppne Isands, or Puerto Rco, or any representatve or repre-
sentatves of such offca, body, or commsson, may, n the dscreton of the
Commssoner of Interna Revenue, be permtted to nspect orgna ncome
returns, for any ta abe year endng on or after uy 31, 1939, for the purpose of
such admnstraton.
Requests for permsson to nspect orgna returns sha be n wrtng sgned
by the e ecutve head of the government on whose behaf the Inspecton s to
be made and sha be addressed to the Commssoner of Interna Revenue, Rec-
ords Dvson, Washngton, D. C. The request sha state (a) the knd of
returns t s desred to nspect, ( ) the ta abe year or years covered by the
returns It s desred to nspect, (c) the name of the offca, body, or commsson,
by whom or whch the nspecton s to be made, (d) the name of the repre-
sentatve of such offca, body, or commsson, desgnated to make the nspec-
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93
ton, (e) by specfc reference, the ta aw whch such offca, body, or com-
msson, s charged wth admnsterng and the aw under whch he, she, or t
s so charged, and (/) the purpose for whch the nspecton s to be made.
Wthn a reasonabe tme after the returns are fed the copes thereof (n-
cudng photostats and photographs), under such procedure as may be pre-
scrbed by the Commssoner, sha be made avaabe for nspecton n the
offce of the coector of nterna revenue In whch the returns are fed, by
any offca, body, or commsson, awfuy charged wth the admnstraton of
any ta aw of the Dstrct of Coumba, aska, awa, the Phppne Isands,
or Puerto Rco, or by the propery desgnated representatves of such offca,
body, or commsson, for the purpose of such admnstraton. The respectve
heads of the above-desgnated governments sha be notfed by the Comms-
soner of the date the copes of the returns are avaabe for nspecton and
nspecton thereof sha not be permtted after one year from such date. Re-
quests for nspecton of copes of returns sha conform wth the requrements
reatng to requests for permsson to nspect orgna returns as prescrbed
by ths subsecton.
2. rtce 3, Part III, of Treasury Decson 4873 C. . 1938-2,
2 1 secton 458.33, Subpart , of Tte 2G, Code of edera Regu-
atons, 1938 Sup. s amended by strkng out rt. 3. and nsertng
n eu thereof rt. 3. (a) and addng at the end of the artce
the foowng:
( ) Inspecton by Dstrct of Coumba, aska, aca, the Phppne
Isands, and Puerto Rco. ny offca, body, or commsson, awfuy charged
wth the admnstraton of any ta aw of the Dstrct of Coumba, aska,
awa, the Phppne Isands, or Puerto Rco, or any representatve or rep-
resentatves of such offca, body, or commsson, may, n the dscreton of the
Commssoner of Interna Revenue, be permtted to nspect orgna ncome
returns, for any ta abe year, for the purpose of such admnstraton.
Requests for permsson to nspect orgna returns sha be n wrtng sgned
by the e ecutve head of the government on whose behaf the nspecton s to
be made and sha be addressed to the Commssoner of Interna Revenue. Rec-
ords Dvson, Washngton, D. C. The request sha state (a) the knd of
returns t s desred to nspect, ( ) the ta abe year or years covered by the
returns t s desred to nspect, (c) the name of the offca, body, or comms-
son, by whom or whch the nspecton s to be made, (d) the name of the
representatve of such offca, body, or commsson, desgnated to make the
nspecton, (c) by specfc references, the ta aw whch such offca, body, or
commsson, s charged wth admnsterng and the aw under whch he. she,
or t s so charged, and (f) the purpose for whch the nspecton s to be made.
(Part 1 of ths Treasury decson s prescrbed pursuant to sectons
55(a), 508. 03, 702(a), 1204, and 1 04(c) of the Interna Revenue
Code (53 Stat., 29, 111, 111, 11 , 171, 18 ).
(Part 2 of ths Treasury decson s prescrbed pursuant to secton
257(a), 44 Stat., 51: secton 55, 45 Stat., 809 secton 55, 47 Stat., 189,
as amended by secton 218(h), 48 Stat., 209. 2 U. S. C, 55 secton
215(e) and 21 (b), 48 Stat., 207, 208 sectons 55(a), 701(e), and
702(b), 48 Stat., 98, 7 9, 770, 2 U. S. C, 55, 1358, 341 sectons
105(e) and 10 (c),49 Stat., 1017,1019, 2 U. S. C, 1358a, 342 secton
905, 49 Stat., 41. 42 U. S. C, 1105 sectons 55(a), 351(c), and
503(a), 49 Stat., 1071. 1733, 1738. 2 U. S. C. Sup. I , 55. 331, 345b
sectons 55(a), 409, 01(c), and 02(c), 52 Stat, 478, 5 4, 5 5, 5 7,
2 U. S. C, Sup. I , 55(a), 337a, 1358(e), 341(c).)
. MoRG N T T , r.,
Secretary of the Treasury.
pproved uy 20, 1940.
rankn D. Roosevet,
The Whte ouse.
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155.
94
CUTI ORD R UT ORIZING T INSP CTION Y T DISTRICT O
COLUM I , L S , W II, T P ILIPPIN ISL NDS, ND PU RTO RICO
O C RT IN R TURNS M D UND R T INT RN L R NU COD ND
O INCOM , C SS-PRO ITS, ND C PIT L STOC T R TURNS IL D
UND R T R NU CT O 1938 OR PRIOR R NU CTS, ST T ND
GI T T R TURNS IL D T R UN 1 , 1933, ND R TURNS UND R TITL
I O T SOCI L S CURITY CT.
y vrtue of and pursuant to the authorty vested n me by secton
55(a) of the Interna Revenue Code (53 Stat., 29) -and by secton
257(a) of the Revenue ct of 192 (44 Stat, 9, 51) secton 55 of the
Revenue ct of 1928 (45 Stat., 791, 809) secton 55 of the Revenue
ct of 1932 (47 Stat., 1 9, 189 , as amended by secton 218(h) of the
Natona Industra Recovery ct (48 Stat., 195, 209) sectons 215(e)
and 21 (b) of the Natona Industra Recovery ct (48 Stat., 195,
208) sectons 55(a), 701(e), and 702(b) of the Revenue ct of 1934
(48 Stat., 80, 98, 770): sectons 105(e) and 10 (c) of the Revenue
ct of 1935 (49 Stat., 1014, 1018, 1019) secton 905 of the Soca
Securty ct (49 Stat, 20, 41) sectons 55(a), 351(c), and 503(a)
of the Revenue ct of 193 (49 Stat., 1 48, 1 71, 1733, 1738) and
sectons 55(a), 409, 01(e), and 02(c) of the Revenue ct of 1938
52 Stat,, 447, 5 4, 5 5, 5 7), t s hereby ordered that the foowng
esgnated returns sha be open to nspecton by the Dstrct of Co-
umba, aska, awa, the Phppne Isands, and Puerto Rco n
accordance and upon compance wth the rues and reguatons pre-
scrbed by the Secretary of the Treasury n the Treasury decson re-
atng to the nspecton of such returns approved by me on ugust
28, 1939, and the amendment thereto approved by me ths date, and
the rues and reguatons prescrbed by the Secretary of the Treasury
n the Treasury decson reatng to nspecton of returns under Rev-
enue cts pror to the Interna Revenue Code approved by me on
November 12, 1938, and the amendment thereto approved by me ths
date:
(1) Income (ncudng ncome of persona hodng companes and
un|ust enrchment ncome), e cess-profts, capta stock, estate, and
gft ta returns under the Interna Revenue Code ana returns of
empoyment ta on empoyers under Subchapter C of Chapter 9 of
such Code.
(2) (a) Income, e cess-profts, and capta stock ta returns made
under the Revenue ct of 1938, the Revenue ct of 193 , the Rev-
enue ct of 1935, the Revenue ct of 1934, the Natona Industra
Recovery ct, the Revenue ct of 1932, the Revenue ct of 1932, as
amended by the Natona Industra Recovery ct, and under the
pror Revenue cts, (b) estate and gft ta returns made under the
Revenue ct of 1932 or the Revenue ct of 1932 as amended, and
fed after une 1 , 1933, (o) returns made under Tte I of the
Soca Securty ct, and (d) returns made under any of such cta
as amended.
rankun D. Roosevet.
The Whte ouse,
uy 20, 1940.
(8490)
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95
55.
1940 7-10490
T. D. 5019
TITL 2 INT RN L R NU . C PT R I, P RT 45S, SU P RT P RT 4S8,
SU P RT P. INSP CTION O R TURNS.
mendng sectons 4 3C.2, 4 3C.4, and 4 3C.7 of Treasury Decson
4929 C. . 1939-2, 91 , reatng to the Inspecton of certan returns
made under the Interna Revenue Code, and artces 5, 7, and 10, Part
I, of Treasury Decson 4873 C. . 1938-2, 2 1 , reatng to the
Inspecton of certan returns made pursuant to the requrements of
the Revenue ct of 1938 and pror Revenue cts, so as to permt
nspecton of certan returns by a recever, or trustee n bankruptcy.
Washngton, D. C.
1. Secton 4 3C.2 of Treasury Decson 4929 C. . 1939-2, 91
secton 458.302, Tte 2 , Code of edera Reguatons, 1939 Sup.
and artce 5, Part I. of Treasury Decson 4873 C. . 1938-2, 2 1
secton 458.5, Tte 2 , Code of edera Reguatons, 1938 Sup. are
amended by nsertng the foowng sentence mmedatey after the
ne t to the ast sentence of each:
If the propery of the person who made the return s n te hands of a recever,
or trustee n bankruptcy, the return of such person sha be open to nspecton
by such recever or trustee, or by the duy consttuted attorney n fact of such
recever or trustee.
2. Secton 4 3C.4 of Treasury Decson 4929 secton 458.304, Tte
2 . Code of edera Reguatons. 1939 Sup. and artce 7, Part I, of
Treasury Decson 4873 secton 458.7, Tte 2 , Code of edera Regu-
atons, 1938 Sup. are amended by nsertng the foowng sentence
mmedatey after the ne t to the ast sentence of each:
If the property of the partnershp s n the hands of a recever, or trustee n bank-
ruptcy, the return of the partnershp sha be open to nspecton by such recever
or trustee, or by the duy consttuted attorney n fact of such recever or trustee.
3. Secton 4 3C.7 of Treasury Decson 4929 secton 458.307, Tte
2 , Code of edera Reguatons, 1939 Sup. and artce 10, Part I, of
Treasury Decson 4873 secton 458.10, Tte 2 , Code of edera Regu-
atonS| 1938 Sup. are amended by nsertng the foowng sentence
mmedatey after the ne t to the ast sentence of each:
If the property of the corporaton s n the hands of a recever, or trustee n bank-
ruptcy, the return of such corporaton sha be open to nspecton by such recever
or trustee, or by the duy consttuted attorney n fact of such recever or trustee.
(Ths Treasury decson s prescrbed pursuant to sectons 55(a),
508, 03, 702(a), 1204, and 1 04(c) of the Interna Revenue Code (53
Stat., 29, 111, 111, 11 ,171,18 ) secton 257(a) of the Revenue ct of
.192 (44 Stat., 51) secton 55 of the Revenue ct of 1928 (45 Stat.,
809) secton 55 of the Revenue ct of 1932 (47 Stat., 189), as amended
by secton 218(h) of the Natona Industra Recovery ct (48 Stat.,
209,2 U. S. C, 55) sectons 215(e) and 21 (b) of the Natona Indus-
tra Recovery ct (48 Stat., 207, 208) sectons 55(a), 351, 701(e), and
702(b) of the Revenue ct of 1934 (48 Stat., 98, 751, 7 9, 770, 2
U. S. C, 55,331,1358, 341) sectons 105(e) and 10 (c) of the Revenue
ct of 1935 (49 Stat., 1017, 1019, 2 U. S. C, 1358a, 342) secton 905
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55.
9G
of the Soca Securty ct (49 Stat., 41, 42 U. S. C, 1105) sectons
55(a), 351(c), and 503(a) of the Revenue ct of 193 (49 Stat., 1 71,
1733, 1738, 2 U. S. C, Sup. I , 55, 331, 345b) sectons 55(a), 409,
01(e), and 02(c) of the Revenue ct of 1938 (52 Stat., 478, 5 4,
5 5, 5 7. 2 U. S. C, Sup. I , 55(a), 337a, 1358(e), 341(c)).) -
ohn L. Suvan,
pproved November 7, 1940.
rankn D. Roosevet,
The Whte ouse.
CUTI order authorzng the nspecton by recevers, and
TRUST S IN N RUPTCY, ND T IR DULY CONSTITUT D TTORN Y S
IN CT, OP C RT IN R TURNS M D UND R T INT RN L R NU
COD ND O INCOM , C SS-PRO ITS. ND C PIT L STOC T R TURNS
IL D UND R T R NU CT O 19.18 OR PRIOR R NU CTS, GI T
T R TURNS IL D T R UN 1 , 1933, ND R TURNS UND R TITL
I O T SOCI L S CURITY CT.
y vrtue of the authorty vested n me by secton 55(a) of the
Interna Revenue Code (53 Stat., 29), secton 257(a) of the Revenue
ct of 192 (44 Stat., 9, 51), secton 55 of the Revenue ct of 1928
(45 Stat,, 791, 809), secton 55 of the Revenue ct of 1932 (47 Stat.,
1 9, 189), as amended by secton 218(h) of the Natona Industra
Recovery ct (48 Stat., 195, 209), sectons 215(e) and 21 (b) of the
Natona Industra Recovery ct (48 Stat., 195, 208), sectons 55(a),
-851, 701(e), and 702(b) of the Revenue ct of 1934 (48 Stat., 80,
98, 751, 7 9, 770), sectons 105(e) and 10 (c) of the Revenue ct
of 1935 (49 Stat., 1014, 1018, 1019), secton 905 of the Soca Securty
ct (49 Stat., 20, 41), sectons 55(a), 351(c), and 503(a) of the
Revenue ct of 193 (49 Stat., 1 48, 1 71, 1733, 1738), and sectons
55(a), 409, 01(e , and 02(c) of the Revenue ct of 1938 (52 Stat.,
447, 5 4, 5 5. 5 7), t s hereby ordered that the foowng-desgnated
returns sha be open to nspecton by a recever, or trustee n
bankruptcy, and by ther duy consttuted attorneys n fact, n ac-
cordance and upon compance wth the rues and reguatons pre-
scrbed by the Secretary of the Treasury n the Treasury decson
reatng to the nspecton of such returns approved by me on ugust
28, 1939, and the amendments thereto approved by me on uy 20,
1940, and ths date, and the rues and reguatons prescrbed by the
Secretary of the Treasury n the Treasury decson reatng to nspec-
ton of returns under Revenue cts pror to the Interna Revenue
Code approved by me on November 12, 1938, and the amendments
thereto approved by me on uy 20, 1940, and ths date:
(1) Income (ncudng ncome of persona hodng companes and
un|ust enrchment ncome), e cess-profts, capta stock, and gft,
ta returns under the Interna Revenue Code and returns of empoy-
ment ta on empoyers under Subchapter C of Chapter 9 of such
Code.
(2) (a) Income, e cess-profts, and capta stock ta returns made
under the Revenue ct of 1938, the Revenue ct of 193 , the Revenue
ct of 1935, the Revenue ct of 1934, the Natona Industra Re-
covery ct, the Revenue ct of 1932, the Revenue ct of 1982 as
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97
19.55(b)-2.
amended by the Natona Industra Recovery ct, and under the
pror Revenue cts, (b) gft ta returns made under the Revenue
ct of 1932 or the Revenue ct of 1932 as amended, and fed after
une 1 ,1933, (c) returns made under Tte I of the Soca Securty
ct, and (d) returns made under any of such cts as amended.
rankn D. Roosevet.
The Whte ouse,
November 7, 1940.
(858 )
( ed wth the Dvson of the edera Regster November 8, 1940, 2.1 p. m.)
Secton 19.55(b)-2: Copes of ncome returns. 1940-31-10355
( so Sectons 19.55(b)-3, 19.55(b)-4, and T. D. 4989
19.55 (b)-5.)
TITL 2 INT RN L R NU . C PT R I, SU C PT R , P tT 19.
INCOM T .
mendng sectons 19.551 b)-2, 19.55(b)-3, 19. 5(b)-4, and
19.55(b)-5 of Reguatons 103, reatng to the fng of copes of
ncome returns by ta payers and the nspecton of such copes by au
offca, body, or commsson, awfuy charged wth the admnstra-
ton of a Sate ta aw.
Washngton, D. C.
Paragraph 1. Reguatons 103 Part 19, Tte 2 , Code of edera
Reguatons, 1940 Sup. n so far as they prescrbe rues reatve to
the fng of copes of ncome returns by ta payers and the nspecton
of such copes by an offca, body, or commsson, awfuy charged
wth the admnstraton of a Sate ta aw, under secton 55(b) of the
Interna Revenue Code, are hereby amended as foows:
Par. 2. Secton 19.55(b)-2, secton 19.55(b)-3, and secton
19.55(b)-4 are amended by addng at the end of each of those sec-
tons a paragraph readng as foows:
The provsons of ths secton sha not appy to ta abe years begnnng after
December 31, 1039.
Par. 3. The ast sentence of the frst paragraph of secton
19.55(b)-5 s amended to read as foows:
When permsson to nspect orgna returns s requested, the appcaton of the
governor of the State sha conform to the requrements spec fed n secton
19.55(b)- appyng to copes of returns fed for ta abe years begnnng before
anuary 1, 1940.
sectons 55(b) and 2 of the Interna Revenue Code (53 Stat., 29, 32).)
Guy T. everng,
pproved uy 15, 1940,
ohn L. Suvan,
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19.101( )-1. 98
Secton 19.55(b)-3: Inspecton of copes of returns.
INT RN L R NU COD .
Se( ton 19.55 (b)-4: Request for permsson to nspect copes.
INT RN L R NU COD .
Secton 19.55(b)-5: Inspecton of orgna returns.
INT RN L R NU COD .
SU C PT R C SUPPL M NT L PRO ISIONS.
SUPPL M NT a. rates of ta .
S CTION 101. MPTIONS ROM T
ON CORPOR TIONS.
Secton 19.101 ( )-: Regous, chartabe, scen- 1940-28-10318
tfc, terary, and educatona organzatons and G. C. M. 22120
communty chests.
The 11 Teachers ssocaton, organzed as a nonproft, profes-
sona, educatona corporaton havng nether capta stock nor
surpus, ts purpose beng the promoton of educatona nterests
of the State of R and ts functons consstng of the conduct of
educatona research programs and those actvtes reatng to the
genera professona wefare of ts membershp, s entted to e -
empton from edera ncome ta under secton 101( ) of the
Interna Revenue Code aud secton 101( ) of the Revenue ct of
1938.
n opnon s requested whether the M Teachers ssocaton s
entted to e empton from edera ncome ta under the provsons
of secton 101( ) of the Interna Revenue Code and secton 101( )
of the Revenue ct of 1938.
The M Teachers ssocaton was organzed as a nonproft, pro-
fessona, educatona corporaton. It has nether capta stock nor
surpus and t can not make any payments of nterest or dvdends.
Its purpose, as stated n ts consttuton, sha be to pro-
mote the educatona nterests of the State of R. Its functon s
to conduct programs of educatona research and those actvtes
reatng to the genera professona wefare of ts membershp. The
assocaton pubshes an educatona |ourna, commttee reports, re-
search fndngs, and other educatona revews. It operates a readng
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99
19.101( )- .
servce, pursues educatona research, conducts educatona conven-
tons, and attends to the ordnary busness ncdenta to a State-wde
organzaton.
Membershp n the assocaton s open to anyone. owever, actve
membershp s mted to persons engaged n teachng, or the super-
vson or admnstraton of schoos n the State of R, who have pad
the annua dues. Persons otherwse engaged may become assocate
members on payment of a smar fee but such members are negbe
for offce. Students preparng for professona teachng are egbe
for membershp as assocate members.
The M Teachers ssocaton conssts of a genera assocaton
and a sma number of dstrct assocatons. The dstrct assoc-
atons are authorzed to adopt a consttuton and by-aws consstent
wth the parent body s consttuton, to requre members to pay annua
dues of a specfed amount, a porton of whch s forwarded to the
parent body, and to eect deegates for representaton at the deegate
assemby. The secretary-treasurer s eected by the e ecutve com-
mttee, whch s composed of the presdent of the genera assocaton
and one member from each dstrct assocaton.
The ncome of the assocaton s derved from dues, the sae of
advertsng space n ts |ourna, and the sae of research buetns,
reports, etc. ny profts derved by the assocaton are used to e -
tend ts program of educatona servce and to purchase a home offce
budng whch s to be a permanent center of operaton. No part
of the assocaton s net earnngs nures to the beneft of any prvate
sharehoder or ndvdua, and no substanta part of ts actvtes
conssts of carryng on propaganda or otherwse attemptng to nfu-
ence egsaton.
Secton 101( ) of the Interna Revenue Code provdes n part as
foows:
Sec. 101. The foowng organzatons sha be e empt from ta aton
under ths chapter
( ) Corporatons organzed and operated e cusvey for re-
gous, chartabe, scentfc, terary, or educatona purposes, no
part of the not earnngs of whch nures to the beneft of any prvate share-
hoder or ndvdua, and no substanta part of the actvtes of whch s
carryng on propaganda, or otherwse attemptng, to nfuence egsaton
Secton 101( ) of the Revenue ct of 1938 contans amost dentca
anguage.
Secton 19.101 ( )- of Reguatons 103, reatng to the Interna
Revenue Code, provdes n part as foows:
In order to be e empt under secton 101( ), the organzaton must meet three
tests:
(1) It must he organzed and operated e cusvey for one or more of the
specfed purposes
(2) Its net ncome must not nure n whoe or n part to the beneft of
prvate sharehoders or ndvduas and
(3) It must not by any substanta part of ts actvtes attempt to nfuence
egsaton by propaganda or otherwse.
rtce 101( )-1 of Reguatons 101, reatng to the Revenue ct of
1938, contans dentca anguage.
The ureau has consstenty hed that an organzaton to be e empt
as an educatona corporaton under secton 101( ), supra, must, as
theren provded, be organzed and operated e cusvey tor educa-
tona purposes. (See I. T. 3182, C. . 1938-1, 1 8 G. C. M. 1983 ,
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19.101( )- .
100
C. . 1038-2,1 3 cf. I. T. 2334, C. . I-1, 82 (1927) G. C. M. 4805,
C. . II-2, 58 (1928).) Ths poston s supported by the decsons
n ppeas of George O. May (1 . T. .. 1220), fred . Cook v.
Commssoner (30 . T. ., 292). and Stanford Unversty ook Store
v. ehverng (83 ed. (2d), 710). Whether an assocaton s organ-
zed and operated e cusvey for educatona purposes s argey a
queston of fact to be determned n each case.
n educatona organzaton wthn the meanng of secton 101( ),
supra, s descrbed n secton 19.101 ( )- of eguatons 103 as
one desgned prmary for the mprovement or deveop-
ment of the capabtes of the ndvdua, but, under e ceptona cr-
cumstances, may ncude an assocaton whose soe purpose s the n-
structon of the pubc, or an assocaton whose prmary purpose s to
gve ectures on sub|ects usefu to the ndvdua and benefca to the
communty, even though an assocaton of ether cass has ncdenta
amusement features.
In the opnon of ths offce, the purposes, functons, and actvtes of
the assocaton n the nstant case warrant the concuson that t s an
educatona assocaton. The corporate purposes and actvtes of the
organzaton are amed at the mprovement of educatona methods and
admnstraton n the schoos of the State of R. Such purposes and
actvtes are truy educatona wthn the prmary meanng of that
word whch, as stated n the reguatons, s the mprovement or de-
veopment of the capabtes of the ndvdua.
In vew of the foregong, t s hed that the M Teachers ssocaton
s entted to e empton from edera ncome ta under the provsons
of secton 101( ) of the Interna Revenue Code and secton 101( ) of
the Revenue ct of 1938.
. P. Wenche,
Secton 19.101(0)-1: Regous, chartabe, 1940-33-10382
scentfc, terary, and educatona or- G. C. M. 2211
ganzatons and communty chests.
( so Secton 101, Secton 19.101 (9)-.)
INT RN L R NU COD .
The M umn ssocaton, organzed prmary to promote n
every proper way the nterests of the M Coege and to foster
among ts graduates n sentment of regard for each other and
attachment to ther ama mater, whch annuay transfers to the
M Coege the e cess of ts ncome (derved prncpay from annua
contrbutons to an aumn fund) over ts operatng e penses, s
not e empt from Income ta aton under secton 101( ) of the In-
terna Revenue Code. Roche s each, Inc., v. Commssoner (98
ed. (2d), 77 , Ct. D. 1359, C. . 1938-2, 230) dstngushed. ow-
ever, the assocaton s entted to e empton under secton 101(9)
of the Interna Revenue Code.
n opnon s requested whether the M umn ssocaton s en-
tted to e empton from edera ncome ta aton under the pro-
vsons of secton 101( ) of the Interna Revenue Code.
The M umn ssocaton has been hed e empt from edera
ncome ta aton under the provsons of secton 231(9) of the Reve-
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101
19.101( )- .
me ct of 1918 (correspondng to secton 101(9) of the Interna
Revenue Code), whch reads as foows:
Sec. 231. That the foowng organzatons sh: be e empt from ta aton
under ths tte
(9) Cubs organzed and operated e cusvey for peasure, recreaton, and
other nonproftabe purposes, no part of the net earnngs of whch nures to
the beneft of any prvate stockhoder or member
The assocaton now cams e empton from edera ncome ta a-
ton under the provsons of secton 101( ) of the Interna Revenue
Code.
The M umn ssocaton was ncorporated under the genera
aws of the State of n 1920. Its purposes and ob|ects, as set forth
n ts artces of ncorporaton, are as foows:
(a) To promote n every proper way the nterests of M Coege and to foster
among ts graduates a sentment of regard for each other, and attachment to
ther ama mater.
(b) To purchase, take or ease, or otherwse acqure any ands, budngs,
easements or property, rea and persona, whch may be requste for the pur-
pose of, or capabe of beng convenenty used n connecton wth, any of the
ob|ects of the corporaton.
( ) To subscrbe to, become a member of. and cooperate wth any other
assocaton, whether ncorporated or not, whose ob|ects are atogether or n
part smar to those of ths corporaton.
(rf) To rase money by subscrptons, and to grant any rghts and prveges
to subscrbers.
The assocaton s managed by a board of drectors, whch eects
the presdent, two vce presdents, correspondng and recordng sec-
retares, and the treasurer of the assocaton.
Membershp n the assocaton s of two casses, actve and asso-
cate. To be egbe for actve membershp, the appcant must have
receved a degree from M Coege. ssocate membershp, however,
s predcated on the appcant s connecton wth the coege and s
not dependent upon acquston of a degree therefrom. ctve mem-
bers have the votng prvege, whereas assocate members do not.
Membershp n the assocaton for any current year s dependent
upon a contrbuton to the aumn fund.
The ncome of the assocaton s derved prmary from the an-
nua contrbutons to the aumn fund. contrbuton ncudes a
membershp fee. a subscrpton to a quartery magazne, and a gft
to the coege. Other ncome s derved from the sae of advertsng
space n the magazne and a sma amount of nterest s receved
from a fund composed of pad fe membershp fees. The ncome, s
used to defray operatng e penses of the assocaton, and any ba-
ance over e penses s gven annuay to the coege to be apped
to some need.
The assocaton has no capta stock, and no part, of the net enrn-
hoder or ndvdua. No substanta part of the assocaton s actv-
tes conssts of attemptng to nfuence egsaton by propaganda or
otherwse.
Secton 101( ) of the Interna Revenue Code provdes n part as
foows:
Sec. 101. the foowng organzatons sha be e empt from ta aton
under ths chapter
beneft of any prvate share-
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19.101( )- .
102
Corporatons organzed and oppratod e cusvey for regous,
chartabe, scentfc, terary, or educatona purposes, no part of the
net earnngs of whch nures to the beneft of any prvate sharehoder or nd-
vdua, and no substanta part of the actvtes of whch s carryng propa-
ganda, or otherwse attemptng, to nfuence egsaton
Secton 19.101 ( )- of Reguatons 103, reatng to the Interna
Revenue Code, provdes n part as foows:
In order to be e empt under secton 101( ), the organzaton must meet
three tests:
(1) It must be organzed and operated e cusvey for one or more of the
specfed purposes
(2) Its net ncome must not nure n whoe or n part to the beneft of
prvate sharehoders or ndvduas and
(3) It must not by any substanta part of ts actvtes attempt to nfuence
egsaton by propaganda or otherwse.
s stated n Northwestern Muncpa ssocaton, Inc., v. Unted
States (99 ed. (2d), 4 0, Ct. D. 1419, C. . 1939-2, 224), The pur-
pose of an organzaton must be determned from the purpose de-
cared n the nstrument creatng t. Ths genera rue s sub|ect to
the e cepton enuncated n Roches each, Inc.. v. Commssoner (9
ed. (2d), 77 , Ct. D. 1359, C. . 1938-2, 230), the facts of whch,
as we as the concuson, are adequatey set forth n G. C. M. 21010
(C. . 1939-2, 103). The appcaton of the rue n Roche s each,
Inc., v. Commssoner, supra, s, however, mted by G. C. M. 21 10,
whch provdes n part as foows:
owever, ths rue s sub|ect to the e cepton that where (as n
Roche s each) the net ncome of an organzaton s requred by some other
bndng nstrument to be used for chartabe purposes, ts e empton w not
be defeated by the fact that ts charter or other nstrument under whch t
e sts does not ndcate an e cusvey chartabe purpose. Ths e cepton to
the genera rue s requred by the prncpe that statutes e emptng ncome
devoted to charty are not to be narrowy construed snce they are begotten
from motves of pubc pocy. (Cf. everng v. ss, 293 U. S., 144, Ct. D.
884, C. . III-2, 191 (1934), and Ledercr v. Stockton, 2 0 T . S., 3.) Ths
e cepton to the genera rue shoud not he e tended to cases n whch there
s no such bndng nstrument requrng that the ncome he devoted to charty,
even though the ncome s n fact devoted to charty. The e cepton to the
genera rue s aso confned to cases n whch (as n Roche s each) the ntent
whch prompted the orgna organzaton was an ntent to set up an organza-
ton to be operated e cusvey for chartabe purposes. Itacs supped.
In the nstant case there s no bndng nstrument requrng that
the ncome of the assocaton be transferred to the M Coege. The
M umn ssocaton was not created to provde funds for the M
Coege, whereas Roche s each, Inc., was desgned to provde funds
for the charty set up by the w of dward Roche. The coege
does not operate the assocaton or depend on t for ts soe support,
whch s n contrast wth the facts n the case of Roche s each, Inc.,
v. Commssoner, supra. Nether does t appear that the ntent whch
prompted the creaton of the M umn ssocaton was to set up
an organzaton to be operated e cusvey for educatona purposes.
Under the crcumstances, t s apparent that the nstant case s ceary
dstngushabe from the case of Roche s each, Inc., v. Comms-
soner, supra, and that the crtera set forth n G. C. M. 21 10, supra,
for the appcaton of that case have not been satsfed.
Snce the facts do not estabsh that the M umn ssocaton s
organzed and operated e cusvey for one or more of the purposes
enumerated n secton 101 ( ) of the Interna Revenue Code, t s not
entted to e empton from edera ncome ta aton under the pro-
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103
19.101(8)- .
vsons of that secton. owever, the assocaton s entted to e emp
ton under secton 101(9) of the Interna Revenue Code.
. P. We che,
Lmted dvdend housng corporatons organzed under rtce I
of the Pubc ousng Law of New York, 1939 (Laws of New York,
19159, ch. 808), are not e empt from edera ncome ta . Interest
on the securtes ssued by such corporatons Is not e empt from
edera ncome ta .
dvce s requested whether (1) mted dvdend housng corpora-
tons formed pursuant to rtce I of the Pubc ousng Law of
New York, 1939, effectve une 8, 1939 (Laws of New York, 1939, ch.
808), are entted to e empton from edera ncome ta , and (2)
whether the nterest pad on the bonds and mortgages of such corpora-
tons s e empt from edera ncome ta .
In magamated ousng Corporaton v. Commssoner and ma-
gamated Dwengs, Inc., v. Commssoner (37 . T. ., 817, affrmed,
108 ed. (2d), 1010), whch cases arose under the New York State
ousng Law of 192 (Laws of New York, 192 , ch. 823), t was hed
that a prvate mted dvdend housng corporaton organzed under
that aw was not e empt from edera ncome ta ether as an nstru-
mentaty of the State of New York engaged n an essenta govern-
menta functon or as a cvc eague or organzaton not organzed for
proft but operated e cusvey for the promoton of soca wefare under
sectons 103(8) of the Revenue cts of 1928 and 1932.
The present questons arse under the 1939 aw. There are certan
dfferences n the wordng of that aw and the earer one.
rtce 1, secton 2, of the 192 aw provdes:
Therefore, there are created and authorzed the agences and nstru-
mentates herenafter prescrbed, whch are decared to be the agences and
nstrumentates of the State for the purpose of attanng the ends heren
rected, and ther necessty n the pubc nterest s hereby decared as a matter
of egsatve determnaton.
rtce I, secton 2, of the 1939 aw provdes:
that these condtons requre the creaton of the agences, nstrumen-
tates and corporatons herenafter prescrbed, whch are decared to be agences
and nstrumentates of the State for the purpose of attanng the ends heren
rected and the necessty n the pubc nterest for the provsons herenafter
enacted s hereby decared as a matter of egsatve determnaton.
The dfferences between the decaratons of pocy set forth n the
statutes do not resut n a dfference n the ta abe status, for edera
ncome ta purposes, of the corporatons organzed under the 192
aw and corporatons organzed under the 1939 aw.
rtce I , secton 190(2), of the 1939 aw provdes:
onds and mortgages and the ncome debenture certfcates of a housng
companes are decared to be nstrumentates of the State, ssued for pubc
purposes and sha, together wth nterest thereon, be e empt from ta a-
ton.
Secto 19.101 (8)-1: Cvc eagues and oca
assocatons of empoyees.
( so Secton 22(b), Secton 19.22(b)(4)- .)
1940-39-10429
I. T. 3411
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19.104-1.
104
The New York State ousng Law of 192 authorzed the forma-
ton of pubc and prvate mted dvdend housng companes, the
prncpa dfference between them beng that the former coud e er-
cse the power of emnent doman and were restrcted wth respect
to the dsposton of ther property, whereas the atter had no power
of emnent doman but coud dspose of ther property wth the con-
sent of the State oard of ousng. The pettoner companes n
the magamated cases were ncorporated as prvate mted dvdend
housng companes. The e empton provson for prvate mted
dvdend housng companes under the 192 aw, as amended by Laws
of New York, 1931, ch. 557, provdes:
The securtes of a prvate mted dvdend housng company are not to be
deemed nstrumentates of the State, but they and the nterest on bonds or
Income debentures and the dvdends on the sock of such companes sha never-
theess be e empt from any ta aton by the State.
The correspondng provson for pubc mted dvdend housng
companes under the 192 aw was smar to secton 190(2) of the
1939 aw quoted above.
It s the opnon of the ureau that the prncpe enuncated n the
magamated cases referred to heren s appcabe to mted dv-
dend housng corporatons organzed under rtce I of the Pubc
ousng Law of New York, 1939, and that such corporatons are not
e empt from edera ncome ta . It s beeved that the securtes
ssued by such corporatons are not obgatons of the State of New
York or of a potca subdvson thereof. ccordngy, the nterest
on such securtes s not e empt from edera ncome ta . (See sec-
ton 22(b)4 of the Interna evenue Code.)
Secton 19.101 (9)-: Soca cubs.
INT RN L R NU COD .
Coege aumn assocaton. (See G. C. M. 2211 , page 100.)
S CTION 102. SURT ON CORPOR TIONS
IMPROP RLY CCUMUL TING SURPLUS.
Secton 19.102-1: Ta aton of corporaton formed or
utzed for avodance of surta .
INT RN L R NU COD .
S CTION 104. N S ND TRUST COMP NI S.
Secton 19.104-1: Ta on banks.
INT RN L R NU COD .
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105
19.113(b)(1)- .
SUPPL M NT . COMPUT TION O N T INCOM .
S CTION 113(b). D UST D SIS OR D T RMIN-
ING G IN OR LOSS: D UST D SIS.
Whore the orgna bass (March 1, 1913, vaue) of a deveoped o
propery was competey recovered through depeton deductons n
the ta abe year 1934, the amount of percentage depeton deductons
aowed the ta payer In subsequent years n e cess of such orgna
bass shoud be apped aganst and used to reduce the cost of an
addtona we dred on the property n 1938, for the purpose of
ascertanng the ad|usted bass under secton 113(b)( ) of the
Interna Revenue Code for determnng gan or oss upon the sae
of the property n 1939.
n opnon has been requested whether, n ascertanng the ad|usted
bass for determnng gan or oss as provded n secton 113(a)( )
of the Interna Revenue Code, the capta account of a deveoped o
property (whch, n the year of sae, conssted ony of the cost of dr-
ng an addtona o we, after the prevous e hauston through depe-
ton deductons of the orgna bass March 1, 1913, vaue of the
property) shoud be reduced by the e cess over the orgna bass of
percentage depeton deductons aowed n years pror to the drng
of such addtona we.
The ta payer (the M Company) operated a sma o property for a
number of years. The March 1,1913, vaue of such property was 57a)
doars. No further addtons were made to the capta account unt
1938. Pror to 1933, the depeton deducton was computed on the
bass of the March 1,1913, vaue. egnnng wth 1933, the depeton
deducton was computed on the percentage of ncome bass. In 1934,
the deducton for depeton had the effect of reducng the remanng
capta account to zero. s of anuary 1, 1938, e cess depeton
amounted to doars. In the year 1938, the ta payer dred an
return, the ta payer e ercsed the opton of captazng the cost of
ths addton to the property. In anuary, 1939, a of the physca
assets of the company were sod.
It has been contended that even though the aggregate of depeton
deductons n pror years was a sum n e cess of the cost or other bass
of the property, the e cess shoud not be offset aganst an addton to
the property n a subsequent year, the theory beng that an addton
to the capta account can not be depeted before t s n e stence and
that each year s return stands by tsef n that depeton aowances
of a pror year are appcabe ony to the capta bass e stng n such
year.
On the other hand, t has been urged that the cost or other bass
of a wes on a property must be taken as a whoe n determnng
the ad|usted bass of the property (Wtherspoon O Co. v. Comms-
soner, 34 . T. ., 1130) that whe, under secton 113(b) 1( )
of the Interna Revenue Code, the ad|ustment of bass for ta abe
290217 11 8
Secton 19.113(b) (1)-1: d|usted bass:
Genera rue.
INT N L R NU COD .
1940-35-10399
G. C. M. 22 239
In connecton wth the 1938
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19.113(b)(1)- .
10
3 ears pror to 1932 on account of depeton aowed or aowabe,
whchever s greater, can not e ceed depeton computed wthout
reference to dscovery vaue or to percentage depeton, the ad|ust-
ment of bass for 19:32 and subsequent ta abe years under sad sec-
ton must be for the fu depeton, whether aowed on dscovery
vaue or as percentage depeton and that, therefore, the amount of
percentage depeton aowed to the ta payer n pror years after the
e hauston of the orgna bass of the property must be apped
aganst and used to reduce any subsequent addtons to the capta
account of the property n determnng the ad|usted bass as of the
year of the sae of the property.
Secton 113(b) 1( ) and ( ) of the Interna evenue Code,
governng ths case, provdes as foows:
(b) d|usted ass. The ad|usted bass for determnng the gan or oss
from the sae or other dsposton of property, whenever acqured, sha be the
bass determned under subsecton (a) March 1, 1913, vaue n ths case ,
ad|usted as herenafter provded.
(1) Genera rue. I roper ad|ustment n respect of the property sha
n a cases be made
( ) or e pendtures, or other tems, propery chargeabe
to capta account
( ) n respect of any perod snce ebruary 28, 1913. for
depeton, to the e tent aowed (but not ess than the amount aow-
abe) under ths chapter or pror ncome ta aws. Where for any
ta abe year pror to the ta abe year 1932 the depeton aowance
was based on dscovery vaue or a percentage of ncome, then the
ad|ustment for depeton for such year sha be based on the depeton
whch woud have been aowabe for such year f computed wthout
reference to dscovery vaue or a percentage of ncome
It seems cear that subparagraph ( ), above, requres the addton
to the bass of the property of the e pendtures made n 1938 by the
ta payer and whch t eected to captaze. (Secton 19.113(b) (1)-1,
Reguatons 103.)
The purpose of subparagraph ( ), above, regardng ad|ustment
of bass on account of depeton, s set forth n Senate Report No. 5,
Soventv-second Congress, frst sesson, on . R. 1023 (the revenue
b of 1932) (C. . 1939-1 (Part 2), 49 , at 517), as foows:
The requrement n subparagraph ( ) of the ouse b that the ad|ust-
ment for depeton shoud be computed wthout regard to dscovery vaue or
percentage depeton s emnated n the b as to a ad|ustments n respect
of the ta abe year 1932 and subsequent years. Your commttee beeves t ony
far that the bass of the property shoud be ad|usted to the fu e tent of the
depeton aowances, wthout regard to the method by whch these aowances
are determned. In vew of the substanta change from the e stng aw n
ths respect, your commttee s of the opnon that t shoud not dsturb
the depeton ad|ustments n respect of years pror to 1932. Itacs supped.
In construng secton 113(b) 1( ) of the Revenue ct of 193 ,
the anguage of whch s amost dentca wth the correspondng
secton of the Code, ths offce, n G. C. M. 177 0 (C. . 1937-1, 102),
stated n part as foows:
The provson requres that the bass of depetabe property be reduced
begnnng wth the ta abe year 1932 on account of the fu depeton aowed,
whether computed on the cost, dscovery vaue, or percentage of ncome
bass .
Therefore, n the nstant case, n ascertanng the ad|usted bass
for determnng gan or oss as provded n secton 113(b) 1( ) of
the Interna Revenue Code, the capta account of the o property,
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107
19.113(b) ()-2.
whch n 1939, the year of sae, conssted entrey of the cost n 1938
of drng the addtona o we, shoud he reduced by the e cess,
over the orgna bass, of depeton aowed n years pror to the
drng of such addtona we.
. P. Wenchf ,
Secton 19.113(b) ()-2: d|usted bass: Cance- 1940-35-10401
aton of ndebtedness. T. D. 5003
( so Secton 19.113(b) ()-3.)
TITL 20 INT RN L R NU Cn I T R I, SU C PT R , P RTS 3, 9,
ND 19. INCOM T .
Reguatons 103, 101, 94, and 8 , amended. Canceaton of Indebt-
edness and reducton of bass of debtor s property n proceedngs
under ankruptcy ct of 1898, as amended.
Offce of Commssoner of Interna Rea-enue,
Washngton, D. C.
The ct of uy 1, 1940 (Pubc, No. C99, Seventy-s th Congress,
thrd sesson), amends sectons 270, 39 , and 522 of the ankruptcy
ct, as amended, to read as foows, effectve une 22, 1938:
Sec. 270. In determnng the bass of property for any purposes of any aw of
the Unted States or of a State mposng a ta upon ncome, the bass of the
debtor s property (other than money) or of such property (other than money)
as s transferred to any person requred to use the debtor s bass n whoe or n
part sha be decreased by an amount equa to the amount by whch the ndebt-
edness of the debtor, not ncudng accrued nterest unpad and not resutng
n a ta beneft on any Income ta return, has been canceed or reduced u a
proceedng under ths chapter, but the bass of any partcuar property sha not
be decreased to an amount ess than the far market vaue of such property as
of the date of entry of the order confrmng the pan. ny determnaton of
vaue n a proceedng under ths chapter sha not be deemed a determnaton of
far market vaue for the purposes of ths secton. The Commssoner of Interna
evenue, wth the approva of the Secretary of the Treasury, sha prescrbe
such reguatons as he may deem necessary n order to refect such decrease u
bass for edera ncome-ta purposes and otherwse carry nto effect the pur-
poses of ths secton.
Sec. 39 . In determnng the bass of property for any purposes of any aw
of the Unted States or of a State mposng a ta upon Income, the bass of the
debtor s property (other than money) or of such property (other than money) as
s transferred to any person requred to use the debtor s bass n whoe or n part
sha be decreased by an amount equa to the amount by whch the ndebtedness
of the debtor, not ncudng accrued nterest unpad and not resutng n a ta
beneft on any ncome-ta return, has been canceed or reduced n a proceedng
under ths chapter, but the bass of any partcuar property sha not be de-
creased to an amount ess than the far market vaue of such property as of
the date of entry of the order confrmng the arrangement. ny determnaton
of vaue n a proceedng under ths chapter sha not be deemed a determnaton
of far market vaue for the purposes of ths secton. The Commssoner of
Interna Revenue, wth the approva of the Secretary of the Treasury, sha pre
scrbe such reguatons as he may deem necessary n order to refect such de-
crease n bass for edera ncome-ta purposes and otherwse carry nto effect
the purposes of ths secton.
Sec. 522. In determnng the bass of property for any purposes of any aw
of the Unted States or of a State mposng a ta upon ncome, the bass of the
as Is transferred to any person requred to use the debtor s bass In whoe or
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19.113(b) ()-2.
10S
n part sha be decreased by nn amount equa to the amount by whch the
ndebtedness of the debtor, not ncudng accrued nterest unpad and not
resutng n a ta beneft on any ncome-ta return, has been canceed or re-
duced In a proceedng under ths chapter, but the bass of any partcuar
propery sha not be decreased to an amount ess than the far market vaue of
such property as of the date of entry of the order confrmng the arrangement.
ny determnaton of vaue n a proceedng under ths chapter sha not be
deemed a determnaton of far market vaue for the purposes of ths secton.
The Commssoner of Interna Revenue, wth the approva of the Secretary of
the Treasury, sha prescrbe such reguatons as he may deem necessary
In order to refect such decrease n bass for edera ncome-ta purposes
and otherwse carry nto effect the purposes of ths secton.
In conformty wth the above-quoted provsons of aw, Regua-
tons 103 Part 19, Tte 2 Code of edera Reguatons. 1940 Sup. ,
101 Part 9, Tte 2 , Code of edera Reguatons, 1939 Sup. , 94
Part 3, Tte 2 , Code of edera Reguatons , and 8 are amended
as foows:
Paragraph 1. Secton 19.113(b) ()-2 of Reguatons 103 and ar-
tce 113(b)-2 of Reguatons 101 secton 9.113 (b)-2 are amended
by emnatng the frst two sentences and substtutng n eu thereof
the foowng:
In addton to the ad|ustments provded n secton 113(b)(1) and secton
19.113(b) (1)-1 artce 113(b)- n Reguatons 101 whch are requred to
be made wth respect to the cost or other bass of property, a further ad|ust-
ment sha be made n any case n whch there sha have been a canceaton or
reducton of ndebtedness In any proceedng under secton 12, 74 (e cept In
the case of a wage earner as defned n the ankruptcy ct, ss amended),
or 77 or under Chapter , I, or II of the ankruptcy ct of 18 )8, as
amended.
Par. 2. Secton 19.113(b) ()-2 of Reguatons 103, artce 113
(b)-2 of Reguatons 101 secton 9.113(b)-2 , both as amended by
the precedng paragraph of ths Treasury decson, artce 113(b) -2
of Reguatons 94, as amended by Treasury Decson 4871, approved
November 9, 1938 C. . 1938-2, 130 secton 3.113(b)-2, Tte 28,
Code of edera Reguatons, 1938 Sup. , and artce 113(b)-2 of
Reguatons 8 , as amended by such Treasury Decson 4871, are
each amended by substtutng for the matter foowng the frst
sentence thereof the foowng:
Such further ad|ustment sha be made n the foowng manner and order:
(1) In the case of ndebtedness ncurred to purchase specfc property (other
than nventory or notes or accounts recevabe) whether or not a en s paced
aganst such property securng the payment of a or part of such ndebtedness,
whch ndebtedness sha have been canceed or reduced n any such proceed-
ng, the cost or other bass of such property sha be decreased (but not beow
ts far market vaue) by the amount by whch the ndebtedness so ncurred
wth respect to such property sha have been canceed or reduced
(2) In the case of specfc property (other than nventory or notes or ac-
counts recevabe) aganst whch, at the tme of the canceaton or reducton
of the ndebtedness, there s a en (other than a en securng ndebtedness
ncurred to purchase such property) the cost or other bass of such property
sha be decreased (but not beow ts far market vaue) by the amount by
whch the ndebtedness secured by such en sha have been canceed or
reduced
(3) ny e cess of the tota amount by whch the ndebtedness sha have
been so canceed or reduced n such proceedng over the sum of the ad|ust-
ments made under (1) and (2) sha ne t be apped to reduce the cost or
other bass of the property of the debtor (other than nventory and notes and
accounts recevabe, but ncudng property covered by (1) and (2)) as fo-
ows: Te cost or other bass of each unt of property sha be decreased (but
not beow ts far market vaue) n an amount equa to such proporton of
such e cess as the ad|usted bass (after ad|ustment under (1) and (2)) of
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109
19.113(b) ()-2.
each such unt of property bears to the sum of the ad|usted bases (after
ad|ustment under (1) and (2)) of a the property of the debtor other than
nventory and notes and accounts recevabe:
(4) ny e cess of the tota amount by whch such ndebtedness sha have
been so canceed or reduced over the sum of the ad|ustments made under (1),
(2) , and (3) sha ne t be apped to reduce the cost or other bass of any
unts of property covered by (1), (2), and (3) whch have a remanng bass
(after ad|ustment under (1), (2), and (3)) greater than ther far market
vaue, as foows: The cost or other bass of each such unt of property sha
be decreased (but not beow ts far market vaue) n an amount equa to such
proporton of such e cess as the remanng bass of each such unt bears to the
sum of the remanng bases of such unts. The process sha be repeated unt
the cost or other bass of each unt of the property covered by (1), (2), and
(3) s reduced to ts far market vaue or the amount by whch the ndebted-
ness sha have been canceed or reduced s e hausted, takng nto account n
the successve steps ony those unts of property havng, after the precedng
ad|ustment, a remanng bass greater than ther far market vaue and
(5) ny e cess of the tota amount by whch the ndebtedness sha have
been so canceed or reduced over the sum of the ad|ustments made under (1),
(2), (3), and (4) sha ne t be apped to reduce the cost or other bass of
nventory and notes and accounts, recevabe, as foows: The cost or other
bass of nventory or notes or accounts recevabe, as the case may be, sha
be decreased (but not beow ts far market vaue) n an amount equa to such
proporton of such e cess as the ad|usted bass of nventory, notes recevabe
or accounts recevabe, as the case may be, bears to the sum of the ad|usted
bases of such nventory and notes and accounts recevabe. The process sha
be repeated unt the ad|usted bases of nventory, notes recevabe and ac-
counts recevabe are reduced to ther far market vaue or the amount by
whch the ndebtedness sha have been canceed or reduced s e hausted,
takng nto account n the successve steps ony those unts of property hav-
ng, after the precedng ad|ustment, a remanng bass greater than ther far
market vaue.
or the purposes of (hs artce secton n Reguatons 103
( ) ass sha be determned as of the date of entry of the order
confrmng the pan, composton or arrangement under whch such n-
debtedness sha have been canceed or reduced
( ) cept where the conte t otherwse requres, property means a of
the debtor s property, other than money
(C) No ad|ustment sha be made by vrtue of the canceaton or reduc-
ton of any accrued nterest unpad whch sha not have resuted u a ta
beneft n any ncome ta return
(D) The phrase ndebtedness ncurred to purchase ncudes () ndebt-
edness for money borrowed and apped n the purchase of property and
() an e stng ndebtedness secured by a en aganst the property whch
the debtor, as purchaser of such property, has assumed to pay and
( ) The term far market vaue has reference to such vaue as of the
date of entry of the order confrmng the pan, composton or arrangement
under whch such ndebtedness sha have been canceed or reduced.
ny determnaton of vaue n a proceedng under the ankruptcy ct, as
amended, sha not consttute a determnaton of far market vaue for the pur-
poses of ths artce secton n Reguatons 108 .
The bass of any of the debtor s property whch sha have been transferred
to a person requred to use the debtor s bass n whoe or n part sha be deter-
mned n accordance wth the provsons of ths artce secton n Regua-
tons 103 .
Par. 3. Reguatons 103 are amended by nsertng after secton
19.113(b) ()-2 thereof the foowng new secton:
Sec. 19.113(b) ()-3. d|usted baftts: Canceaton of ndebtedness: Speca
cases. If the ta payer and the Commssoner agree, the bass of the ta payer s
property may be ad|usted n a manner dfferent from that set forth n secton
19.113(b) (1 )-2. aratons from such rue may, for e ampe, nvove ad|ustng
the bass of any part of the ta payer s property or ad|ustng the bass of a the
ta payer s property, accordng to a f ed aocaton. greement between the
ta payer and the Commssoner as to any varaton from such genera rue sha
be effected ony by a cosng agreement entered nto under the provsons of
secton 37 0 (paragraph 4 of the ppend to these reguatons).
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19.115-3.
110
Par. 4. rtce 113(b)-3 secton 9.113(b)-3 of Reguatons 101,
and artce 113(b)-3 of Reguatons 94 secton 3.113(b)-3 , and 8 ,
as amended by Treasury Decson 4871, approved November 9, 1938,
are each redesgnated artce 113(b)-4.
Par. 5. Reguatons 101, and Reguatons 94 and 8 both as amended
by Treasury Decson 4871, approved November 9, 1938, are each
amended by nsertng after artce 113(b)-2 thereof the foowng
new artce:
rt. 113(b)-3. d|usted bass: Canceaton of ndebtedness: Speca cases.
If the ta payer and the Commssoner agree, the bass of the ta payer s prop-
erty may be ad|usted In a manner dfferent from that set forth n artce
113(b)-2. aratons from such rue may, for e ampe, nvove ad|ustng the
bass of any part of the ta payer s property or ad|ustng the bass of a the
ta payers property, accordng to a f ed aocaton. greement between the
ta payer and the Commssoner as to any varaton from such genera rue
sha be effected ony by a cosng agreement entered nto under the provsons
of secton 37 0 of the Interna Revenue Code.
(Ths Treasury decson s ssued under the authorty of the ank-
ruptcy ct of 1898, as amended, and as further amended by the ct of
uy 1,1940 (Pubc, No. 99, Seventy-S th Congress, thrd sesson)
sectons 2 and 113(b) of the Interna Revenue Code (53 Stat., 32,
44) and sectons 2 and 113(b) of the Revenue cts of 1938, 193 ,
and 1934 (52 Stat.. 480, 490. 2 U. S. C, Sup., 2, 113(b) 49 Stat.,
1 73.1 82. 2 U. S. C, Sup., 2, 113(b) 48 Stat, 700, 70 , 2 U. S. C,
2, 113(b).)
Tmothy C. Moonet,
ctng Commssoner of Interna Revenue.
pproved ugust 1 , 1940.
ohn L. Suvan,
( ed wth the Dvson of the edera Regster ugust 19, 1940, 12.38 p. m.)
Secton 19.113(b)(1)-3: d|usted bass: Canceaton of
ndebtedness: Speca cases.
INT RN L R NU COD .
S CTION 115. DISTRI UTIONS Y CORPOR TIONS.
Secton 19.115-3: arnngs or profts. 1940-52-10538
( so Sectons 19.115-12, 19.115-13, and T. D. 5024
19.115-14.)
TITL 2(1 INT RN L R NU . C PT R I, SU C PT R , P RT 19.
INCOM T .
Reguatons 103 amended to conform to secton 501 of the Second
Revenue ct of 1940 and made appcabe to ta abe years begnnng
pror to anuary 1, 1939.
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I
19.115-3.
Offce of Commssoner of Interna .Revenue,
Washngton, D. C,
Paragraph 1. y reason of the enactment of secton 501 of the
Second Revenue ct of 1940 (Pubc, No. 801, Seventy-s th Con-
fress, thrd sesson), approved October 8, 1940, Reguatons 103
Part 19, Tte 2 , Code of edera Reguatons, 1940 Sup. are
amended as foows:
. The foowng s nserted mmedatey precedng secton
19.115-1:
Sec. 501. arnngs and Profts of Corporatons. (Second Revenue
ct of 1940, Tte .)
(a) Under Interna Revenue Code. Secton 115 of the Interna
Revenue Code s amended by nsertng at the end thereof the foowng
new subsectons:
(1) ffect on arnngs and Profts of Gan or Loss and of
Recept of Ta - ree Dstrbutons. The gan or oss reazed from
the sae or other dsposton (after ebruary 28, 1913) of property by
a corporaton
(1) for the purpose of the computaton of earnngs and profts
of the corporaton, sha be determned, e cept as provded n para-
graph (2), by usng as the ad|usted bass the ad|usted bass (under
the aw appcabe to the year n whch the sae or other dsposton
was made) for determnng gan, e cept that no regard sha be had
to the vaue of the property as of March 1, 1913 but
(2) for the purpose of the computaton of earnngs and profts
of the corporaton for any perod begnnng after ebruary 28,
1913, sha be determned by usng as the ad|usted bass the ad|usted
bass (under the aw appcabe to the year n whch the sae or other
dsposton was made) for determnng gan.
Gan or oss so reazed sha ncrease or decrease the earnngs and
profts to, but not beyond, the e tent to whch such a reazed gan or
oss was recognzed n computng net ncome under the aw appcabe
to the year n whch such sae or dsposton was made. Where n de-
termnng the ad|usted bass used n computng such reazed gan or
oss the ad|ustment to the bass dffers from the ad|ustment proper
for the purpose of determnng earnngs or profts, then the atter
ad|ustment sha be used n determnng the Increase or decrease awve
provded. Where a corporaton receves (after ebruary 28, 1913) a
dstrbuton from a second corporaton whch (under the aw appcabe
to the year n whch the dstrbuton was made) was not a ta abe
dvdend to the sharehoders of the second corporaton, the amount of
such dstrbuton sha not ncrease the earnngs and profts of the frst
corporaton n the foowng cases:
(1) No such ncrease sha be made n respect of the part of
such dstrbuton whch (under such aw) s drecty apped n
reducton of the bass of the stock n respect of whch the dstrbu-
ton was made.
(2) No such ncrease sha be made f (under such aw) the
dstrbuton causes the bass of the stock n respect of whch the
dstrbuton was made to be aocated between such stock and the
property receved,
(n) arnngs and Profts Increase n aue ccrued efore
March 1, 1913.
(1) If any ncrease or decrease n the earnngs or profts for
any perod begnnng after ebruary 28, 1913, wth respect to any
matter woud be dfferent had the ad|usted bass of the property
nvoved been determned wthout regard to ts March 1, 1913,
vaue, then, e cept as provded n paragraph (2), an ncrease
(propery refectng such dfference) sha be made n that part
of the earnngs and profts consstng of ncrease n vaue of prop-
erty accrued before March 1, 1913.
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19.115-3.
112
(2) If the appcaton of subsecton (1) to a sae or other ds-
poston after ebruary 28, 1913, resuts n a oss whch s to be
apped n decrease of earnngs and profts for any perod begn-
nng after ebruary 28, 1913, then, notwthstandng subsecton (1)
and n eu of the rue provded n paragraph (1) of ths subsec-
ton, the amount of such oss so to be apped sha be reduced by
the amount, f any, by whch the ad|usted bass of the property
used n determnng the oss, e ceeds the ad|usted bass computed
wthout regard to the vaue of the property on March 1, 1913,
and f such amount so apped n reducton of the decrease e ceeds
such oss, the e cess over such oss sha ncrease that part of
the earnngs and profts consstng of ncrease n vaue of prop-
erty accrued before March 1, 1913.
(b) ffectve Date of mendment. The amendment made by sub-
secton (a) sha be appcabe to ta abe years begnnng after De-
cember 31, 19IS8.
(c) Under Pror cts. or the purposes of the Revenue ct of
19:58 or any pror Revenue ct the amendments made to the Interna
Revenue Code by subsecton (a) of ths secton sha be effectve as
f they were a part of each such Revenue ct on the date of ts enact-
ment. Nothng n ths subsecton sha affect the ta abty of any
ta payer for any year whch, on September 20. 1940. was pendng
before, or was theretofore determned by, the oard of Ta ppeas,
or any court of the Unted States.
. Secton 19.115-3 s amended as foows:
(a) y nsertng before the perod at the end of the thrd sen-
tence of the frst paragraph the foowng: (see secton 19.11. ) 12) .
(b) y strkng out the second paragraph and nsertng n eu
thereof the foowng:
In the case of a corporaton n whch depeton or deprecaton s a factor
In the determnaton of ncome, the ony depeton or deprecaton deductons
to be consdered n the computaton of the tota earnngs and profts are
those based on cost or other bass wthout regard to March 1, 191 , vaue.
In computng the earnngs and profts for any perod begnnng after ebruary
28, 1913, the ony depeton or deprecaton deductons to be consdered are
those based on (1) cost or other bass, f the depetabe or deprecabe asset
was acqured subsequent to ebruary 28, 1913. or (2) ad|usted cost or March
1, 1913, vaue, whchever s hgher, f acqured pror to March 1, 1913. Thus,
dscovery or percentage depeton under a Revenue cts for mnes and o
and gas wes s not to be taken nto consderaton n computng the earnngs
and profts of a corporaton. Smary, where the bass of property n the
hands of a corporaton s a substtuted bass, such bass, and not the far
market vaue of the property at the tme of the acquston by the corpora-
ton, s the bass for computng depeton and deprecaton for the purpose
of determnng earnngs and profts of the corporaton. The provsons of
ths paragraph may be ustrated by the foowng e ampe:
ampe: O producng property whch had acqured n 193 at a cost
of 28,000 was transferred to the Y Corporaton In December, 193S, n e -
change for a of ts capta stock. The far market vaue of the stock
and of the property as of the date of the transfer was 247,000. The Y
Corporaton, after two years operatons, effected n 1940 a cash ds-
trbuton to n the amount of 1 5,000. In determnng the e tent to
whch the earnngs and profts of the Y Corporaton avaabe for
dvdend dstrbutons have been Increased as the resut of producton and
sae of o, the depeton to be taken nto account s to be computed upon the
bass of 28,000 estabshed n the nonta abe e change n 1938 regardess of
the far market vaue of the property or of the stock ssued n e change
therefor.
C. The foowng sectons are nserted mmedatey foowng sec-
ton 19.115-11:
Sec. 19.115-12. ffect on earnngs and proft of gan or oss reazed after eb-
ruary 28, 1913. In order to determne the effect on earnngs and profts of gan or
oss reazed from the sae or other dsposton (after ebruary 28, 1913) of prop-
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113
5 19.115-3.
erry by a corporaton, secton 115(1) prescrbes certan rues for (1) the computa-
ton of the tota earnngs and profts of the corporaton, of most frequent app-
caton n determnng nvested capta and (2) the computaton of earnngs and
profts of the corporaton for any perod begnnng after ebruary 28, 1913, of
most frequent appcaton n determnng the source of dvdend dstrbutons.
Such rues are appcabe whenever under any provson of Chapter 1 or 2 t Is
necessary to compute ether the tota earnngs and profts of the corporaton or the
earnngs and profts for any perod begnnng after ebruary 28, 1913. or
e ampe, snce the earnngs and profts accumuated after ebruary 28, 1913, or
the earnngs and profts of the ta abe year, are earnngs and profts for a perod
begnnng after ebruary 28, 1913, the determnaton of ether must be n accord-
ance wth the rues heren prescrbed for the ascertanment of earnngs and profts
for any perod begnnng after ebruary 28, 1913. Under (1) such gan or oss
s determned by usng the ad|usted bass (under the aw appcabe to the year n
whch the sae or other dsposton was made) for determnng gan, but dsre-
gardng vaue as of March 1, 1913. Under (2) there s used such ad|usted bass
for determnng gan, gvng effect to the vaue as of March 1, 1913, whenever
appcabe. In both cases the rues are the same as those governng deprecaton
and depeton n computng earnngs and profts (see secton 19.115-3). Under
both (1) and (2) the ad|usted bass s sub|ect to the mtatons of the thrd sen-
tence of secton 115(1) requrng the use of ad|ustments proper n determnng
earnngs and profts. The proper ad|ustments may dffer under (1) and (2) of
secton 115(1) dependng upon the bass to whch the ad|ustments are to be made.
If the appcaton of (2) of the frst sentence of secton 115(1) resuts n n oss
and f the appcaton of (1) of such sentence to the same transacton reaches a
dfferent resut, then the oss under (2) w be sub|ect to the ad|ustment thereto
requred by secton 115(m) (2). (See secton 19.115-14.)
The gan or oss so reazed ncreases or decreases the earnngs and profts to,
but not beyond, the e tent to whch such gan or oss was recognzed n computng
net ncome under the aw appcabe to the year n whch such sae or dsposton
was made. s used n ths subsecton the term recognzed has reference to
that knd of reazed gan or oss whch s recognzed for ncome ta purposes by
the statute appcabe to the year n whch the gan or oss was reazed, for e -
ampe, see secton 112. oss may be recognzed though not aowed as a deduc-
ton (by reason, for e ampe, of the operaton of sectons 24(b), 117, and 118 and
correspondng provsons of pror revenue aws) but the mere fact that t s not
aowed does not prevent decrease n earnngs and profts by the amount of such
dsaowed oss. The recognzed gan or oss for the purpose of computng
earnngs and profts s determned by appyng the recognton provsons to the
reazed gan or oss computed under the provsons of secton 11 )(1) as ds-
tngushed from the reazed gan or oss used n computng net ncome. The
appcaton of ths paragraph may be ustrated by the foowng e ampes:
ampe (1): The Corporaton on anuary 1, 1939, owned stock In the Y
Corporaton whch t had acqured from the Y Corporaton n December, 1938, n
an e change transacton n whch no gan or oss was recognzed. The ad|usted
bass to the Corporaton of the property e changed by t for the stock n the Y
Corporaton was 30,000. The far market vaue of the stock n the Corpora-
ton when receved by the Corporaton was 930,000. On pr 9, 1939, the
Corporaton made a cash dstrbuton of . 900,000 and, e cept for the possbe
effect of tfce transacton n 1938, had no earnngs or profts accumuated after
ebruary 28, 1913, and had no earnngs or profts for the ta abe year. The
amount of 900,000 representng the e cess of the far market vaue of the stock
of the Y Corporaton over the ad|usted bass of the property e changed therefor
was not recognzed gan to the Corporaton under the provsons of secton 112
of the Revenue ct of 1938. ccordngy, the earnngs and profts of the Cor-
poraton are not ncreased by 900,000, the amount of the gan reazed but not
recognzed n the e change, and the dstrbuton was not a ta abe dvdend. The
bass n the hands of the Y Corporaton of the property acqured by t from the
Corporaton s 30,000. If such property s thereafter sod by the Y Corpora-
ton, gan or oss w be computed on such bass of 30,000, and earnngs and
profts w be Increased or decreased accordngy.
ampe (2): On anuary 2, 1910, the M Corporaton acqured nondeprecabe
property at a cost of 1,000. On March 1, 1913, the far market vaue of such
property n the hands of the M Corporaton was 2,200. On December 31, 1940,
the M Corporaton transfers such property to the N Corporaton n e change for
1,900 n cash and a the N Corporaton stock, whch has a far market vaue of
1,100. or the purpose of computng the tota earnngs and profts of the M
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19.115-3.
114
Corporaton the gan on such transacton s 2,000 (the sum of 1,900 n cash and
stock worth 1,100 mnus 1,000, the ad|usted bass for computng gan, determned
wthout regard to March 1, 1913, vaue), 1,900 of whch s recognzed under
secton 112(c). snce ths was the amount of money receved, athough for the
purpose of computng net ncome the gan s ony 800 (the sum of 1,900 n cash
and stock worth 1,100, mnus 2,200, the ad|usted bass for computng gan
determned by gvng effect to March 1, 1913, vaue). Such earnngs and profts
w therefore be ncreased by 1,900. In computng the earnngs and profts of
the M Corporaton for any perod begnnng after ebruary 28, 1913. however,
the gan arsng from the transacton, ke the ta abe gan, s ony 800, a of
whch s recognzed under secton 112(c), the money receved beng n e cess of
such amount. Such earnngs and profts w therefore be ncreased by ony 800
r.a a resut of the transacton. ITor ncrease n that part of the earnngs and
profts consstng of ncrease n vaue of property accrued before, but reazed on
or after, March 1. 1913, see secton 19.115-14.
ampe (.). On uy 31, 1940, the R Corporaton owned o producng property
acqured after ebruary 28, 1913. at a cost of 200,000. but havng an ad|usted
bass (by reason of takng percentage depeton) of 100,000 for determnng gan
n computng net ncome. owever, the ad|usted bass of such property to be
used n computng gan or oss for the purpose of earnngs and profts s, because
of the provsons of the thrd sentence of secton 115(1), 150,000. On such day
the R Corporaton transferred such property to the S Corporaton In e change for
25,000 n cash and a of the S Corporaton stock, whch had a far market vaue
of 100,000. or the purpose of computng net ncome the R Corporaton has
reazed a gan of 25,000 as a resut of ths transacton, a of whch s recognzed
under secton 112(c). or the purpose of computng earnngs and profts, however,
the R Corporaton has reazed a oss of 25,000, none of whch s recognzed owng
to the provsons of secton 112(e). The earnngs and profts of the R Corporaton
are therefore nether ncreased nor decreased as a resut of the transacton. The
ad|usted bass of the S Corporaton stock n the hands of the R Corporaton for
purposes of computng earnngs and profts, however, w be 125,000 (though
ony .00,000 for the purpose of computng net ncome), computed as foows:
ass of property transferred 200,000
Less money receved on e change 25, 000
Pus gan or mnus oss recognzed on e change None
ass of stock 175, 000
Less ad|ustments (same as those used n determnng ad|usted bass of
property transferred) 50, 000
d|usted bass of stock 125,000
If, therefore, the R Corporaton shoud subsequenty se the S Corporaton stock
for 100,000, a oss of 25,000 w agan be reazed for the purpose of computng
earnngs and profts, a of whch w be recognzed and w be apped to decrease
the earnngs and profts of the R Corporaton.
The thrd sentence of secton 115(1) provdes for cases In whch the ad|ust-
ment, prescrbed n secton 113, to the bass ndcated n paragraph (1) or (2)
of the frst sentence, as the case may be, of secton 115(1), dffer from the ad|ust-
ments to such bass proper for the purpose of determnng earnngs or profts.
The ad|ustments provded by the thrd sentence of secton 115(1) refect the
treatment provded by secton 19.115-3 reatve to cases where the deductons for
depcton and deprecaton n computng net ncome dffer from the deductons
proper for the purpose of computng earnngs and profts. The effect of such
thrd sentence may be ustrated by the foowng e ampes:
ampe (/): The Corporaton purchased on anuary 2, 1931, an o ease
at a cost of 10,000. The ease was operated ony for the years 1931 and 1932.
The deducton for depeton n each of the years 1931 and 1932 amounted to
2,750. of whch amount 1,750 represented percentage depeton n e cess of
depeton based on cost. The ease was sod n 1940 for 15,000. Under secton
113(b)(1)( ), n determnng the gan or oss from the sae of the property,
the bass must be ad|usted for cost depeton of 1,000 n 1931 and percentage
depeton of 2,750 n 1932. owever, the ad|ustment of such bass, proper for
the determnaton of earnngs and profts, s 1,000 for each year, or 2,000.
ence, the cost s to be ad|usted ony to the e tent of 2,000, eavng an ad-
usted bass of 8,000 and the earnngs and profts w be ncreased by 7,000,
and not by 8,750. The dfference of 1,750 s equa to the amount by whch the
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115
19.11 -8.
percentage depeton for the year 1932 ( 2,780) e ceeds the depeton on cost
for that year ( 1,000) and has aready been apped n the computaton of earn-
ngs and profts for the year 1932 by takng nto account ony 1,000 nstead
of 2,750 for depeton n the computaton of such earnngs and profts (see
sectons 19.115-3 and 19.115- ).
ampe (2): If, n the precedng e ampe, the property, nstead of beng sod,
s e changed n a transacton descrbed n secton 112(c) for ke property havng
a far market vaue of 7,750 and cash of 7,250, then the ncrease n earnngs
and profts amounts to 7,000, that s, 15,000 ( 7,750 pus 7,250) mnus the
base of S,000. owever, n computng net Income of the Corporaton, the
gan s 8,750, that Is, 15,000 mnus ,250 ( 10,000 ess depeton of 3,750), of
whch ony 7,250 s recognzed because the recognzed gan can not e ceed the
sum of money receved n the transacton. Secton 112(c)(1), and correspond-
ng provsons of pror revenue aws. If, howaver, the cash receved was ony
2,250 and the vaue of the property receved was 12,750, then the ncrease n
earnngs and profts woud be 2,250, that amount beng the gan recognzed
under secton 112.
or ad|ustment and aocaton of the earnngs and profts of the transferor
as between the transferor and the transferee n cases where the transfer of
property by one corporaton to another corporaton resuts n the nonrecognton,
n whoe or n part, of gan or oss, see secton 19.115-11.
Sec. 19.115-13. ffect on earnngs and profts of recept of ta -free dstrbutons
requrng ad|ustment or aocaton of bass of stock. In order to determne the
ef ct on earnngs and profts, where a corporaton receves (after ebruary 28,
1913) from a second corporaton a dstrbuton whch (under the aw appcabe
to the year n whch the dstrbuton was made) was not a ta abe dvdend
to the sharehoders of the second corporaton, secton 115(1) prescrbes certan
rues. It provdes that the amount of such dstrbuton sha not ncrease the
earnngs and profts of the frst or recevng corporaton In the foowng cases:
(1) No such ncrease sha be made n respect of the part of such dstrbuton
whch (under the aw appcabe to the year n whch the dstrbuton was made)
s drecty apped n reducton of the bass of the stock n respect of whch the
dstrbuton was made and (2) no such ncrease sha be made f (under the
aw appcabe to the year n whch the dstrbuton was made) the dstrbuton
causes the bass of the stock n respect of whch the dstrbuton was made to
be aocated between such stock and the property receved. Where, therefore,
the aw (appcabe to the year n whch the dstrbuton was made, as, for
e ampe, a dstrbuton n 1934 from earnngs and profts accumuated pror to
March 1, 1913) requres that the amount of such dstrbuton sha he apped
aganst and reduce the bass of the stock wth respect to whch the dstrbuton
was made, there s no ncrease n the earnngs and profts by reason of the
recept of such dstrbuton. Smary, where there s receved by a corporaton
a dstrbuton from another corporaton n the form of a stock dvdend and the
aw appcabe to the year n whch such dstrbuton was made requres the
aocaton, as between the od stock and the stock receved as a dvdend, of the
bass of the od stock, then there s no Increase n the earnngs and profts by
reason of the recept of such stock dvdend even though such stock dvdend
consttutes ncome wthn the meanng of the s teenth amendment to the
Consttuton. These prncpes may be ustrated by the foowng e ampes:
ampe (1): The Corporaton n 1939 dstrbuted to the Y Corporaton,
one of ts sharehoders, 10,000 whch was out of earnngs or profts accumuated
before March 1, 1913, and dd not e ceed the ad|usted bass of the stock n
respect of whch the dstrbuton was made. Ths amount of 10,000 was, there-
fore, a ta -free dstrbuton and under the provsons of secton 115(b) must be
apped aganst and reduce the ad|usted bass of the stock n respect of whch
the dstrbuton was made. The earnngs and profts of the Corporaton are
not ncreased by reason of the recept of ths dstrbuton.
ampe (2): The Z Corporaton n 1934 had outstandng common and pre-
ferred stock of whch the Y Corporaton hed 100 shares of the common and no
preferred. The stock had a cost bass to the Y Corporaton of 100 per share,
or a tota cost of 10,000. In December of that year t receved a dvdend of
100 shares of the preferred stock of the Z Corporaton. Such dstrbuton s a
stock dvdend whch, under secton 115(f) of the Revenue ct of 1934, was not
ta abe and was accordngy not Incuded n the gross ncome of the Y Corpora-
ton. The orgna cost of 10,000 s aocated to the 200 shares of the Z Cor-
poraton none of whch has been sod or otherwse dsposed of by the Y Corpora-
ton. See secton 113(a) (19) and sectons 19.113(a) (19)-1 and 19.113(a) (12)-1.
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19.115-3.
11
The earnngs and profts of the Y Corporaton are not Increased by reason of the
recept of such stock dvdend.
Se , . 19.115-14. d|ustments to earnngs and profts refectng ncrease n vaue
accrued pror to March 1. 1913. In order to determne, for the purpose of ascer-
tanng the source of dvdend dstrbutons, that part of the earnngs and profts
whch s represented by ncrease n vaue of property accrued before, but reazed
on or after, March 1, 1913, secton 115(m) prescrbes certan rues.
Paragraph (1) of secton 115(m) sets forth the genera rue wth respect to
computng the ncrease to be made n that part of the earnngs and profts con-
sstng of ncrease n vaue of property accrued before, but reazed on or after,
March 1, 1913. The effect of ths paragraph may be ustrated by the foowng
e ampes:
ampe (1): The Corporaton acqured nondeprecabe property pror to
March 1, 1913, at a cost of . 10,00 . Its far market vaue of March 1,1913, was
12,000 and t was sod n 1040 for 15,000. The ncrease n earnngs and profts
based on the vaue as of March 1, 1913. representng earnngs and profts accumu-
ated snce ebruary 28, 1913. s 3,000. If the bass s determned wthout
regard to the vaue as of March 1, 1913, there woud be an ncrease n earnngs
and profts of 5,000. The dfference of 2,000 ( 5,000 mnus 3,000) represents
the ncrease to be made n that part of the earnngs and profts of the Cor-
poraton consstng of the ncrease n vaue of property accrued before, but
reased on or after, March 1, 1913.
ampe (2): The Y Corporaton acqured deprecabe property n 1908 at a
cost of 100,000. ssumng no addtons or betterments, and that the depreca-
ton sustaned pror to March 1, 1913. was 10,000, the ad|usted cost as of that
date was 90,000. Its far market vaue as of March 1, 1913, was 94,000 and u
1939 t was sod for 00,000. or the purpose of determnng gan from the sae,
the bass of the property s the far market vaue of 94,000 as of March 1, 1913,
ad|usted for deprecaton for the perod subsequent to ebruary 28, 1913, com-
puted on such far market vaue. If the amount of the deprecaton deducton
aowed (not ess than the amount aowabe) after ebruary 28, 1913, to the
date of the sae n 1939 s the aggregate sum of 43,240, the ad|usted bass for
determnng gan n 1939 ( 94,000 ess 43,240) s 50,7 0 and the gan woud be
9,240 ( 00,000 ess 50,700). The ncrease n earnngs and profts accumuated
snce ebruary 28, 1913, by reason of the sae, based on the vaue as of March 1
1913, ad|usted for deprecaton, s 9,240. If the deprecaton snce ebruary 28,
1913, had been based on the ad|usted cost of 00,000 ( 100 000 ess 10,000)
Instead of the March 1, 1913. vaue of 9-1.000. the deprecaton sustaned from
that date to the date of sae woud have been 41,400 nstead of 43,240 and the
actua gan on the sae based on the cost of 100,000 ad|usted by deprecaton
on such cost to 48, 00 ( 100.0q0 reduced by the sum of 10,000 and 41,400)
woud be 11,400 ( 0,000 ess 48,000). If the ad|usted bass of the property
was determned wthout regard to the vaue as of March 1, 1913, there woud be
an ncrease n earnngs and profts of 11,400. The dfference of 2,1 0 ( 11,400
mnus 9,240) represents the ncrease to be made n that part of the earnngs and
profts of the Y Corporaton consstng of the Increase n vaue of property
accrued before, but reazed on or after, March 1, 1913.
Paragraph (2) of secton 115(m) s an e cepton to the genera rue n para-
graph (1) of such secton and aso operates as a mtaton on the appcaton
of secton 115(1). It provdes that, f the appcaton of (2) of the frst sentence
of secton 115(1) to a sae or other dsposton after ebruary 28. 1913, resuts
n a oss whch s to be apped n decrease of earnngs and profs for any perod
begnnng after ebruary 28, 1913, then, notwthstandng secton 115(1) and In
eu of (he rue provded n paragraph (1) of secton 115(m), the amount of
such oss so to be apped sha be reduced by the amount. If any, by whch the
ad|usted bass of the property used n determnng the oss, e ceeds the ad|usted
bass computed wthout regard to the far market vaue of the property on
March 1, 1913. If the amount so apped n reducton of the oss e ceeds such
oss, the e cess over such oss sha ncrease that part of the earnngs and
pn fts consstng of ncrease n vaue of property accrued before, but reazed
on or after, March 1, 1913. The foowng e ampes w show the appcaton
of secton 115(m) (2) :
ampe (1): The Y Corporaton acqured nondeprecabe property pror to
March 1, 1913, at a cost of 8,000, Its far market vaue as of March , 913. was
13,000, and t was sod n 1939 for 10,000. Under (2) of the frst sentence of
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117
19.115-3.
secton 115(1) the ad|usted bass woud be 13,000 and there woud he a oss of
3,000. The appcaton of (2) of the frst sentence of secton 115(1) woud
resut n a oss from the sae n 1939 to be apped n decrease of earnngs and
profts for that year. Secton 115(m) (2), however, appes and the oss of 3,000
Is reduced by the amount by whch the ad|usted bass of 13,000 e ceeds the
cost of 8,000 (the ad|usted bass computed wthout regard to the vaue on-
March 1, 1913), namey, 5,000. The amount of the oss s, accordngy, reduced
from 3,000 to zero and there s no decrease n earnngs and profts of the
Y Corporaton for the year 1939 as the resut of the sae. The amount apped
In reducton of the decrease, namey, 5,000, e ceeds 3,000. ccordngy, as a
resut of the sae the e cess of 2,000 ncreases that part of the earnngs and
profts of the Y Corporaton consstng of ncrease n vaue of property accrued
before, but reazed on or after, March 1, 1913.
ampe (2): The Z Corporaton acqured nondeprecabe property pror to
March 1, 1913, at a cost of 10,000, ts far market vaue as of March 1, 1913,
was 12,000, and t was sod n 1039 for 8,000. Under (2) of the frst sentence
of secton 115(1) the ad|usted bass woud be 12,000 and there woud be a oss
of 4,000. The appcaton of (2) of the frst sentence of secton 115(1) woud
resut n a oss from the sae n 1939 to be apped n decrease of earnngs and
profts for that year. Secton 115(m)(2), however, appes and the oss of
4,000 s reduced by the amount by whch the ad|usted bass of 12,000 e ceeds
the cost of 10,000 (the ad|usted bass computed wthout regard to the vaue
on March 1, 1913), namey, 2,000. The amount of the oss s, accordngy,
reduced from 4,000 to 2,000 and the decrease n earnngs and profts of tre
Z Corporaton for the year 1939 as the resut of the sae s 2,000 nstead of
4,0(0. The amount apped n reducton of the decrease, namey, 2,000, does
not e ceed 4,000. ccordngy, as the resut of the sae there s no ncrease
n that part of the earnngs and profts of the Z Corporaton consstng of
ncrease n vaue of property accrued before, but reazed on or after. March
1, 1913.
Par. 2. The above amendments to Reguatons 103 (whch regua-
tons cover ta abe years begnnng after December 31, 1938) are
hereby made appcabe to ta abe years begnnng pror to anuary
1,1939 (such years beng covered by Reguatons 101, 94, 8 , 77, 74, 9,
5, 2, 45, and 33). though under secton 501(c) the fna determ-
naton by the oard of Ta ppeas or any court of the Unted Sates
of the ta abty of any ta payer for any such ta abe year whch,
on September 20, 1940, was pendng before, or was theretofore deter-
mned by, the oard of Ta ppeas, or any court of the Unted States,
s not affected by the enactment of secton 501, the rues stated n the
reguatons are appcabe to such cases nasmuch as such rues are a
proper nterpretaton of the aw as t e sted pror to the enactment
of secton 501. The mtaton n secton 501(c) has appcaton ony
to such ta payer, and n the case of such ta payer, ony wth respect
to the ta abty for the specfc year or years actuay so pendng on,
or so determned pror to, September 20, 940.
(Ths Treasury decson s prescrbed pursuant to sectons 2 and
8791(b) of the Interna Revenue Code (53 Stat., 32, 4 7), correspond-
ng provsons of pror nterna revenue aws, and secton 501 of the
Second Revenue ct of 1940 (Pubc, No. 801, Seventy-s th Congress,
thrd sesson).)
Guy T. evertng,
pproved December 19,1940.
ohn L. Suvan,
( ed wth the Dvson of the edera Regster December 20,1940, 3.11 p. m.)
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19.115-14. 118
Secton 19.115-7: Stock dvdends. 1940-48-10501
T. D.5020
TITL 2 INT RN L R NU . C PT R I, SU C PT R , P RT 19.
INCOM T .
Reguatons 103 amended. Stock dvdends and stock rghts.
Washngton, D. O.
Secton 19.115-7 of Reguatons 103 Part 19, Tte 2 , Code of ed-
era Reguatons, 1910 Sup. s amended by strkng out a of the
matter appearng after the frst sentence thereof.
secton 2 of the Interna Revenue Code (53 Stat., 32).)
Tmothy C. Mooney,
ohn L. Suvan,
( ed wth the Dvson of the edera Regster November 19, 1940, 3.27 p. m.)
Secton 19.115-12: ffect on earnngs and profts of
gan or oss reazed after ebruary 28,1913.
Secton 19.115-13: ffect on earnngs and profts of
recept of ta -free dstrbutons requrng ad|ust-
ment or aocaton of bass of stock.
Secton 19.115-14: d|ustments to earnngs and
profts refectng ncrease n vaue accrued
pror to March 1, 1913.
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119
19.124-1.
S CTION 11 . CLUSIONS ROM GROSS INCOM .
1940-45-10477
I. T. 3424
INT RN L R NU COD .
made two trps to urope n the year 1939. The frst trp
e tended from Mny 5 to une 8, and the second trp e tended from
une If to December 2. ed, was a bona fde nonresdent of
the Unted States for more than s caendar months durng the
ta abe year 1939, and s entted to the e empton provded n
secton 11 (a) of the Interna Revenue Code.
dvce s requested as to whether was a bona fde nonresdent of
the Unted States for more than s months durng the year 1939,
wthn the meanng of secton 11 (a) of the Interna Revenue Code.
I made two trps to urope n that year. The frst trp e tended
from May 5 to une 8, and the second trp e tended from une 1 to
December 2.
In G. C M. 220 5 (C. . 1940-1, 100) t was hed (syabus) :
ctzen of the Unted States must he absent from the Unted States for
more than s caendar months to come wthn the e empton provded by sec-
ton 11 (a) of the Revenue ct of 193 . ractona parts of months from
severa trps may not be added to make whoe caendar months, snce whoe
caendar months must consst of consecutve days of absence from the Unted
States n any one trp.
In accordance wth G. C. M. 220 5, supra, the frst trp made by ,
e tendng from May 5 to une 8, s to be treated as one caendar
month. The second trp, e tendng from une 1 to December 2, con-
sttuted fve fu caendar months. Under the prncpe contaned n
G. C. M. 220 5, supra, the fractona parts of months from the two
trps, that s, from une 5 to une 8 and from November 1 to De-
cember 2, may not be recognzed n the computaton of caendar
months absence. owever, n vew of the fact that was absent
from the Unted States for s fu caendar months n 1939, n ad-
dton to the fractona parts of months above mentoned, t s
hed that he was absent from the Unted States for more than s
caendar months n that year. ccordngy, the ta payer quafes as
a bona fde nonresdent of the Unted States for more than s caen-
dar months durng the ta abe year, and comes wthn the e empton
provded by secton 11 (a) of the Interna Revenue Code.
S CTION 124. MORTIZ TION D DUCTION.
Secton 19.124-1: Defntons. 1940-44-10474
T. D. 501
INCOM T .
Reguatons 103 amended. mortzaton deductons under Tte
III of the Second Revenue ct of 1940 (Pubc, No. 801, Seventy-
s th Congress, thrd sesson), approved October 8, 1940.
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19.124-1.
120
Washngton, D. C.
Reguatons 103 Part 19, Tte 2 , Code of edera Reguatons,
1940 Sup. are amended as foows:
Paragraph 1. Secton 19.23(1)-1 s amended by nsertng at the
end thereof a sentence readng as foows:
or deducton wth respect to the amortzaton of emergency factes, n eu
of the deducton for deprecaton, see sectons 23(t) and 124.
Par. 2. The foowng s nserted mmedatey precedng secton 24:
Sec. 301. owance of mortzaton Deducton. (Second Revenue ct of
1940.)
Secton 23 of the Interna Revenue Code s amended by nsertng at the end
thereof the foowng new subsecton:
(t) mortzaton Deducton. The deducton for amortzaton provded n
secton 124.
Par. 3. The foowng s nserted mmedatey foowng secton
19.123-2:
Sec. 302. Computaton of mortzaton Deducton. (Second Revenue ct of
1940.)
The Interna Revenue Code s amended by nsertng after secton 123 the
foowng new secton:
Sec. 124. mortzaton Dkucton.
(n) Oeneha. Rue. very corporaton, at ts eecton, sha be entted to
a deducton wth respect to the amortzaton of the ad|usted bass of any
emergency facty (as defned In subsecton (e)), based on a terod of 00
months. Such amortzaton deducton sha be an amount, wth res oct to each
month of such perod wthn the ta abe year, equa to the ad|usted bass of
the facty at the end of such month dvded by the number of months (ncud-
ng the month for whch the deducton s computed) remanng n the perod.
Such ad|usted bass at the end of the month sha be computed wthout regard
to the amortzaton deducton for such month. The amortzaton deducton
above provded wth respect to any month sha, e cept to the e tent provded
n subsecton (g) of ths secton, bo n en of the deducton wth respect to
such facty for such month provded by secton 23(1), reatng to e hauston,
wear and tear, and obsoescence. The CU-month perod sha begn as to any
emergency facty, at the eecton of the ta payer, wth the month foowng
the month n whch the facty was competed or acqured, or wth the suc-
ceedng ta abe year.
(h) ecton of mortzaton. The eecton of the ta payer to take the
amortzaton deducton and to begn the 0-month perod wth the month
foowng the month n whch the facty was competed or acqured sha (e -
cept as provded n subsecton (d)(3)) e made ony by a statement to that
effect n ts return for the ta abe year n whch the facty was competed or
acqured. Its eecton to take the amortzaton deducton and to begn such
perod wth the ta abe year succeedng sueh year sha be made ony by a
statement to that effect n ts return for such succeedng ta abe year.
(c) Termnaton of mortzaton Dkoucton. ta payer whch has eected
under subsecton (b) to take the amortzaton deducton provded n subsecton
(a) may, at any tme after makng such eecton, dscontnue the amortzaton
deductons wth respect to the remander of the amortzaton perod, such ds-
contnuance to begn as of the begnnng of any month specfed by the ta payer
n a notce n wrtng fed wth the Commssoner before the begnnng of
such month. The deducton provded under secton 23(1) sha be aowed,
begnnng wth the frst month as to whch the amortzaton deducton s not
appcabe, and the ta payer sha not (e cept as provded n subsecton (d))
be entted to any further amortzaton deductons wth respect to such emer-
gency facty.
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121
19.124-1.
(d) Termnaton of mortzaton Perod.
(1) If the Presdent has procamed the endng of the emergency perod
(as defned n subsecton (e)), or f the Secretary of War or the Secretary of
the Navy has, n accordance wth reguatons prescrbed by the Presdent,
certfed to the Commssoner that an emergency facty ceased, on the date
specfed n the certfcate, to be necessary n the nterest of natona defense
durng the emergency perod, and f the date of such procamaton or the date
specfed n such certfcate occurs wthn 0 months from the begnnng of the
amortzaton perod wth respect to such emergency facty, then the ta payer
may eect (n accordance wth paragraph (4) of ths subsecton) to termnate
the amortzaton perod wth respect to such emergency facty as of the end
of the month n whch such procamaton was ssued or n whch occurred the
date specfed n such certfcate, whchever s the earer. In such case the
amortzaton perod wth respect to such facty sha end wth the end of
such month n eu of the end of the 0-month perod.
(2) If the date of the procamaton or the date specfed n the certfcate
referred to n paragraph (1) of ths subsecton occurs wthn 00 mouths from
te begnnng of the amortzaton perod wth respect to such emergency
facty and after the begnnng of the month whch the ta payer has prev-
ousy f ed under subsecton (e) for the takng, n eu of the amortzaton
deducton provded n ths secton, of the deducton aowed by secton 23(1),
the ta payer may eect (n accordance wth paragraph (4) of ths subsecton)
to termnate the amortzaton perod wth respect to such emergency facty
as of the end of the month n whch such procamaton was ssued or n whch
occurred the date specfed n such certfcate, whchever s the earer. In
such case the amortzaton perod wth respect to such facty sha end wth
the end of such month n eu of the end of the 00-month perod, and the ter-
mnaton of the amortzaton deducton under subsecton (c) sha be
dsregarded.
(8) In the case of a ta payer whch has not n ether of ts returns spec-
fed n subsecton (b) eected to take an amortzaton deducton wth respect
to an emergency facty, f the date of the procamaton or the date specfed
n the certfcate, referred to n paragraph (1) of ths subsecton, whchever s
earer, s before the e praton of 0 months from the ast day of the month
n whch such emergency facty was competed or acqured, then the ta -
payer may eect (n accordance wth paragraph (4) of ths subsecton) the
amortzaton deducton provded n subsecton (a), usng an amortzaton
perod begnnng wth the month foowng the mouth n whch the emergency
facty was competed or acqured and endng as of the end of the month
wthn whch such procamaton was ssued or wthn whch occurred the date
specfed n such certfcate, whchever s the earer.
(4) The eecton provded n paragraph (1), (2), or (3) sha be made by
fng wth the Commssoner, n such manner, n such form, and wthn such
tme, as the Commssoner wth the approva of the Secretary may by regua-
tons prescrbe, a statement of such eecton. When such eecton has been so
made, then, under reguatons prescrbed by the Commssoner wth the ap-
prova of the Secretary, the ta es for a ta abe years, begnnng wth the
ta abe year n whch the amortzaton perod began, sha be computed n
accordance wth an amortzaton deducton computed n accordance wth the
method provded n subsecton (a), but usng (n eu of the 0-month perod
provded n such subsecton) the amortzaton perod specfed n paragraph
(1), (2), or (3), as the case may be.
(5) Rbcomputaton of ta n case of eecton under ths subsecton.
If the ad|ustment of the ncome or e cess-profts ta abty for any ta abe
year necessary to gve effect to paragraph (4) of ts subsecton s pre-
vented ( ) on the date of the certfcate of the Secretary of War or the
Secretary of the Navy or on the date of the Presdent s procamaton, whch-
ever s the bass of the ta payer s eecton under ths subsecton, or ( )
wthn one year from such date, by any provson of aw (other than ths
paragraph and other than secton 37 1, reatng to compromses), an ad|ust-
ment of the ta abty sha nevertheess be made f n respect of such
ta abe year a notce of defcency s maed or a cam for refund s ted,
as the case may be, wthn one year after the date of such certfcate or
such procamaton, whchever s the bass of the ta payer s eecton under
ths subsecton. If at the tme of the mang of such notce of defcency
or the fng of such cam for refund, the ad|ustment s so prevented, then
290217 41 0
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19.124-1.1
122
to amount of the ad|ustment authorzed In ths paragraph sha be mted
to the Increase or decrease n the ta prevousy determned for such ta abe
year whch resuts soey from the effect of paragraph (4) of ths subsecton,
and such amount sha be assessed and coected, or credted or refunded,
n the same manner as f t were a defcency or an overpayment, as the
case may be, for such ta abe year and as f on the date of such certfcate
or such procamaton, whchever s the bass of the ta payer s eecton under
ths subsecton, one year remaned before the e praton of the perods f
mtaton upon assessment or tng cam for refund for the ta abe year.
The ta prevousy determned sha be ascertaned n accordance wth sec-
ton 3 01U1). The amount to be assessed and coected under ths para-
graph n the same manner as If t were a defcency, or to be refunded or
credted n the same manner as f t were an overpayment, sha not be
dmnshed by any credt or set-off based upon any Item, ncuson, deducton,
credt, e empton, gan, or oss, other than one resutng from the effect of
paragraph (4) of ths subsecton. Such amount, f pad, sha not be recov-
ered by a cam or sut for refund or sut for erroneous refund based upon
any Item, ncuson, deducton, credt, e empton, gan, or oss, other thau
one resutng from the effect of paragraph (4) of ths subsecton.
(e) Defntons.
(1) mergency facty. s used n ths secton, the terra emergency
facty menus any facty, and, budng, machnery, or equpment, or
part thereof, the constructon, reconstructon, erecton, or nstaaton of
whch was competed after une 10, 1940, or whch was acqured after such
date, and wth respect to whch a certfcate under subsecton (f) has been
made.
(2) mergency perod s used n ths secton, the term emergency
perod means the perod begnnng une 10, 1940, and endng on the date on
whch the Presdent procams that the utzaton of a substanta porton
of the emergency factes wth respect to whch certfcatons under sub-
secton (f) have been made, s no onger requred n the nterest of natona
defense.
(f) Determnaton of d|usted ass of mergency acty. In deter-
mnng, for the purposes of subsecton (a) or subsecton (h), the ad|usted bass
of an emergency facty
(1) There sha be ncuded ony so much of the amount otherwse con-
sttutng such ad|usted bass as s propery attrbutabe to such constructon,
reconstructon, erecton, nstaaton, or acquston after une 10, 1940, as the
dvsory Commsson to the Counc of Natona Defense and ether the Sec-
retary of War or the Secretary of the Navy have certfed, wthn the tme
specfed n paragraph (3) of ths subsecton, and under such reguatons as
the Presdent may prescr e, as necessary n the nterest of natona defense
durng the emergency perod
(2) fter the competon or acquston of any emergency facty wth
respect to whch a certfcate under paragraph (1) has been made, any
e pendture (attrbutabe to such facty and to the perod after such com-
peton or acquston) whch does not represent constructon, reconstructon,
erecton, nstaaton, or acquston ncuded n such certfcate, but wth
respect to whch a separate certfcate s made under paragraph (1), sha
not be apped n ad|ustment of the bass of such facty and sha be con-
sdered as an e pendture wth respect to a new emergency facty and
(3) The certfcate provded for n paragraph (1) sha have no effect
uness made before whchever of the foowng dates s the ater: ( ) The
begnnng of such constructon, reconstructon, erecton, or nstaaton, or
the date of such acquston, or ( ) the one hundred and twenteth day after
the date of the enactment of the Second Revenue ct of 1940.
(g) Deprecaton Deducton. If the ad|usted bass of the emergency fa-
cty computed wthout regard to subsecton (f) of ths secton s n e cess of
the ad|usted bass computed under such subsecton, the deducton provded by
secton 23(1) sha, despte the provsons of subsecton (a) of ths secton, be
aowed wth respect to such emergency facty as f ts ad|usted bass were an
amount equa to the amount of such e cess.
(h) Payment by Unted States of Unamortzed Cost of acty. If tn
amount Is propery ncudbe n the gross ncome of the ta payer on account of
a payment wth respect to an emergency facty and such payment s certfed as
provded n ths paragraph, then, at the eecton of the ta payer In Its return
for the ta abe year n whch such amount s so ncudbe
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123
19.124-1.
(1) The amortzaton deducton for the month In whch such amount s
so ncudbe sha (n eu of the amount of the deducton for such month
computed under subsecon (a)) be the amount so ncudbe, but such de-
ducton sha not be n e cess of the ad|usted bass of the emergency facty
as of the end of such month (computed wthout regard to any amortzaton
deducton for such month). Payments referred to n ths paragraph sha
be payments the amounts of whch are certfed, under such reguatons as
the Presdent may prescrbe, by ether the Secretary of War or the Secretary
of the Navy as compensaton to the ta payer for the unamortzed cost of
the emergency facty made because
( ) contract wth the Unted States nvovng the use of the
facty has been termnated by ts terms or by canceaton, or
( ) the ta payer had reasonabe grounds (ether from provsons
of a contract wth the Unted States nvovng the use of the facty,
or from wrtten or ora representatons made under authorty of the
Unted States) for antcpatng future contracts nvovng the use of
the facty, whch future contracts have not been made.
(2) In case the ta payer s not entted to any amortzaton deducton
wth respect to the emergency facty the deducton aowabe under secton
23(1) on account of the month n whch such amount Is so ncudbe sha
be Increased by such amount, but such deducton on account of such month
sha not be n e cess of the ad|usted bass of the emergency facty as of
the end of such month (computed wthout regard to any amount aowabe,
on account of such month, under secton 23(1) or ths paragraph),
() Pbotkcton of thk Unted Statks. If the ta payer has been or w be
embursed by the Unted States for a or a part of the cost of any emergency
facty pursuant to any contract wth the Unted States, ether
(1) drecty, by a provson theren deang e pressy wth such rem-
bursement, or
(2) ndrecty, because the prce pad by the Unted States (nsofar as
return of cost of the facty s used as a factor n the f ng of such prce)
s recognzed by the contract as ncudng a return of cost greater than the
norma e hauston, wear and tear,
no amortzaton deducton wth respect to such emergency facty sha be
aowed for any month after the end of the month n whch such contract
s made, uness, before the e praton of )0 days after the makng of such
contract or 120 days after the date of the enactment of the Second Revenue
ct of 1910, whchever of such perods e pres the ater, the dvsory
Commsson to the Counc of Natona Defense, and ether the Secretary
of War or the Secretary of the Navy certfy to the Commssoner that such
contract adequatey protects the Unted States wth reference to the future
use and dsposton of such emergency facty. certfcate by the dvsory
Commsson to the Counc of Natona Defense and ether the Secretary of
War or the Secretary nf the Navy, made to the Commssoner before the
e praton of 90 days after the makng of a contract or 1-0 days after tn-
date of the enactment of the Second Revenue ct of 1940, whchever of
such perods e pres the ater, to the effect that, under such contract, rem-
bursement for a or a part of the cost of any emergency facty s not
provded for wthn the meanng of cause (1) or cause (2), sha be con-
cusve for the purposes of ths subsecton.
The terms and condtons of contracts wth reference to rembursement
of the cost of emergency factes and the protectng of the Unted States wth
reference to the future use and dsposton of such emergency factes
sha be made avaabe to the pubc.
Skc. 19.124 1. Defnton. . s used n ths secton and sectons 19.124-2 to
19.124-9, ncusve, the term
(a) dvsory Commsson means the dvsory Commsson to the Counc
of Natona Defense.
(h) Secretary of the department concerned means the Secretary of War
or the Secretary of the Navy, as the case may be.
(c) mergency facty means any facty, and, budng, machnery, or
equpment, or any part thereof,
(1) the acquston of whch occurred after une 10, 1940, or the construc-
ton, reconstructon, erecton, or nstaaton of whch was competed after
such date, and
(2) any part of the constructon, reconstructon, erecton, nstaaton, or
acquston of whch has, before ( ) the date of such acquston or the
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19.124-1.
( ) ebruary 5, 1941, whchever date s the ater, been certfed by the d-
vsory Commsson and the Secretary of the department concerned as neeea-
sar.v n the nterest of nrtona defense durng the emergency perod. The
term emergency facty. as so defned, may ncude, among other thngs,
mprovements of and, such as the constructon of arports and the dredgng
of channes.
d) mergency perod means the perod begnnng on une 10, 1940,
and endng on the date on whch the Presdent procams that the utzaton
of a substanta porton of the emergency factes s no onger requred n
the nterest of natona defense.
Sec. 19.124-2. mortzaton deducton Genera rue. If the dvsory Comms-
son and the Secretary of the department concerned have made the requred cer-
tfcatons (ncudng those requred by secton 124(1)), a corporaton s entted,
at ts eecton, to a deducton wth respect to the amortzaton of the ad|usted
bass of an emergency facty, such amortzaton to be based generay on a perod
of 0 months. s to the ad|usted bass of an emergency facty, see secton
19.124- . The ta payer may, wth respect to an emergency facty, eect to begn
the 0-month amortzaton perod wth (1) the month foowng the month n
whch such facty was competed or acqured, or (2) the ta abe year succeedng
that n whch such facty was competed or acqured (see secton 19.124-3). The
date on whch, or the month wthn whch, an emergency facty s competed or
acqured s a queston to be determned upon the facts In the partcuar case.
Ordnary the ta payer s n possesson of a the facts and, therefore, n a pos-
ton to ascertan such date. statement of the date ascertaned by the ta payer,
together wth a statement of the pertnent facts reed upon, shoud be fed wth
the ta payer s eecton to take amortzaton deductons wth respect to such
facty.
In genera, wth respect to each month of the 0-month perod whch fas
wthn the ta abe year, the amortzaton deducton s an amount equa to the
ad|usted bass of the facty at the end of such month dvded by the number
of months (ncudng the partcuar month for whch the deducton s com-
puted) remanng n the 0-month perod. The ad|usted bass of the facty at
the end of any month sha be computed wthout regard to the amortzaton
deducton wth respect to such facty for such month. The tota amortzaton
deducton wth respect to an emergency facty for a partcuar ta abe year s
the sum of the amortzaton deductons aowabe wth respect to such facty
for each month of the 0-month perod whch fas wthn such ta abe year.
The amortzaton deducton wth respect to an emergency facty taken for
any month s n eu of the deducton for deprecaton whch woud otherwse be
aowabe under secton 23(1) wth respect to such facty for such month. See,
however, secton 19.124-7. reatve to deprecaton wth respect to any amount
not sub|ect to amortzaton.
Ths secton may be ustrated by the foowng e ampes:
ampe (1): On uy 1, 1940, the Corporaton, whch makes ts ncome
ta returns on the caendar year bass, begns the constructon of an emergency
facty whch s competed on .September 30. 1940, at a cost of 240,000. The
certfcate of necessty covers the entre constructon. The Corporaton
eects to take amortzaton deductons wth respect to the facty and to begn
the 0-month amortzaton perod wth October, the month foowng ts com-
peton. The ad|usted bass of the facty at the end of October s 240,000.
Te aowabe amortzaton deducton wth respect to such facty for the ta -
abe year 1940 s 12,000, computed as foows:
Monthy amortzaton deductons:
October ( 240 000 0) 4,000
November ( 23 .0C0, or 210,000 mnus 1,000,4- 9) 4.000
December ( 232,000, or 23 ,000 mnus 4,000, 58) 4, 000
Tota amortzaton deducton for 1940 12,000
ampe (2): The Y Corporaton, whch makes ts ncome ta returns on the
bass of a fsca year endng November 30, purchases an emergency facty (No. 1)
on uy 29. 1940. On une 15. 1940, t begns the constructon of an emergency
facty (No. 2) whch Is competed on ugust 2, 1940. The entre acquston and
constructon of such factes are certfed as necessary n the nterest of natona
defense. The Y Corporaton eects to take amortzaton deductons wth respect
to both factes and to begn the 0-month amortzaton perod n each case wth
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125
19.124-1.
the month foowng the month of acquston or competon. The ad|usted bass
of facty No. 1 s 300,000 and the ad|usted bass of facty No. 2 s 54,000 at the
end of the frst month of the amortzaton perod. In September, 1SMU, facty
No. 1 s damaged by re, as a resut of whch ts ad|usted bass s propery reduced
by 25,370. The aowabe amortzaton deducton wth respect to such factes
for the ta abe year endng November 30, 1940, s 21,410, computed as foows:
CILITY NO. 1.
Monthy amortzaton deductons:
ugust ( 300,0004-00) 5,000
September ( 2 9, 30, or 300,000 mnus 5,000 and 25,370,
50) 4,570
October ( 2 5,000, or 2 9,030 mnus -,570. 58) 4.570
November ( 2 0,400, or 2 5,0 0 mnus 4,570, 57) 4, 570
mortzaton deducton for 1040 18. 710
CILITY NO. 2.
Montbv amortzaton deductons:
September ( 54,000 0) 900
October ( 53.100 59) 900
November ( 52,200 58) 900
mortzaton deducton for 1040 2, 7(10
Tota amortzaton deducton for 1940 21, 410
Sec. 19.124-3. ecton of amortzaton. n eecton by a ta payer to take
amortzaton deductons wth respect to an emergency facty and to begn the
0-month amortzaton perod wth the month foowng the month n whch such
facty was competed or acqured sha be made ony by a statement to that rff et
n ts return for the ta abe year n whch such facty was competed or acqured.
n eecton by a ta payer to take amortzaton deductons wth respect to an
emergency facty and to begn the 0-month amortzaton perod wth the ta -
abe year succeedng that n whch such facty was competed or acqured sha
be made ony by a statement to that effect n ts return for such succeedng ta -
abe year. No other method of makng such eectons s permtted. If an emer-
gency facty s competed or acqured n the ast month of the ta payer s ta abe
year, such statement shoud be made n the return for the ta abe year succeedng
the year durng whch such facty was competed or acqured. ny statement
of eecton shoud contan a descrpton ceary dentfyng each emergency facty
for whch an amortzaton deducton s camed.
ta payer whch does not eect, n the manner provded n secton 124(b), to
take amortzaton deductons wth respect to an emergency facty sha not,
e cept as provded n secton 124(d)(3), be entted to amortzaton deductons
wth respect to such facty (see secton 19.124-5( Z)).
Sec. 19.124 4. ecton to dscontnue amortsaton. If a ta payer has eected
to take amortzaton deductons wth respect to an emergency facty, t may,
after such eecton and pror to the e praton of the 0-month amortzaton pe-
rod, dscontnue the amortzaton deductons wth respect to such facty for
the remander of the 0-month perod. n eecton to dscontnue the amortza-
ton deductons sha be made by a notce n wrtng fed wth the Commssoner
specfyng the month as of the begnnng of whch the ta payer eects to ds-
contnue the deductons. Such notce sha he fed before the begnnng of the
month specfed theren, and shoud contan a descrpton ceary dentfyng the
emergency facty wth respect to whch the ta payer eects to dscontnue the
amortzaton deductons. If the ta payer so eects to dscontnue the amortza-
ton deductons wth respect to an emergency facty, t sha not, e cept as pro-
vded n secton 124(d), be entted to any further amortzaton deductons wth
respect to such facty (see secton 19.124-5(c)).
ta payer whch thus eects to dscontnue amortzaton deductons wth
respect to an emergency facty s entted, f such facty s deprecabe prop-
erty under secton 23(1) and the reguatons pertanng thereto, to a deducton
for deprecaton wth respect to such facty. The deducton for deprecaton sha
begn wth the frst mouth as to whch the amortzaton deducton s not app-
cabe, and sha be computed on the ad|usted bass of the property as of the
begnnng of such mouth (see secton 113(b) and the reguatons thereunder).
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19.124-1.
12
Ths secton may be ustrated by the foowng e ampe:
ampe: On uy 1, 1940, the Corporaton, whch makes ts Income ta
returns on the caendar year bass, purchases an emergency facty, consstng
of and wth a budng thereon, at a cost of 30 ,000, of whch 0,000 s aocabe
to the aud and 24 ,000 to the budng. The certfcate of necessty covers the
entre acquston. The corporaton eects to take amortzaton deductons wth
respect to the facty and to begn the 0-month amortzaton perod wth the
ta abe year 19-11. Deprecaton of the budng n the amount of ,000 s de-
ducted and aowed for the ta abe year 1940. On March 25, 1942, the corpora-
ton fes noce wth the Commssoner of ts eecton to dscontnue the amortza-
ton deductons begnnng wth the month of pr, 1942. The ad|usted bass of
the facty on anuary 31, 1941, s 300,000, or the cost of the facty ( 300,000)
ess the deprecaton aowed for 1940 ( ,000). The amortzaton deducton for
the ta abe year 1941 and the months of anuary, ebruary, and March, 1942,
amounts to 75,000, or 5,000 per month for 15 months. Snce, at the begnnng
of the amortzaton perod ( anuary 1, 1941), the ad|usted bass of the and a
one-ffth of the ad|usted bass of the entre facty and snce there are no ad|ust-
ments to bass other than on account of amortzaton durng the perod, the
ad|usted bass of the aud shoud be reduced by 15,000, or one-ffth of the entre
amortzaton deducton, and the ad|usted bass of the budng shoud be reduced
by 00,000, or four-ffths of the entre amortzaton deducton. ccordngy, the
ad|usted bass of the facty as of pr 1, 1942. s 225,000, of whch 180,000 s
nocabe to the budng for the purpose of deprecaton deductons under secton
23(1), and 45,000 s aocabe to the and.
Sec. 19.124-5. Termnaton of amortzaton perod. (a) Date the emergency
use ceases. s used n ths secton, the term date the emergency use ceases
means whchever of the foowng s the earer
(1) the date of the procamaton by the Presdent by reason of whch the
emergency perod ends or
(2) the date specfed n a certfcate wth respect to an emergency
facty made to the Commssoner by the Secretary of the department con-
cerned (n accordance wth reguatons prescrbed by the Presdent) as the
date on whch such facty ceased to be necessary n the nterest of
natona defense durng the emergency perod.
( ) Ta payer whch has eected to amortze. ta payer whch has eected
to take amortzaton deductons wth respect to an emergency facty may eect,
n the manner provded n paragraph (e) of ths secton, to termnate the
amortzaton perod wth respect to such facty as of the end of the mouth n
whch occurs the date the emergency use ceases, provded that such date occurs
pror to the e praton of the orgna 0-month perod. In such case there
sha, wth respect to such facty, be substtuted, n eu of the orgna 0-
month perod, a new amortzaton perod begnnng wth the frst month of the
orgna 0-month perod and endng wth the end of the month n whch occurs
the date the emergency use ceases and the ta payer s ta es for a ta abe
years (begnnng wth the ta abe year n whch the orgna 0-month perod
began) sha be computed (or recomputed) so as to gve effect to amortzaton
deductons wth respect to such facty computed n the manner provded n
secton 124(a) (see secton 19.124-2) but on the bass of the new amortzaton
perod.
ampe: On ugust 15, 1940, the Corporaton, whch makes ts ncome ta
returns on the caendar year bass, acqures an emergency facty for the pur-
pose of performng War Department contracts. The corporaton eects to take
amortzaton deductons wth respect to such facty and to begn the 0-mont
amortzaton perod wth September, 1940, the month foowng the month of
acquston. The Secretary of War certfes to the Commssoner that such
facty ceased, as of uy 15, 1942, to be necessary n the nterest of natona
defense. The Corporaton eects to termnate the amortzaton perod and,
accordngy, there s to be substtuted, n eu of the 0-month amortzaton
perod, a new amortzaton perod of 23 months (4 months n 1940, 12 mouths
n 1941, and 7 months n 1942). The Corporaton s ta es for the ta abe
years 1940, 1941, and 1942 sha be computed or recomputed so as to gve effect
to amortzaton deductons computed n the manner provded n secton 124(a)
but on the bass of the new 23-nonth amortzaton perod.
(c) Ta payer whch has eected to dscontnue amortzaton. ta payer whch
has eected to take amortzaton deductons wth respect to an emergency facty
and has subsequenty eected under secton 124(c) (see secton 19.124-4) to ds-
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127
19.124-1.
contnue, as of the begnnng of a specfed month, the amortzaton deductons
wth respect to such facty may eect, n the manner provded n paragraph (e)
of ths secton, to termnate the amortzaton perod wth respect to such facty
as of the end of the month n whch occurs the date the emergency use ceases,
provded that such date occurs pror to the e praton of the orgna 0-month
perod and after the begnnng of such specfed month. In such case, wth
respect to such facty, the eecton to dscontnue the amortzaton deductons
sna be dsregarded and there sha be substtuted, n eu of the orgna 0-
month perod, a new amortzaton perod begnnng wh the frst month of the
orgna 0-month perod and endng wth the end of the month In whch occurs
the date the emergency uses ceases. The ta payer s ta es for a ta abe years
(begnnng wth the ta abe year n whch the orgna 0-month perod began)
sha be computed (or recomputed) so as to gve effect to amortzaton deductons
wth respect to such facty computed n the manner provded n secton 124(a)
(see secton 19.124-2) but on the bass of the new amortzaton perod.
ampe: On November 1, 1940, the Y Corporaton, whch makes ts ncome
ta returns on the bass of a fsca year endng une 30, begns the constructon of
an emergency facty whch s competed on March 15, 1941. The corporaton
eects to take amortzaton deductons wth respect to such facty and to begn
the 0-mouth amortzaton perod wth pr, 1941, the month foowng the
competon. On anuary 15, 1942, the corporaton fes a notce wth the Com-
mssoner n whch It eects to dscontnue the amortzaton deductons wth
respect to such facty as of the begnnng of ebruary, 1942. The Presdent
ssues a procamaton on ugust 10, 1912, by reason of whch the emergency
perod ends. The Y Corporaton then eects to termnate the amortzaton
perod and, accordngy, Its eecton to dscontnue the amortzaton deductons
s to be dsregarded. In such case, there s to be substtuted, n eu of the
orgna 0-month amortzaton perod, a new amortzaton perod of 17 mouths
(3 months n the ta abe year endng une 30, 1941, 12 months In the ta abe
year endng une 30, 1942, and 2 months n the ta abe year endng une 30,
1943). The corporaton s ta es for the ta abe years endng une 30, 1941, 1942,
and 1943, are to be computed or recomputed so as to gve effect to amortzaton
deductons (n eu of amortzaton and deprecaton deductons prevousy taken
durng such 17-month perod) computed n the manner provded n secton 124(a)
but on the bass of the new 17-month amortzaton perod.
If the date the emergency use ceases shoud occur between the date of the
notce of dscontnuance and the begnnng of the month specfed n such notce,
the provsons of secton 124(d) () and paragraph ( ) of ths secton are
appcabe.
( f) Ta payer whch has not eected to amortze. ta payer whch has
obtaned the requred certfcatons but has not eected, as provded n secton
124(b), to take amortzaton deductons wth respect to the emergency facty
to whch such certfcatons reate may nevertheess take amortzaton deduc-
tons wth respect to such facty, f (1) the date the emergency use ceases
occurs before the e praton of 0 months from the ast day of the month n
whch such facty was competed or acqured, and (2) an eecton to take
such amortzaton deductons s made n the manner prescrbed n paragraph (e)
of ths secton. In such case, the ta es for a ta abe years (begnnng wth
the ta abe year n whch fe the month foowng the month n whch such
facty was competed or acqured) sha be computed (or recomputed) so as to
gve effect to amortzaton deductons wth respect to such facty computed n
the manner provded n secton 124(a) (see secton 19.124-2) but on the bass
of an amortzaton perod begnnng wth the month foowng the month n whch
such facty was competed or acqured, and endng wth the ast day of the
month n whch occurs the date the emergency use ceases.
ampe: On September 25, 1940, the Z Corporaton, whch makes ts ncome
ta returns on the caendar year bass, acqures an emergency facty for the
purpose of performng Navy Department contracts. The corporaton does not
eect to take amortzaton deductons wth respect to such facty. The Secretary
of the Navy certfes to the Commssoner that such facty ceased, as of uy 20,
1942, to be necessary n the nterest of natona defense. The Z Corporaton may
eect, n the manner provded n paragraph ( ) of ths secton, to take amortza-
ton deductons wth respect to such facty and n such case ts ta es for the
ta abe years 1940. 1941, and 1942 are to be computed or recomputed so as to gve
effect to amortzaton deductons computed In the manner provded n secton
124(a) but on the bass of an amortzaton perod of 22 months (3 months n 1940,
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19.124-1.
128
12 months n 1041, and 7 months n 1942), such amortzaton deductons to be In
eu of deprecaton deductons prevousy taken durng such 22-month perod.
(c) Manner of makng eecton. The eecton descrbed n paragraph ( ), (c),
or (d) of ts secton sha be made by fng wth the Commssoner of Interna
Revenue. Washngton. D. C, a statement of such eecton. Such statement sha
e ted wthn ) days after the date of the Presdent s procamaton or the date
of the certfcate of the Secretary of the department concerned, whchever s the
bass of the ta payer s eecton, and shoud contan a descrpton ceary dentfy-
ng the facty. copy of such statement shoud be attached by the ta payer
to the ncome-ta return for the ta abe year n whch fas the date the emergency
use ceases.
(f) Reconcaton-of ta es n case of commuted amortzaton perod. The
recomputaton of the ta abty authorzed by secton 124(d) (4) appes to any
ncome or e cess-profts ta mposed under Chapter 1 or Subchapter , , D, or
of Chapter 2, to the capta stock ta mposed by Chapter , and to any other
ta of (he corporaton affected drecty or ndrecty by the recomputaton of the
amortzaton deducton.
Under secton 124(d) (5), f the ad|ustment of any ncome or e cess-profts ta
for any ta abe year to gve effect to the revsed amortzaton deducton s pre-
vented (1) on the date of the certfcate of the Secretary of the department con-
cerned or the date of the Presdent s procamaton, whchever forms the bass of
the ta payer s eecton, or (2) wthn one year after such date, by any provson
of aw (other than secton 3701, reatng to compromses, and other than secton
124(d) (5) or by any rue of aw, ncudng the doctrne of res |udcata, an ad|ust-
ment sha nevertheess be made f a cam for refund or credt s fed or a notce
of defcency s maed, as the case may be. wthn one year after the date of such
certfcate or procamaton. Secton 124(d) (5) appes ony f, at the tme of the
fng of the cam for refund or the mang of the notce of defcency, the ad|ust-
ment woud otherwse be prevented by the runnng of the statute of mtatons,
by the e ecuton of a cosng agreement, by the operaton of the rue of res |udcata
or for other reasons. or reference to provsons whch woud prevent ad|ustment
e cept for the provsons of secton 124(d) (5), see secton 19.3801 (b)-0. Secton
124(d) (5) s not appcabe, however, f on the (ate of the fng of the cam for
refund or the mang of the notce of defcency, ad|ustment of the ta abty s
permssbe wthout recourse to such secton.
The amount of the ad|ustment authorzed by secton 124(d)(5) s mted to
the ncrease or decrease n the ta prevousy determned for the ta abe year
whch resuts soey from the revson of the amortzaton deducton and the
coatera effects of such revson upon tems of ncome, deductons, credts, n-
vested capta, etc., aready taken nto account n ascertanng the ta prevousy
determned. The ta prevousy determned for any ta abe year s to be ascer-
taned n accordance wth the provsons of secton 3801(d). See secton
19.3801(d)-. If the amount of the ad|ustment determned under secton
124(d) (5) represents an ncrease n ta . It s to be treated n the same manner
as a defcency for the ta abe year f t represents a decrease n ta . t s to be
treated n the same manner as an overpayment for the ta abe year. The amount
of the ad|ustment consdered as a defcency or as an overpayment, as the case may
be, w bear nterest to the e tent provded by the nterna revenue aws appcabe
to defcences and overpayments for the ta abe year for whch the ad|ustment
s made.
The amount of any ad|ustment under the provsons of secton 124(d) (5) whch
s refunded may not subsequenty be recovered n a sut for erroneous refund based
upon any ad|ustment other than one resutng from the revson of the amortza-
ton deductons. The amount of any ad|ustment under secton 124(d)(5) whch
Is assessed and coected as a defcency may not thereafter be recovered by the
ta payer n any sut for refund based upon any ad|ustment other than one resut-
ng from the revson of the amortzaton deductons. The appcaton of the
provsons of secton 124(d) (5) may be ustrated by the foowng e ampe:
ampe: On ugust 31, 1940, the Corporaton, whch makes ts ncome ta
returns on the caendar year bass, acqures an emergency facty at a cost of
300,000 and eects to take amortzaton deductons wth respect to such facty
over the 0-month perod begnnng wth the month of September, 1940. or
the ta abe year 1940 the corporaton fes an ncome ta return dscosng a
norma-ta net ncome of 08,500 and a ta abty of 1 ,440 whch s assessed
and pad. In makng such computaton, the corporaton takes amortzaton
deductons of 5,000 a month for four months, or 20,000, but n computng Its
gross ncome erroneousy omts Interest ncome amountng to ,000, and n
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129
19.124-1.
computng ts deductons erroneousy omts a deducton for nsurance e pense of
2,000. The corporaton ncudes n gross ncome dvdends from a domestc
corporaton n the amount of 10,000 and takes a dvdends receved credt of
8,500. It aso fes an e cess-profts ta return under Subchapter of Chapter 2
dscosng an nvested capta of 500,000, an e cess-profts net ncome of 50,5 0,
an e cess-profts credt of 40,000 computed on the nvested capta bass, and an
e cess-profts ta abty of 1,300.
On September 1, 1944, the Secretary of the department concerned certfes to the
Commssoner that such emergency facty ceased as of ugust 15, 1044, to be
necessary n the nterest of natona defense. The Corporaton eects to
termnate the amortzaton perod and to amortze the ad|usted bass of such
facty over the shortened perod of 48 months begnnng September 1, 1040, and
endng ugust 31, 1944. The corporaton s therefore entted to compute or
recompute ts ta es for 1940, 1941, 1942, 1943, and 1944 on the bass of an
amortzaton deducton of ,250 n eu of 5,000 for each month begnnng wth
September, 1940, and endng wth ugust. 1944. The aowabe deducton for
1940 s therefore 25,000 n eu of 20,000. Cams for refund for a years,
e cept 1944, are fed on November 30, 1944. or the ta abe year 1940 the perod
of mtatons upon the fng of a cam for refund provded by secton 322
e pres on March 15, 1944. Snce, however, the cam s fed wthn one year
from the date of the certfcate of the Secretary of the department concerned,
an ad|ustment s authorzed under secton 124(d)(5). The amount of the
ad|ustment of the ncome ta under secton 13 and the e cess-profts ta under
Subchapter of Chapter 2 for 1940 s 2,150 (ncome ta , 1,200 e cess-profts
ta , 950), computed as foows:
Income ta .
Norma-ta net ncome upon whch ta prevousy determned was
based 08,500
Less: ddtona deducton for amortzaton:
mount deductbe 25, WO
mount deducted n return 20, 000
5,000
Norma-ta net ncome as recomputed 03, 500
Norma ta as recomputed 15,240
Ta prevousy determned and pad 10. 440
mount of ad|ustment under secton 124(d)(5) to be refunded or
credted 1, 200
cess-profts ta .
cess-profts net ncome reported 50. 500
Less : ddtona deducton for amortzaton 5, 0O0
aance 45, 5 0
dd: d|ustment for norma ta es:
mount prevousy deducted 1 . 440
s recomputed 15.240
1,200
cess-profts net ncome as recomputed 40, 7 0
Less: cess-profts credt 10, 000
Specfc e empton 5,000
45,0 )
d|usted e cess-profts net ncome 1, 7t 0
cess-profts ta as recomputed 440
Ta prevousy determned and pad 1, 390
mount of ad|ustment under secton 124(d)(5) to be refunded or
credted 950
y reason of the mtatons mposed by secton 124(d)(5), the ad|ustment
Is mted to the decrease n the ta prevousy determned whch resuts soey
from the revson of the amortzaton deductons and the consequences fowng
therefrom. ccordngy, the recomputaton does not take uto consderaton the
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19.124-1.
130
tem of ,000, representng nterest receved, whch wns omtted from gross
ncome, or the tem of 2,000, representng nsurance e pense, for whch no de-
ducton was aowed.
Snce the cams for refund for the ta abe years 1041, 1042, and 1943 were
fed wthn the perod of mtatons provded n secton 322, the provsons of
secton 124(d)(5) are not appcabe and the compete ad|ustment of the ta es
for such ta abe years may be made wthout regard to the mtatons contaned
n secton 124(d) (5).
ec. 19.124- . d|usted bass of emergency facty. (a) In genera. The
ad|usted bass of an emergency facty for purposes of computng the amortza-
ton deducton may dffer from what woud otherwse consttute the ad|usted
bass of such emergency facty, n that t may be ony a porton of such other
ad|usted bass. It w be ony a porton of such other ad|usted bass f ony
a porton of the bass (unad|usted) s attrbutabe to certfed constructon, re-
constructon, erecton, nstaaton, or acquston after une 10, 1940. It s there-
fore necessary frst to determne the unad|usted bass of the emergency facty
from whch the ad|usted bass for amortzaton purposes s derved.
The unad|usted bass for amortzaton purposes, n cases where the entre con-
structon, reconstructon, erecton, nstaaton, or acquston takes pace after
une 10. 1940, and such constructon, reconstructon, erecton, nstaaton, or
acquston s certfed n ts entrety by the dvsory Commsson and the Sec-
retary of the department concerned as necessary n the nterest of natona
defense durng the emergency perod, s the same as the unad|usted bass other-
wse determned.
In cases where the dvsory Commsson and the Secretary of the department
concerned certfy the entre constructon, reconstructon, erecton, nstaaton, or
acquston after une 10. 1940. as necessary n the nterest of natona defense
durng the emergency perod, but ony a porton of the constructon, reconstruc-
ton, erecton, nstaaton, or acquston attrbutabe to the facty takes pace
after une 10, 1040. the unad|usted bass for purposes of amortzaton s so much
of the entre unad|usted bass of the emergency facty as s attrbutabe to that
porton of the constructon, reconstructon, erecton, nstaaton, or acquston
whch took pace after une 10, 1040. or e ampe, the Corporaton begns
the constructon of a facty on pr 11, 1940, and such facty s competed on
September 10, 1040, at a cost of -100,000. The certfcate of necessty covers the
entre constructon after une 10, 1940, and a the constructon Is dstrbuted
unformy throughout the 5-month constructon perod. The unad|usted bass of
the emergency facty for amortzaton purposes s therefore three-ffths of
500,000. or 300,000, snce ony such amount s attrbutabe to the constructon In
the three months foowng une 10. or deprecaton of remanng porton
( 200,000), see secton 19.124-7.
If the dvsory Commsson and the Secretary of the department concerned
certfy ony a porton of the constructon, reconstructon, erecton, nstaaton,
or acquston after une 10, 1940, then the unad|usted bass for amortzaton
purposes s mted to the amount attrbutabe to such porton of the constructon,
reconstructon, erecton, nstaaton, or acquston after une 10. 1940. ssum-
ng the same facts as In the e ampe n the precedng paragraph, e cept that the
certfcate s to the effect that ony 50 per cent of the constructon after une 10,
1040, s necessary n the nterest of natona defense durng the emergency perod,
the unad|usted bass for amortzaton purposes s 50 per cent of three-ffths of
500,000, or 150,000.
The ad|usted bass of an emergency facty for amortzaton purposes Is the
unad|usted bass for amortzaton purposes ess the ad|ustments propery app-
cabe thereto. Such ad|ustments are those specfed n secton 113(b), e cept
that no ad|ustments are to be taken nto account whch ncrease the ad|usted
bass. (See paragraph ( ) of ths secton.) mounts receved by a ta payer
n connecton wth ts agreement to suppy artces for natona defense, though
denomnated rembursements for a or a part of the cost of an emergency
facty, are not to be treated as capta recepts but are to be taken nto account
n computng ncome, and are therefore not to be apped n reducton of the
bass of such facty. The foowng e ampes w ustrate the computaton
of the ad|usted bass of an emergency facty for amortzaton purposes:
ampe (1): The Corporaton competes an emergency facty on uy
1, 1040, the entre unad|usted bass of whch Is 500,000, and the unad|usted
bass of whch for purposes of amortzaton s 300,000. The Corporaton
eects to begn amortzaton on anuary 1, 1041. The ony ad|ustment to bass
for the perod from uy 1, 1940, to anuary 31, 1941, other than deprecaton or
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131
19.124-1.
amortzaton for anuary 1941, s 5,000 for deprecaton for the ast s months
of 1940. The ad|usted bass for purposes of amortzaton s therefore OU,000
ess 3,000 (300,000/oOO.OOOths of 5,000). or 297,000.
ampe (2): On uy 31, 1944, the Y Corporaton has an emergency facty
(a budng) competed on uy 1, 1940, the entre unad|usted bass of whch
s 500,000, and the unad|usted bass of whch for purposes of amortzaton s
300,000. The corporaton eects to begn amortzaton on anuary 1, 1941, by
whch tme t s entted to 5,000 deprecaton for the ast s months of 1940.
On uy 1. 1944, the facty s damaged by fre, as the resut of whch ts ad|usted
bass s propery reduced by 200,000. The ad|usted bases of the emergency
facty as of uy, 1944, for purposes of amortzaton and deprecaton, and the
ad|usted bass for other purposes, are 23,849.18, 49,250.82, and 73,100, re-
spectvey, computed as foows:
or amor-
tzaton.
or depre-
caton.
or other
purposes.
300.000.00
200,000.00
2,000.00
500,000
5.000
3,000.00
Less deprecaton tor 42 months
297.000.00
207,900.00
None
1U8.0OU. 00
None
14,000.00
495, 000
207,900
14,000
d|usted bass at tme of re oss
89,100.00
5, 250. 82
184,000.00
134.749.18
273,100
200,000
d|usted basts after fre oss
23,849. 18
49,250.82
73,100
The 200,000 fre oss s apped aganst the ad|usted bass for purposes of
amortzaton and the ad|usted bass for purposes of deprecaton n the pro-
porton that each such ad|usted bass at the tme of such tre oss bears to ther
sum, . e., 89.100/273.100ths of 200,000 or 5,250.82, aganst the amortzaton
bass, and 184,000/273,100ths of 200,000 or 134,749.18, aganst the deprecaton
bass.
( ) Capta addton . If. after the competon or acquston of an emer-
gency facty wth respect to whch a certfcate of necessty has been made,
further e pendtures are made for constructon, reconstructon, erecton, n-
staaton, or acquston attrbutabe to such facty but not ncuded n such
certfcate of necessty, such e pendtures sha not be added to the ad|usted
bass of the emergency facty for amortzaton purposes under such certfcate.
If such further e pendtures are covered by a separate certfcate of necessty
made n accordance wth the provsons of secton 124(f), they are treated as
certfed e pendtures n connecton wth a new emergency facty, and. f
proper eecton s made, w be taken nto account n computng the ad|usted
bass of such new emergency facty for purposes of amortzaton.
ampe: On March 1, 1941, the dvsory Commsson and the Secretary of
the department concerned certfy as an emergency facty a heatng pant pro-
posed to be constructed by the Z Corporaton. Such facty s competed on
uy 1, 1941. The Z Corporaton, on ugust 1, 1941, nstas In the pant an
addtona boer, whch s not ncuded n the certfcate for the pant but Is,
pror to such nstaaton, certfed n a separate certfcate as necessary n the
nterest of natona defense. or amortzaton purposes, the ad|usted bass of
the heatng pant s determned wthout ncudng the cost of the addtona
boer. Such cost s taken nto account n computng the ad|usted bass of the
new emergency facty (the boer), as to whch the ta payer has a separate
eecton for amortzaton purposes and a separate amortzaton perod.
Sec. 19.124-7. Denrecaton of porton of emeryency facty not ub|ect to
amortzaton. The rue set forth n secton 124(a) (see secton 19.124-2), that
an amortzaton deducton wth respect to an emergency facty s n eu of
any deducton for deprecaton whch woud otherwse be aowabe wth respect
to such facty. Is sub|ect to the e cepton provded n secton 121(g). Under
ths e cepton, f the property consttutng such facty s deprecabe property
under secton 23(1) and the reguatons pertanng thereto and f the ad|usted
bass of such facty as computed under secton 113(b) for purposes other than
the amortzaton deductons (see secton 19.113(b)(1)- ) s n e cess of the
ad|usted bass computed under secton 124(f) for purposes of the amortzaton
deductons (see secton 19.124-0), then the e cess sha be charged off over the
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19.124-1.
132
usefu fe of the facty am recovered through deprecaton deductons. Thus,
f the constructon of an emergency facty s begun on or before une 10, 1940,
and competed after such date, no amortzaton deductons are aowabe wth
respect to the amount attrbutabe to such constructon on or before such date
(see secton 19.124-8). owever, f the property consttutng such facty s
deprecabe property under secton 23(1) and the reguatons pertanng thereto,
then the deprecaton deducton provded by such secton and reguatons s
aowabe wth respect to the amount attrbutabe to such constructon on or
before une 10, 1940.
Smary, f ony a part of the constructon, reconstructon, erecton, nstaa-
ton, or acquston after une 10, 1940, of an emergency facty has been cert-
fed by the dvsory Commsson and the Secretary of the department concerned
as necessary n the nterest of natona defense durng the emergency perod,
and f such facty s deprecabe property under secton 23(1) and the reguatons
pertanng thereto, then the deprecaton deducton provded by such secton and
reguatons s aowabe wth respect to the part whch has not been so certfed.
or ustraton of the treatment of a deprecabe porton of an emergency
facty, see ampe (2) n secton 19.124- U).
Sec. 19.124-8. Payment by Unted States of unamortzed cost of facty.
Secton 124(h) contempates that certan payments may be made by the Unted
States to a ta payer as compensaton for the unamortzed cost of an emergency
facty. If the amount of any such payment s propery Incudbe n gross ncome
and has been certfed, as provded n secton 124(h), as havng been pad under
the crcumstances descrbed theren, a ta payer whch s recoverng the ad|usted
bass of an emergency facty through amortzaton rather than deprecaton
may eect to take such amount as an amortzaton deducton wth respect to such
facty for the mouth n whch such amount s so ncudbe. Such amortzaton
deducton sha be n eu of the amortzaton deducton otherwse aowabe
wth respect to such facty for such month, and sha not n any case e ceed,
the ad|usted bass of such facty (see secton 19.124- ) as of the end of such
month (computed wthout regard to any amortzaton deducton for such month).
The eecton referred to In ths paragraph sha be made n the return for the
ta abe year n whch the amount of such payment s ncudbe n gross ncome.
If a ta payer s recoverng the ad|usted bass of an emergency facty through
deprecaton rather than amortzaton, the deprecaton deducton aowabe
under secton 23(1) for the month n whch the amount of any such payment s
ncudbe n gross ncome sha, at the ta payer s eecton, be ncreased by such
amount: but the tota deducton wth respect to the certfed porton of such
facty sha not n any case e ceed the ad|usted bass of such facty (computed
as provded n secton 124(f) and secton 19.124- for amortzaton purposes) as
of the end of such month (computed wthout regard to any amount aowabe for
such month under secton 23(1) or 124(h)(2)). The eecton referred to n ths
paragraph sha be made n the return for the ta abe year n whch the amount
of such payment s ncudbe n gross ncome.
Ths secton may be ustrated by the foowng e ampes:
ampe (/): On anuary 31, 1941, the Corporaton purchases an emergency
facty at a cost of 00,000. The certfcate of necessty covers the entre acqu-
ston. The Corporaton eects to take amortzaton deductons wth respect
to such facty and to begn the 0-month amortzaton perod wth ebruary,
1941, the month foowng the month of acquston. On uy 15, 1942, as a resut
of the canceaton of certan contracts wth the Corporaton, the Unted
States makes a payment of 300.01(0 to the corporaton as compensaton for the
unamortzed cost of such facty. The . 300.(100 payment s ncudbe n the
Corporaton s gross ncome for uy, 1942. The ad|usted bass of such facty for
amortzaton purposes as of the end of uy, 1942. computed wthout regard to
any amortzaton deducton for such month, s 430,000. ccordngy, the cor-
poraton s entted to take an amortzaton deducton of 300,000 for such month,
n eu of the 10,000 amortzaton deducton whch s otherwse aowabe.
ampe (2): On November 30, 1940, the Y Corporaton purchases an emer-
gency facty, consstng of and wth a budng thereon at a cost of 500,000,
of whch 200,000 s aocabe to the and and 300,090 to the budng. The cer-
tfcate of necessty covers the entre acquston. The Y Corporaton does not
eect to take amortzaton deductons wth respect to such facty, but s entted
to a deprecaton deducton wth respect to the budng at the rate of 3 per cent
per annum, or 750 per month. On ugust 12, 1942, as a resut of canceaton
of certan contracts, the Unted States makes a payment of 400,000 to the
corporaton as compensaton for the unamortzed cost of such facty. The
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133
19.124-2.
400,000 s ncudbe In the Y Corporaton s gross ncome for ugust, 11142. The
ad|usted bass of the facty as of the end of ugust, 1042, computed wthout
regard to deprecaton for such month, s 4 5,000, of whch amount . 1200.000 s
aocabe to the and and 2M. .O00 to the budng. ccordngy, the corporaton
s entted to ncrease the 750 deprecaton deducton for ugust, 1042, by the
fu amount of the 400,000 payment.
Sec. 19.124-9. Rembursement by Unted States for cost of facty. If the
ta payer has been or w be rembursed by the Unted States for a or a part
States, no amortzaton deductons w be aowed wth respect to su.-h facty
of the cost of any emergency facty pursuant to any contract wth te Unted
for any month after the end of the month n whch such contract s made, uness
(1) before the e praton of 90 days after the makng of such contract or (2)
before ebruary t. 1941, whchever date s the ater, the dvsory Commsson
and the Secretary of the department concerned have certfed to the Commssoner
that the contract contans provsons adequatey protectng the Unted States
wth reference to the future use and dsposton of such facty. or treatment
of rembursements, see secton 19.124- . If the dvsory Commsson and the
Secretary of the department concerned have certfed to the Commssoner before
the date ndcated above that under such contract no rembursement s provded
for wthn the meanng of secton 124(), such certfcaton sha be concusve of
such fact.
(Ths Treasury decson s ssued tnder the authorty contaned n
sectons 301 and 302 of the Second Revenue ct of 1040 (Pubc, No.
801, Seventy-s th Congress, thrd sesson), and secton 2 of the
Interna Revenue Code (53 Stat., 32).)
Tmothy C. Mooney,
pproved October 23, 1940.
ohn L. Suvan.
( ed wth the Dvson of the edera Regster October 24, 1940, 11.5 a. m.)
Secton 19.124-2: mortzaton deducton 1940-47-10491
Genera rue.
Notce of procedure for certfcaton under secton 124 of the
Interna Revenue Code.
November 1,1940.
Sectons 23 and 124 of the Interna Revenue Code aow a deduc-
ton for ncome and e cess-profts ta purposes for amortzaton, over
a 0-month perod, wth respect to any emergency facty, the con-
structon of whch was competed, or whch was acqured, after une
10,1940, upon the ssuance of the certfcate or certfcates, as herenafter
defned, provded for n the statute. Such certfcates are to be ssued
to the Commssoner of Interna Revenue by the Secretary of War or
the Secretary of the Navy and the dvsory Commsson to the Counc
of Natona efense.
In a cases a Necessty Certfcate s requred. ta payer who
has been or w be rembursed by the Unted States for a or a part
of the cost of any emergency facty pursuant to any contract wth
the Unted States, s not aowed such amortzaton deducton uness
a Certfcate of Government Protecton s aso ssued wth respect
1 Tte III, secton 302, Second Revenue ct ot 1940.
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19.124-2.
134
to the facty covered by such contract. Certfcate of Non-
Rembursenent wth respect to any contract wth the Unted States
concusvey estabshes that t does not provde for rembursement
to the appcant.
In the event that a ta payer has no contract wth the Unted
States, t s not consdered necessary for the ta payer, n addton to
a Necessty Certfcate. to obtan a Certfcate of Government
Protecton or a Certfcate of Non-Rembursement, uness the ta -
payer s the rea party n nterest under a contract wth the Unted
States, as, for e ampe, a case n whch some other person s actng
n a contract as agent for the ta payer to secure payment of the cost
of the emergency factes by the Unted States.
The Secretary of the Treasury, the, Secretary of War, the Secretary
of the Navy, and the dvsory Commsson to the Counc of Na-
tona Defense hereby gve notce that the foowng w be the pro-
cedure for appyng for such certfcates:
I. ppcatons. ppcatons for certfcates sha be respectvey
entted - ppcaton for a Necessty Certfcate, ppcaton for a
Certfcate of Government Protecton, ppcaton for a Certfcate
of Non-Rembursement. Instructons as to the nformaton to be
gven n such appcatons may be obtaned from the Offce of the
ssstant Secretary of War (Purchase and Contract ranch), Wash-
ngton, D. C, or from the Offce of the udge dvocate Genera of
the Navy, Navy Department (Certfcaton Unt), Washngton, D. C.
II. Pace of fng appcatons and copes requred. The orgna
and two unsgned copes of the appcaton, addressed to ether the Sec-
retary of War or the Secretary of the Navy, as the case may be, and
to the dvsory Commsson to the Counc of Natona Defense, sha
be duy prepared n accordance wth the appcabe nstructons and
fed as foows:
The orgna and both copes of appcatons, addressed to the Sec-
retary of War and the dvsory Commsson, sha be fed wth the
contractng offcer (or wth the Offce of the ssstant Secretary of
War, Purchase and Contract ranch, Washngton, D. C, n cases
n whch there s no partcuar contractng offcer concerned).
The orgna and both copes of appcatons, addressed to the Sec-
retary of the Navy and the dvsory Commsson, sha be fed wth
the Offce of the, udge dvocate Genera, Navy Department (Certf-
caton Unt), Washngton, D. C.
One copy of any appcaton w be prompty transmtted by the
offce n whch the appcaton has been fed to the Offce of the Coord-
nator of Natona Defense Purchases, Washngton, D. C., actng on
behaf of the dvsory Commsson.
III. Tme of fng appcatons. Secton 124 of the Interna Reve-
nue Code provdes that the Necessty Certfcate must be made
before ebruary 5, 1941. or before the begnnng of the constructon
or the date of acquston of the emergency facty, whchever s
ater, and that the Certfcate of Government Protecton and Cer-
tfcate of Non-Rembursement must be made before ebruary f,
1941, or wthn 90 days after the e ecuton of the contract, whchever
s ater.
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135
19.124-2.
In order that the appcatons may be acted upon and certfcates
made wthn the prescrbed tme, appcatons for such certfcates
shoud be fed at the earest possbe date. Uness fed n suffcent
tme, t w not be possbe to act upon the appcatons wthn the
statutory perods referred to above.
I . Notfcaton. The Offce of the ssstant Secretary of War
(Purchase and Contract ranch) or the Offce of the udge dvocate
Genera of the Navy, as the case may be, w notfy the appcant of
the acton taken upon ts appcaton by the Secretary of War or
Secretary of the Navy and the dvsory Commsson to the Counc
of Natona Defense.
. Defnton of terms. (1) The term Necessty Certfcate as
used heren means a certfcaton, ssued pursuant to secton 124(f) of
the Interna Revenue Code, that the constructon or acquston of the
factes, referred to n the certfcate, s necessary n the nterest of
natona defense durng the emergency perod.
(2) The term Certfcate of Government Protecton as used
heren means a certfcaton, ssued pursuant to secton 124() of the
Interna Revenue Code, that a contract n whch the ta payer has
been or w be rembursed b|r the Unted States, drecty or ndrecty,
for a or a part of the cost of the emergency facty, referred to n
the certfcate, adequatey protects the Unted States wth reference
t the future use and dsposton of such facty.
(3) The term Certfcate of Non-Rembursement as used heren
means a certfcaton, ssued pursuant to secton 124() of the Inter-
na Revenue Code, that rembursement to the ta payer for a or a part
of the cost of any emergency facty s not provded for under a con-
tract wth the Unted States.
(4) The term rembursement as used heren means remburse-
ment to the ta payer pursuant to any contract wth the Unted States
ether (1) drecty, by a provson theren deang e pressy wth such
rembursement, or (2) ndrecty, because the prce pad by the Unted
State (n so far as return of cost of the facty s used as a factor n
the f ng of such prce) s recognzed by the contract as ncudng a
return of cost greater than the norma e hauston, wear, and tear.
(5) The term emergency facty as used heren means any fac-
ty, and, budng, machnery, or equpment, or part thereof, the con-
structon, reconstructon, erecton, or nstaaton of whch was com-
peted after une 10. 1940 or whch was acqured after such date, and
wth respect to whch a Necessty Certfcate has been made.
pproved:
krrkkt . Gaston,
ames ckhesta,
ctng Secretary of the Navy.
G. C. Marsha,
ctng Secretary of War.
Wm. II. McReynods,
Secretary of dvsory Commsson
to the Counc of Natona Defense.
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19.131-1.
13G
SUPPL M NT C CR DITS G INST T .
S CTION 131 T S O OR IGN COUNTRI S ND
POSS SSIONS O UNIT D ST T S.
Secton 19.131-1: nayss of credt for 1940-49-10504
ta es. I. T. 3429
( so Secton 23(c), Secton 19.23(c)-.)
INT RN L R NU COD .
The ta mposed by the Cuban aw of October 9, 1922. as amended
by aw of uy 15, 1925, and by aw of anuary 27, 1927, and
decree aw No. 393, dated November 8, 1985, equa to a certan
percentage on saes, e changes or assgnments, and gross recepts,
whch ta was e tended by the aw of anuary 27, 1927, to the
purca.se of merchandse comng from abroad, s not an ncome
ta and may not be camed as a credt under secton 131 of the
Interna Revenue Code. Such ta may, however, be taken as a
deducton under secton 23(c) of the Code.
Ths rung s aso appcabe to ta es mposed by decree No.
G9.r , dated March 3, 1940.
dvce s requested whether the ta es mposed by certan Cuban
aws consttute foregn ncome-ta es whch may be taken as credts
under secton 131 of the Interna Revenue Code.
The aw of October 9, 1922, enacted by the Cuban Government,
estabshed a ta of 1 per cent on saes, e changes or assgnments,
and gross recepts, whch ta was ncreased by one-haf of 1 per cent
by the aw of uy 15, 1925. Those aws were e tended on anuary
27, 1927, to ncude the purchase of merchandse comng from abroad
(outsde Cuba). Decree aw No. 393, dated November 8, 1935, made
no matera change n the orgna provsons of the aw of October
9, 1922, n so far as the nature of the ta s concerned.
It s the opnon of the ureau that the ta n queston s a ta
on gross saes and gross recepts and not a ta mposed on net profts.
The genera rue s that a ta based on gross recepts consttutes
a ta on busness and s an e cse ta . Cooey on Ta aton, 4th
dton, sectons 844 and 892, contans numerous ctatons to the
effect that a ta on gross revenues or gross recepts s an e cse ta .
(See aso Mane v. Grand Trunk Raway Co., 142 U. S., 217 Secu-
rty Savng de Commerca ank v. Dstrct of Coumba, 279 ed.,
185 Oho Rver W. Raway Co. v. Dttey, 203 ed., 537.)
It s accordngy hed that the. amount of ta pad under the, aw
of October 9, 1922, as amended by aw of uy 15, 1925, and by aw
of anuary 27, 1927, and decree aw No. 393, supra, to the Cuban
Government s not an ncome ta and may not be camed as a credt
under secton 131 of the Interna Revenue Code. The amount of such
ta may be camed, however, as a deducton under secton 23(c) of
the Interna Revenue Code for the year n whch pad or accrued,
dependent upon whether a ta payer s books of account are kept on
the cash recepts and dsbursements bass or on the accrua bass.
Ths rung s aso appcabe to ta es pad under decree No. 95,
dated March 3, 1940, whch ncreased the rate of ta from /2 to
2 per cent.
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137
19.142-1.
Secton 19.131-1: nayss of credt for ta es. 1940-50-10517
( so Secton 23(c), Secton 19.23(c)-.) I. T. 3433
INT RN L R NU COD .
The ta es mposed by rtces II and III of Chapter
I of the mnera fue aw of Cuba, effectve anuary 1. 1039, whch
ta es are based upon the vaue of the product at the mouth of the
we, are not ncome ta es and may not be taken as credts aganst the
edera ncome ta under secton 131 of the Interna Revenue Code.
Payments of such ta es, however, consttute aowabe deductons
from gross ncome for edera ncome ta purposes by the person
who s actuay abe for such ta es.
dvce s requested whether the ta es mposed by the mnera fue
aw of Cuba may be taken as credts aganst the edera ncome
ta under secton 131 of the Interna Revenue Code.
The pertnent provsons of the Cuban aw, whch reate to the
mposton of the ta and the varous rates of ta upon e porers
and e poters of petroeum and ts natura assocates, are contaned
n rtces II and III of Chapter I of the mnera fue aw
of Cuba.
rom an e amnaton of the provsons of that aw, t s apparent
that the ta s based on the commerca vaue of the product at the
mouth of the we, computed at the average prce of the product
of the same quaty durng the precedng month n the reguatng
market, mnus cost of transportaton to such reguatng markets,
regardess of whether there s any ncome from the sae of the
product. In other words, the ta s upon the vaue of the product
rather than on ncome derved from the operaton of the wes.
ccordngy, amounts pad under rtces II and III of
Chapter I of the mnera fue aw of Cuba, effectve anuary
1, 1939, do not consttute payments of ncome ta and, therefore,
no credt s aowabe under the provsons of secton 131 of the
Interna Revenue Code wth respect to such payments. owever,
such payments by the person upon whom the ta s mposed under the
Cuban aw consttute aowabe deductons from gross ncome as pro-
vded by secton 23(c) of the Interna Revenue Code.
Secton 19.131-8: Lmtatons on credt for foregn ta es.
INT RN L R NU COD .
SUPPL M NT D. R TURNS ND P YM NT O T .
S CTION 142. IDUCI RY R TURNS.
Secton 19.142-1: ducary returns.
INT RN L R NU COD .
290217 41 10
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19.143-1. 138
Secton 19.142-2: Return by guardan or commttee.
INT RN L R NU COD .
Secton 19.142-5: Return for nonresdent aen benefcary.
INT RN L R NU COD .
S CTION 143. WIT OLDING O T
T SOURC .
Secton 19.143-1: Wthhodng ta at source. 1940-28-10322
( so Secton 143, Sectons 19.143-3 and 19.143-7 T. D. 4979
Secton 144, Sectons 19.144-1 and 19.144-2
Secton 2 2, Secton 19.2 2-4.)
INCOM T .
Wthhodng under sectons 143 end 144 of the Interna Revenue
Code as amended by the Revenue ct of 1940 Reguatons 103
amended.
Washngton, D. C.
To Coectors of nterna Revenue and Others Concerned:
edera Reguatons, 1940 Sup.), reatng to the ncome ta under the
Interna Revenue Code, to secton 5 and secton 202 of the Revenue ct
of 1940 (Pubc, No. 5 , Seventy-s th Congress, thrd sesson),
amendng secton 143 and secton 144 of the Interna Revenue Code,
such reguatons are amended as foows:
(1) The foowng s nserted mmedatey precedng secton
19.143-1:
Sec. 5. Wthhodng of Ta at Source.
(a) Secton 143 of the Interna Revenue Code s amended by strkng
out 10 per centum wherever occurrng theren and nsertng n eu
thereof 15 per centum .

(c) The amendments made by ths secton sha take effect on une 2G,
1910.
Skc. 202. Rates of Wthhodng.
Secton 143 of the Interna Revenue Code s amended by nsertng
at the end thereof te foowng new subsecton:
(h) Rates Unt anuahy 194.1. or the perod after une 25,
1940, and before anuary 1, 194.r , the rate provded n ths secton nd
secton 144, of 15 per centum sha be 1 1/-. per centum. Ths sub-
secton or secton 15 sha not appy n any case where ts operaton
woud be contrary to any treaty obgaton of the Unted States, nor
to a resdent of. or a corporaton organzed under the aws of, a
contguous country so ong as there s n effect wth such country a
treaty, ratfed pror to ugust 2 , 1937, reatng to rates of n-
come ta .
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139
19.143-1.
(2) Secton 19.143-1 s nmended as foows:
(a) y nsertng after the words 10 per cent wherever appear-
ng theren the words, (15 per cent on and after une 2 , 1940, e -
cept as otherwse provded heren).
(b) y nsertng at the end of the frst paragraph of subsecton
(a) the foowng sentence:
owever, In accord wth rtce II of the ta conventon and protoco be-
tween the Unted States and Sweden, effectve anuary 1, 1940, the rate of wth-
hodng sha, for a perod of at east two years begnnng wth such date, be 10
per cent wth respect to dvdends pad to resdents of Sweden.
( ) y strkng out the words Sortng Secton n the, eghth
paragraph of subsecton (a) and nsertng n eu thereof the words,
Wthhodng Returns Secton.
(d) y addng at the end of subsecton ( ) the foowng new
subsecton:
(c) Wthhodng on and after une 2 , IP O, and pror to anuary 1, W t .
Wth respect to ncome pad ou or after .Tune . 1 I40, and pror to anuary
1,1045, the rate of wthhodng (e cept wth respect to ncome pad to resdents
of Canada and dvdends pad to resdents of Sweden) s 1 I er cent nstead
of 15 per cent.
(3) Secton 19.143-3 s amended as foows:
(a) y strkng out the words Sortng Secton wherever occur-
rng theren and nsertng n eu thereof the words, Wthhodng
Returns Secton.
(b) y nsertng n the ast paragraph thereof mmedatey after
1,000 the foowng words: , or 800 for ta abe years begnnng
after December 31, 1939, .
(4) Secton 19.143-7 s amended by nsertng n eu of the ast
sentence of the frst paragraph thereof the foowng sentence:
If orm 1000 s modfed to show the name and address of a fsca or payng
agent n the Unte States (see secton 19.143-5), orms 1012 and 1013 shoud
be kewse modfed.
(5) The foowng s nserted mmedatey precedng secton
19.144-1:
Sec. 5. Wthhodng of Ta at Souce.

(b) Secton 144 of the Interna Revenue Code s amended by strkng
out e cept that n the case of dvdends the rate sha be 10 per
centum, and and by strkng out of 10 per centum.
(c) The amendments made by ths secton sha take effect on
une 2 , 1940.
Sec. 202. Rates of Wthhodng.
at the end thereof the foowng new subsecton:
(h) Rates Unt anuary 1945. or the perod after une 25,
1940, and before anuary 1, 1945, the rate provded In ths secton
and secton 144, of 15 per centum sha be per centum. Ths sub-
secton or secton 15 sha not appy n any case where ts operaton
woud be contrary to any treaty obgaton of the Unted States, nor
to a resdent of, or a corporaton organzed under the aws of, a con-
tguous country so ong as there s n effect wth such country a
treaty, ratfed pror to ugust 2 , 1937, reatng to rates of ncome
ta .
( ) Secton 19.144-1 s amended as foows:
(a) y nsertng n the frst paragraph thereof the word and
mmedatey precedng (2), by strkng out, and (3) dvdends
and by nsertng at the end of such paragraph the foowng sentence |
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19.143-1.
140
owever, n accord wth rtce II of te ta conventon and protoco
between te Unted States and Sweden, effectve anuary 1, 1040, the rate
of wthhodng sha, for a perod of at east two years begnnng wth such
date, he 10 per cent wth respect to dvdends pad to a corporaton or other
entty created or organzed under the aws of Sweden.
(b) y nsertng n the thrd paragraph after the words 10 per
cent whenever occurrng theren the words, (15 per cent on and
after une 2 . 1940, e cept as otherwse provded heren).
( ) y addng at the end thereof the foowng new paragraph:
W respect to ncome pad on or after une 2 , 1910, and pror to anuary
1, 1945, the rate of wthhodng (e cept wth respect to dvdends pad to
corporatons organzed under the aws of Canada and to corporatons or other
enttes created or organzed under the aws of Sweden) s 10 /1 per cent
nstead of 15 per cent.
(7) Secton 19.144-2 s amended as foows:
( /) y strkng out the words Sortng Secton n the frst par-
agraph and nsertng n eu thereof the words, Wthhodng Re-
turns Secton.
(b) y nsertng, mmedatey precedng the tabe n the ast para-
graph thereof, the foowng headng:
or the, perod pror to une 2 , W O.
(c) y nsertng n the ast coumn of ne numbered 7 of the
tab e the symbo ( ) and addng a footnote to such tabe as foows:
1 Interest on any noncorporate securty the owner of whch s unknown to the
wthhodng agent s sub|ect to wthhodng at the rate of 10 per cent.
((/) y nsertng at the end thereof the foowng new paragraph:
The foowng tabe of wthhodng rates under the Interna Revenue Code
as amended and the ta conventons between the Unted States and Canada
and Unted States and Sweden has been prepared for the purpose of makng
a summary of such rates ready avaabe to wthhodng agents:
or the perod on and after une 2 . U. /O, and pror to anuary 1. 1945.
m-
Corporate bond nterest.
Other f ed
or deter-
mnabe
annua or
perodca
ncome.
Incudng
dvdends,
from
sources
wthn the
Unted
Staes.
Wth ta -free cove-
nant and ssued
before an. 1, 1934.
Wthout
ta -free
covenant
or ssued
on or after
an. 1,
1( 1, wth
ta -free,
covenant.
Saary or
Casses of ta payers.
If corpo-
raton
If corpo-
raton
assumes
not over
2 per cent
of the
ta .
other
compen-
saton for
persona
servces.
assumes
over 2
per cent
of the
ta .
1. Cr.en or resdent ndvdua, fducary, or
Per cent.
2
Per cent.
2
Per cent.
Per cent.
Per cent.
partnershp
2. Nonresdent ndvdua, fduenry, or part-
nershp (e cept as stated n tem 5 beow) .
2
w

1
3. Domestc corporaton or resdent foregn
4. Nonresdent forepn contoraton (e cept as
sated n tem t beow) _
2
1
MM
5
5. Indvdua, fducary, or partnershp, res-
dent of Canada
2
0)
. Nonresdent corporaton organzed under
aws of Canada..
2
2
vat
1
t .,
1 M
7. Unknown owner
1 Raary or compensaton for persona servces rendered n the Unted States s not sub|ect to wthhodng
n the case of nonresdent aens, resdents of Canada or Me co, who enter and eave the Unted States at
frequent ntervas.
1 In the cose of dvdends pad to a corporaton organzed under the aws of Canada, the rate s 5 per oent,
n the ease of a resdent of Sweden or a corporaton or other entty organzed under the aws of Sweden
the rate wth respect to dvdends s 10 per cent for at east two years begnnng anuary 1,1940.
Interest on any noncorporate securty the owner of whch s unknown tothe wthhodng agent s sub|ect
to wthhodng at the rate of 1 M per cent.
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141
19.143-1.
(8) Secton 19.2 2-4 s amended as foows:
(a) y nsertng after the |svords 10 per cent wherever appear-
ng theren the words, (15 per cent on and after une 2 , 1940, e -
cept as otherwse provded heren).
( ) y strkng out the ast sentence thereof and nsertng n
eu thereof the foowng:
s to reducton In rate of wthhodng (a) n the ease of nonresdent aen
ndvduas who are resdents of Canada or of Sweden, see secton 19.143-1
(o) n the case of nonresdent foregn corporatons organzed under the aws
of Canada, or corporatons or other enttes created or organzed under the
aws of Sweden, see secton 19.144-1.
Wth respect to Income pad on or after une 2 , 1940, and pror to anuary
1, 1945, the rate of wthhodng (e cept wth respect to dvdends pad to
resdents of, or corporatons organzed under the aws of, Canada or to res-
dents of, or to corporatons or other enttes created or organzed under the
aws of, Sweden) s 1 per cent nstead of 15 per cent.
(Ths Treasury decson s ssued under the authorty of sectons
143 and 144 of the Interna Revenue Code (53 Stat., 0, 2), as
amended by secton 5 and secton 202 of the Revenue ct of 1940
(Pubc, No. 5 , Seventy-s th Congress, thrd sesson) and secton
2 of the sad Interna Revenue Code (53 Stat., 32).)
Gut T. everng,
Commssoner of Interna e ven ue.
pproved uy 1, 1940.
erbert . Gaston,
( so Secton 144, Secton 19.144-1.) Mn. 5075
Wthhodng of ta from ncome derved by persons n certan
foregn countres.
Washngton, D. C, uy 8, 19 0.
Coectors of Interna Revenue, Interna Revenue gents n Charge,
and Other Persons Concerned:
Certan ecutve Orders have been ssued by the Unted States
Government restrctng the transfer of funds from the Unted States
to persons n Norway, Denmark, the Netherands, egum, Lu em-
bourg, and rance.
anks, corporatons, and other persons n the Unted Staes have
the contro, recept, custody, dsposa, and payment of f ed or de-
termnabe annua or perodca ncome from sources wthn the
Unted States of persons n those foregn countres, whch s sub|ect
to the provsons of sectons 143 and 114 of the Interna Revenue
Code, as amended by sectons 5 and 202 of the Revenue ct of 1940.
Such ncome s credted to the accounts of the foregn persons to
whom actua transfer thereof s prohbted. The ta shoud be wth-
hed n such cases n the same manner and to the same e tent as f
the restrcton on the transfer of the ncome dd not e st.
If a custodan account s mantaned n the name of a foregn bank
or other foregn person n any of the foregn countres referred to,
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5 19.143-1.
142
and the Unted States custodan has reason to beeve that the actua
owner of the securtes s another person, the name of the foregn
bank or other foregn person shoud be entered on the ownershp cer-
tfcate. orm 1001, as the owner of the securtes unt such tme aa
the name of the actua owner s dscosed to the custodan. In such
a case an amended ownershp certfcate showng the name of the
actua owner shoud be secured as soon as possbe.
Correspondence reatng to the provsons of ths mmeograph
Tmothy C. Mooney,
. ctng Commssoner.
I. T. 3404
INT RN L R NU COD .
Wthhodng agents n the Unted States are authorzed to return
drecty to the rtsh Government, or to the M ank as the agent
of the rtsh Government, the amount of ta wthhed durng 1940
from nterest on bonds and dvdends on stock of mercan corpora-
tons, tte to whch was taken by the rtsh Government under
the cquston of Securtes Order, 1940, provded the securtes
beonged to the rtsh Government when the ta was wthhed.
dvce s requested reatve to the reease to the rtsh Govern-
ment by wthhodng agents n the Unted States of the amount of
ta wthhed durng 1940 from nterest on bonds and dvdends on
stock.
On ebruary 17 and pr 13. 1940, the rtsh Government, under
the cquston of Securtes Order, 1940, took tte to the stocks
owned by ts sub|ects n a number of mercan corporatons, and
under the same authorty aso took tte to certan bonds ssued by
mercan corporatons. The M ank s actng on behaf of the
rtsh Government as custodan for those securtes. There has been
deay n gettng physca possesson of some of the securtes and
n havng stocks transferred to the names of nomnees. Durng
that nterva, the record owners of the securtes so taken over have
coected dvdends and nterest thereon from whch 10 per cent or 15
per cent ncome ta has been wthhed. The rtsh Government has
recamed such dvdends and nterest from the recpents, and con-
tends that the ta shoud not have been wthhed therefrom.
s ncome of foregn governments from sources wthn the Unted
States s e empt from edera ncome ta under secton 11 (c) of
the Interna evenue Code, no ta s requred to be wthhed from
the ncome of the rtsh Government consstng of nterest on bonds
and dvdends on stock owned by that Government. The amount of
ta wthhed durng 1940 s not requred to be pad to the edera
Government unt une 15, 1911. Wthhodng agents n the Unted
States are, therefore, authorzed to reease the amount of ta wth-
hed from such securtes durng 1940 to the rtsh Government
drect, or to the M ank as the agent of the rtsh Government,
provded the wthhodng agents are satsfed that the securtes be-
onged to the rtsh Government at the tme the ta was wthhed,
and that the nterest and dvdends formng the bass for the ta
wthhed were turned over to the rtsh Government by the former
owners of the securtes.
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143
19.143-3.
Secton 19.143-1: Wthhodng ta at source.
INT RN L R NU COD .
Wthhodng wth respect to nonresdent aen ndvduas under
the Interna Revenue Code, as amended by the Revenue ct of 1940.
(See Mn. 5140, page 151.)
Secton 19.143-3: empton from wthhodng.
INT RN L R NU COD .
Secton 19.143-3: empton from wthhodng. 1940-47-10492
( so Secton 1 5, Secton 19.1 5-1.) I. T. 3427
INT RN L R NU COD .
Under the ta conventon wth Sweden, a ctzen of Sweden not
resdng n ether Sweden or the Unted States s consdered a
resdent of Sweden.
The term prvate pensons, as used n rtce of the conven-
ton, means pensons pad by prvate persons as dstngushed from
pensons pad by one of the contractng States or by the potca
subdvsons, terrtores, or possessons thereof. Prvate pensons
pad by trusts whch quafy under secton 105 of the Interna
Revenue Code are e empt under rtce of the conventon ony
to the e tent that they represent addtona compensaton for past
servces.
Dvdends receved as ncome by a domestc trust and dstrbuted
by a fducary to Swedsh benefcares retan ther character as
dvdends under rtce II of the conventon.
dvce s requested n connecton wth the ta conventon and
protoco wth Sweden (C. . 1940 1, 288), n vew of the Revenue ct
of 1940 and Treasury Decson 4979 (page 138, ths uetn).
The questons submtted reate to the foowng:
(a) Defnton of the term resdent as used n the conventon
wth respect to resdents of Sweden.
(b) Defnton of the term prvate pensons as used n rtce
of the conventon.
(c) Status of dvdends receved as ncome by domestc trusts and
pad by such trusts to aen benefcares thereof resdent n Sweden.
Wth respect to the persons to whom the benefts of the conventon
accrue ( rtce I of the conventon) and the defnton of the term
resdent (paragraph 3 of the protoco), t has been suggested
that the anguage used n Treasury Decson 4979, supra, promu-
gated under the Revenue ct of 1940, seems to confne the effect of
the conventon to resdents. It s aso ponted out that the term
prvate pensons mentoned n rtce of the conventon s not
defned. If a payments made to benefcares of trusts whch
quafy under secton 1 5 of the Interna Revenue Code are not
e empt as prvate pensons, a st of the payments whch are e empt
s requested. The queston s aso presented as to whether dvdends,
whch are receved as ncome of a domestc trust and then remtted
as a dstrbuton of trust ncome to a Swedsh benefcary, retan
ther character as dvdends under rtce II of the conventon.
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19.143-3.
144
The ast paragraph of rtce I of the conventon provdes:
The benefts of ths conventon sha accrue ony to ctzens and resdents of
the Unted States of merca, to ctzens and resdents of Sweden and to Unted
States or Swedsh corporatons and other enttes.
Paragraph 3 of the protoco reads n part as foows:
ctzen of one of the contractng States not resdng n ether sha be
deemed, for the purpose of ths conventon, to be a resdent of the contractng
State of whch he s a ctzen.
The thrd paragraph of secton 25.1 of the reguatons prescrhed
n connecton wth the treaty (T. D. 4975, page 43, ths uetn)
reads as foows:
The conventon does not affect the abty to Unted States ncome ta of
Swedsh ctzens resdent n the Unted States e cept to the e tent such ctzens
are entted to the benefts of rtce I of the conventon. or the purposes
of the conventon, an ndvdua resdent n nether Sweden nor the Unted
States and camng the benefts of the conventon as a ctzen of Sweden sha
be deemed to be a resdent of Sweden f t s shown to the satsfacton of the
Commssoner that he s such ctzen. Wth respect to dvdends and nterest,
see secton 25.9 of these reguatons.
The frst paragraph of secton 25.2 of Treasury Decson 4975,
supra,reads:
Defntons. ny word or term used n these reguatons whch s defned
n the conventon sha be gven the defnton assgned to such word or term
n such conventon. ny word or term used n these reguatons whch s not
defned n the conventon but s defned n the Interna Revenue Code sha be
gven the defnton contaned theren.
Treasury Decson 4979, supra, reates to the ncrease n the wth-
hodng rates of sectons 143 and 144 of the Interna Revenue Code
as effected by the Revenue ct of 1940. That Treasury decson does
not and coud not have any mtng effect on the provsons of
rtce I of the conventon. The provsons of sectons 143 and 144
of the Code are appcabe n genera to nonresdent aen ndvdu-
as, nonresdent foregn partnershps, and nonresdent foregn cor-
poratons. The ncreased rates of the Revenue ct of 1940 affect
ther edera ncome ta abty e cept n cases where the rates of
ta are f ed by treates. (Secton 22(b)7, Interna Revenue Code.)
The ony tem of ncome specfed n the conventon whch remans
unaffected by the ncreased rate of wthhodng s dvdends pad
to a resdent of Sweden or a corporaton or other entty organzed
under the aws of Sweden. Inasmuch as the term resdent as
used n the treaty, ncudes ctzens of Sweden resdent n countres
other than the Unted States and Sweden, t was deemed unneces-
sary to add to the terms resdent of Sweden or resdents of
Sweden n Treasury Decson 4979, the cause, as defned n para-
graph 3 of the protoco to the ta conventon between the Unted
States and Sweden.
rtce of the conventon provdes as foows:
Wages, saares, and smar compensaton and pensons pad by one of the
contractng States or by the potca subdvsons or terrtores or possessons
thereof to ndvduas resdng n the other State sha be e empt from ta a-
ton n the atter State.
Prvate pensons and fe annutes derved from wthn one of the contractng
States and pad to ndvduas resdng n the other contractng Sate sha be
e empt from ta aton n the former State.
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145
19.144-1.
The term prvate pensons, as used n the second paragraph of
rtce of the conventon, means pensons pad by prvate per-
sons as dstngushed from pensons pad by one of the contractng
States or by the potca subdvsons or terrtores or possessons
thereof, referred to n the frst paragraph of rtce . smar
dstncton s made n secton 19.22(a)-2 of Reguatons 103. pertan-
ng to the ncome ta provsons of the Interna Revenue Code, and
the correspondng artce n ncome ta reguatons promugated
under pror Revenue cts, whch provde n part that
pensons or retrng aowances pad by prvate persons or by the
Unted States are ncome to the recpents.
In genera, prvate pensons pad ether drectv or through the
medum of a trust come wthn the meanng of the term prvate
pensons n rtce of the conventon. No broad rung can be
made, however, that a payments made to benefcares of trusts
whch quafy under secton 1 5 of the Interna Revenue Code are
e empt under rtce . Such e empton s appcabe ony to those
payments made under trusts quafyng under secton 105 whch
represent addtona compensaton for past servces rendered.
Paragraph 1 of rtce II of the ta conventon provdes as
foows:
1. Dvdends sha be ta abe ony n the contractng State n whch the
sharehoder s resdent or, f the sharehoder s a corporaton or other entty,
n the contractng State n wheh such corporaton or other entty s created
or organzed provded, however, that each contractng State reserves the
rght to coect and retan (.sub|ect to appcabe provsons of ts revenue aws)
the ta es whch, under ts revenue aws, are deductbe at the source, but
not n e cess of 10 per centum of the amount of such dvdends. or the
purposes of ths artce the natona ncome and property ta mposed by Sweden
sha be deemed to be a ta deducted at the source.
Dvdends receved as ncome of a domestc trust whch are to be.
dstrbuted currenty by a fducary to a Swedsh benefcary retan
ther character as dvdends under paragraph 1 of rtce II of the
conventon when dstrbuted to the benefcary.
Secton 19.143-7: Return and payment of ta wthhed.
INT RN L R NU COD .
S CTION 144. P YM NT O CORPOR TION
INCOM T T SOURC .
Secton 19.144-1: Wthhodng n the case of nonresdent
foregn corporatons.
INT RN L R NU COD .
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19.147-8. 14
foregn corporatons.
INT RN L R NU COD .
Wthhodng of ta from ncome derved by persons n Norway,
D. mark, the Netherands, egum, Lu embourg, and rance. (See
Mn. 5075, page 141.)
foregn corporatons.
INT RN L R NU COD .
Wthhodng wth respect to foregn corporatons under the Interna
Revenue Code, as amended bv the Revenue ct of 1940. (See Mm.
5140, page 151.)
Secton 19.144-2: ds .to wthhodng agents n
determnng abty for wthhodng of ta .
INT RN L R NU COD .
S CTION 147. IN ORM TION T SOURC .
Secton 19.147-1: Return of nformaton as to payments
of 1,000.
INT RN L R NU COD .
Secton 19.147-2: Return of nformaton as to payments
to empoyees.
INT RN L R NU COD .
Secton 10.147-3: Cases where no return of nformaton
requred.
INT RN L R NU COD .
Secton 19.147-7: Return of nformaton a to foregn
tems.
INT RN L R NU COD .
Secton 19.147-8: Informaton as to actua owner.
INT RN L R NU COD .
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147 19.148-3.
S CTION 148. IN ORM TION Y CORPOR TIONS.
Secton 19.148-3: Return of nformaton re- 1940-44-10473
spectng dstrbutons n qudaton. T. D. 5015
TITL 20 INT RN L R NU . C PT R 1, SU C PT R ,
P RT 19. INCOM T .
Reguatons 103 amended wth respect to certan nformaton returns.
Offce or Commssoner of Interna Revenue,
Washngton, D. C.
ffectve for ta abe years begnnng after December 31,1939, Regu-
atons 103 Part 19, Tte 2 , Code of edera Reguatons, 1940 Sup.
are amended as foows:
Paragraph 1. Secton 19.148-3 s amended as foows:
(a) y amendng the frst sentence to read as foows:
Uness the dstrbuton s one n respect of whch nformaton Is requred to
be fed pursuant to secton 19.112(b) (0-5( ), 19.112(g)- (a), or 19.371-10,
every corporaton makng any dstrbuton of 800 or more durng a caendar year
to any sharehoder n qudaton of the whoe or any part of Its capta stock
sha fe a return of nformaton on orms 109 and 1099L, gvng a the nforma-
ton requred by such forms and by these reguatons.
(b) y strkng out n dupcate n the second sentence.
(c) y strkng out dupcate n the ast sentence.
Par. 2. Secton 19.148-4 s amended by strkng out Schedue -
n the frst sentence and nsertng n eu thereof a schedue on the
form prescrbed by the Commssoner.
Par 3. Secton 19.149-1 s amended as foows:
(a) y strkng out ether and purchases or n the frst
sentence.
(b) y strkng out the tota of the purchases, n the second
sentence.
(c) y nsertng at the end of the frst paragraph the foowng:
anks and trust companes w not be requred to show the doar totas of the
saes and e changes.
(d) y strkng out the second paragraph.
(e) y strkng out purchases, and purchases and wherever
occurrng n the thrd paragraph.
(/) y strkng out purchases and and purchases or n the
frst sentence of the fourth paragraph.
(Ths Treasury decson s ssued under the authorty contaned
n sectons 2,148, and 149 of the Interna Revenue Code (53 Stat., 32,
4, 5).)
Gut T. everng.
C onvmssoner of Interna Revenue.
ohn L. Suvan,
( ed wth the Dvson of the edera Regster October 24, 1940, 10.5 a. ra.)
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19.1 5-1. 148
Secton 19.148-4: Informaton respectng compensaton of
offcers and empoyees n e cess of 75,000.
INT RN L R NU COD .
S CTION 149. R TURNS O RO RS.
Secton 19.149-1: Return of nformaton by brokers.
INT RN L R NU COD .
SUPPL M NT . ST T S ND TRUSTS.
S CTION 1G3. CR DITS G INST N T INCOM .
Secton 19.1 3-1: Credts to estate, trust, or
benefcary.
INT RN L R NU COD .
S CTION 1 5. MPLOY S TRUSTS.
Secton 19.1 5-1: mpoyees trusts.
INT RN L R NU COD .
empton of pensons pad under rtce of ta conventon
wth Sweden. (See I. T. 3427. page 143.)
Secton 19.1 5-1: mpoyees trusts. 1940-52-10531
I. T. 343
INT RN L R NU COD ND R NU CT O 1 8.
The penson pan mantaned by the M away Co. quafes as
an empoyees trust under secton 1G5 of the Interna Revenue Code
and the evenne ct of 1988, even though there s no forma trust
nstrument, snce the M Raway Co. has parted wth tte to the
fund and the partcpants have the rght to demand that t be admn-
stered accordng to the terms and condtons of the penson pan.
dvce s requested whether the suppementa penson pan of the
M Raway Co. meets the requrements of secton 1 5 of the Interna
Revenue Code, as amended, and the correspondng provsons of the
Revenue ct of 1938 for cassfcaton as an empoyees trust
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149
19.1 5-1.
The suppementa penson pan, effectve December , 1938, pro-
vdes for pensons to those empoyees of the company recevng com-
pensaton n e cess of 300 a month, whch pensons w be n addton
to those to whch such empoyees become entted under the Raroad
Retrement ct of 1937. Contrbutons are made to the penson trust
fund by the empoyee and the raway company. The empoyee con-
trbutes the same percentage of hs compensaton above 300 a month
as s requred to be pad by hm on hs compensaton I dow 300 a
month under the Carrers Ta ng ct of 1937. The raway company
contrbutes an amount equa to the empoyee s contrbuton on hs
compensaton above 300 a month. The radway company w make
an addtona contrbuton to the penson for each empoyee n the
year n whch he retres to cover servces rendered by the retred
empoyee pror to the effectve date of the pan. contrbutons
made by the raway company and empoyees under the suppementa
penson pan are turned over to a trust company n accordance wth a
custoda agreement entered nto between the board of managers and
the trust company. The board of drectors of the raway company
reserves the rght upon wrtten notce of not ess than days to
amend or dscontnue the pan, but n ether case a abtes wth
respect to the empoyees under the pan must be satsfed before any
moneys remanng can be returned to the raway company. No forma
trust ndenture, appears to have been e ecuted, but ths omsson s
mmatera f the facts and crcumstances connected wth the creaton
and operaton of the fund show that t s a vad, e stng trust.
It s we estabshed that there s no specfc formua requred for
the creaton of trusts. If the ntenton of the creator s cear, the
trustee and benefcares desgnated, and the sub|ect of the trust nd-
cated, the smpest of words w be suffcent to sustan the trust. s
stated n 39 Cyc, page 80, under Trusts :
n e press trust may be proved not ony by e press decaratons but aso by
crcumstances from whch ts e stence may be nferred, and to ths end evdence
of the acts and decaratons, ether ora or wrtten, of the partes, as we as the
surroundng crcumstances, may be admtted and consdered.
The eements requred to create a trust are set forth n 2 R. C. L.,
1179, as foows:
The severa eements whch must concur n the creaton of a trust are, a person
competent to create It, suffcent words to create t, a person capabe of hodng
as trustee a specfed or ascertanabe ob|ect, a defnte sub|ect, and decaraton of
the terms of the trust.
(To the same genera effect see the ctatons n bbard. Spencer,
artett Co. v. Commssoner, 5 . T. ., 4 4, acquescence, C. .
I-2, 3 (1927).)
It s, therefore, the opnon of the ureau that the gudng rues
appcabe n cases such as here nvoved shoud be whether the em-
poyer has paced the fund absoutey n the hands of the trustees and
beyond hs power to reca t, and whether the empoyees have such
a vested rght n the fund that they may demand t be admnstered for
and n ther behaf. If these condtons obtan, there woud appear to
be a true trust reatonshp between the trustees and benefcares, and
the organzaton shoud be deat wth as a trust separate and dstnct
from the empoyer who created t, even though the empoyer may have
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19.207-1.
150
some supervsory power over the nvestment of the fund and may ter-
mnate t on notce. The essenta thng s whether the empoyer has
absoutey contrbuted hs porton of the fund to the trustees and the
empoyees hod the compete vested equtabe nterest n t.
ppyng these tests to the suppementa penson fund of the M
Raway Co., t s the opnon of the ureau that the fund shoud be
treated as a vad, enforceabe trust. It appears that the M Raway
Co. has effectvey parted wth tte to the fund that t has no rght
thereto e cept a possbty of reverson upon qudaton of the fund,
provded a abtes to the empoyees under the pan have been met
and that the partcpants theren have the rght to demand that the
fund be admnstered accordng to the terms and condtons of the
penson pan and the above-mentoned agreement.
ased on the foregong, t s hed that the suppementa penson
pan of the M Raway Co. quafes as an empoyees trust under sec-
ton 1 5 of the Interna Revenue Code, as amended, and the correspond-
ng provsons of the Revenue ct of 1938.
SUPPL M NT G. INSUR NC COMP NI S.
S CTION 201(b). T ON LI INSUR NC
COMP NI S: IMPOSITION O T .
Secton 19.201 (b)-: Ta on fe nsurance companes.
INT RN L R NU COD .
Reguatons 10:5, amended. (See T. D. 5011, page 15.)
S CTION 204(a). INSUR NC COMP NI S OT R T N
LI OR MUTU L: IMPOSITION O T .
Secton 19.204(a)-: Ta on nsurance companes other
than fe or mutua.
INT RN L R NU COP .
S CTION 207. MUTU L INSUR NC COMP NI S
OT R T N LI .
Secton 19.207-1: Ta on mutua nsurance companes
other than fe.
INT RN L R NU COD .
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151 19.211-7.
SUPPL M NT . NON SID NT LI N INDI IDU LS.
S CTION 211. T ON NONR SID NT LI N
INDI IDU LS.
Secton 19.211-1: Ta aton of aens n genera.
INT RN L R NU COD .
Secton 19.211-1: Ta aton of aens n genera.
INT RN L R NU COD .
oregn |ournasts and newspaper correspondents n the Unted
States. (See I. T. 3419, page 32.)
Secton 19.211-7: Ta aton of nonresdent aen
ndvduas.
INT RN L revenue code.
Secton 19.211-7: Ta aton of nonresdent 1940-53-10543
aen ndvduas. Mm. 5140
Ta nton of nonresdent aen ndvduas and foregn corpora-
tons not engaged n trade or busness wthn the Unted States and
not havng an offce or pace of busness theren, under the Interna
Revenue Code, as amended by the Revenue ct of 1040, approved
une 25, 1940.
Washngton, D. C, December 12,
and Other Persons Concerned.
In order to avod unnecessary repetton, nonresdent aen nd-
vduas and foregn corporatons of the type covered by the capton
of ths mmeograph w be desgnated as nonresdent aen nd-
vduas and nonresdent foregn corporatons, respectvey, wthout
any reference to Unted States busness or offce.
uetn N (revsed) contans the basc prncpes of the ta -
aton of nonresdent aen ndvduas and foregn corporatons under
the Interna Revenue Code and the provsons of Reguatons 103
concernng the tems of gross ncome, the deductons and credts,
and the condtons under whch they may be camed, and under
whch ncome ta returns are requred to be fed, the method of ther
preparaton, the tme and pace for fng such returns, and the tuna
for the payment of the ta due thereon.
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19.211-7.
152
C NG S.
The computaton of the edera ncome ta abty of nonresdent
aen ndvduas and nonresdent foregn corporatons for ta abe
years begnnng after December 31,1939, was affected by the Revenue
ct of 1940. These changes are:
(1) The rate of 10 per cent mposed upon the f ed or determnabe
annua or perodca ncome from sources wthn the Unted States
of nonresdent aen ndvduas was ncreased to 15 per cent (secton
211 (a) 1( ) of the Code, as amended), e ceptng dvdends re-
ceved by nonresdent aens resdng n Sweden, such e cepton beng
due to the e stng ta conventon between the Unted States and
Sweden (secton 8, Revenue ct of 1940)
(2) The substtuton of 24,000 for 21, 00 (secton 211 (a)2 of the
Code, as amended)
(3) The reducton of the persona e empton of 1,000 to 800 (sec-
ton 214, as amended), affectng ony nonresdent aens who are en-
tted to such credt
(4) The ncreased surta rates (secton 12(b) of the Code, as
amended), affectng ony nonresdent aens who are abe to surta
and
(5) The mposton of the 10 per cent defense ta for ta abe years
begnnng after December 31,1939, and before anuary 1,1945 (Chap-
ter 1 of the Code, as amended by the nserton of secton 15).
The changes affectng the computaton of the edera ncome ta
abty of nonresdent foregn corporatons under the Revenue ct
of 1940 are:
(1) The rate of 10 per cent appcabe to dvdends was ncreased
to 15 per cent (secton 231(a) of the Code, as amended) e cept dv-
dends pad to corporatons and other enttes organzed under the aws
of Sweden, such e cepton beng due to the e stng ta conventon
between the Unted States and Sweden (secton 8, Revenue ct of
1940) and
(2) The mposton of the 10 per cent defense ta for ta abe years
begnnng after December 31,1939, and before anuary 1,1945 (Chap-
ter 1 of the Code, as amended by the nserton of secton 15).
the amendments referred to are appcabe to ta abe years
begnnng after December 31, 1939. Secton 15 s appcabe to ta -
abe years begnnng after December 31, 1939, and before anuary 1,
1945.
No change was made n the rate of ta (5 per cent) appcabe to
nonresdent aens resdng n Canada wth respect to ther f ed or
determnabe annua or perodca ncome from sources wthn the
Unted States, and the rate of ta (5 per cent) appcabe to dv-
dends receved by nonresdent foregn corporatons organzed under
the aws of Canada (secton 8, Revenue ct of 1940).
WIT OLDING.
The wthhodng rate of 10 per cent has been ncreased to 15 per
cent (sectons 143 and 144 of the Code, as amended), and for the
perod after une 25, 1940. and before anuary 1. 1945, such 15 per
cent rate s ncreased to hy2 per cent (secton 143 of the Code, as
amended by the nserton of subsecton (h)).
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153
19.211-7.
The ncreased rate of 1 U Per cen t1 es n t appy to the f ed
or determnabe annua or perodca ncome from sources wthn
the Unted States of nonresdent aen ndvduas resdng n
Canada, to dvdends receved by nonresdent foregn corporatons
organzed under the aws of Canada, or to dvdends receved by
nonresdent aen ndvduas resdng n Sweden and nonresdent
foregn corporatons and other enttes organzed under the aws
of Sweden.
SUMM RY O TU C NG S IS T TION.
Summarzng the foregong, n genera, nonresdent aen nd-
vduas and nonresdent foregn corporatons are sub|ect to ta at
the rate of 1 fc per cent upon ther f ed or determnabe annua
or perodca ncome from sources wthn the Unted States for
ta abe years begnnng after December 31, 1939, and before anuary
1, 1945.
In genera, the ta at the rate of 1 4 P r cent due from
nonresdent aen ndvduas and nonresdent foregn corporatons
s coectbe at the source, as ther ta abe ncome s mted to the
tems of ncome whch are sub|ect to wthhodng at the source.
If. however, a nonresdent aen ndvdua (not a resdent of
Canada) receves durng the ta abe year f ed or determnabe
annua or perodca ncome from sources wthn the Unted States
e ceedng 24,000 he w be abe to ta (1) at the norma rate
of 4 per cent mposed by secton 11. the graduated surta mposed
by secton 12 of the Code, as amended, and the 10 per cent defense
ta , or (2) to ta at the rate of 1 2 per cent, whchever method
of cacuaton resuts n the arger ta . In computng the norma
ta and surta , such aen s entted to the statutory deductons
from gross ncome aowabe to a nonresdent aen ndvdua pro-
vded by sectons 23 and 213, and aso to the credts aganst net
ncome aowabe to an ndvdua by secton 25, as amended, sub-
|ect to the mtaton provsons of secton 214. Shoud a nonres-
dent aen resdng n Sweden receve f ed or determnabe annua
or perodca ncome from sources wthn the Unted States n e cess
of 24,000, that porton of such ncome consstng of dvdends s
ta abe at the rate of 10 per cent on y.
R TURNS.
very nonresdent aen ndvdua must fe a return on orm
1040N and pay the ta shown to be due thereon uness the ta
has been fuy pad at the source.
very nonresdent foregn corporaton must fe a return on orm
1120N and pay the ta shown to be due thereon uness the ta
has been fuy pad at the source.
Some of the tems upon whch the ta abty w not have been
fuy satsfed at the source are nterest receved durng the year u )on
so-caed ta -free covenant bonds upon whch a ta of 2 per cent ony
was wthhed at the source and dvdends receved from a foregn
corporaton whch are treated as ncome from sources wthn the
Unted States under secton 119(a)2( ).
290217 41 11
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19.214-1.
154
If a nonresdent aen (other than a resdent of Canada) receves
more than 24,000 gross amount of f ed or determnabe annua or
perodca ncome from sources wthn the Unted States, a return
on orm 1040N -a of such ncome s requred to be fed by or n
behaf of such nonresdent aen.
The wthhodng provsons of the Interna Revenue Code, as
amended, ncreasng the wthhodng rates of 10 and 15 per cent to
1 per cent appy ony to ncome payments made on and after
une 2 , 1940. Nonresdent aen ndvduas and nonresdent foregn
corporatons recevng ncome whch was sub|ect to wthhodng dur-
ng 1940 pror to une 2 , 1940, are abe to ta n addton to the
amount of ta wthhed at the rate of 10 per cent or 15 per cent dur-
ng that perod, f ther ta abe year 1940 began after December 31,
1939. Such ta payers w, therefore, be requred to fe orms
1040N , orms 1040N -a, or orms 1120N for the year 1940.
The tems of f ed or determnabe annua or perodca ncome
from sources wthn the Unted States whch are e cuded from the
gross ncome of ctzens of rance resdng theren, rench corpora-
tons, nonresdent aen ndvduas resdng n Sweden, and corpo-
ratons and other enttes organzed under the aws of Sweden, under
e stng ta conventons between the Unted Sates and rance and
the Unted States and Sweden, are not covered by ths mmeograph,
as ths sub|ect s fuy e paned n the ncome ta returns requred
to be fed by nonresdent aen ndvduas and nonresdent foregn
corporatons.
Correspondence reatng to the provsons of ths mmeograph
Guy T. everno,
Commssoner.
S CTION 213. D DUCTIONS.
Secton 19.213-1: Deductons aowed nonresdent
aen ndvduas.
INT RN L R NU COD .
S CTION 214. CR DITS G INST N T
INCOM .
Secton 19.214-1: Credts to nonresdent aen
ndvduas.
INT RN L R NU COD .
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155 19.231-1.
S CTION 215. LLOW NC O D DUCTIONS
ND C DITS.
Secton 19.215-1: owance of deductons and credts
to nonresdent aen ndvduas.
INT RN L R NU COD .
Reguatons. 103, amended. (See T. D. 5011, page 15.)
S CTION 217. R TURNS.
Secton 19.217-2: Return of ncome.
INT RN L R NU COD .
S CTION 219. P RTN RS IPS.
Secton 19.219-1: Partnershps.

INT RN L R NU COD .
SUPPL M NT I. OR IGN CORPOR TIONS.
S CTION 231. T ON OR IGN CORPOR TIONS.
Secton 19.231-1: Ta aton of foregn corporatons.
INT RN L R NU COD .
Secton 19.231-1: Ta aton of foregn corporatons.
INT RN L R NU COD .
Ta aton of foregn corporatons not engaged n trade or busness
wthn the Unted States and not havng an offce or pace of busness
theren under the Interna Revenue Code, as amended by the Revenue
ct of 1940. (See Mm. 5140, page 151.)
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) 19.231-3.
15
Secton 19.231-3: cuson of earnngs of 1940-32-10373
foregn shps from gross ncome. I. T. 3399
INT RN L R NU COD . R NU CT O n38, ND PRIOR R NU CTS.
The term shp or shps, as used n secton 231(d) of the Interna
Revenue Code and correspondng sectons of pror Revenue cts,
does not ncude the terms arshp or arshps or arpane or
arpanes.
dvce s requested whether the term shp or shps, as used n
secton 231(d) of the Interna Revenue Code and secton 19.231-3 of
Reguatons 103, ncudes the terms arshp or arshps or arpane
or arpanes.
Secton 231(d) of the Interna Revenue Code provdes as foows:
(d) Sp- under foregn fag. The ncome of a foregn corporaton, whch
conssts e cusvey of earnngs derved from the operaton of a shp or shps
documented under the aws of -a foregn country whch grants an equvaent
e empton to ctzens of the Unted States and to corporatons organzed u
the Unted States, sha not he ncuded n gross ncome and sha be e empt
from ta aton under ths chapter.
The provsons of secton 231(d) of the Interna Revenue Code frst
appeared n the Revenue ct of 1921 as secton 213(b)8, and they
have been reenacted substantay unchanged n each subsequent Rev-
enue ct. The egsatve hstory of secton 213(b) 8 of the Revenue
ct of 1921 ceary ndcates that t was not ntended to ncude
arcraft wthn the meanng of the term shp or shps.
In G. C. M. 11539 (C. . II-1, 4 (1933)) t was hed that sea-
panes, amphbans, arpanes, and and panes are not vesses wthn
the meanng of Schedue -5 of Tte III of tbe Revenue ct of
192(3, as amended by secton 442 of the Revenue ct of 1928 reatng
to stamp ta es. That memorandum was based upon the decson of
the Unted States Supreme Court n Mc oye v. Unted States (283
U. S., 25), whch nvoved the convcton of Mc oye for theft of an
arpane, aeged to be n voaton of the provsons of the edera
Motor ehce Theft ct (41 Stat., 324). The ct prohbted the
transportaton n nterstate or foregn commerce of stoen motor ve-
hces. It defned the term motor vehce and provded that t shoud
ncude an automobe, automobe truck, automobe wagon, motor-
cyce, or any other sef-propeed vehce not desgned for runnng
on ras. The Court stated n part that:
No doubt etymoogcay t s possbe to use the word vehce to
sgnfy a conveyance workng on and, water or ar, and sometmes egsaton
e tends the use n that drecton, e. g., and and ar, water beng separatey
provded for, n the Tarff ct, September 22, 1922 (ch. 35 . secton -101(b), 42
Stat., 858, 948). ut n everyday speech vehce cas up the pcture of
a thng movng on and. So here, the phrase under dscusson cas
up the popuar pcture. or after ncudng automobe truck, automobe wagon
and motor cyce, the words any other sef-propeed vehce not desgned for
runnng on ras st ndcate that a vehce n the popuar sense, that s a
vehce runnng on and, s the theme. It s a vehce that runs, not somethng,
not commony caed a vehce, that fes.
When a rue of conduct s ad down n words that evoke n the
common mnd ony the pcture of vehces movng on and, the statute shoud
not be e tended to arcraft, smpy because t may seem to us that a smar
pocy appes, or upon the specuaton that, f the egsature had thought of
t, very key broader wods woud have been used.
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157
19.251-2.
In G. C. M. 11539. supra, t s stated :
Passage tckets fur transportaton by ar nvove the prmary functon of sea-
panes and amphbans, as we as and panes. They nvove transportaton by
str, not by water. Water transportaton s purey ncdenta and occurs ony when
the andng factes avaabe are water and not and.
The decson n the Mc oye case, supra, seems entrey to the pont. The
term vesse etymoogcay Is broad enough to sgnfy any contaner or con-
veyance, rrespectve of the medum n whch t operates. ut n ts mted and
everyday meanng, when used wth respect to transportaton, the term vesse
ras up a pcture of a thng movng on water. When the Congress, n a statute,
ays down words evokng n the common mnd ony the pcture of craft movng
m water, the statute shoud not. n the words of Mr. ustce omes, be e tended
to arcraft, smpy because t may seem that a smar pocy appes.
The reasonng empoyed n G. C. M. 11539, supra, s appcabe to
the present nqury. It s hed, therefore, that the term shp or shps,
as used n secton 231(d) of the Interna Revenue Code and corre-
spondng sectons of pror Revenue cts, does not ncude the terms
arshp or arshps or arpane or arpanes.
SUPPL M NT . POSS SSIONS O T UNIT D ST T S.
S CTION 251. INCOM ROM SOURC S WIT IN
POSS SSIONS O UNIT D ST T S.
Secton 19.251-1: Ctzens of the Unted States and
domestc corporatons dervng ncome from sources
wthn a possesson of the Unted States.
INT RN L R NU COD .
Reguatons 103, amended. (See T. D. 5011. page 15.)
Secton 19.251-2: Income receved wthn 1940-4 -10485
the Unted States. G. C. M. 22314
INT RN L R NU COD .
Income of , a professona man practcng n the Phppne
Isands and entted to the benefts of secton 251 of the Interna
Revenue Code, whch was actuay receved by s agents n the
Phppne Isands and deposted by them n s bank account n
Mana whe he was on a vacaton n the Unted States, s hed
to have been receved by n the Phppne Isands.
n opnon s requested whether certan ncome of , a ta payer
entted to the benefts of secton 251 of the Interna Revenue. Code,
was receved by hm n the Phppne Isands or n the Unted States.
, an mercan ctzen engaged n the practce of hs professon
n the Phppne Isands and entted to the benefts of secton 251
of the Interna Revenue Code, came to the Unted States on a vacaton
n December, 1939, whch vacaton e tended nto 1940. Durng hs
absence from the Phppne Isands, professona fees due hm were
receved by s agents m the Phppne Isands and deposted by
them n hs bank account n Mana. The queston s presented
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19.2 2-4.
158
whether the fees whch accrued to the ta payer whe he was n the
Unted States are ta abe to hm under secton 251(b) as ncome
constructvey receved n the Unted States.
Secton 251 of the Interna Revenue Code provdes n part as
foows:
Sec. 251. Income from Sources Wthn Possessons or Unted States.
(a) Genera Rue. In tho case of ctzens of the Unted States or domestc
corporatons, satsfyng the foowng condtons, gross ncome means ony gross
ncome from sources wthn te Unted States
(1) If 80 per centum or more of the gross ncome of such ctzen or domestc
corporaton (computed wthout the beneft of ths secton), for the 3-year
perod mmedatey precedng the cose of the ta abe year (or for such
part of such perod mmedatey precedng the cose of such ta abe year as
may be appcabe) was derved from sources wthn a possesson of the
Unted States and

(3) If, n case of such ctzen. 50 per centum or more of hs gross ncome
(computed wthout the beneft of ths secton) for such perod or such part
thereof was derved from the actve conduct of a trade or busness wthn a
possesson of the Unted States ether on hs own account or as an empoyee
or agent of another.
(b) mounts Receved n Unted States. Notwthstandng the provsons of
subsecton (a) there sha be ncuded n gross ncome a amounts receved by
such ctzens or corporatons wthn the Unted States, whether derved from
sources wthn or wthout the Unted States.
Ths offce s of the opnon that the mere temporary presence of the
ta payer n the Unted States s n tsef nsuffcent to warrant the
concuson that he constructvey receved ncome n the Unted States
when such ncome was actuay receved by hs agents n the Ph-
ppnes, the pace of hs resdence. Ths offce dsapproves any n-
ference to the contrary whch mght arse from the statement n S. M.
5488 (C. . -, 51 (192 )) to the effect that certan payments made
to a ta payer s wfe and to hs attorney-n-fact were constructvey
receved by the ta payer at whatever pace he happened to be at the
tme of payment.
It s the opnon of ths offce that n the nstant case reance shoud
be paced prmary on the fact that agents of the ta payer actuay
receved the funds n the Phppnes. Such recept by hs agents n
the Phppnes s equvaent to recept there by the ta payer.
. P. Wenche,
SUPPL M NT . C IN TR D CT CORPOR TIONS.
S CTION 2 2. CR DIT G INST N T INCOM .
Secton 19.2 2-2: Credts aowed Chna Trade ct
corporatons.
INT RN L R NU COD .
Secton 19.2 2-4: Wthhodng by a Chna Trade ct
corporaton.
INT RN L R NU COD .
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293.
SUPPL M NT M. INT R ST ND DDITIONS TO T T .
S CTION 293. DDITIONS TO T T
IN C S O D ICI NCY.
1940-4 -1048
G. C. M. 2232
INT RN L R NU COD , R NU CT O 1938, ND PRIOR R NU CTS.
The 50 per centum addton to tu for fraud mposed by secton
293(b) of the Revenue cts of 193 and 1938 does not abate upon
the death of the ta payer but s coectbe from hs estate and shoud
be asserted n the notce of defcency.
The same prncpe appes to dentca or smar provsons of
pror Revenue cts and of the Interna Revenue Code aso to the
other addtons to ta Incuded n Suppement M of the Revenue ct
of 1928, correspondng sectons of other Revenue cts and of the
Interna Revenue Code, and to the addtons to ta provded by sec-
ton 317 , Revsed Statutes, as amended, and secton 3 12, Interna
Revenue Code.
G. C. M. 91 2 (C. . -, 2 3 (1931)) revoked, and G. C. M. 1573
(C. . I -2, 325 (1935)) modfed.
n opnon s requested whether the 50 per cent addton to ta pro-
vded by secton 293(b) of the Revenue cts of 193 and 1938, assessed
as a part of |eopardy assessments made aganst , are coectbe from
hs estate.
On uy , 1940, |eopardy assessments were made aganst for the
years 1937 and 1938 of addtona ncome ta es totang 284,| doars,
50 per cent addtona ta es for fraud totang 142 doars, and nterest
n the amount of 32,r doars, makng tota assessments for the two
years of 458,c doars. To stay coecton of the ta pendng appea,
gave to the coector of nterna revenue a bond secured by Unted
States Treasury bonds n the aggregate prncpa sum of 550./ doars,
wth power of attorney to the coector to dspose of ths coatera,
sub|ect to the condtons of the bond. ded on ugust , 1940,
pror to the ssuance of the 90-day notce of defcency coverng the
|eopardy assessments. The queston s presented whether the 50 per
cent addton to ta abated upon the death of .
Secton 293 of the Revenue ct of 1938 s entted ddtons to the
ta n case of defcency, and paragraph (b) provdes as foows:
(b) raud. If any part of any defcency s due to fraud wth ntent to evade
ta , then 50 per centum of the tota amount of the defcency (n addton to such
defcency) sha be so assessed, coected, and pad, n eu of the 50 per centum
addton to the ta provded n secton 317 of the Revsed Statutes, as amended.
The foregong provson appears as secton 293(b) n each of the
Revenue cts of 193 . 1934, 1932, and 1928, and as secton 275(b) n
the Revenue cts of 192 and 1924. Smar provsons are contaned n
secton 250(b) of the Revenue cts of 1921 and 1918. pror to whch
tme secton 317 of the Revsed Statutes was apped to ncome ta es.
The same provson aso appears as secton 520(b) of the Revenue ct
of 1932 wth respect to gft ta es. of these sectons derve from
secton 317 of the Revsed Statutes.
Secton 317 of the Revsed Statutes, as amended, s genera n terms
and appes to a nterna revenue ta es for whch returns are requred,
uness specfcay e cepted therefrom by speca provsons smar to
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1G0
the above wth respect to partcuar types of ta es. Secton 317 , as
amended, provdes n part as foows:
In case a fase or frauduent return or st Is wfuy made, the Comms-
soner of Interna Revenue sha add to the ta 50 per centum of Its amount.
The amount so added to any ta sha be coected at the same tme and
n the same manner and as a part of the ta uness the ta has been pad before
the dscovery of the negect, fasty, or fraud, n whch case the amount so added
sha be coected n the same manner as the ta .
There s no provson or e cepton n any of the cts to the effect
that ths penaty sha not be assessed aganst, or coected from, the
estate of a deceased ta payer. The queston whether such addton
to ta s coectbe from a deceased ta payer s estate, therefore, de-
pends upon whether the cause of acton for such addtona amount
survves the death of the ta payer. The addton to ta s based
upon or resuts from a wrongfu act (or tort) commtted by the
deceased ta payer. There s no edera statute defnng what causes
of acton survve. Secton 955 of the Revsed Statutes provdes
merey that where ether party to a sut n a edera court des before
fna |udgment, the e ecutor or admnstrator of such deceased party
may prosecute or defend the sut n case the cause of acton sur-
vves by aw. State statutes provdng for the survva of causes
of acton have no appcaton where the cause of acton arses under
a edera statute. (Schreber v. Sharpes, , 110 U. S., 7 .) In an
Choate v. Genera ectrc Co. (245 ed., 120) the court stated:
In causes of acton whch arse soey under the aws of the Unted
States, survvorshp s determned accordng to the prncpes of the common
aw. (Schreber v. Sharpes . 110 U. S., 7 , 3 Sup. Ct., 423, 28 L. d.. 5.)
t common aw, actons e decto dd not survve, e cept n a few nstances,
n whch the n|ured party had the rght to wave the tort and sue n assumpst.
( aton v. rady, ., 184 T . S., 08, 14, 22 Sup. Ct., 493, 4 L. d., 713
Phps v. omfray, 24 Ch. D., 439 Unted States v. Danes. ow., 11, 12 I-.
d., 323.) ctons for mere n|ures not resutng n proft to the wrongdoer dd
not survve ether hs death or that of the n|ured party. ( enshaw v. Mer,
17 ow., 212, 219. 222, 15 L. d., 222.) Pena actons, for obvous reasons, come
wthn the cass whch are abated by death. Svhrebcr v. Sharpess, supra.)
Whether the cause of acton for the addton to ta (or penaty)
here n queston s one whch survves under the common aw de-
pends, n the frst nstance, upon whether the addton to ta s, n
substance, a persona punshment to be mposed upon the wrongdoer.
If so, the cause of acton abates upon the death of the tort-feasor
under the common aw rue that persona actons de wth the person.
(Schreber v. Sharpess, supra Suvan v. ssocated posters
and Dstrbutors, ed. (2d), 1000.)
In Law Opnon 1091 (C. . 1-1, 422 (1922)) t was hed that the 5
per cent penaty mposed by secton 502 of the Revenue ct of 1918 was
a persona punshment and dd not survve the death of the ta payer
so as to be coectbe from hs estate. In reachng that concuson,
reference was made to the smarty of penates mposed by secton
317 of the Revsed Statutes to the penaty mposed by secton 502,
and Law Opnon 92 (C. . 1, 241 (1919)) was cted, n whch t was
hed that the addtons to ta authorzed by secton 317 , Revsed
Statutes, were to be consdered as penates and not ta es, e cept
for purposes of coecton. The hodng n Law Opnon 92 was n
turn based argey upon an opnon of the ttorney Genera (17
Op. tty. Gen., 433, 435). On the strength of the rung n Law
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293.
Opnon 1091, supra, and ts reference to secton 317 , Revsed
Statutes, ths offce hed n G. C. M. 91G2 (C. . -, 2 3 (1931))
and n G. C. M. 1573 (C. . I -2, 325 (1935)) that the 25 per
cent penaty mposed by secton 317 , Revsed Statutes, for de-
nquency n fng a return was a persona punshment and, there-
fore, was not coectbe from the ta payer s estate or from trans-
ferees of the ta payer s estate.
The opnon of the ttorney Genera (17 Op. tty. Gen., 433, 435),
referred to n Law Opnon 92 , supra, and n Law Opnon 1091, supra,
was rendered under date of uy 28, 1882, n response to an nqury
from the Secretary of the Treasury as to whether the 50 per centum
addton to ta authorzed by secton 317 , Revsed Statutes, to be
mposed upon any person who negects or refuses to make a st or
return was a penaty wthn the meanng of secton 5292 of the Re-
vsed Statutes, whch authorzed the Secretary of the Treasury to
remt fnes, penates, and forfetures mposed under any revenue aw.
The ttorney Genera hed that the addton to ta was a penaty
tethn the meanng of that (statute, and n the course of hs opnon
stated
It s n the nature of punshment, and was ntended, by fear of ts e acton,
to nduce a persons hodng ta abe property to make out sts thereof and
return the same wthn the tme prescrbed by aw.
In Law Opnon 92 , supra, the queston was whether the addton
to ta for denquency authorzed by secton 317 , Revsed Statutes,
as amended, when mposed n connecton wth an e cess profts ta
return, shoud be dsaowed as a deducton from gross ncome n
determnng net ncome sub|ect to norma ncome ta . On the
strength of the ttorney Genera s opnon above cted, t was hed
that the addton to ta shoud be consdered a penaty for such pur-
pose, but t was not hed that the penaty was a punshment, that
queston not beng pertnent to the ssue there nvoved.
Reference s aso made n Law Opnon 1091, supra, to a porton
of the opnon of the Supreme Court n ewg v. Unted States (188
|. S., 05), n whch the Court hed that the addtona sums mposed
upon mporters by secton 7 of the Customs dmnstratve ct of
1890 (2 Stat., 131), whch were more than fve tmes as much as the
norma dutes, were puntve and wthout doubt a punshment upon
the mporter. The transactons nvoved n the ewg case arose
before the passage of the ct of uy 29, 1897, whch cut the add-
tona dutes n haf and by secton 32 drected that the addtona
duty shoud not be construed as a penaty. The queston before the
Supreme Court n the ewg case was whether the addtona dutes
mposed by secton 7 of the 1890 ct were pena wthn the mean-
ng of penates n sectons 5 3 and 29 of the Revsed Statutes,
the frst of whch conferred |ursdcton upon the dstrct courts of
a suts for penates and the atter conferred |ursdcton upon the
crcut courts of a suts at common aw e cept suts for
penates . The Court, therefore, was e amnng the statute
n queston from a |ursdctona pont of vew.
s stated above, Law Opnon 1091, supra, deat wth the 5 per cent
penaty mposed by secton 502 of the Revenue ct of 1918. Secton
500 of that ct mposed certan ta es upon amounts pad for trans-
portaton, whch ta es were payabe by the person payng for the
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293.
1 2
transportaton (secton 501). Secton 502 requred the person recev-
ng such payments to coect the ta es, make monthy returns thereof,
and pay the ta es so coected to the coector of nterna revenue at
the tme f ed for fng the returns, and provded further that:
If the ta s not pad when due, there sha be added ns part of the
ta a penaty of 5 per centum, together wth nterest at the rate of 1 mt centum
for each fu mouth, from the tme when the ta became due.
That penaty was not one to be mposed upon the ta payers but
was appcabe to persons n unoffca capactes who were requred
to coect the ta es from the ta payers and pay them over to the co-
ector of nterna revenue. In tbs respect the penaty under consd-
eraton n Law Opnon 1091. supra, was not necessary smar to
the addtons to ta authorzed by secton 317 of the Revsed
Statutes.
The nature of the 50 per cent addton to ta provded bv secton
293(b) of the Revenue ct of 1928 (dentca wth secton 293(b) of
the Revenue cts of 193 and 1938) was squarey before the Supreme
Court n everng v. Mtche, decded March 7, 1938 (303 U. S.,
391, C. . 1938-1, 317). In that case Mtche had been ndcted
under secton 14 (b) of the Revenue ct of 1928 for wfuy
attemptng to defeat and evade ncome ta upon hs net ncome for
1929. e was tred and acqutted. Thereafter, the Commssoner
ssued a notce of defcency to Mtche for 1929 and asserted the
50 per cent addton to ta provded by secton 293(b) of the Revenue
ct of 1928. Mtche appeaed to the oard of Ta ppeas, whch
sustaned the Commssoner s determnaton (Chares . Mtche v.
Commssoner, 32 . T. ., 1093). Upon petton for revew the
Crcut Court of ppeas for the Second Crcut sustaned the fnd-
ng of the oard that Mtche had frauduenty camed a certan
deducton and had frauduenty faed to return Other ncome
receved by hm. The crcut court affrmed the oard s decson
wth respect to the defcency n ta , but reversed the oard s ap-
prova of the assessment of the addton to ta under secton 293(b).
The crcut court based ts reversa of ths porton of the oard s
decson upon the acqutta of Mtche n the crmna proceedng,
hodng that under the decsons of the Supreme Court n Coffey v.
Unted States (11 U. S., 43 ) and Unted States v. La ranca (282
U. S.| 5 8), t was requred to treat the mposton of the 50 per cent
addton to ta as barred by the pror acqutta n the crmna acton.
(Mtche v. Commssoner, 89 ed. (2d), 873.)
t the nstance of the Unted States, the Supreme Court granted
certorar to revew that part of the decson of the crcut court of
appeas whch reversed the decson of the oard. The Government
contended before the Supreme Court that secton 293(b) operates not
as a puntve but as a compensatory measure and that t represents
a remeda provson enacted by Congress to f the damages resutng
to the Government n fraud cases, and to mpose those damages on
the persons responsbe. Mtche contended that the addton to
ta provded by secton 293(b) was a penaty and punshment that
the facts and ntents requste to the mposton of ths penaty were
put n ssue and determned aganst the Government n the crmna
tra and that the acqutta n that case barred the Government
from obtanng a second |udgment based upon the same facts and
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1 3
293
ntents. The queston whether secton 293(b) of the Revenue ct of
1928 was puntve, therefore, was drecty n ssue n the Mtche
case.
In ts opnon n that case the Supreme Court stated n part as
foows:
That acqutta on a crmna charge s not a bar to n cv acton
by the Government, remeda h ts nature, arsng out of the same facts on
whch the crmna proceedng was based has ong been setted. (.Stone v.
Unted States, 1 7 U. S., 178, 188 Murphy v. Unted States, 272 U. S., 30. 31,
32. Compare Cantangco v. bavoa, 218 U. S.. 47 . 481, 482.) Where the ob|ec-
tve of the subsequent acton kewse s punshment, the acqutta s a bar,
because to entertan the second proceedng for punshment woud sub|ect the
defendant to doube |eopardy and doube |eopardy s precuded by the ffth
amendment whether the verdct was an acqutta or a convcton. (Murphy v.
Unted States. 272 U. S., 30, 32.)
The necessary mpcaton from the foregong statement of the
Court s that f the addton to ta were a punshment, t coud not
be mposed n any case n whch, on the same faets, the ta payer
has been crmnay prosecuted, whether such prosecuton resuted n
acqutta or convcton, but woud be merey an aternatve punsh-
ment. The Court dstngushes between penates whch are ntended
as punshments and are, therefore, essentay crmna, and penates
whch are remeda n character, provdng compensaton or ndem-
nty, and whch, therefore, may be mposed admnstratvey wthout
the necessty of nvokng the |udca power. In ths connecton, the
opnon of the Court reads n part as foows:
Mtche contends that ths proceedng Is barred under the doctrne of doube
|eopardy because the 50 per centum addton of 3 4,3- 4.92 s not a ta , but a
crmna penaty ntended as punshment for aegedy frauduent acts. Uness
ths sancton was ntended as punshment, so that the proceedng s essentay
crmna, the doube |eopardy cause provded for the defendant n crmna
prosecutons Is not appcabe.
1. In assessng ncome ta es the Government rees prmary upon the ds-
cosure by the ta payer of the reevant facts. Ths dscosure t requres hm
to make n hs annua return. To nsure fu and honest dscosure, to ds-
courage frauduent attempts to evade the ta . Congress mposes sanctons.
Such sanctons may confessedy e ether crmna or cv. s stated n
Oceanc Steam Navgaton Co. v. Stranahan (214 D. S., 320, 839) :
In accord wth ths setted |udca constructon, the egsaton of Congress
from the begnnng, not ony as to tarff but as to nterna revenue, ta aton
and other sub|ects, has proceeded on the concepton that t was wthn the com-
petency of Congress, when egsatng as to matters e cusvey wthn ts con-
tro, to mpose approprate obgatons and sancton ther enforcement by
reasonabe money penates, gvng to e ecutve offce s the power to enforce
such penates wthout the necessty of nvokng the |udca power.
Congress may mpose both a crmna and a cv sancton n respect to the
same act or omsson for the doube |eopardy cause prohbts merey punsh-
ng twce, or attemptng a second tme to punsh crmnay, for the same
offense. The queston for decson s thus whether secton 2 t.3(b) mposes
a crmna sancton. That queston s one of statutory constructon. (Compare
Murphy v. Unted States. 272 U. S., t 30, 32.)
Remeda sanctons may be of varyng types. One whch s characterstcay
free of the puntve crmna eement s revocaton of a prvege vountary
granted.
orfeture of goods or ther vaue and the payment of f ed or varabe sums
of money are other sanctons whch have been recognzed as enforceabe by
cv proceedngs snee the orgna revenue aw of 178 ). ( ct of uy 31,
1789, chap. 5, secton 3(5, 1 Stat., 29, 47.) In spte of ther comparatve severty,
such sanctons have been uphed aganst the contenton that they are essentay
crmna and sub|ect to the procedura rues governng crmna prosecu-
tons. (Ctng numerous Supreme Court cases.)
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293.
1 4
2. The remeda character of sanctons mposng addtons to a ta has been
made cear hy ths Court n passng upon smar egsaton. They are pro-
vded prmary as a safeguard for the protecton of the revenue and to rem-
burse te Government for the heavy e pense of nvestgaton and the oss
resutng from the ta payer s fraud. In Stoekwe v. Unted States (13 Wa.,
531, . 47. 551), the Court sad of a provson whch added doube the vaue of
the goods:
It must therefore be consdered as remeda, as provdng ndemnty for oss.
nd t s not the ess so because the abty of the wrongdoer s measured by
doube the vaue of the goods receved, conceaed, or purchased, nsead of ther
snge vaue. The act of abstractng goods egay mported, recevng, con-
ceang or buyng them, nterposes dffcutes n the way of a Government
sezure, and mpars, therefore, the vaue of the Government rght. It Is,
then, hardy accurate to say that the ony oss the Government can sustan
from conceang the goods abe to sezure s ther snge vaue, or to assert
that the abty mposed by the statute of doube the vaue s arbtrary and
wthout reference to ndemnfcaton. Doube the vaue may not be more than
compete ndemnty .
The ct of 1823 was, as we have seen, remeda n ts nature. Its purpose
was to secure fu compensaton for nterference wth the rghts of the Unted
States .
In sectons 270 and 293 t s provded that coecton of the 50 per centum
addton, ke that of the prmary ta tsef, may he made by dstrant as
we as by a proceedng n court. If the secton provded a crmna sanc-
ton, the provson for coecton by dstrant woud make t unconsttutona.
(Compare Lpke v. Lederer, 259 U. S., 557 Rcya Drug Corporaton v. Warde,
2G0 U. S.. 3 . See aso Unted States v. Chouteau, 102 T . S., 03, 11 oyd
v. Unted States, 11 IT. S., 1 Lees v. Unted State . 15(1 U. S 47(5 Unted
States v La ranca, 2S2 U. S., 5 8.) That Congress provded a dstncty cv
procedure for the coecton of the addtona 50 per centum ndcaes ceary
that ntended a cv, not a crmna, sancton. Cv procedure s ncom-
patbe wth the accepted rues and consttutona guarantes governng the
tra of crmna prosecutons, and where cv procedure s prescrbed for the
enforcement of remeda sanctons, those rues and guarantes do not appy.
Thus the determnaton of the facts upon whch abty s based may be by
an admnstratve agency nstead of a |ury, or f the prescrbed proceedng s
n the form of a cv sut, a verdct may be drected aganst the defendant
there s no burden upon the Government to prove ts case beyond a reasonabe
doubt, and t may appea from an adverse decson furthermore, the defendant
has no consttutona rght to be confronted wth wtnesses aganst hm, or to
refuse to testfy and fnay, n the cv enforcement of a remeda sancton
there can be no doube |eopardy.
4. The fact that the Revenue ct of 1928 contans two separate and dstnct
provsons mposng sanctons, and that these appear n dfferent parts of the
statute, heps to make cear the character of that here nvoked. The sancton of
fne and mprsonment prescrbed by secton 14 (b) for wfu attempts n
any manner to evade or defeat any ncome ta , ntroduced nto the ct
under the headng Penates, s obvousy a crmna one. The sancton of
50 per centum addton f any part of any defcency s due to fraud wth
ntent to evade ta , prescrbed hy secton 293(b), ntroduced nto the ct
under the headng ddtons to the Ta , was ceary ntended as a cv one.
Ths sancton, and other addtons to the ta , are set forth n Suppement 11,
entted Interest and ddtons to the Ta . The suppement ncudes, besdes
secton 293(b), sectons 291, 292, 293(a), and 294. Secton 291 prescrbes a 23
per centum addton for faure to make and fe a return secton 292 pre-
scrbes nterest at the rate of per centum per annum upon the defcency from
the date prescrbed for payment of the ta secton 293(a), an addton of 5
per centum f the defcency s due to neggence, or ntentona dsregard of
rues and reguatons but wthout ntent to defraud and secton 294 pre-
scrbes an addton to the ta of 1 per centum per month n case of nonpay-
ment. Obvousy a of these addtons to the ta were Intended hy Congress
as cv ncdents of the assessment and coecton of the ncome ta .
In vew of the decson of the Supreme Court that secton 293(b)
s remeda and provdes compensaton and ndemnty, t seems obv-
ous that the cause of acton for ths penaty does not abate upon the
death of the ta payer as a cause of acton for a persona punshment.
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1 5
293.
It s the opnon of ths offce that t w queston as to whether ths
50 per centum addton to ta s coectbe from the estate of the
deceased ta payer s not to be determned by the common aw rue
wth respect to actons e decto.
Secton 3744 of the Interna Revenue Code (sec/on 3213, R. S., as
modfed by secton 289, ct of March 3, 1911) provdes as foows:
Sec. 3744. Suts fob Ta es.
Ta es may be sued for and recovered n the name of the Unted States n
any proper form of acton, before any dstrct court of the Unted States, for
the dstrct wthn whch the abty to such ta s ncurred, or where the
party from whom such ta s due resdes at the tme of the commencement of
the sad acton.
In Doar Savngs ank v. Unted States (19 Wa., 227) the
Supreme Court hed that the acton of debt was a proper form of
acton for the recovery of ta es.
In every nstance where provson has been made for a 0 per cent
addton to ta due to fraud, Congress has provded that t sha be
coected as a part of the ta , or n the same manner as the ta ,
or n the same manner as f t were a defcency. (R. S., 317ft, as
amended secton 293(b) of the Revenue ct of 1938 and correspond-
ng provsons of pror Revenue cts secton 520(b) of the Revenue
ct of 1932 and correspondng provsons of the Interna Revenue
Code.)
In an opnon of the ttorney Genera dated October 24, 1933 (38
Op. tty. Gen., 94, 97), t was hed that ta , nterest, and penaty
consttute a snge abty. To the same effect s the decson of
the Crcut Court of ppeas, ghth Crcut, n y tfc Waker Dry
Goods Co. v. Unted States (34 ed. (2d), 429, 432), wheren the
court stated:
We accordngy concude that the defcency ta ncuded the penaty and
consttuted an entre, snge abty, that ths snge abty, treated as such
hy the partes, was duy compromsed, and that such compromse s a bar to
ths acton.
Summarzng wth respect to the nature of ths addton to ta , t
has been hed that the statute s remeda, provdng compensaton or
ndemnty for oss that the addton to ta s to be added to the ta
and coected n the same manner as the ta , or the defcency ( and
as a part of the ta R. S., 317 ) and that the ta and penaty
make a snge abty, whch, under common aw forms of acton,
was recoverabe n the contract acton for debt.
It s, therefore, the opnon of ths offce that the addton to ta
provded by secton 293(b) of the Revenue cts of 193 and 1938 s
coectbe from the estate of the deceased ta payer, , and shoud
be asserted n the notce of defcency. Ths concuson aso appes
to the 50 per cent addton to ta for fraud mposed by dentca or
smar provsons of pror Revenue cts and the Interna Revenue
Code.
The other addtons to ta ncuded n Suppement M of the
Revenue ct of 1928, as dscussed by the Supreme Court n the
Mtche case, correspondng sectons of other Revenue cts and of
the Interna Revenue Code, the addtons to ta provded by secton
317 , Revsed Statutes, as amended, and the same secton n the
Code (secton 3 12, I. R. C), fa wthn the same cassfcaton and
prncpe.
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19.502-1.
1
In vew of the foregong, G. C. M. 91G2, supra, s revoked, and
G. C. M. 1573 , supra, s modfed to the e tent that t s nconsstent
wth ths opnon. Law Opnon 1091, supra, shoud be apped ony
to secton 502 of the Revenue ct of 1918 and, as that statute has
been repeaed, t s not necessary to determne the nature of that
penaty.
. P. Wenchk,
Chef Counse, ureau, of Interna Revenue.
SUPPL M NT . MUTU L IN STM NT COMP NI S.
S CTION 3 2. T ON MUTU L IN STM NT
COMP NI S.
Secton 19.3 2-1: Ta on mutua nvestment companes.
INT RN L R NU COD .
C PT R 2. DDITION L INCOM T S.
SU C PT R . P RSON L OLDING COMP NI S.
S CTION 500. SURT ON P RSON L OLDING
COMP NI S.
Secton 19.500-1: Surta on persona hodng companes.
INT RN L R NU COD .
Computaton of defense ta . (See Mm. 5094, page 34.)
Secton 19.500-1: Surta on persona hodng companes.
INT RN L R NU COD .
Reguatons 103, amended. (See T. D. 0 1, page 15.)
S CTION 502. P RSON L OLDING COMP NY INCOM .
Secton 19.502-1: Persona hodng company 1940-34-10393
ncome. I. T. 3401
INT RN L R NU COD .
The M Corporaton compes wth the gross ncome requrements
for cassfcaton as a persona hodng company nasmuch as an
tem of ncome desgnated recepts under o and gas eases
consttutes rents wthn the purvew of secton 502(g) of the
Interna Revenue Code, and not royates wthn the meanng
of secton 502(h) of the Code, such tem amountng to ess than
50 per cent of the corporaton s gross ncome.
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19.502-1
dvce s requested whether the M Corporaton compes wth the
gross ncome requrements for cassfcaton as a persona hodng
company under the provsons of the Interna Revenue Code.
The underyng queston s whether an tem of ncome desgnated
4 recepts under o and gas eases n the amount of doars, such
tem amountng to ess than 50 per cent of the corporaton s gross
ncome, consttutes rents - wthn the purvew of secton 502(g)
of the Interna Revenue Code. The reference to ths tem, whch s
contaned n a ease, reads, The essee sha pay to the essor as a
renta herefor, the sum of one doar ( 1) per acre per year, com-
mencng on date of e ecuton hereof and payabe semannuay n
advance . Itacs supped. Ths gross payment s sub|ect
to dmnuton or abatement per unt of a stated number of acres
upon the brngng n of ether a producng or nonproducng o or
gas we. It s argued on behaf of the ta payer that ths dsputed
tem consttutes ether royates wthn the purvew of secton
502(h) of the Interna Revenue Code or some type of ncome whch
s not cassfed as persona hodng company ncome by any of the
subdvsons of secton 502 of the Code.
Secton 502 of the Interna Revenue Code reads n part as foows:
Sec. 502. or the purposes of ths subchapter the term persona
hodng company ncome means the porton of the gross ncome whch
conssts of:
t
(g) Ras. ents, uness consttutng 50 per centum or more of the gross
ncome. or the purposes of ths subsecton the term rents means com-
pensaton, however desgnated, for the use of, or rght to use, property, and
the nterest on debts owed to the corporaton, to the e tent such debts represent
the prce for whch rea property hed prmary for sae to customers n the
ordnary course of ts trade or busness was sod or e changed by the cor-
poraton but does not ncude amounts consttutng persona hodng com-
pany ncome under subsecton (f).
(h) Mnera, o. or gan royate . Mnera, o, or gas royates, uness (1)
consttutng 50 per centum or more of the gross ncome, and (2) the deductons
aowabe under secton 23(a) (reatng to e penses) other than compensaton
for persona servces rendered by sharehoders, consttute 15 per centum or
more of the gross ncome.
The word royaty as used n a gas ease generay refers to a
.share of the product or proft reserved by the owner for permttng
another to use the property. ( . T. Sneed, r., v. Commssoner,
33 . T. ., 478, acquescence, C. . -1, 21 (1930) Contnenta O
Co. v. Commssoner, 3 . T. ., 93 v. Roberts, 284 S. W.,
24 3 Smmers O and Gas (1938 edton), secton 571, page 348).
It s compensaton for the prvege of drng and producng o
and gas and conssts of a share n the product. eport v. arr-
son, 123 an., 310, 255 Pac, 52.) o o or other mneras were
removed from the ands of the M Corporaton. Moreover, the tem
of ncome n queston s not the resut of producton and does not
represent a porton of o or other mneras produced. ccordngy,
t s cear that the moneys n queston can not be cassfed as
royates.
The agreement of ease denomnates ths payment renta and
requres the payment thereof n advance semannuay. s stated
n 54 C. ., at page 382. The word rent has a we defned sg-
nfcance and may he generay defned as a compensaton or return.
In 40 C. ., at page 742 (Mnes and Mneras), t s stated that,
Dead or seepng rent s rent whch must be pad under a
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mnp ease whether the mne s worked or not , ctng
Mcntyre v. Mcntyre Coa Co. (105 N. Y., 2 4, 273, 11 N. ., 45).
(See aso Indanapos Gas Co. v. Perce 3 Ind. pp., 573, 7 N. .,
173: Same v. Raye, 3 Ind. pp., 70 , 7 N. ., 17 Commssoner
v. Wson, 7 ed. (2d), 7 . T. Sneed. r., v. Commssoner, supra.)
Whe the queston of whether deay rentas consttute rente,
as that term s used n secton 502(g) of the Interna Revenue Code,
does not appear to have receved the consderaton of the courts, the
ureau has hed that for edera ncome ta purposes there s no
dstncton between the term rent, n the sense n whch that term
ordnary s used, and deay rentas. (G. C. M. 11197, C. .
II-1, 238 (1933).) In the consderaton of ths queston, t s
further stated n G. C. M. 11197 that:
Rent s a f ed compensaton pad for the use, possesson, or nterest
n and or other property. Deay renta s a sum pad under the terms of a
ease for the prvege of contnung the essee s nterest wthout deveopng
the property. In the case of drdge v. ouston O Co. et a. (244 Pac, 782)
. The court quoted as foows from Thornton s Law of O
and Gas, page 8, secton 253:
Care must be taken to dstngush between rent and royaty n
connecton wth gas and o eases. Rent s the term apped to the prvege
gven to bore for gas and o and for deay n begnnng operaton: whe
royaty s a certan percentage of the o after It s found, or so much per
gas we deveoped.
In that case drdge v. ouston O Co. et a. the court was concerned
ony wth the annua rentas and/or deay rentas whch were to he pad under
the terms of the ease. The court made no dstncton between the term rent
and deay rentas.
It s, accordngy, hed that the tem recepts under o and gas
eases n the sum of z doars consttutes rents wthn the
purvew of secton 502(g) of the Interna Revenue Code, and that
the M Corporaton compes wth the gross ncome requrements for
cassfcaton as a persona hodng company, such tem amountng
to ess than 50 per cent of the corporaton s gross ncome.
SU C PT R . C SS-PRO ITS T .
S CTION 00. R T O T .
( so Secton 52, Secton 19.52-1.) 1940-31-103 7
Mn. 5083
C SS-PRO ITS T .
Computaton of defense ta prescrbed by secton 204 of the
Revenue ct of 1940 amendng secton 00 of the Interna Revenue
Code corporaton ncome and e cess-profts ta returns for the
fsca years endng uy 31, 1940, to November 30, 1940, Incusve.
Washngton, D. C, uy 17, 1910.
approved une 25, 1940 (Pubc, No. 5 , Seventy-s th Congress,
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1 9
00,
thrd sesson), whch amends secton 00 of the Interna Revenue
Code (53 Stat., Part 1) to read as foows:
Sec. 00. Rate of Ta .
(a) Genera Rue. If any corporaton s ta abe under secton 1200 wth
respect to any year endng une 30, there sha be mposed upon ts net ncome
for the ncome-ta ta abe year endng after the cose of such year, un e cess-
profts ta equa to the sum of the foowng:
per centum of such porton of ts net ncome for such ncome-ta ta abe
year as s n e cess of 10 per centum and not n e cess of 15 per centum of
the ad|usted decared vaue
12 per centum of such porton of ts net ncome for such ncome-ta ta abe
year as s n e cess of 15 per centum of the ad|usted decared vaue.
(b) Defense Ta fob ve Years. In the case of any ta payer, the amount
of ta payabe under ths secton for any ncome-ta ta abe year endng after
une 30, 1940, and before uy 1, 194 ), sha be 10 per centum greater than the
amount of ta whch woud be payabe f computed wthout regard to ths
subsecton.
2. Corporaton ncome and e cess-profts ta return forms for the
caendar year 19-10 and for fsca years endng n 1941 w be pre-
pared and prnted n due course. New return forms w not be
prnted for e cess-profts ta purposes wth respect to the fsca
years endng uy 31, 1940, to November 30, 1940, ncusve. In the
case of such fsca years, orm 1120 and orm 1120 for 1939 w be
utzed for e cess-profts ta purposes n accordance wth the foow-
ng procedure:
(a) If the return s made on orm 1120, the e cess-profts ta
computaton (Schedue ) w be made wthout regard to secton
204 of the Revenue ct of 1940 and the amount of ne 8 of that
schedue w be nserted on ne 3 (page 1 of the return) mmed-
atey foowng the parenthess. The defense ta w be computed
by takng 10 per cent of such amount and, wth the notaton defense
ta , , w be nserted wth a typewrter or pen and nk on
ne 3 , after whch the tota e cess-profts ta w be nserted n
the money coumn. Such tota e cess-profts ta w aso be n-
serted on ne 29 of the return form, e cept that f the return s made
on the cash recepts and dsbursements bass, ne 29 w ncude ony
the e cess-profts ta actuay pad wthn the ta abe year. If, for
e ampe, a corporaton s e cess-profts ta , computed wthout regard
to secton 204, amounts to 100, ne 3 w appear as foows:
3 . cess-profts ta (ne 8, Schedue ), 100 (Defense ta , 10) 110.00
(b) If the return s made on orm 1120 , the e cess-profts ta
computaton (page 1 of the return) w be made wthout regard to
secton 204 of the Revenue ct of 1940 and the amount so computed
w be nserted n coumn 3 of ne 40. The defense ta w be
computed by takng 10 per cent of such amount and, wth approprate
notatons, nserted wth a typewrter or pen and nk, the amount so
computed w be added to the e cess-profts ta as determned wth-
out regard to secton 204. The tota e cess-profts ta w aso be
nserted on nes 29 and 50 of the return form, e cept that f the
return s made on the cash recepts and dsbursements bass, ne 29
w ncude ony the e cess-profts ta actuay pad wthn the ta -
abe year. If, for e ampe, a corporaton s e cess-profts ta , com-
puted wthout regard to secton 204, amounts to 100, ne 40, wth
notatons referred to above, w appear as foows:
290217 41 12
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000.
170
40. Tota e cess-profts ta (tota of tem 38, coumn 3, and Item 39,
coumn 3) 100.00
Defense ta , 10 per cent of tem 40 10.0O
Tota e cess-profts ta 110.00
3. The return on orm 1120 and orm 1120 for the fsca years
endng uy 31, 1040. to November 30, 1940, ncusve, w be gven
a premnary e amnaton n the coectors offces for the purpose
of ascertanng whether the defense ta prescrbed by secton 204 s
correcty computed and care w be taken to see that such ta s
ncuded n the e cess-profts ta assessments. The e cess-profts
ta assessments for such fsca years w be made n the usua manner
and dentfed by the etters . P. and D.
4. Correspondence reatng to the provsons of ths mmeograph
shoud refer to ts number and the symbos IT:TM.
Tmothy C. Moonf.t,
ctng Commssoner.
( so Secton 01.) 1040-33-10389
T. 1). 4090
TITL 2 INT RN L R NU C PT R I. SU C PT R , P RT 21.
C SS-PRO ITS T .
mendng Treasury Decson 4927 C. P.. 1939-2, 143 to conform
to the Revenue ct of 1040.
Washngton, D. C.
In order to make the provsons of Treasury Decson 4927, approved
ugust 23,1939 C. . 1939-2,143 Part 21, Tte 2 , Code of edera
Reguatons, 1939 Sup. , reatve to the e cess-profts ta , conform to
the provsons of sectons 204 and 2 ). ) of the Revenue ct of 1940, such
Treasury decson s amended as foows:
Paragraph 1. That part of secton 21.0 precedng the quotaton of
secton 1200 of the Interna Revenue Code s amended to read as
foows:
Secton 21.0. Introductory. (a) Chapter.0 (Capta Stock Ta ) of the Interna
Revenue Code (53 Stat., Part 1). as amended by secton 301 of the Revenue ct of
1939 (53 Stat., 882) and by secton 205 of the Revenue ct of 1940 (Pubc, No.
(55 , Seventy-s th Congress, thrd sesson), approved une 25. 1940, provdes n
port:
Par. 2. Secton 21.0 s amended by nsertng after the quotaton of
secton 1200(b) of the Interna Revenue Code, the foowng:
Sec. 205. Capta Stock Ta . (Revenue ct of 1940.)
Secton 120(1 of the Interna Revenue Code s amended by nsertng
at the end thereof the foowng new subsecton :
(c) Defense Ta for ve Years. or the year endng une 30,
1940, and for the four succeedng years endng une 30, the rates
provded n subsectons (a) and (b) sha be 1.10 n eu of 1.
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171
01.
Par. 3. Secton 21.0 s amended by nsertng after the quotaton
of secton 00 of the Interna Revenue Code the foowng:
Sec. 204. cess-Profts Ta . ( Revenue ct of 1940.)
Secton 000 of the Intern Revenue Code s amended by nsertng
(a) Genera R e. before the frst paragraph and by nsertng
at the end of such secton the foowng uew subsecton:
(b) Defense Ta fob ve Years. .In the case of any ta payer,
the amount of ta payabe under ths secton for any ncome-a ta -
abe year endng after une 30, 1940, and before uy 1, 1945, sha be
10 per centum greater than the amount of ta whch woud be payabe
f computed wthout regard to ths subsecton.
Par. 4. Secton 21.1(a) s amended to read as foows:
(a) d|usted decared vaue means n the case of a domestc corporaton the
ad|usted decared vaue of ts capta stock as determned under secton 1201 of the
Interna Revenue Code and the reguatons ssued respectng the capta stock ta
Imposed by secton 1200 of such Code, and n the case of a foregn corporaton the
ad|usted decared vaue of capta empoyed n the transacton of ts busness n
the Unted States as determned under such secton 1202 and the reguatons ssued
n reference thereto.
Par. 5. Secton 21.3 s amended by substtutng a comma n eu of
the perod at the end of paragraph (a) and by addng the foowng:
pus (3) for any ncome-ta ta abe year endng after une 30, 1940, and before
uy 1,1945,10 per cent of the sum of (1) and (2).
Par. . Secton 21.4 s amended by addng after the ampe
the foowng:
or any ncome-ta ta abe year endng after une 30, 1940, and before uy 1,
1945, the e cess-profts ta sha be computed n the manner set forth n the above
e ampe. To the resut thus obtaned sha be added 10 per cent thereof as defense
ta . Thus, f the ncome of the M Corporaton for the caendar year 1940 s the
same as that for the year 1939, ts tota e cess-profts ta woud be 1,089 ( 990
pus 99).
(Ths Treasury decson s ssued pursuant to sectons 204 and
205 of the Revenue ct of 1940 (Pubc, No. 5 , Seventy-s th Con-
gress, thrd sesson) and secton 2 of the Interna Revenue Code
(53 Stat., 32).)
Tmothy C. Mooney,
pproved ugust 1, 1940.
ohn L. Su van,
( ed wth the Dvson of the edera Regster ugust , 1940, 10.55 a. m.)
S CTION 01. D UST D D CL R D LU .
INT RN L R NU COD .
mendng Treasury Decson 4927 C. . 1939-2, 143 to conform
to the Revenue ct of 1940. (See T. D. 4999, page 170.)
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729(b).
172
S CTION 729(b). L WS PPLIC L : R TURNS.
1940-53-10547
T. D. 5025
TITL 20 INT RN L NT . C PT R I, SU C PT R , T 30.
C LS PRO ITS T .
Reguatons reatng to tme for fng returns and payment of
ta under the cess Profts Ta et of 1940.
Washngton, D. C.
To Coector of Interna Revenue and Others Concerned:
Sec. 30.729-1. Tme and pace for fng returns. cess profts
ta returns under the cess Profts Ta ct of 1940 sha be hed at
the same tme and pace as the tme and pace prescrbed n sectons
53 and 235 of the Interna Revenue Code and the ncome ta regua-
tons under such sectons (sectons 19.53-1 to 19.53-5 and 19.235-1 of
Reguatons 103 Part 19, Tte 20. Code of edera Reguatons, 1940
Sup. ) for the fng of ncome ta returns under Chapter 1, e cept
that such e cess profts ta returns for ta abe years endng before
December 31, 1940, whch, f fed wthn the tme prescrbed n Regu-
atons 103, woud be fed before March 15, 1941, sha be fed on or
before March 15,1941. (Secton 2, 53 Stat.. 32 2 U. S. C, Sup. 2
secton 729. cess Profts Ta ct of 1940, Pubc, No. 801, Seventy-
s th Congress, thrd sesson.)
Sec. 30.729-2. Tme for payment of ta . The e cess profts ta
mposed by the cess Profts Ta ct of 1940 sha be pad at the
same tme as the tme prescrbed n sectons 50 and 23 of the Interna
Revenue Code and the ncome ta reguatons under such sectons (sec-
tons 19.5 -1,19.5 -2, and 19.230-1 of Reguatons 103) for the payment
of the ncome ta mposed by Chapter 1. e cept that such e cess profts
ta for ta abe years endng before December 31, 1940, whch, f pad
wthn the tme so prescrbed, wouc be pad before March 15, 1941,
sha be pad on or before March 15, 1941. In case an eecton s
made to pay n nstaments such e cess profts ta for a ta abe
year endng before December 31,1940, and the frst nstament, f pad
wthn the tme prescrbed n secton 19.5 -1, 19.5 -2, or 19.23 -1 of
Reguatons 103, woud be pad before March 15, 1941, then the frst
nstament of such ta sha be pad on March 15, 1941. and the
second, thrd, and fourth nstaments thereof sha be pad on or
before the 15th day of the thrd, s th, and nnth months, respectvey,
after March 15,1941. (Secton 2. 53 Stat.. 32, 2 U. S. C, Sup., 2
secton 729. cess Profts Ta ct of 1940. Pubc, No. 801, Seventy-
s th Congress, thrd sesson.)
Gut T. everno,
pproved December 21, 1940.
erbert . Gaston,
( ed wth the Dvson of the edera Regster December 2 , 1940, 10.10 a. m.)
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173 22(b), rt. 22(b)(2)-2.
C PT R 38. MISC LL N OUS PRO ISIONS.
S CTION 3798 ( M ND D Y S CTION 40 , R NU C T
O 1939). MPTION O INSOL NT N S ROM
T. .
1940-45-10482
T. D.5018
TITL 2 INT RN L R NU . C PT R I, SU C PT R D, P RT 4G4 .
INSOL NT N S.
Treasury Decson 4958 C. . 1940-1, 74 amended.
Waskmgton, D.
2 o Coectors of Interna Revenue and Others Concerned:
Secton 4 4 .5( ) of Treasury Decson 4958 C. . 1940-1, 74
Part 4 4 , Tte 2 , Code of edera Reguatons, 1939 Sup. s
amended by strkng out the second paragraph thereof.
(Ths Treasury decson s prescrbed pursuant to sectons 3791
and 3798 of the Interna Revenue Code as amended by secton 40 of
the Revenue ct of 1939 (53 Stat., 4 7, 470, 884).)
Tmothy C. Mooney,
ctng Commsso-ner of Interna Revenue.
pproved October 2 , 1940.
ohn L. Suvan,
. R NU CT O 1938.
SU TITL . G N R L PRO ISIONS.
S CTION 22(b). GROSS INCOM : CLUSIONS
ROM GROSS INCOM .
rtce 22(b) (2)-2: nnutes.
R NU CT O 1938.
mounts receved under so-caed endowment, ncome, and fna sum
pocy. (See I. T. 3402, page 57.)
R NU CT O 1938.
Dsabty retrement pay under secton of the Cv Servce Re-
trement ct of 1920, as amended. (See I. T. 3428, page 0.)
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23(a), rt. 23(a)- .
174
INCOM : P NS S.
rtce 23(a)-: usness e penses. 1940-39-10430
I. T. 3412
R NU CT O 1038.
wards made by the Natona Labor Reatons oard n favor
of e empoyees of the M Company represent compensatory damages
and are deductbe by the SI Company as ordnary and necessary
busness e penses for edera ncome ta purposes. Counse fees
ncurred by the company n defendng ts poston before that
oard are aso deductbe as ordnary and necessary busness
e penses.
dvce s requested reatve to the deductbty by the M Company
for edera ncome ta purposes of awards requred to be pad to
certan empoyees as the resut of a decson of the Natona Labor
Reatons oard. The queston s aso presented as to the deductbty
of counse fees n connecton therewth.
Pror to the year 1938 the M Company was nvoved n abor dff-
cutes n ts pant and |ursdcton over the stuaton was taken by the
Natona Labor Reatons oard. decson was rendered n 1938
under whch the M Company pad to ts empoyees a sum of money
appro matng 32c doars. The company aso ncurred counse fees
appro matng h doars n defendng ts poston. The awards of
the Natona Labor Reatons oard represented what the empoyees
woud have earned had they not been absent from work as a resut of
the abor dffcutes, after subtractng therefrom the amount of
wages, f any, whch such empoyees earned esewhere durng such
absence. No appea from the decson was fed by the M Company.
It s hed that the awards here n queston represent compensatory
damages and are deductbe under the provsons of secton 23(a) of
the Revenue ct of 1938 as ordnary and necessary e penses ncurred
n connecton wth the operaton of the ta payer s busness. Counse
fees ncurred n defendng ts poston before the Natona Labor
Reatons oard are aso consdered to have been ncurred n connec-
ton wth the ta payer s busness and consttute ordnary and neces-
sary busness e penses. (See generay O. D. 974, C. . 5,129 (1921)
O. D. 1117. C. . 5, 121 (1921) I. T. 1853. C. . II-2, 124 (1923)
S. M. 4078. C. . -. 22 (192 ) ornhamer v. Unted States, 27
U. Sv 145 Wech v. d wrng, 290 U. S., 111.)
Wth respect to the year n whch the amounts n queston are de-
ductbe, under secton 43 of the Revenue ct of 1938, deductons for
edera ncome ta purposes sha be taken for the ta abe year n
whch pad or accrued or pad or ncurred, dependent upon the
method of accountng upon the bass of whch the net ncome s com-
puted, uness n order ceary to refect the ncome the deductons
shoud be taken as of a dfferent perod. rtce 43-1 of Regua-
tons 101 provdes that a ta payer sha take the deducton ony for
the ta abe perod n whch actuay pad or ncurred or pad or
accrued, as the case may be.
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175
23(k), rt, 23(k)-.
Inasmuch as the M Company has adopted the accrua method of
reportng ts ncome, t s entted to deduct the amount of the awards
for the ta abe year 1938, that s, the year n whch the decson of the
Natona Labor Reatons oard was rendered (no appea havng been
taken) and the abty became f ed and determned. If the ega
fees aso became a f ed and determned abty durng the year 1938,
the ta payer kewse s entted to deduct such fees as a busness
e pense for that year.
rtce 23(c)-1: Ta es.
R NU CT O 1938.
Refunds or credts for State ta es prevousy deducted wthout
ta benefts. (See I. T. 3438, page 44 .)
ktce 23 (c) -1: Ta es.
R NU CT O 1938.
I. T. 3278 (C. . 1939-1 (Part 1), 7 ) modfed. (See I. T. 3390,
page 8.)
S CTION 23 (k). D DUCTIONS ROM GROSS
INCOM : D D TS.
rtce 23 (k) -1: ad debts.
R NU CT O 1938.
Reguatons 101. amended. (See T. D. 4978, page 75.)
rtc e 23 (k)-: ad debts.
R NU CT O 1938.
Recoveres of bad debts charged off n pror years. (See G. C. M.
221 3, page 7 .)
rtc e 23(k)-: ad debts.
R NU CT O 1938.
Recoveres upon bad debts prevousy deducted wthout ta
beneft, (See I. T. 3438. page 44 .)
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101, rt, 101 ( )- 17
T RT I . CCOUNTING P RIODS ND M T ODS O
CCOUNTING.
S CTION 42. P RIOD IN W IC IT MS O
GROSS INCOM INCLUD D.
rtce 42-1: When ncuded n gross ncome.
R NU CT O 1938.
I. T. 3278 (C. . 1939-1 (Part 1), 7 ) modfed. (See I. T. 3390,
page 8.)
rtce 42-1: When ncuded n gross ncome.
R NU CT O 1938.
Refunds or credts for State ta es prevousy deducted wthout
ta beneft, (See I. T. 3438, page 44 .)
R NU CT O 1938.
Treasury Decson 4873 (C. . 1938-2, 201), reatng to the nspec-
ton of certan returns, amended. (See T. D. 4991, page 92.)
R NU CT O 1938.
Treasury Decson 4873 (C. . 1938-2. 2 1). reatng to the nspeo.
ton of certan returns, amended. (Sec T. D. 5019, page 95.)
SU TITL C SUPPL M NT L PRO ISIONS.
SUPPL M NT . R T S O T .
ON CORPOR TIONS.
rtce 101( )-1: Regous, chartabe, scentfc, terary,
and educatona organzatons and communty chests.
R NU CT O 19 8.
State teachers assocaton organzed and operated for the mprove-
ment of educatona methods and admnstraton. (See G. C. M.
22120, page 98.)
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177
293.
S CTION 113(b). D UST D STS OR D T RMIN-
rtce 113(b)-2: d|usted bass: Canceaton of
ndebtedness.
R NU CT O 1938.
R NU CT O 1938.
rtce 113(b)-4: Substtuted bass.
R NU CT O 1938.
S CTION 1 5. MPLOY S TRUSTS.
rtce 1 5-1: mpoyees trusts.
R NU CT O 1938.
Penson pan not evdenced by trust nstrument. (See I. T. 343 ,
page 148.)
S CTION 231. T ON OR IGN CORPOR TIONS.
rtce 231-3: cuson of earnngs of foregn shps
from gross ncome.
R NU CT O 1938.
I
Incuson of terms arshp or arshps or arnane or arpanes 1
term shp or shps. (See I. T. 3399, page 15 .)
IN C S O D ICI NCY.
R NU CT O 1938.
Coectbty, after death of the ta payer, of 50 per centum addton
to ta for fraud. (See G. C. M. 2232 , page 159.)
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23(h) rt. 23(a)-9.
178
INCOM T RULINGS. P RT II.
R NU CTS O 1937 ND 193 .
SU TITL G N R L PRO ISIONS.
ROM GROSS INCOM .
mounts receved under so-caed endowment, ncome, and fna
um pocy. (See I. T. 3402, page 157.)
INCOM : P NS S.
The M Company may take as deductons for edera ncome ta
purposes reasonabe amounts pad for sck or accdent benefts or
nto ts penson trust even though the reguatons of the edera
Communcatons Commsson requre the aocaton of a pro rata
share of such e pendtures to the cost of new constructon. The
cost or other bass of assets as shown on the books under the regua-
tons of the Commsson must be ad|usted, for edera ncome ta
purposes, by emnatng such tems whch have been aowed as
deductons from gross ncome as busness e penses.
dvce s requested whether sck and accdent benefts and penson
accruas are deductbe by the M Company for the year 1937, even
though the provsons of the edera Communcatons Commsson s
reguatons requre that a pro rata porton of such tems sha be
captazed and charged to new constructon.
Under secton 23(a) of the Revenue ct, of 193 and reguatons
ssued thereunder, reasonabe amounts pad by the ta payer nto the
penson trust fund n 1937, whch were not n e cess of the company s
penson abty for such year, and reasonabe amounts pad for sck
or accdent benefts, were proper deductons by the company n com-
putng ts ncome sub|ect to ta for such year. Payments to the pen-
son trust fund n e cess of the company s penson abty for the year
n queston are deductbe over a 10-year perod as provded n secton
23(p) of the Revenue ct of 193 .
Notwthstandng the provsons of the edera Communcatons
Commsson s reguatons reatve to the aocaton of a pro rata share
of the e pendtures for sck and accdent benefts and penson accruas
to the cost of new constructon, for edera ncome ta purposes the
ta payer s entted to deduct as ordnary and necessary busness
R NT CT O 11)30.
rtce 23(a) 9: Pensons Compensaton for
n|ures.
( so Secton 23(p), rtce 23(p)- Secton
113(a). rtce 113(a)- .)
1940-58-10424
I. T. 3408
R NU CT O .ttf.
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179 23(p), rt. 23CP-1).
e penses for the |-ear 1937 reasonabe amounts pad for sck and acc-
dent benefts and reasonabe amounts pad to the penson trust fund
coverng the ta payer s penson abty for such year.
The above-mentoned tems, f taken as deductons from gross
ncome, shoud not be added to the base of deprecabe property ether
as M overhead or otherwse. ( s to overhead see G. C. M. 9357,
C. . -, 3S5 (1931).) In computng gan or oss upon the sae or
other dsposton of such property, the cost or other bass thereof as
shown on the books under the provsons of the edera Commun-
catons Commsson s reguatons shoud be ad|usted by emnatng
therefrom such tems prevousy aowed as deductons from gross
ncome as ordnary and necessary busness e penses.
INCOM : D D TS.
rtce 23 (k)-: ad debts.
R NU CT O 193 .
Reguatons 94. amended. (See T. D. 4978, page 75.)
rtce 23(k)-: ad debts. 1940-28-1032
I. T. 3391
R NU CT O 193 .
I. T. 3172 (C. . 1938-1,150) and I. T. 325 (C. . 1939-1 (Part 1),
172), concernng ta abty of amounts recovered on debts deducted by
banks n a pror year pursuant to charge-offs at the specfc drecton
of edera or State supervsory offcers, are revoked n vew of G. C. M.
221 3 (page 7 , ths uetn.)
rtce 23(k)-: ad debts.
R NU CT O 193 .
221 3, page 7 .)
R NU CT O 193 .
Recoveres upon bad debts prevousy deducted wthout ta beneft.
(See I. T. 3438, page 44 .)
S CTION 23 (p). D DUCTIONS ROM GROSS
INCOM : P NSION TRUSTS.
rtce 23(p)-: Payments to empoyees penson trusts.
R NU CT O 193 .
Deductbty of payments to penson trusts requred under regua-
tons of edera Communcatons Commsson to be captazed n part.
(See. T. 3408,page 178.)
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ISO
S CTION 2 . CR DITS O CORPOR TIONS.
rtce 2C - 2: Credt n connecton wth con-
tracts restrctng payment of dvdends.
1940-48-1049 3
Ct. D. 14 7
INCOM T R NU CT O 1930 D CISION Or SI T M COURT.
1. St RT ON T NnSTRI fT D PRO ITS CR DIT O CoR O TION CON-
TR CT Restrctng Payment ok Dvdends Prohbton on
Payment of Dvdends Corporate Charter and State Law
not a Wrtten Contract ecuted by Corporaton.
corporate charter granted by a State together wth a State aw
prohbtng a corporaton havng a prevousy e stng defct from
dstrbutng dvdends do not consttute a wrtten contract e ecuted
by the corporaton wthn the meanng of secton 2 fe) of the
Revenue ct of (3t , whch aows credt to a corporaton whch
can not dstrbute dvdends wthout voatng an e press provson
of a wrtten contract e ecuted by t, deang wth the payment of
dvdends. Therefore such a corporaton, not beng entted to the
credt aowed by that secton, s abe for surta on ts unds-
trbuted profts for the year 193G.
2. Case oowed.
ererng v. ortkcest Stee Rong U, Inc., decded by the
Supreme Court on November 12. 1940 t t. D. 14 8, page 181, ths
uetn , foowed.
3. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, ghth
Crcut (105 ed. (2d). 740). affrmng decson of the Unted States
oard of Ta ppeas (3S . T. .. 13. ), affrmed.
Crane- ohnson Co., a Corporaton of orth Dakota, pettoner, r. Ouy T.
ererng, Commssoner of Interna Reroute.
f(31 S Ct., 114.1
On wrt of certorar to the I nted States Crcut Court of ppeas for the ghth Crcut.
Mr. ustce ack devered the opnon o the Court.
ecause of a prevousy e stng defct, pettoner corporaton was prohbted
by State aw 1 from dstrbutng as dvdends ts profts earned n 1980. Notwth-
standng ths State prohbton, the Commssoner hed respondent abe under
the 103 Revenue ct for surta on undstrbuted profts. The oard of Ta
ppeas sustaned the Commssoner.1 and the crcut court of appeas affrmed.
On a smar state of facts the Court of ppeas for the Nnth Crcut hed
undstrbuted profts e empt from surta . We granted certorar n both cases
to resove ths confct. The ega questons here presented are n a respects
the same as those presented n ererng v. orth n e t Stee Rong h, ths
day decded Ct. D. 14Ck . page 181. ths uetn , and on the authorty of that
case the decson beow s affrmed.
The drectors of corporatons must not make dvdends e cept from the surpus profts
arsng from the busness thereof . (N. D. Conp. Laws (Supp. - O), secton
4543.)
49 Stat., 1 48. 1055.
ScP M CofRT O T UNIT D ST T S.
November 12, I . O.
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181
2 , rt. 2 -2.
|tncL 2 -2: Credt n connecton wth con-
tracts restrctng payment of dvdends.
1940-48-10497
Ct. D. 14 8
INCOM T R NU CT O 193 D CISION OP SUPR M COURT.
1. Sttota on Undstrbuted Profts Credt of Corporaton
Contract Restrctng Payment of Dvdends Prohbton on
Payment of Dvdends Corporate Charter and State Law
Not a Wrtten Contract ecuted by Corporaton.
corporate charter granted by a State together wth a State aw
prohbtng a corporaton havng a prevousy e stng defct from
dstrbutng dvdends do not consttute a wrtten contract e e-
cuted by the corporaton wthn the meanng of secton 2 (c) of
the Revenue ct of 193 , whch aows credt to a corporaton whch
can not dstrbute dvdends wthout voatng an e press provson
of a wrtten contract e ecuted by t, deang wth the payment of
dvdends. Therefore, such a corporaton, not beng entted to
the credt aowed by that secton, s abe for surta on ts unds-
trbuted profts for the year 193 .
2. Consttutonaty of Statute.
Secton 2 (c) 1 of the Revenue ct of 193 , construed as denyng
credt to corporatons prohbted by State aw from dstrbutng
dvdends, does not offend the ffth, tenth, and s teenth amend-
ments to the Consttuton.
3. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, Nnth
Crcut (110 ed. (2d), 28 ), reversng unreported decson of the
Unted States oard of Ta ppeas, reversed.
Guy T. everng, Commssoyer of Interna Revenue, pettoner, v. Northue
Stee Rong Ms, Inc.
1 S. Ct,, 109.
On wrt of certorar to the Unted States Crcut Court of ppeas tor the Nnth Crcut.
Mr. ustce ack devered the opnon of the Court.
Respondent corporaton, because of a prevousy e stng defct, was prohbted
by State aw 1 from dstrbutng as dvdends ts profts earned n 103 . Not-
wthstandng ths State prohbton, the Commssoner hed respondent abe
under the 193 Revenue ct1 for surta on undstrbuted profts. The oard
of Ta ppeas sustaned the Commssoner the crcut court of appeas re-
versed. On a smar state of facts the Court of ppeas for the ghth Crcut
hed undstrbuted profts ta abe. We granted certorar n both cases to
resove ths confct.
Secton 14 of the 193 ct mposed a genera surta on corporate profts earned
but not dstrbuted as dvdends durng the ta year. Secton 2 (c) of the
ct reeved from such surta a undstrbuted profts whch the corporaton
coud not dstrbute as dvdends wthout voatng a provson of a wrtten
contract e ecuted by the corporaton pror to May 1, 193 , whch provson
e pressy deas wth the payment of dvdends.
The ony wrtten contract e ecuted by the corporaton upon whch re-
spondent rees for ts camed e empton s ts corporate charter, granted by
the State of Washngton. Upon the premses that respondent s Washngton
1 No corporaton sha pay dvdends e cept from the surpus of the aggre-
ate of ts assets over the aggregate of ts abtes. (Wash. Rev. Stat. nn.
Remngton. 1932), tte 25, secton 3803-24.)
49 Stat., 1 48, 1 55.
The memorandum opnon of the oard s not offcay reported : the oard reed on
Its earer opnon n Crane- ohnson Co. v. Commssoner (38 II. T. ., 135o).
110 ed. (2d), 28 .
Crane- ohnson Co. v. Commssoner (105 ed. (2d), 740).
309 . S-, 92 311 U. S.. .
Supreme Court of the Unted States.
November 12, 1940.
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182
charter was a wrtten contract, and that the Washngton aws prohbtng dvdend
payments were by operaton of aw a part of that contract, the court beow con-
cuded that the ta payer had satsfed the requrements of secton 2 (c).
We must therefore decde whether secton 2 (c) authorzed a credt or deduc-
ton to corporatons prohbted by State aw from dstrbutng dvdends. nd
respondent strongy urges that the ct, f construed to deny such credt, a
unconsttutona.
rst. It s matera that we are deang here wth a generay mposed surta
upon the undstrbuted net ncome of corporatons, and that respondent s cam s
for a credt n the nature of a specay permtted deducton. It has been sad
many tmes that provsons grantng speca ta e emptons are to be strcty
construed.
Measured by ths sound standard t s probaby not necessary to go beyond
the pan words of secton 2 (c) u search of the egsatve meanng. Cer-
tany, at frst bush, fewr woud suppose that when Congress granted a speca
e empton to corporatons whose dvdend payments were prohbted by e ecuted
wrtten contracts, t thereby ntended to grant an e empton to corporatons
whose dvdend payments were prohbted by State aw. The natura mpresson
conveyed by the words wrtten contract e ecuted by the corporaton s that
an e pct understandng has been reached, reduced to wrtng, sgned and de-
vered. True, obgatons not set out at ength n a wrtten contract may be
ncorporated by specfc reference, or even by mpcaton. ut Congress ndcated
that any e empted prohbton aganst dvdend payments must be e pressy
wrtten n the e ecuted contract. It dd ths by addng a precautonary cause
that the granted credt can ony resut from a provson whch e pressy deas
wth the payment of dvdends.
That the anguage used n secton 2 (e) 1 does not authorze a credt for
statutory prohbted dvdends s further supported by a consderaton of secton
2 (c)2. y ths secton, a credt s aowed to corporatons contractuay ob-
gated to set earnngs asde for the payment of debts. That ths secton referred
to routne contracts deang wth ordnary debts and not to statutory obgatons
s obvous yet the words used to ndcate that the sectou had reference ony
to a wrtten contract e ecuted by the corporaton are dentca wth those
used n secton 2t(c). There s no reason to beeve that Congress ntended
that n broader meanng be attached to these words as used n secton 2ft(c) than
attached to them under the necessary mtatons of 2 (c)2.
Respondent urges that the egsatve hstory of secton 2 (c) 1 supports
ts contenton. nt, on the contrary, that hstory ponts n the other drecton.
The orgna ouse b contaned separate reef provsons (1) for defct
corporatons such as respondent (2) for corporatons contractuay obgated
to pay debts and (3) for corporatons conrtetuay prohbted from payng
dvdends. The Senate nance Commttee struck out a three of these ouse
provsons, bnt substtuted an equvaent for the thrd.10 n amendment from
the Senate foor restored an equvaent of the second. ut the b as fnay
passed contaned no -e press reef provson reatng to defct corporatons.
It s true, as respondent contends, that a charter has been |udcay consd-
ered to be a contract n so far as t grants rghts, propertes, prveges and
franchses. To ths e tent t has been sad that an net of ncorporaton s a
contract between the State and the stockhoders. ut t does not foow
that Congress ntended to ncude corporate charters and reated State aws
n the cautousy mted area permssbe for ta credts and deductons under
ths secton. Nor have the courts consdered that a the provsons of aws
provdng for the gant of corporate franchses are necessary contractua
In ther nature. The same egsatve ct s a aw as we as a grant, and
L g.. Urputu v. rfu rnnt (308 . S., 488, 493) Whte v. Unted States (305 . S.,
281, 292 t. f). 1372, C. . 1938-2, 238 Nec Coona ee Co. v. ecerng (292
. S., 435, 440 Ct. D. 841, C. . II-1, 194 (1833)1).
49 Stat., 1(1( 4. The credt aowed Is n amount equa to the porton of the earnngs
and profts of e ta abe year whch s requred (by a provson of a wrtten contract
e ecuted by the corporaton pror to .May 1, 193 , whch provson e pressy deas wth
the dsposton of earnngs and profts of the ta abe year) to be pad wthn the ta abe
year n dscharge of a debt, or to be rrevocaby set asde wthn the ta abe year for the
dscharge of a debt: to the e tent that such amount has been so pad or set asde.
. . 123 .1, Seventy-fourth Congress, eeond sesson, sectons 14, 15, and 1 see
. Rept. No. 2475. Seventh-fourth Congress, second sesson, pages 8-9.
10 See S. Rept. No. 21. (S. Seventy-fourth Congress, second sesson, pages 12-13, 15-1 .
11 80 Cong. Rec. 9071. Seventy-fourth Congress, second sesson.
Trusters of Dartmouth Coege v. Wood mo d ( Wheat., 518) ome udng and
Loan s n v. amM (290 t. S., 308. 429).
Chenango rdge Co. v. nghamton rdge Co. (3 Wa., 51, 73).
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183
2 , rt. 2 -2.
ths Court has hed that the same egsatve enactment may be both a con-
tract whch can not be mpared and a aw, sub|ect to repea, modfcaton,
ateraton, or amendment wthn the genera egsatve powers. Respondent s
chef reance s upon that charter provson whch requred that t conform
to the e stng and future aws of Washngton. ut that provson s not a
grant and s not a contract. Wth or wthout such a charter provson, t
was the duty of the corporaton to conform to vad Washngton statutes.
The corporaton was sub|ect to the aw of Washngton It coud not rse above
t. corporate charter to operate a partcuar busness n a partcuar manner
does not deprve the State of ts nherent power of egsaton touchng cor-
porate actvtes. nd the grant of a franchse does not e empt the corporaton
from the requrement that t obey State egsaton vady adopted n the
nterests of the pubc wefare.15 It can not be sad, therefore, that the charter
provson that the corporaton shoud obey Washngton aw, ncudng the
statutory prohbton aganst dstrbutng dvdends, was a provson of a wrt-
ten contract e ecuted by respondent. More, the Consttuton of the State of
Washngton under whch the genera corporaton aws were enacted provdes
that aws reatng to corporatons may be atered, amended, or repeaed
by the egsature at any tme, and a corporatons dong busness n ths State
may, as to such busness, be reguated, mted, or restraned by aw. It
s cear, therefore, that what prohbted respondent from dstrbutng dvdends
was not the provson of an e ecuted wrtten contract e pressy deang wth
the payment of dvdends. On the contrary, what prohbted respondent from
payng dvdends was a vad aw of the State of Washngton.17
Second. Respondent contends that the ta statute, as construed, offends the
ffth, tenth and s teenth amendments. None of those contentons s vad.18
It s argued that the ct offends the due process cause of the ffth amendment
because t permts credts or deductons n the case of corporatons restraned
from a dstrbuton of dvdends under a gven type of wrtten contract, whe
not permttng any credt or deducton to corporatons restraned from dstrbu-
ton by ora contracts or by the aws of a State. Ths contenton s wthout
mert. It s not necessary to pont out the many obvous reasons that mght
undere the dstnctons here drawn n grantng speca deductons from a
generay mposed ta .
Respondent aso urges that the ta as apped to It amounts to a confscaton
of ts property wthout due process of aw because the ta Is mposed, not on
ncome, but ony on undstrbuted ncome, and that there can be no unds-
trbuted ncome so ong as the corporaton has an e stng defct. ut the
surta here s mposed upon the undstrbuted net ncome of the corporaton
for each ta abe year. It s true that the surta s mposed upon the annua
ncome ony f t s not dstrbuted, but ths does not serve to make t anythng
other than a true ta on ncome wthn the meanng of the s teenth amendment.
Nor s t true, as respondent urges, that because there mght be an mparment
of the capta stock, the ta on the current annua proft woud be the equvaent
of a ta upon capta. Whether there was an mparment of the capta stock
or not, the ta here under consderaton was mposed on profts earned durng
a defnte perod a ta year and therefore on profts consttutng ncome
wthn the meanng of the s teenth amendment.
It s contended that the statute as here apped voates the tenth amend-
ment because t nterferes wth the authorty of the States to prescrbe the
powers of corporatons and the condtons under whch ther powers may be
e ercsed. ut the statute n no way mts the powers of the corporaton.
It mposes a ta as authorzed by the s teenth amendment and docs not nfrnge
upon the powers reserved to the State by the tenth amendment.1 The court
beow was n error ts |udgment s reversed and the cause s remanded
wth drectons to affrm the |udgment of the oard of Ta ppeas.
Reversed.
Oregon Caforna Raroad Co. v. Unted State (238 . S., 893, 427).
u ammond Packng Co. v. rkansas (212 U. S., 322, 343).
Washngton Consttuton, artce 12, secton 1.
Respondent contended that the stock certfcates satsfed the statutory requstes even
If the charter dd not but what we have here sad wth respect to the charter appes
equay to the certfcates.
aCt eherng v. Natona roeery Co. (304 U. S., 282 ft. D. 1341, C. . 1038-1, 27 h
u everng v. natona Grocery Co., supra, at 2S( -287. nd cf. orda v. Meon
(273 . 8., 12, 17) : Congress can not accommodate ts egsaton to the confctng or
dssmar aws of the severa States nor contro the dverse condtons to be found In
the varous States whch necessary work unke re Uts from the enforcement of the same
ta .
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101, rt. 101(11)-1. 184
R NU CT O 193 .
Treasury Decson 4873 (C. . 1938-2, 2 1), reatng to the nspec-
ton of certan returns, amended. (See T. D. 4991. page 92.)
R NU CT OP 193 .
Treasury Decson 4873 (C. . 1938-2, 2( 1), reatng to the nspec-
ON CORPOR TIONS.
rtce 101(11)-1: armers or other mutua 1940-51-1052
ha, cycone, casuaty, or fre nsurance Ct. D. 1474
companes or assocatons.
INCOM T R NU CTS O 1928. 193 2, 1934, ND 193 D CISION O
COURT.
1. Corporaton re Insurance Company empton as Mutua
Company Determned by Character of usness ctuay
Done.
fre nsurance company s not e empt from payment of ncome
ta es as a mutua nsurance company wthn the meanng of sectons
103(11) of the Revenue cts of 1928 and 1932 and sectons 101(11)
of the Revenue cts of 1 34 and 193 . where t appears that ess than
1 per cent of ts pocyhoders quafed for membershp and votng
prveges by e ecutng the depost notes requred from members,
and that no refunds to pocyhoders of the e cess of premums over
actua cost were ever made. Whe name, charter powers, and sub-
|ecton to State nsurance aws have sgnfcance as to the busness
whch a corporaton s authorzed and ntends to carry on, the char-
acter of the busness actuay done n the ta abe years determnes
whether t s entted to e empton as a mutua nsurance company.
2. Decson Reversed.
Decson of the Dstrct Court of the Unted State for the Western
Dstrct of Pennsyvana (28 . Supp., 224) reversed.
3. Certorar Dened.
Petton for certorar dened October 14, 1940.
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101, rt. 101(11) 1.
Unted St-ates Crctt Covbt of ppeas for the Thrd Crcut.
Wam Drsrtt, Coector of Interna Revenue. Twenty-ttrd Dstrct of Petn-
M|/Irana, Pttsburgh, Pa.. defe ant-appeant, v. Washngton County re
Insurance C tt| Washngton, Pt., puntff-appeee.
110 ed (2d , 485.
On appea from the Dstrct Court of the Unted States for th Western Dstrfct f
e nsyva4a.
ebruary 27, 1940
OPINION.
ggs. Crcut udge: Upon December 8, 1873, the appeee, Washngton County
re Insurance1 Co., was ncorporated pursuant to the provsons of ct No. 23 ,
page 211, Laws of Pennsyvana, Sesson of 18. G, n con|uncton wth the prov-
sons of ct No. 27, page 44, Laws of Pennsyvana, Sesson of 18G7. The charter
of the company (secton 2), ssued hy the Court of Common Peas of Washngton
County, provded, The busness of the sad company sha he transacted upon
the mutua prncpe, e cusvey, and the sad company s aowed to nsure on
the cash or annua premum system, the sum so receved to be pad nto the
common treasury of the company, and n consderaton thereof the sad company
to be responsbe for a osses occurrng to property thus nsured accordng to the
terms of ther poces. Insurance thus effected sha not entte the nsured to
mem ershp n sad company, nor sub|ect them to the payment of assessments.
Paragraph I of the by-aws of the appeee provdes, very person wshng
to become a member of ths company, sha prevous to beng nsured, depost
hs appcaton and premum note wth the secretary of sad company, and f
approved, the pocy sha hear dae on that day, and take effect at noon, utdess
drected by the appcant to he dated on a future date. sum equa to at east 5
per cent of the premum note sha be pad at the tme of makng the appcaton.
It appears from the agreed statement of facts that begnnng n 1873, when
the appeee was ncorporated, a nsurance poces were Issued by t In con-
sderaton of a cash premum and a contngent abty represented by a depost
note. Ths course was contnued unt uy, 1911, when the by-aws were
amended to provde that an nsured shoud e ecute a depost note ony when
the property nsured was not rated. egnnng n anuary, 1914, and unt the
present tme (wth the e cepton set forth n the ne t paragraph) nsurance
has been ssued upon rated property and unrated propery ake for an annua
cash premum payabe n advance wthout the e ecuton of depost notes.
The e cepton referred to s as foows: Durng the perod nvoved n ths
tgaton (1928 to 1930, ncusve) the 1 persons who were or are n charge
of the management of the company dd e ecute depost notes n accordance
wth the practce whch prevaed pror to 1911. Durng ths perod the average
number of pocyhoders was 3,000. The agreed statement of facts (paragraph
12) states, Ony those persons e ecutng depost notes are members. The
use of the depost notes has been contnued snce 1914 for the purpose of pro-
vdng for the membershp entted to eect the managng offcers of the cor-
poraton. The personne of the depost note makers snce 1914 has been de-
termned by the drectors of the pantff company. very depost note maker
s a pocyhoder. No refunds or returns whether by way of the payment of
redundancy or otherwse have ever been made to anyone. The corporaton
has prospered and no assessments have ever been made.
If the charter provsons aone consttute the contract between the appeee
and ts members, puttng to one sde for the tme beng the provsons of the
act. under whch the appeee was ncorporated, ony depost note makers are
members. It s cear that throughout the ta abe perod ony the 1 depost
note makers voted to eect drectors, thereby fufng one of the functons of
membershp n a mutua assocaton. the other pocyhoders performed
none of the dutes of members. If the provsons of secton 2 of the charter
are to be deemed vad they are not sub|ect to assessment for osses, and
poces of nsurance were ssued to them precsey smar to those ssued by
Ths act was repeaed by 1021 P. L., 82, rtce I, secton 1101, 40 P. S., 901.
290217 41 18
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101, rt. 101(11)- .
18
stock companes to those whom they .Insured. These po cyhoders, as ds-
tngushed from the depost note makers, merey pad a f ed premum for
whch they obtaned a contract of nsurance.
The queston presented for our determnaton s whether the appeee was
e empt from the payment of ncome ta es durng the years 1928 to 1930
ncusve. The edera cts provde:
The foowng organzatons sha be e empt from ta aton under ths
tte

(11) armers or other mutua ha, cycone, casuaty, or fre nsurance
companes or assocatons the ncome of whch s used or hed for
the purpose of payng osses or e penses
Was the appeee a mutua company The court beow hed that t was,
beevng that ts membershp coud not be mted to the depost note makers
despte the provson of the charter to such effect. The argument n favor
of ths concuson may he stated as foows: Secton 11 of the Pennsyvana
net of 85 provdes that membershp n the company may be obtaned by
payment of a premum or contractng to pay t and that the e tent of the a-
bty of the Insured for assessment shoud be mted to the amount of such
premum. Therefore by the payment of a premum, the nsured becomes a
member of a mutua company, but s not abe for assessment beyond the
amount of the premum pad. The Supreme Court of ennsyvana has con-
strued the act of 185 to such effect n the case of Schmpf Son v. Lehgh
aey Mutua Insurance Co. (8 Pa. St., 373, 37 ). The terms of a statute
under whch a corporaton s created may be read nto and become a part of
the contract between the corporaton and ts members. Therefore, runs the
argument, a pocyhoders are members of the corporaton. pocyhoders,
whether they have gven depost notes or not, possess the rght to vote for
drectors for such a rght s gven to pocyhoders by secton 114 of the act of
185 . The pocyhoders are the ony persons nterested n the appeee and
they are a treated upon an dentca bass. Therefore, says the appeee,
t s a mutua company.
The e emptng statutes, however, requre that the appeee meet a twofod
test f t s to gan e empton. Not ony must t be a mutua company but ts
ncome must be used or hed soey for the payment of osses or e penses.
(MacLaughn v. Phadepha Contrbutonshp, 73 ed. (2d), 582 atmore
qutabe Socety v. Unted States, 3 ed. Supp., 427 Ct. D. 709, C. . II-2, 121
(1933) , certorar dened, 290 U. S., 2.) The appeee contends that t meets
the second requrement as we as the frst, that not ony s t a mutua com-
pany but a of ts ncome s hed for the purpose of payng osses and e penses.
The dstrct court so hed. ssumng arguendo, that the appeee must be
deemed to be a mutua company wthn the purvew of the statutes conferrng
e empton, et us test frst the ast contenton of the appeee.
It s cear that the ncome upon whch the appeee was ta ed n the ta abe
years n queston was net ncome computed after deductng payments for osses
and e penses. The ncome ta ed was not used for the payment of osses or
e penses. Was t hed for such purposes It w be observed that the com-
pany s surpus Increased from 280,000 n 1929 to 14 ,000 In 193 . Throughout
Revenue ct of 1928 (ch. 8.r.2, 45 Stat., 791, 813), secton 103(11) Revenue ct of
1932 (ch. 209, 47 Stat., 1 9, 193), secton 103(11) Revenue ct of 1934 (ch. 277. 48
Stat., GSO, 700, 701), secton 101(11) and Revenue ct of 193 (ch. 090, 49 Stat., 1 48.
1 74), secton 101 (11) (U. S. C, Tte 2 . secton 103).
The pertnent provsons of the.respectve cts are Identca.
Secton 11 of the act of 180 provdes In part:
That whenever any company may be Incorporated under ths aw, and may Intend to
transact Its busness upon the mutua prncpe e cusvey, or In conuecton wth a ont
stock capta, t sha be so desgnated In ts charter and If upon the mutua prncpe
e cusvey, then the partes named n sad speca act, and ther assocates, sha be made
and consttuted a body corporate, drecty, and wthout the grant of etters patent, as
herenbefore provded In reference to |ont stock companes and In that case a persons
Insurng wth, and contnung to be Insured theren, sha thereby become membera durng
the perod they sha reman so nsured, and no onger, and sha pay such rates as sha
be determned by the board of drectors, and be abe for a osses and e penses of ad
company, to the amouut of the premums pad, or agreed to be pad by sad members
respectvey.
The pertnent nnguage of secton 11 of the act of 1S5 Is as foows :
t the eectons for drectors, each member Insured by any sum not ess than II, pad
n as a premum of Insurance to sad company durng the year prevous to sad eecton,
and on pocy then e stng, sha have one vote and for every addtona 25 so pad,
one other vote. In other respects, the management of sad mutua companes sha be as
herenbefore provded In reference to ont stock nsurance companes: .
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187
5 101, rt. 101 ()-.
the ta abe.years In queston the, appeee has had Insurance In force averagng
more than 10,000,000. The amount of surpus s fur n e cess of unearned
premum reserve requred by the aw of Pennsyvana. These facts requre
a further consderaton of the terms of the act of s|O.
be act qf 1850 was a genera ncprporaton act for Insurance companes.
It provded for the ncorporaton of |ont stock nsurance companes , for
mutua companes, and for hybrd companes authorzed to ssue nsurance
both as |ont stock companes and upon the mutua prncpe at the same tme.
It prescrbed the terms upon whch such companes mght do busness. Secton
12 of the act provdes for the payment of dvdends by ont stock companes,
and In respect to companes organzed upon the mutua prncpe
e cusvey (thp secton states that), each member sha be entted to such
a proporton of the sad surpus, as the cash premum pad by such members
respectvey may bear to the aggregate surpus so decared and for the pro-
portonate share of each member so ascertaned, a certfcate sha be ssued,
decarng hm or them to be entted to such a porton of the accumuated
enpta of the company sad certfcate to be construed and governed as here-
nafter mentoned but no certfcate sha be ssued for a ess sum than 25,
nor for any fractona part of , and sha, at the dscreton of the drectors
near, and be pad nterest at a rate not e ceedng per centum per annum.
Secton 14 of the act provdes, That wthn days after the yeary baance
of the affars of sad company sha be struck, the drectors sha cause to be
pad, n cash, to the stockhoders of any such |ont stock nsurance company,
the amount of dvdends they may respectvey be entted to and where any
such company may be chartered upon the stock and mutua prncpe combned,
they sha cause to be pad to the stockhoders, n cash, not e ceedng per
centum on ther stock respectvey and sha ssue the company s certfcates
to such nsured members and stockhoders respectvey, agreeaby to the prov-
sons of the twefth secton n whch case, and where sad company sha be
chartered on the mutua prncpe e cusvey, the certfcates ssued to the
members as aforesad sha not be pad unt the net profts or surpus sha
e ceed te sum of 250,000, when the sad e cess may be apped for the
redempton of the sad certfcates, and any arrears of nterest that may have
been aowed thereon.
The aw pursuant to whch appeee was ncorporated thus decares that
each member s entted to an aquot share or the appeee s surpus and the
drectors are requred to ssue to them certfcates to such effect. The payment
of nterest upon the certfcates s dscretonary as s the utmate payment of
the shares represented by the certfcates sub|ect to the quafcaton that the
surpus of the company must e ceed 250,000 before that dscreton may be
e ercsed. s noted, the surpus of the appeee far e ceeds ths sum and
has done so throughout the whoe of the ta abe perod. We thnk that (he
dscreton of the drectors of mutua fre nsurance companes ncorporated
under the act of 185 s a ega dscreton and may not be abused. Whte v.
Provdent L. Tr. Co.. 237 Pa.. 37r , 384 Orange v. Penn Mutua Lfe Insurance
Co., 23. Pa., 320, 329. 330 raterna Guardans . Shceer s p., r ) Pa.. 594
See aso Me eun v. Itde et at., 181 Pa., 3 1.) If the fnanca condton and
burpns of a mutua fre nsurance company ncorporated under the act of 18. ,
are such as those of the appeee and nterest bearng certfcates representng
redundancy have not been ssued, we entertan no doubt that drectors may
not e heard to say that the surpus s not hed for the beneft of the members.
ow much a dstrbuton of surpus ncudng earnngs coud be made s not the
queston before us. We are concerned wth a queston of ta aton and not
wth corporate management, but t does appear from te record that the
appeee as nvested proftaby ts accumuated capta from tme to tme and
receved ncome from such nvestments throughout the ta abe perod. Pay-
ments of redundancy must be treated as eements of e pense deductbe from
gross ncome for ncome ta purposes (see paragraph 3 of secton 2( 8 of the
Revenue ct of 1928 (ch. 852, secton 208, 45 Stat., 84(f)), but payments of
corporate earnngs to members of a company are not so deductbe. It foows
that surpus hed even n part for the payment of nterest upon redundancy
certfcates Is not hed for the payment of osses and e penses, treatng
e cuses as ncudng redundancy. or anaogy see MaeLaughn v. Phade-
pha ( ontrbutotuhp, supra, page 584.
I udoU a. Stat, Tte 40. secton 91.
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101, rt. 101(11)- .
The appeee contends, however, that foowng the passage of the act of
May 25, 1921 (P. L 1124, 40 P. S., 77), by the egsature of Pennsyvana U
coud not hod ts surpus for any other purposes than the payment of osseg
and e penses. Secton 3 of the act of May 25, 1921, provdes that The surpus
of any domestc re nsurance companes ssung poces In accordance wth
the provsons of secton 1 or 2 of ths act sha be hed as a reserve for the
payment of osses and e penses and, n the event of dssouton of the com-
pany, sha be dvded pro rata among the pocyhoders whose poces are n
force at the tme of dssouton, but no pocyhoder, other than oss camants,
sha receve more than the amount of the unearned cash premum ast pad to
the company for the current term of such pocy. ny baance remanng sha
escheat to the Commonweath of Pennsyvana. Secton 2 of the act need not
be dscussed here. Secton 1, however, provdes that ny domestc mutua
fre nsurance company, organzed pror to May frst, one thousand eght hun-
dred and seventy-s , havng a surpus not ess than the mnmum capta
requred for the organzaton of a domestc stock fre nsurance company and
an unearned premum reserve computed upon the same bass as that requred
of domestc stock fre nsurance companes, may Issue poces for a cash pre-
mum wthout any contngent abty for assessment. The appeee s accu-
muated capta and unearned premum reserve s suffcent to meet the requre-
ments of ths secton f t be appcabe. We thnk that the amendment of
1857 to the consttuton of Pennsyvana of 1838, provdng that the egsature
sha have the power to ater the provsons of any charter thereafter con-
ferred by genera or speca aw, s appcabe to tte charter of the appeee.
It foows, says the appeee, that the egsature by passng the act of May 25,
1921, has amended Its charter and has set forth n the act tsef the purposes
for whch the appeee must hod ts surpus f t operates upon the bass set
forth n secton 1. The provsons of secton 3 of the 1921 act may be hed
to consttute a vad e ercse of poce power by the Commonweath It s not
necess|ry for us to pass upon ths queston, however, for t s our opnon that
the appeee s not a mutua company.
The essenta of mutuaty s membershp. In Cooey s refs on Insurance
(2d d., 1927), voume 1, page 8, t s stated that the fundamenta
prncpe of a mutua nsurance company s that the company n no case can
nsure property not owned by one of ts members. (See Pmn Mutua Co. v.
Lederer, 2.r 2 U. S., 523. 533-534 T. D. 3040, C. . 3. 249 (1920) tantc Lfe
Insurance Co. v. Mouture. 35 ed. (2d). 3 0, 3 2: aus v. Lycomng re Insur-
ance Co., 9S Pa., 1S4, 191 Gren v. Rettcw, 1 2 Pa.. 38, 10- 41 Mc ean v.
d de, supra, page 3 2.) Incdent to membershp s the rght to redundancy
and the burden of assessment. s was staed by the Supreme Court n Penn
Mutua Co. v. Lederer, supra, 525, t Is the essence of mutua nsurance that
the e cess n the premum over the actua cost as ascertaned sha e returned
to the pocyhoders.
Wthout regard to the purposes for whch the appeee hods ts surpus, t s
the case that hy the terms of ts own charter, by the condtons of ts own
by-aws and by the very stpuaton of the agreed statement of facts, those
pocyhoders who have not e ecuted depost notes are not members. The
appeee can not refuse membershp to those whose property t Insures for a
cash premum and grant t to those whose property t Insures for the consdera-
ton of a depost note and be deemed to be a mutua company. ven f those
whose property Is nsured soey for a cash premum be deemed to be mem-
bers as we as the depost note makers, those members are treated upon
dfferent bases, for each cass receves nsurance under dfferent condtons.
rom ether vewpont, the appeee carred on a nonmutua busness.
Lookng to the actua conduct of the appeee from the tme of ts ncorpora-
ton through the perod embraced by ths sut, we fnd the foowng: rom the
tme of ts Incorporaton n 1873 to 1911. the appeee operated on a strcty
mutua bass, a pocyhoders makng depost notes and deverng them to the
appeee, thereby becomng members of the corporaton. rom 1911 unt the
end of the ta abe perod the appeee dd not operate as a mutua company or
upon a mutua bass. Specfcay, throughout the ta abe perod depost notes
have been gven by ess than 1 per cent of the persons to whom poces have
been Issued. It therefore conducted Its busness upon a dua bass wth mem-
bershp for the 1 depost note makers and nonmembershp for the other 3,000
or more pocyhoders. ven treatng a those whose property was nsured as
So fur ns we can ascertan, the vadty of secton 3 of the act of May 25, 1921, has
been passed upon hut once namey, by the court beow In the case at bur.
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189
112(a), rt, 112(a)- .
members, the status of the two groups was essentay dfferent and such as to
destroy mutuaty. The note makers voted for drectors and managed the
company the nonnote makers dd not do these thngs. We thnk t s frutess
to argue that perhaps the nonnote makers coud have gone nto a court of
equty and compeed the appeee to recognze them as members. The deter-
mnaton of that queston nvoves the nterna management of a Pennsyvana
corporaton and s one whch woud have to he determned by the courts of that
State. Our probem s the determnaton of the appcabty of edera e empt-
ng cts. In determnng such appcabty we must ook not to what the
appeee shoud have done or what t eond have been compeed to do by pre-
mum-payng pocyhoders n search of membershp status. Upon the contrary,
we must fnd what t actuay dd do and |udge t accordngy. In owers v.
Larers Mortgage Co. (285 U. S., 182, 188 Ct. D. 484, C. . I-1, 304 (1932) ),
the Supreme Court In hodng that a company ncorporated, nter aa to do
busness as an Insurance company, was not ta abe as such, the Supreme Court
y Mr. ustce uter stated, Whe name, charter powers, and sub|ecton to
State nsurance aws have sgnfcance as to the busness whch a corporaton
s: authorzed and ntends to carry on. the character of the busness actuay
done n the ta abe years determnes whether t was ta abe as an nsurance
company. So In the case at bar, what the appeee actuay dd In the ta abe
years determnes whether It s entted to e empton as a mutua nsurance
company. We concude for the reasons stated that the appeee s not entted
to e empton.
The |udgment of the court beow s reversed and the cause Is remanded wth
drectons to enter |udgment for the appeant.
S CTION 112(a). R COGNITION O G IN OR
LOSS: G N R L RUL .
rtce 112(a)-: Saes or e changes. 1940-27-10308
G. C. M. 2205
R NU CT O 1930.
The e tenson of the maturty date of notes ssued by the M Com-
pany was not, under the facts of ths case, an e change of one
obgaton for another and was not a transacton whch resuted n
gan or oss for edera ncome ta purposes.
n opnon s requested whether the e tenson of the maturty date
of certan notes ssued by the M Company was a ta abe transacton
resutng n gan or oss for edera ncome ta purposes.
The terms of the e tenson are contaned n an agreement heren-
utter referred to as the pan, whch provded that f the note-
hoders woud depost ther notes wth certan depostares such notes
woud be returned to the notehoders wth an agreement e tendng
the maturty to a certan date. Interest coupons provdng for pay-
ment of the same rate of nterest as n the orgna notes were aso
to be attached. The pan further provded that the notes were to
contnue to be secured by the trust ndenture under whch mortgage
bonds of the M Company were hed as securty and were to be guar-
anteed by the orgna guarantor, the N Company. The N Company,
whch owned .e doars out of 92, doars of the outstandng notes,
agreed that none of the notes owned by t woud, durng the perod
of e tenson, be redeemed by the N Company unt a notes other
than those owned by t were retred or ther retrement provded for.
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112(a), rt. 112(a)- .
190
The N Company aso agreed that the en of the notes owned by t
upon the coatera securty woud be subordnated to the en of the
other notes unt such other notes were retred or provson made for
the retrement thereof.
The queston presented s whether there was, n effect, an e change
of the od obgaton of the M Company for a new obgaton of that
company whch resuted n gan or oss for edera ncome ta
purposes.
In I. T. 13 5 (C. . 1-1, 151 (1922)) t was hed that second 4 4
per cent Lberty bonds and fourth 414 per cent Lberty bonds are not
substantay dentca property wthn the meanng of secton
214(a)5 of the Revenue ct of 1921 whch precudes the aowance of
a oss sustaned upon the sae or other dsposton of stock or secur-
tes f, wthn 30 days before or after the date of such sae or other
dsposton, the ta payer has acqured substantay dentca prop-
erty. In I. T. 2G72 (C. . II-1, 72 (1933)) t was hed, under
the correspondng provsons of the, Revenue ct of 1932. that two
bonds of the same face vaue ssued by the same muncpaty at tnp
same rate of nterest but of dfferent dates of ssue, of nterest pay-
ments, and of maturty, are not substantay dentca securtes.
In I. T. 2734 (C. . II-2, 73 (1933)) Lberty bonds were e changed
for a new ssue of Treasury bonds and t was hed that the trans-
acton was one n whch gan or oss s recognzed. In I. T. 289
(C. . I -1, 9 (1935)) t was hed that an e change of one ssue
of muncpa bonds for another ssue of bonds of the same munc-
paty was a transacton from whch gan or oss resuted. In I. T.
2778 (C . III-1, 79 (1934)) the Seres debentures of the M
Corporaton were ssued n the amount of 8.r doars under an n-
denture dated n 1929. In 1930 an addtona ssue of doars,
desgnated as Seres , was made under a suppementa ndenture.
The ony dfferences between the two ssues were the dates of ssue
and the amounts to be redeemed annuay. It was hed that an
e change of Seres debentures for Seres debentures s a
transacton from whch gan or oss may resut.
In a of those cases one ssue of securtes was e changed for an
entrey new and dstnct ssue, or securtes of one ssue were sod
and those of an entrey new and dstnct ssue were purchased. In
the present case there was not an e change of one securty for another.
that occurred was that the maturty date of an e stng seres of
notes was e tended and the hoder of a part thereof agreed that none
of the notes owned by t woud be redeemed durng the perod of
e tenson unt a the other notes were retred or ther retrement
provded for, and that the en of the notes owned by t upon the
coatera securty shoud be subordnated to the en of the other
notes. Under the facts of ths case, t s the opnon of ths offce that
no gan or oss resuted from the above descrbed transacton.
The foregong does not mean that the ncome ta abty re-
sutng from a partcuar transacton nvovng change n the terms of
outstandng securtes s controed entrey by the mechanca means
used for tbe accompshment of such change. It s reazed that
there may be cases where matera changes n the terms of an out-
standng bond are made by ndorsement of such changes on the
e stng bond rather than by the ssuance of a new one. Where the
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191 113(b), rt. 113(b)-4.
changes are so matera as to amount vrtuay to the ssuance of a
new securty, the same ncome ta consequences shoud foow as f
the new securty were actuay ssued. ach case of ths nature must
be governed by ts own facts. In the present case t s, as stated
above, the opnon of ths offce that a mere e tenson of maturty of
outstandng notes, accompaned by the agreement of some of the
hoders of the notes not to resort to the underyng securty unt
other notehoders have been pad, does not consttute n substance
the e change of the outstandng note for a new and materay
dfferent note, or a cosed and competed transacton upon whch
gan or oss may be determned.
It s, therefore, the opnon of ths offce that nether gan nor oss
to any of the hoders of these notes resuted from the above-descrbed
transacton.
. P. Wenche,
Chef Covnw, ureau of Interm . Revenue.
S CTION 113(a). D UST D SIS OR D T RMINING
G IN OR LOSS: SIS (UN D UST D) O PROP RTY.
rtce 113(a)-: Scope of bass for determnng gan or oss.
R NU CT O 103 .
d|ustment of bass by emnaton of tems aowed as busness
e penses. (See I. T. 3408, page 178.)
ndebtedness.
R NU CT O 193 .
R NU CT O 193 .
rtce 113(b) 4. Substtuted bass.
R NU CT O 193 .
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275, rt. 275-1. 192
S CTION 231 T ON OR IGN CORPOR TIONS.
from gross ncome.
R NU CT O 193 .
Incuson of terms arshp or arshps or arpane or arpanes
n term shp or shps. (See L T. 3399, page 15 .)
SUPPL M NT L. SS SSM NT ND COLL CTION O D ICI NCI S.
S CTION 275. P RIOD O LIMIT TION UPON
SS SSM NT ND COLL CTION.
rtce 275-1: Perod of mtaton upon 1940-3 -10407
assessment of ta . G. C. M. 22248
R NU CT O 193 .
Where a decedent s edera ncome ta return for the caendar
year 1938 was cosed and an assessment made under secton 275(b)
of the Revenue ct of 193 and, after the 18-month mtaton perod
for assessment provded n that secton had e pred, t was dscov-
ered that addtona ncome n e cess of 25 per centum of the amount
of gross ncome stated n the return for 193 was ncudbe n the
return for that year, secton 275(c) of the Revenue ct of 193( , per-
mttng assessment wthn fve years after the return was fed, s
appcabe.
n opnon s requested whether secton 275(c) of the Revenue ct
of 193 may be apped to a edera ncome ta return for the year
193 whch was cosed and the ta assessed under secton 275(b) of
that ct,
edera ncome ta return for the caendar year 193 was fed
n behaf of , deceased, on March 15, 1937, and the return was cosed
under the appcabe provsons of secton 275(b) of the Revenue ct
of 193 , reatng to requests for prompt assessments n certan cases.
recent e amnaton of the edera ncome ta return of the estate
of the decedent for the year 1938 reveaed addtona ncome whch
was ncudbe n the return of the decedent for the year 193 . Ths
addtona ncome s n e cess of 25 per centum of the amount of gross
ncome stated n the 193 ncome ta return fed for the decedent.
Secton 275 of the Revenue ct of 193 reads n part as foows:
cept as provded n secton 278
(a) Genera Rue. The amount of ncome ta es Imposed by ths tte sha
be assessed wthn three years after the return was fed, and no proceedng n
court wthout assessment for the coecton of such ta es sha be begun after
the e praton of such perod.
(b) Request fur Prompt ssessment. In the case of Income receved durng
the fetme of a decedent, or by hs estate durng the perod of admnstraton,
the ta sha be assessed, and any proceedng n court wthout assess-
ment for the coecton of such ta sha be begun, wthn eghteen months after
wrtten request therefor (fed after the return s made) by the e ecutor, ad-
mnstrator, or other fducary representng the estate of such decedent,
but not after the e praton of three years after the return was fed.
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193
275, rt. 275-.
(c) Omsson from Gross Income. If the ta payer omts from gross ncome
an amount propery ncudbe theren whch s n e cess of 25 per centum of
the amount of gross ncome stated n the return, the ta may be assessed, or a
proceedng n court for the coecton of such ta may be begun wthout assess-
met, at any tme wthn fve years after the return was fed.
Under the genera rue set forth n secton 275(a), supra, a ta may
not be assessed aganst a ta payer by the Government after the e -
praton of three years from the date upon whch the return s fed.
In order to factate prompt settement of estates and to ad n the
coecton of ta es, secton 275(b), supra, provdes that f certan
condtons are comped wth n the case of ncome receved durng
the fetme of a decedent, the ta sha be assessed wthn 18 months
after such compance. If , however, the condtons mentoned n sec-
ton 275(b), supra, are not comped wth, then, n the case of ncome
receved durng the fetme of a decedent, the genera 3-year mta-
ton perod s appcabe. In secton 275(c), supra, Congress has
provded that n an e traordnary case, . e., a case n whch the ta -
payer omts from gross ncome an amount propery ncudbe theren
whch s n e cess of 25 per centum of the amount of gross ncome
stated n the return, the ta may be assessed at any tme wthn fve
years after the return was fed. It seems cear that, athough Con-
gress shortened the perod of mtaton upon assessment, for reasons
whch have been stated, n certan cases covered by secton 275(b),
Congress nevertheess ntended secton 275(c) to supersede secton
275(b) n the e traordnary case covered by secton 275(c). More-
over, the provson reatng to request for prompt assessment n cases
nvovng ncome receved durng the fetme of a decedent, or by
hs estate durng the perod of admnstraton, was n the Revenue
cts ong before secton 275(c) was enacted n the Revenue ct of
1934. Therefore. Congress was aware of secton 275(b) when t
enacted secton 275(c) and gave no ndcaton that t ntended that
secton 275(c) shoud not appy to cases of the type referred to n
secton 275(b) where there was an omsson of ncome n e cess of
25 per centum of the amount of gross ncome stated n the return.
The report of the Senate nance Commttee on secton 275 of the
revenue b of .)M. Senate Report No. 558, Seventy-thrd Congress,
second sesson (C. . 1939-1 (Part 2), 58 , at page 19), reads n
part as foows:
The present aw permts the Government to assess the ta wthout regard
to the statute of mtatons n case of faure to te a return or n case of a
frauduent return. Secton 27 (a), Revenue ct of 39:54. The ouse b
contnues ths pocy, but enarges the scope of ths provson to ncude cases
wheren the ta payer understates gross ncome on hs return by an amount
whch s n e cess of 25 per cent of the gross ncome stated n the return. Your
commttee s n genera accord wth the pocy e pressed n ths secton of the
onse b. owever, t s beeved that n the case of a ta payer who makes
an honest mstake, t woud be unfar to keep the statute open ndefntey. or
Instance, a case mght arse where a ta payer faed to report a dvdend be-
cause he was erroneousy advsed by the offcers of the corporaton that t was
pad out of capta or he mght report as ncome for one year an tem of ncome
whch propery beonged n another year. ccordngy, your commttee has
provded for a 5-year statute n such cases. .
The egsatve hstory of secton 275(c), supra, shows that Con-
gress frst consdered that the Omsson from gross ncome pro-
vson shoud be a part of secton 27 (a) of the Revenue ct of 1934.
owever, when t was concuded that there shoud be a 5-year statute
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I 293..
n such cases, and not an unmted statute, t was decded that the
new provson shoud appear as secton 275(c) of the Revenue ct
of 1934. That s the poston of the provson n subsequent Revenue
cts and n the Interna Revenue Code. In The Natona Cty ank
of New York, ecutor ( state of ames . CNe , v. Comms-
soner (35 . T. ., 975, affrmed, 98 ed. (2d), 93), t was hed that,
under secton 2f)0(d) of the Revenue ct of 1921, the provson re-
atng to the perod of mtaton upon assessment n the case of a
fase or frauduent return wth ntent to evade ta mted the pro-
vson pertanng to a request for prompt assessment and that, a-
though the e ecutor had requested n wrtng a prompt assessment,
the Commssoner woud not be barred by any statute of mtatons
because the ncome ta returns nvoved were frauduent wth ntent
to evade ta es. ad the provson n the Revenue ct of 1934 con-
cernng understatement of gross ncome by an amount n e cess of
25 per cent been ncuded n secton 27 (a) of that ct and had the
mtaton perod been kept open ndefntey, the provson pertan-
ng to omssons from gross ncome woud wthout doubt have m-
ted the provson reatng to requests for prompt assessments. (Cf.
The Natona Cty ank of Neo York, ecutor ( at ate of ames .
OWe), v. Commssoner, supra.) That Congress fnay enacted the
provson concernng omssons from gross ncome as secton 275(c),
supra, and f ed the mtaton perod upon assessments at fve years
n such cases, does not ater the concuson that secton 275(c) mod-
fes or mts secton 275(b). In other words, such secton (275(c))
s appcabe where the condtons prescrbed theren are present even
though a request for assessment under secton 275(b) has been made
and the 18-month perod for assessment prescrbed by that secton
has e pred.
In vew of the foregong, t s the opnon of ths offce that n the
nstant case secton 275(c) of the Revenue ct of 193 s appcabe
notwthstandng that an assessment was made under the provsons
of secton 275(b) of the Revenue ct of 193 and the 18-month m-
taton perod provded for theren has e pred.
. P. Wenche,
Chef Co mse, ureau of Interna Revenue.
IN C S O D ICI NCY.
R NU CT O 193 .
to ta for fraud. (See . C. M. 2232 , page 159.)
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195 22(a), rt. 22 (a)-.
INCOM T RULINGS. P RT III.
R NU CTS O 1935 ND 1934 OR PRIOR CTS.
SU TITL . G N R L PRO ISIONS.
S CTION 22(a). GROSS INCOM : G N R L
D INITION.
btce 22(a)-: What ncuded n gross ncome. 1940-3 -10408
( so Secton 322, rtce 322-3.) Ct. D. 14 4
INCOM T R NU CT O 1928 D CISION O COURT.
1. Sut Recovery of Ta es ccount Stated.
determnaton by the Commssoner that the ta payer was en-
tted to a refund of ta es pad, a teegram advsng her to fe cam
therefor, and the preparaton of a certfcate of overassessment, do
not consttute an account stated n her favor, where, upon further
consderaton by the ureau, the certfcate was canceed wthout
havng been forwarded to the coector or devered to the ta payer.
2. Caforna Communty Property Income Ta ed n ccordance
Wth greement etween usband and Wfe as to Separate
Ownershp of arnngs.
Where husband and wfe, ctzens of Caforna, entered nto an
agreement n 1927, provdng that a property thereafter acqured
by ether shoud be the soe and separate property of the party so
acqurng t, free and cear of any and a cams of the other, ether
communty or otherwse, earnngs of the wfe were propery reported
n her ncome ta return for 1980 on the bass of such agreement
rather than n accordance wth the communty property aws of Ca-
forna. Coder the aw of that State, as construed by her courts, and
under appcabe decsons of the Unted States courts, the earnngs of
the wfe do not become communty property f husband and wfe have
entered nto a vad agreement provdng that the earnngs of each
sha be the separate property of the earner.
3. Decson oowed.
everng v. ckman (C. C. . 9th, 1934) (70 ed. (2d), 985
Ct. D. 8 , C. . III-2, 274 (1934) ) foowed.
4. Certorar Dened.
Petton for certorar dened October 23. 1939.
Court of Cams of the Unted States.
Cornne Grffth Marsha v. The Unted States.
2 . Supp., 474.
March , 1930.
opnon.
Green. udge, devered the opnon of the court.
Ths s a sut to recover an aeged overpayment of ncome ta es for the
year 1930.
It appears from the fndngs that n 1927 pantff and her husband, beng
then, and at a tmes nvoved In the sut, ctzens of the State of Caforna,
entered nto an agreement wth reference to e stng property rghts between
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19
thorn provdng n substance that a property acqured by ether of the partes
after that date shoud be the soe and separate property of the party so acqur-
ng the same, free and cear of any and. a cams of the other, ether com-
munty or otherwse.
In ng a return for her ncome ta for the year 1930, the pantff appears
to have assumed that ths agreement was n force and reported that her per-
sona net ncome was 283,821.44 and her ta abty 55,442.91, whch was
duy pad. er husband aso fed a return of hs persona Income and ta
abty for the same year n accordance wth the agreement. The Comms-
soner of Interna Revenue, however, after e amnng these returns, dsregarded
the agreement and determned that the ncome of pantff and her husband
for edera ta purposes shoud be aocated accordng to the communty
property aws of the State of Caforna, that s, one-haf the ncome earned
by each spouse shoud be attrbuted to the other. ccordngy, an overassess-
ment was computed n favor of the pantff and a defcency found aganst her
husband. Notce and demand for the payment of ths defcency was made
upon the husband but no part of the amount so assessed has ever been pad.
The ureau, nstead of foowng ts orgna determnaton wth reference to
the ta es of the pantff, canceed the overassessment and has coected from
pantff the amount of ta abty shown by her return.
The pantff contends that the acton of the Commssoner together wth
subsequent proceedngs on the part of the ureau of Interna Revenue con-
sttuted an account stated n her favor upon the bass of the orgna deter-
mnaton of pantff s ta by the Commssoner. cam for refund of the
sum coected was duy ted and ths sut begun to recover the amount thereof.
The pantff aso nssts that her ncome ta was correcty determned by
the Commssoner n the frst nstance and that a refund s due her n the
amount of the overassessment as computed.
In support of her contenton that an account stated was rendered the pantff
rees on n number of facts and crcumstances. Those whch have been specay
urged as mportant w be consdered.
On une 13. 19P3. the ureau, pursuant to the determnaton that the ncome
of pantff and her husband shoud be aocated accordng to the communty
property aws of the Sate of Caforna, teegraphed the pantff to fe cam
mmedatey wth coector for 23,275.58 year 1930 bass transfer one-haf
communty ncome to husband s return. In accordance wth ths drecton, the
pantff f cd a cam for refund for the year 1930 n the amount above stated
nnd ater the Commssoner prepared a certfcate of overassessment n favor of
the pantff for 23,275.58, but ths certfcate was subsequenty canceed by
the Commssoner wthout havng been forwarded to the coector or devered
to the pantff. The record does not show the date of preparaton or the date
of canceaton.
St ater and on May 14, 1934, the ureau wrote to pantff n substance that
t had under consderaton her ncome ta return for the year 1930 and that on
the bass of the nformaton now on fe wth your return, t s the opnon of
ths offce that your ta abe ncome as reported shoud be ad|usted n accordance
wth the recommendatons contaned n the revenue agent s report, that s,
one-haf of the ncome earned by each spouse shoud be attrbuted to the other.
The communcaton further stated that a case nvovng a smar ssue was
pendng n the Unted States Crcut Court of ppeas and that t was deemed
advsabe to defer acton unt a decson had been rendered by the court on the
queston. The attenton of the ta payer was caed to the fact that the statu-
tory perod wthn whch fna notce of defcency mght be ssued woud e pre
n the near future and the ta payer was advsed that she had the rght to make
a wrtten appcaton for the e ecuton of a consent e tendng the perod of
mtaton for assessment. Ths resuted In a consent to e tenson of the perod
of mtaton beng e ecuted by the pantff and the ureau of Interna Revenue.
The same knd of a notce was sent to the pantff s husband and the same
acton taken. Later and on May 25, 1934, the representatve of the pantff
teegraphed the Deputy Commssoner of Interna Revenue that pantff and
her husband woud be wng to cose cases by aowng returns to reman as
fed dsaowng wfe s cam for refund, or on a communty bass aowng
wfe s refund to pay husband s defcency provded entre defcency was em-
nated by such procedure. The ureau reped that the cosng of the cases
must be deferred pendng acton of the ureau n regard to a case n the crcut
court of appeas. On ugust 24, 1934, the representatve of the pantff wrote
the Commssoner of Interna Revenue wth reference to the refund cam of
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22(a), rt. 22(a -.
the pantff askng that he be advsed when ho mght e pect some acton on the
cam.
There was further correspondence between the pantff s representatve and
the ureau wth reference to the cam of the pantff for refund whch the
pantff sought to have aowed and pad, the ureau on ts part gvng varous
reasons for not compyng wth the pantff s request. nay, on anuary 3,
193 , the Commssoner sent a communcaton to pantff s attorney statng that
the overassessment woud not be reeased as the defcency assessed aganst Mr.
Morosco had not been pad, and that
It s the poston of ths offce that n cases nvovng the transfer of ncome
from the return of one ta payer to that of another, the amount of the over-
assessment dscosed may not be refunded to the detrment of the Government
In the vew of the court, there s nothng n ths correspondence matera to
the determnaton of the case e cept that the fna communcaton was In effect a
refusa to aow the cam for refund.
We thnk the evdence fas to dscose the necessary eements of an account
stated. n account stated must be or contan a statement of tbe baance of
the account, that s, a baance must be struck and an account rendered to the
other party for that baance. (1 C. . S.. secton 22, page 703.) No account
of any knd was ever rendered to the pantff. Under a msapprehenson of
the aw. the Commssoner orgnay hed that there had been an overassess-
ment of pantff s ta es and prepared a certfcate to that effect. Ths certf-
cate, however, was wthhed n the ureau and subsequenty canceed. There
was nothng n ths acton that shows that pantff was presented wth an
account showng a baance due her. On the contrary, the wthhodng of the
certfcate and ts subsequent canceaton showed that the ureau had not def-
ntey determned what shoud be done wth reference to pantffs ta es. The
Commssoner aso sent a teegram to pantff drectng her to fe mmed-
atey a cam for refund. ut ths was not a promse to pay the cam, t was
merey advce wth reference to the protecton of her rghts n case It shoud
eventuay he found she was entted to the refund. The acton was commend-
abe on the part of the Commssoner as ta payers often fa to fe ther cams
In tme and by reason thereof fnd themseves barred by the statute of mta-
tons. promse to refund a defnte sum or a statement that a defnte sum s
due the other party has sometmes been hed to consttute an account stated,
but here there was no promse ether of aowance or payment or even an ad-
msson that a defnte sum was due. The Commssoner s acton n makng a
premnary e amnaton of the account, hs erroneous concuson as to the
amount of ta es due, and hs drecton to fe a refund cam taken sngy or
consdered together, dd not bnd the defendant to aow and pay pantff s
cam.
In the bref of counse for pantff many cases are cted, none of whch n
our opnon support the contenton made. In Wood v. Unted State (84 O. Cs.,
3 7 , the Commssoner not ony determned an overpayment but sent a certf-
cate of overassessment to the ta payer n whch a baance of the account was
struck and shown to be due pantff. The Commssoner, however, determned
that ths amount acknowedged to be due coud not be pad for the reason that
a cam for t was barred by the statute of mtatons. ere a compete account
was rendered, a baance struck and agreed upon by the partes. The court hed
that the error of the Commssoner wth reference to the effect of the statute
of mtatons dd not prevent the pantff from camng an account stated.
In the case of Shpey Constructon Co. v. Unted Sates (79 C. Cs., 73 ), the
pantff was not ony advsed that an audt of ts ncome ta showed an over-
assessment and the amount thereof but other statements In the etter of advce
were such n the opnon of the court as to mpy a promse to pay the same
and make t an account stated. In the case before us, there s nothng from
whch such a promse can be Imped. On the contrary, the defendant was
contnuay gvng reasons why If woud not pay the cam.
The case of Daube v. Unted States (75 C. Cs., 33, affrmed 2S ) IT. S., 3 7
Ct. D. 77, C. . II-1, 34 (1933) ), was smar n many respects to the
one at bar. In that case the Commssoner prepared a certfcate of over-
assessment and went so far as to enter ths certfcate on a schedue of refunds
and credts whch was sgned by hm and ssued a check n favor of the ta payer
after whch the Commssoner prepared a etter statng the amount of the
overassessment whch, wth the check for the amount thereof, was sent to the
coector. The coector, percevng that an error had been made, dd not forward
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198
the check or the etter to pantff bnt returned the check to the Commssoner.
The ta payer camed that ths acton of the Commssoner consttuted an
account stated. The Supreme Court sad there had been messages back and
forth between the offcers and branches of an admnstratve bureau, as there
ad been n the nstant case, but by none of these acts had the Commssoner
dvested hmsef of contro of the matter and the court hed n effect that he had
the rght to rescnd hs orgna acton. In statng the eements of an account
stated ths court sad n the Daube case, supra, that the rue s absoute that
uness some knd of an account or statement s presented or communcated by
one party to the other whch shows the baance due on the accounts between the
partes, there s no foundaton for a cam upon an account stated. In the case
before us there was no such statement or communcaton. It s true the ureau
dd drect the pantff to fe a cam for a certan amount, but the pantff was
not tod that ths amount was due her or that t woud bo pad. We have stated
above the reasons for ths drecton beng gven. In the argument on behaf of
pantff t s sad that what was done by the Commssoner has never been
undone. The canceaton of the certfcate of overassessment was suffcent
abrogaton of the pror acton of the Commssoner f anythng was necessary
to set asde what had orgnay been done. We thnk, however, nothng was
necessary as the defendant st retaned contro of the whoe matter and the
refusa or faure of the ureau to pay the cam for refund was a suffcent dena
of the cam. It s mmatera that the reasons gven by the Commssoner for
hs acton were nether ogca nor a correct statement of ega prncpes. s
w be shown further on, the Commssoner erred n hs constructon of the
Caforna statute and he was equay unfortunate n gvng the reasons for hs
fna concuson. ut ths does not affect the determnaton of the case whch
must be decded n accordance wth ega prncpes.
In ths connecton the pantff argues that the orgna acton of the Comms-
soner was presumptvey correct and that n the absence of affrmatve peadng
the pantff s entted to recover.
We know of no such rue. The fna determnaton of the Commssoner when
dsputed by the ta payer s presumed to be correct n the absence of evdence
showng the contrary but that rue has no appcaton here. The Commssoner
was not bound to adhere to hs orgna rung f he subsequenty found t was
not In accordance wth the aw as apped to the facts n the case.
It s aso argued on behaf of the pantff that the Commssoner was rght
when n the frst nstance he dsregarded the property agreement between the
pantff and her husband and hed that for edera ncome ta purposes the
ncome of both was communty property under the aws of Caforna and that
the pantff was ony abe for ta es computed accordngy n other words, that
the overassessment of the pantff as orgnay computed by the Commssoner
was correct and that pantff shoud have the amount thereof refunded. In sup-
port of ths contenton, counse for pantff presents an eaborate dscusson of
both edera and State enses n whch was nvoved ether drecty or ndrecty
the queston of the effect of agreements between husband and wfe, ctzens of
Caforna, provdng that a property acqured by ether party subsequent to the
date of the agreement shoud be the soe and separate property of the party ac-
qurng the same. The pantff takes the poston that nether the Caforna
cases nor the decsons of the Unted States courts show that the orgna deter-
mnaton of the Commssoner was erroneous.
That ths ast contenton on the part of pantff Is not we founded s setted
by so many and we reasoned cases t does not seem necessary to add anythng to
the concusons reached theren. Moreover, an attempt to revew a of the cases
cted on behaf of pantff woud unduy e tend the mts of ths opnon. The
precse ssue now rased by pantff was presented to the oard of Ta ppeas
n the case of oward C. ckman v. Commssoner (27 . T. ., 807). In that
case the Commssoner hed that such agreements coud not operate to prevent
the aocaton of one-haf of the communty ncome to each spouse for ncome
ta purposes n a communty property State. The oard of Ta ppeas reversed
the hodng of the Commssoner, and an appea was taken to the Crcut Court
of ppeas for the Nnth Dstrct under the tte of everng, Commssoner, v.
ckman (70 ed. (2d), 985 Ct. D. 80 , C. . III-2, 274 (1984) ). The decson
of the oard of Ta ppeas was affrmed, foowng an eaborate opnon In
whch a of the prncpa cases bearng on the sub|ect were consdered, Incudng
most of those cted by pantff. The decsons bearng on the effect of the vadty
of agreements made by ctzens of Caforna wth reference to communty prop-
erty were carefuy anayzed and the opnon stated postvey that
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22(a), rt, 22(a)-.
y the aw of Caforna, as construed by her courts, the earnngs of the wfe
ver became communty property f the husband and wfe have agreed that
ttey sha be and reman her separate property.
The case of Poe v. Seaborn (282 U. S., 101 Ct. D. 259, C. . I -2, 202 (1930) )
was e amned n connecton wth Ooode, Coector, v. och (282 U. S., 118 Ct.
. 2C2, C. . I -2, 19 ) (1930) ) opkns, Coector, v. acon (282 U. S., 122
Ct. D. 2 0, C. . I -2, 201 (1930) ) and ender, Coector, v. Pfaff (282 U. S..
127). were found to hod n effect that the earnngs of ether husband or
wfe were to be ta ed accordng to the ownershp of the earnngs under the aws
of the State of whch they were resdents, and Lucas v. ar (281 D. S., I)
was dstngushed. We thnk nothng needs to be added to the reasonng of
ths we consdered opnon whch dsposes of the queston now before us.
fter ths decson was rendered, the ureau, havng further consdered the
constructon paced by the Caforna courts on agreements made by husband
and wfe under the communty property aws, announced that the ckman case
woud be foowed n determnng the ta abty of husband and wfe resdng
n Caforna who have entered nto a vad agreement provdng that the earn-
ngs of each shoud be the separate property of the earner. Proceedng accord-
ngy, the ta aganst the pantff was reaudted, assessed, and coected from
pantff n accordance wth her return. Under the rue ad down n Lews v.
Reynods (284 U. S., 281 (Ct. D. 443, C. . I-1, 130 (1932) ), the utmate ques-
ton s whether the ta payer has overpad her ta . Our concuson s that she
has not.
It foows that the pantff s petton must be dsmssed and t s so ordered.
Whaey, udge and ooth, Chef ustce, concur.
Wams, udge, took no part n ths decson.
rtce 22(a)-: What ncuded n gross ncome. 1940-48-10498
Ct. D. 14
INCOM T R NU CT O 1928 D R L RM LO N CT O 191
D CISION O SUPR M CODRT.
1. Gross Income empton Gans Reazed Upon Deangs n
arm Loan onds Interest.
Gans reazed by a ta payer upon hs deangs n farm oan bonds
ssued by |ont-stock and banks under the edera arm Loan ct
of 191 are not e empt from edera ta aton as ncome derved
from the bonds wthn the meanng of secton 2 of that ct. Under
such secton ony nterest on farm oan bonds s e empt from ed-
era ta aton.0
2. Decson Reversed.
Crcut (10 ed. (2d), 405), reversng decson of the Dstrct
Court, N. D. Caf., S. D. (24 . Supp., 145), reversed.
Supheme Court of the Unted States.
The Unted States of merca, pettoner, v. hbu Over Stewart.
1 S. Ct, 102.
On wrt of certorar to the Unted StatPs Crcut Court of ppeas for tbe Nnth Crcut.
November 12, 1940.
opnon.
Mr. ustce Dougas devered the opnon of the Court.
Ths case s here ou certorar to resove a confct of the decson beow (10
ed. (2d), 405) wth Stern ros, d Co. v. Commssoner (108 ed. (2d), 309).
Durng the year 1930 respondent purchased farm oan bonds ssued by |ont-
stock and banks under the edera arm Loan c t of 1910 (39 Stat., 3 0). The
No. 37. Stern ros. Co. v. e rerng, Commssoner. On wrt of certorar to the
Unted States Crcut Court of ppeas for the ghth Crcut. udgment affrmed, per
stpuaton of counse to abde the decson n No. 13, Unted Staes v. Stewart.
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22(a), rt. 22(a)- .
200
purchases were made for the prospectve ncrement to the bonds and not for ther
nterest. t the tme the purchases were made the banks were n recevershp.
The bonds were acqured at prces substantay beow par. In makng these
purchases respondent reed upon statements contaned n crcuars and buetns
ssued by the arm Loan oard, reasonaby beevng that he was purchasng
securtes the proft upon whch n case of sae woud be e empt ncome. part
of the bonds so purchased, wth ther appurtenant coupons, was sod n 1931 and
a part was surrendered n that year to the recever of the ssung bank n e -
change for cash pad to respondent under and pursuant to the covenants con-
taned n the bonds. ach of these transactons resuted n a proft to
respondent.1 The Commssoner hed that those gans were ta abe ncome.
Consequenty respondent ncuded them n hs ncome ta return for the year
1931 and camed a refund. On dsaowance of that cam, ths sut for refund
was nsttuted. The dstrct court determned that the gans so reazed were
ncome and ta abe. (24 P. Supp., 145.) The crcut court of appeas reversed.
Secton 22(a) of the Revenue ct of 1028 (45 Stat., 791) ncudes n gross
ncome gans, profts, and ncome derved from saes, or deangs
n property, whether rea or persona. Secton 22(b)4 e empts from ta aton
Interest upon securtes ssued under the provsons of the edera
arm Loan ct, or under the provsons of such ct as amended.
If those two sectons are controng, t s cear that respondent s ta abe on
these gans, for they fa squarey wthn the defnton of gross ncome contaned
n secton 22(a) and they are not nterest wthn the meanng of secton
22(b)4. ut respondent paces hs man reance on secton 2 of the edera
arm Loan ct whch provdes that farm oan bonds ssued under the provsons
of ths ct, sha be deemed and hed to be nstrumentates of the Government
of the Unted States, and as such they and the ncome derved therefrom sha be
e empt from edera, State, muncpa, and oca ta aton. It s urged that the
gans here nvoved were ncome derved from the bonds wthn the meanng
of that secton.
We dsagree wth that concuson. It Is our vew that under secton 2 re-
spondent s entted to an e empton ony for nterest on the bonds.
To be sure, ncome s a generc term ampy broad to ncude capta gans
for purposes of the ncome ta . (Merchants Loan Trust Co. v. Smetnnka, 255
U. S., 509 Ct. D. , C. . 4, 34 (1921) .) It s kewse true that Congress w
he presumed to have used a word n ts usua and we-setted sense. (Od Coon)/
Raroad Co. v. Commssoner, 284 U. S., 552 Ct. D. 45 , C. . I-1, 274 (1932)
Deputy v. du Pont, 308 U. S., 4,88 Ct. D. 1435, C. . 1940-1, 118 .) ut secton 2
does not e empt smpy ncome t e empts the bonds and the ncome derved
therefrom. naytcay, ncome derved from mere ownershp of the bonds s
ceary dfferent from ncome derved from deangs or transactons n the bonds.
s stated n Wcuts v. unn (282 U. S., 21 , 227-228 Ct. D. 280, C. . -, 309
(1931) ) :
The ta upon nterest s eved upon the return whch comes to the owner of
the securty accordng to the provsons of the obgaton and wthout any further
transacton on hs part. The ta fas upon the owner by vrtue of the mere fact
of ownershp, regardess of use or dsposton of the securty. The tn upon
profts made upon purchases and saes s an e cse upon the resut of the com-
bnaton of severa factors, ncudng capta nvestment and. qute generay,
some measure of sagacty the gan may be regarded as the creaton of capta,
ndustry and sk. (Ta Commssoner v. Putnam. 227 Mass.. 522. 531.)
True, the unn case deat ony wth the aeged consttutona nhbton aganst
ta aton of capta gans on muncpa bonds and not wth a specfc statutory
e empton. ut ts anayss s cognate here as ndcatng that, n absence of
cear countervang evdence, an e empton of ncome derved from a securty
does not embrace ncome derved from transactons n that securty.
There are no crcumstances here whch shoud make the reasonng of the
unn case nappcabe.
The Revenue ct of 191 (39 Stat, 75 ) was enacted shorty after the arm
Loan ct by the same Congress and at the same sesson. Secton 2 of that ct,
These purchases were for respondent and hs wfe who fed separate returns for the
year n queston.
2 The record does not show what porton, f any. of the sums receved on the sae or
on the e chnnso of the bonds and appurtenant coupons was receved as payment on accrued
Interest. Nor dd the compant aege that any porton of the sums receved was e empt
been use t was Interest on the bonds. ence that pont was not rased beow or here.
The arm Loan ct became aw on uy 17, 101 . the Revenue ct of 191 on Sep-
tember S. 191 .
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( 22(a), rt. 22(a)-.
ke secton 22(a) of the 1 28 ct, ncuded n ta abe ncome sans, profts, and
ncome derved from gaes, or deangs n property. nd secton 4
of that ct, ke secton 22(b)4 of te 1028 ct, e empted from ta aton
nterest upon securtes ssued under the provsons of the edera
arm Loan ct. It s cear that a cts n par matera arc to he taken together,
as f they were one aw. (Unted States v. reeman, 3 ow., 55 , 5(54.) That
thtwe two cts are n par matera s pan. Roth dea wth precsey the same
sub|ect matter, vz, the scope of the ta e empton afforded farm oan bonds.
The ater ct can therefore be regarded as a egsatve nterpretaton of the
earer ct (.Cope v. Cope. 137 U. S., 82, 88 cf. Utockdac v. Insurance Com-
panc . 20 Wa., 323, 331-332) n the sense that t ads n ascertanng the meanng
of the words as used n ther contemporary settng.4 It s therefore entted to
great weght n resovng any ambgutes and doubts. (Cf. Unted States v.
tafoff. 2 0 U. S.. 477, 480.) In that vew the e press e empton of nterest aone
makes toeraby cear that capta gans are not e empt.
In support of the contrary vew great stress s paced on the egsatve hstory
of secton 2 . tensve references are made to the hearngs on ths b and to
the debates n Congress. Typca are the statements or crtcsms that the b
gave these nvestments a dstnct advantage over other nvestments, that
the e empton provson was mportant, that mantenance of a market for the
bonds was desrabe, that the e empton was too broad. These comments,
however, are nconcusve. They are not suffcenty dscrmnatng u ther
anayss or crtcsm to throw ght on the narrow ssue nvoved here.
Respondent s resort to admnstratve nterpretaton of secton 2 s equay
unproductve. No estabshed admnstratve practce s shown. The hodng
of the unpubshed memorandum of the Genera Counse of the ureau of
Interna Revenue reed upon s not precsey n pont, even were we to assume
that t s entted to authortatve weght.10 It merey rued that a |ont-stock
and bank was not ta abe on gans from purchases of Its own bonds. nd
when the queston of the ta abty of an ndvdua on hs capta gans from
saes of these bonds was rased ess than two years ater, another such rung
was ssued to the effect that he dd not have the beneft of any e empton.
Nor s respondent materay aded by the change n secton 2 made by secton
817 of the Revenue ct of 193S (52 Stat., 447, 578). That amendment provdes
It shoud be noted In ts connecton that the e empton of Interest contnued n
secton 4 of the 191 ct was contnued n each subsequent Revenue ct unt 1934.
Secton 213(b)4, Revenue ct of 11118 (40 Stat.. 1037, 10 5) : secton 213(b)4, Revenue
ct of 1021 (42 Stat.. 227, 238) secton 213 (b)4. Revenue ct of 1924 (43 Stat.. 2153,
208) secton 213(b)4, Revenue ct of 102 (44 Stat.. 0, 24) secton 22(b)4. Revenue
ct of 1928 (45 Stat.. 701, 70S) secton 22(b)4. Revenue ct of 1032 (47 Stnt., 109,
178). y secton 22(h)4 of the Revenue ct of 1034 (48 Stat., 0, S7) the e empton
was generazed so as to Incude nterest on obgatons of nny edera corporaton whch
Is an nstrumentaty of the Unted States, sub|ect to the mtaton thnt nterest s e empt
ony If and to the e tent provded for n the cts of Congress authorzng the Issuance of
such obgatons. The Senate commttee (S. Rept. No. 558. Seventy-thrd Congress, second
sesson, pases 23-24 C. . 1939-1 (Part 2). page 04)), made the foowng comment on
that change:
Ths Is merey a carfyng change made by the ouse. Under the anguage of ths
secton, as contaned n e stng aw, nterest on securtes ssued under the edera arm
Loan ct, or such ct as amended. Is e pressy e cuded from gross Income and thereby
made e empt from the ncome ta . Other cts have been enacted whch aso e empt the
nterest on obgatons ssued thereunder from ta . In order to brng the secton nto
accord wth the cts authorzng such e emptons and to avod the necessty of referrng
to a such cts, a genera provson has been nserted by the ouse e cudng from gross
ncome the nterest upon the obgatons of a corporaton organzed under ct of Congress
If such corporaton s nn Instrumentaty of the Unted Staes sub|ect to the mtaton,
however, that the nterest s e empt ony to the e tent provded for In the cts of Con-
gress authorzng the ssuance of such obgatons.
Cone. Record, S ty-fourth Congress, frst sesson, voume 53, Part 8, page 7312. nd
ee . Rept. No. 30. S ty-fourth Congress, frst sesson, page. 8.
8 ont hearngs before Sub-Commttees of the Commttees on ankng and Currency,
Rura Credts. S ty-thrd Congress, second sesson, pages 95-07 : S. Doc. No. 380, S ty-
thrd Congress, second sesson. grcutura Credt, Report U. S. Commsson, pages 17, 33.
7 II. Doc. No. 079. S ty-turd Congress, second sesson, pages 15. 10.
Cong. Record, op. ct., supra, note 5, pages 850, 7311. Nor Is t sgnfcant that sub-
sttute bs were offered (Cong. Record, on ct., supra, note r . p.gos 7385, 73 7 S. 4001,
S ty-thrd Congress, second sesson) by the terms of whch nterest was e empted.
These were overu .substtutes. Therefore the Impcaton Is not warranted that the fa-
ure of ther adopton was due to the desre of Congress to grant a broader e empton than
nterest.
Ths Is reproduced, so far as matera here. In S. earngs. Commttee on nance,
Seventy-ffth Congress, thrd sesson, II. R. 9082, Tart 4, pages 019-021.
See rvcrtng v. cu York Trust Co. (292 U. 8., 455, 408 Ct. D. 840, C. . III-1,
188 (1934)1).
See grcutura Securtes Corporaton v. Commssoner (30 . T. .. 1103. 1111).
290217 41 14
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22(a), rt. 22(a)-
202
that a Income, e cept nterest, derved from such bonds sha be ncuded
n gross ncome. It s urged that ths amendment s affrmatve recognton
by the Congress that secton 20 e empts these capta gans. ut hero agaD
the egsatve record s ambguous and hence nconcusve. The purpose of sec-
ton 817, as orgnay ntroduced, ceary was to make certan that capta gans
reazed by |ont-stock and banks on transactons n ther own obgatons woud
not he e empt.1 The secton was amended on the foor of the Senate to ts pres-
ent form on the suggeston that perhaps the anguage s not as broad as It
shoud be. The purpose of the amendment may we have been to carfy
the doubtfu and uncertan status of capta gans whch were not covered by
the commttee s recommendaton. There s no cear and convncng evdence
that t was desgned to change e stng aw, so far as these other categores of
capta gans were concerned. ut even f a contrary mpcaton were to be
assumed, t woud not overrde so beatedy the cear nference, based on a ong
seres of Revenue cts e emptng ony nterest, that capta gans were ta abe.
Respondent further argues that comparson of other e empton statutes wth
the anguage of secton 2 renforces the vew that these capta gans are e empt.
In that connecton our attenton s caed to numerous statutes some e emptng
ony bonds and others e emptng prncpa and nterest 1 some e emptng a
corporaton, ncudng the capta stock and surpus theren, and the ncome
derved therefrom, and others 18 contanng somewhat smar e emptons for
the corporaton hut ony an e empton as to prncpa and nterest for ts bonds
and st others 18 contanng the same knd of e empton as secton 2 of the
arm Loan ct. rom ths panstakng revew respondent argues that where
Congress has desred to e empt ony Interest t has sad so and where t has
ntended to grant a broader e empton t has used the word ncome that
Ths amendment s prospectve ony. It provdes :
Notwthstandng the provsons of secton 2 of the edera arm Loan ct, as
amended, n the case of nortftaws made or obgatons Issued by any |ont-stock and bank
after the date of the enactment of ths ct. a ncome, e cept Interest, derved therefrom
sha he ncuded n gross ncome and sha not be e empt from edera ncome ta aton.
M S. Rept. No. 15 7. Seventy-ffth Congress, thrd sesson, page 47. Ths report ceary
ndcates that the commttee was of the vew that under secton 2 |ont-stock and banks
were e empt from capta gans resutng from purchases of ther own obgatons.
change n that regard was ceary ntended, for the commttee sad, page 47 :
Ths secton sub|ects to edera ncome ta aton the capta gan reazed by a |ont-
stock and bank on the purchase of ts own obgatons or of mortgages made by t. It has
been brought to te attenton of the commttee that these banks have been purchasng ther
own bonds at beow par and ssung new bonds at or above par. Gan reazed on such a
purchase s. under the aw, ta abe ncome and n the case of an ordnary corporaton, s
ta ed. Under the edera arm Loan ct. however, whc governs the ta abty of ob-
gatons of |ont stock und banks, such ncome s e empt. The commttee s of the opnon
that such ncome ought to be ta ed.
The commttee draft of secton 817 (then secton 81 ) provded for that change as fo-
ows ( . . 9082, Seventy-ffth Congress, thrd sesson) :
Notwthstandng the provsons of secton 2 of the edera arm Loan ct, as
amended, gan reazed on the acquston by a |ont-stock and bank of obgatons ssued
by t or mortgages made by It, f such obgatons or mortgages are made or Issued after the
date of the enactment of ths ct. sha not be e empt from edera ncome ta aton.
s ndcated, supra, note .), the unpubshed memorandum of the Genera Counse of the
Pureau of Interna Revenue rung that a |ont-stock and bank was not ta abe on gans
from purchases of ts own bonds was before the Senate commttee. Cf. the recommenda-
ton made to the commttee. S. earngs, op. ct.. supra, note 9. pages 14, 15.
Statement by Senator ng, member of the Commttee on nance, Congressona Rec-
ord, voume S3, Seventy-ffth Congress, thrd sesson, page 4959. When Senator ng
offered the amendment, he gave the foowng e panaton (d., page 5174) :
The b as reported sub|ected to edera Income ta aton capta gans reazed by a
|ont-stock and bank on obgatons ssued and mortgages made by t after the date of en-
actment of the ct. The effect of the amendment s not ony to ta that gan but aso to
ta gan reazed by another |ont-stock and bank or by an ndvdua or corporaton whch
Itsef s not e empt from edera ta aton. Thus, gan on a sae of such a |ont-stock and
bank bond by an nvestor s sub|ect to ta . The amendment contnues the present prov-
son of aw under whch nterest on such bonds and mortgages s e empt from edera
ta aton.
11 Statutes governng Tannnm Cana tot bonds (32 Stat., 481, 484 3 Stat. 11 117) and
Posta Savngs bonds (3 Stat., 814. 817) are cted.
Reference s made to varous statutes Incudng those pertanng to Treasury notes
(38 Stat., 251, 2 0) and severa of the Lberty oans (40 Stat., 35 40 Stat 288 91:
40 Stat.. 1309. 1310). ...
edera Reserve ct of December 23. 1013 (38 Stat., 251. 258). nd see ankhead-
ones arm Tenant ct of uy 22, 1037 tod Stat., 522, 528) : grcutura d|ustment
ct of 1038 (52 Stat., 31, 75).
s Reference s uce to the War nance Corporaton ct of pr 5. 103S (40 Stat. 50
) Reconstructon nance Corporaton ct of anuary 22, 19. 2 (47 Stat., 5, 0) : ome
Owners Loan ct of une 13, 1033 (48 Stat.. 128, 130).
edera arm Mortgage Corporaton ct of anuary 31, 1934 (48 Stat., 344, 347):
Commodty Credt Corporaton ct of March 8. 1938 (52 Stat., 107, 108).
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203 22(a), rt. 22(a)-.
statutes e emptng ony Interest have a narrower meanng than those e empt-
ng ncome and that ths ong and recurrent egsatve practce dscoses a
cear desgn on the part of Congress to draw dstnctons and to shape the varous
e emptons to sut ts dfferng pocy n dvers stuatons.
Suggestve as ths anayss s, t s entted to tte weght. No mere coaton
of other statutes can be decsve n determnng what the nstant statute means.
The meanng of each phrase must be cosey reated to the tme and crcumstance
of ts use. The phrase ncome derved therefrom as used In secton 2 ceary
has taken on cooraton from the e press e empton for neary a quarter century
of ony nterest on these bonds. We have no occason to ntmate an opnon as
to the meanng of other smar statutes. It s suffcent here to note that n
another egsatve settng ncome derved from bonds may or may not he
synonymous wth nterest on bonds. That must necessary be dependent
on a host of factors whch ony a mnute scrutny of the partcuar egsatve
scheme woud revea. or ths reason the fact that the Same Congress whch
In 1938 amended secton 2 granted an e empton to aWther edera nstru-
mentaty couched In the dentca anguage of the orgna secton 2 s merey
a straw n the wnd. So far as the nstant bonds are concerned, that In tsef s
entted to tte weght as aganst the ong standng e press e empton n suc-
cessve Revenue cts of nterest aone.
Respondent aso stresses the fact that crcuars, prepared and dstrbuted by
the arm Loan oard advsng nvestors of the merts and advantages of
farm oan bonds, stated that these bonds and ther ncome were free from
a forms of ta aton ncudng the ncome ta , that ths e empton s com-
pete, etc. s we have sad, t was found that respondent reed upon such
statements reasonaby beevng that capta gans woud not be ta abe. ut
asde from the fact that those statements are hardy more specfc than the
statute tsef, they can not be accorded the weght of unform and ong standng
admnstratve treatment.2 There was no authorty for the oard to make
representatons that capta gans were or were not ta e empt. That ad-
mnstratve functon resded ony n the Treasury. n offcer or agency of the
Unted States to whom no admnstratve authorty has been deegated can not
estop the Unted States even by an affrmatve undertakng to wave or surrender
a pubc rght. (Utah v. Unted States, 284 U. S., 534, 545-54 Wber Natona
ank v. Unted States, 294 U. S., 120, 123-124.)
We return to our concuson that the weght of these varous consderatons
eans to the vew that ony nterest s e empt. The cumuatve strength of
the severa factors urged by respondent s not such cear evdence of Con-
gressona purpose as to make napposte the appcaton of the reasonng of
Wcuts v. unn, supra, to ths stuaton. In that posture of the case, re-
spondent has succeeded ony In castng some doubt on the proper constructon of
the statute. Yet those who seek an e empton from a ta must rest t on more
than a doubt or ambguty. ( ank of Commeree v. Tennessee, 1 1 U. S., 134,
14 1 3 U. S., 41 , 423.) emptons from ta aton can not rest upon mere
Impcatons. (Unted States Trust Co. v. evcrng, 307 U. S., 57, 0 Ct. D.
139 , C. . 1939-1, 330 .) s stated by Mr. ustce Cardozo n Trotter v.
Tennessee (290 U. S., 354, 35 ), emptons from ta aton are not to be en-
arged by mpcaton f doubts are ncey baanced. nd see Pacfc Co., Ltd.,
v. ohnson (285 U. S., 480, 491). ence broad, generazed statutory e emp-
tons have frequenty been construed narrowy and confned to those stuatons
where the sub|ect matter of the e empton was drecty, not Indrecty or re-
motey, Invoved. (Murdock v. Ward, 178 U. S., 139 ae v. State oard of
ssessment and Revew, 302 U. S., 95 Unted States Trust Co. v. everng,
supra.) The e empton contaned n secton 2 of the arm Loan ct must be
bo construed.
or these reasons the chaenged |udgment must be reversed.
Mr. ustce Roberts Is of opnon that the udgment shoud be affrmed on
the grounds stated by the crcut court of appeas n Its opnon beow (10 ed.
(2d), 405).
Commodty Credt Corporaton ct, supra, note 19.
a Pursuant to the authorty vested In the edera arm Loan oard by secton 3 of the
ct.
31 Nor can the casua statement by the Secretary of the Treasury, In the course of a Con-
gressona hearng on the Revenue ct of 1 18, to the effect that Land bank bonds carry
a wder e empton than Lberty bonds (S. earngs, . R. 12883, S ty-ffth Congress,
thrd sesson, Part 4, page 117) carry authortatve weght, as t does not even purport to
be a dscrmnatng anayss of ths probem In Its varous aspects.
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204
ktc e 22(a)-: What ncuded n grass ncome. 1940-49-10505
( so secton 43, rtce 43-2.) G. C. M. 22404
R NU CT O 19 ,4.
Where processors sod goods In 1935 under Charotte cause
contracts, n whch t was provded thnt shoud the grcutura
d|ustment ct (48 Stat., 31) be decared unconsttutona, proc-
essng ta es ncuded n the seng prce of goods sod wthn the
perod of 90 days pror to the decson of the Supreme Court of the
Unted States nvadatng that ct woud be refunded or credted,
abtes set up n 1935 on the books of such processors, who kept
ther books on the accrua bass, to take care of such a contngency
(whch actuay happened on anuary , 1930) are proper deduc-
tons from gross ncome.
Recommended that I. T. 3143 (C. . 1937-2, 21 ) be revoked.
n opnon s requested whether I. T. 3143 (C. . 1937-2, 21 )
shoud revoked n vew of the decson of the oard of Ta p-
peas n San ford Cotton Ms, Inc., v. Commssoner (42 . T. .,
190).
In uy, 1935, te te manufacturers and other processors n North
Carona began to enter nto contracts wth ther vendees contanng
a provson known as the Charotte cause, whch provded that
shoud the grcutura d|ustment ct (48 Stat., 31) be hed un-
consttutona a processng ta es ncuded n the saes prces of
goods sod wthn the perod of 90 days pror to the date of the dec-
son of the Supreme Court of the Unted States nvadatng the ct
woud e repad or credted to the vendees. The decson of the Su-
preme Court n Unted States v. uter (297 U. S., 1) decarng the
grcutura d|ustment ct unconsttutona was rendered on
anuary 0. 193 . The Sanford Cotton Ms, Inc., kept ts books on
the accrua bass. fter the uter decson t reversed an accrua of
processng ta es whch t had not pad to the coector and accrued
on ts books as of December 31, 1935, the amount of 22,4 8.12 as
credts to the accounts of ts vendees under the Charotte cause.
The processors have contended, as dd the Sanford Cotton Ms, Inc.,
before the oard, that under the crcumstances the processor was
under a defnte abty at December 31, 1935, ether to pay the proc-
essng ta es to the Government under the ct, or to repay to, or
credt the accounts of, ts vendees under ts contracts wth them.
Therefore, the processors have contended that so much of the abty
to vendees whch became defnte on anuary , 193 , as mght be
deemed an accrua as of December 31, 1935, shoud be aowed as a
deducton from gross ncome for 1935 for edera ncome ta purposes.
In I. T. 3143 (C. . 1937-2, 21 ), nvovng the Charotte cause,
t was hed that at December 31, 1935, the abty under the pro-
vsons of such cause was a contngent one whch coud not be hed
to have rpened nto a defnte, accruabe abty before anuary ,
193 . (Cf. rown v. everng, 291 U. S., 193, Ct. D. 78 , C. .
III-1, 223 (1934).)
The oard of Ta ppeas hed n Sanford Cotton Ms. Inc., v.
Commssoner, supra, that as the obgaton of the ta payer to repay
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205
22(a), rt. 22(a)-1.
to the vendee an nmount equvaent to the processng ta es nvoved
n 1935 saes prces affected by the Charotte cause was contem-
poraneous wth the ncuson of such amount n the saes prces,
ether the accrua of so much of the saes prces shoud have been
deferred n 1935 or the accrua of the obgaton to repay shoud be
deducted from gross ncome for that year, partcuary snce the
decson n the uter case was rendered, shorty after December 31,
1935, whe the ta payer s books were st open for the year 1935.
The oard regarded the matter as presentng a practca queston of
cear accountng n a stuaton where t s more convenent, and
wthout any rea sacrfce of accuracy, to treat such a contngent
accrua as fe be enough to conform to the outcome of the con-
tngency whch transpred n so short a tme after the cose of
the ta abe year. The oard stated that an attempted ad|ustment
to refect an event occurrng after the books have been cosed mght
nvove consderaton whch woud probaby varousy affect the rue.
Such treatment of contngent accruas, whch regards the account-
ng therefor as a fe be matter so ong as the books for the ta abe
year reman open, s a departure from the strct rue that a con-
tngent abty, whch s dependent on the ast day of the accountng
perod upon a future event, s not a deductbe accrued abty for
the ta abe year. (Cf. ro on v. Ieverng, supra.) It may never-
theess be that t derves some support from awcus Machne Co. v.
Unted States (282 U. S., 375, Ct. D. 278, C. . -, 424 (1931)).
Under the crcumstances of ths case, t s the opnon of ths
offce that the decson of the oard shoud be accepted as to the
resut and apped n the dsposton of cases nvovng accruas
under the Charotte cause. Consequenty, t s recommended that
I. T. 3143, supra, be revoked.
In vew of the fact, however, that the decson of the oard n
Sanford Cotton Ms, Inc., v. Com nss oner, supra, s a departure
from the strct rue that a contngent abty, whch s dependent
on the ast day of the accountng perod upon a future event, s not
a deductbe accrued abty for such accountng perod, t s recom-
mended that nonacquescence n the decson of the oard be
announced. owever, no appea from that decson w be taken.
. P. Wenche,
btce 22(a)-: What ncuded n gross 1940-49-1050
ncome. I. T. 3430
R NU CT O 1934.
In vew of G. C. M. 22404 (page 304, ths uetn), I. T. 3143 (C. .
1937-2, 21 ) s revoked.
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22(a), rt. 22(a)- .
rtce 22(a)-: What ncuded n gross ncome. 1940-50-10518
Ct. D. 1472
INCOM T R NU CT O 1934 D CISION O SUPR M COURT.
1. Gross Income Gft of Negotabe Interest Coupons Ta abe
to Grantor.
The gft of negotabe Interest coupons detached from nego-
tabe bonds by the owner thereof shorty before ther due date
and devered to hs son, who n the same year coected them at
maturty, s the reazaton of ncome ta abe to the donor, under
the provsons of secton 22 of the Revenue ct of 1934. The
power to dspose of ncome s the equvaent of ownershp of t.
The e ercse of that power to procure the payment of ncome to
another s the en|oyment and hence the reazaton of the ncome
by hm who e ercses t. The domnant purpose of the revenue
aws s the ta aton of ncome to those who earn or otherwse
create the rght to receve t and en|oy the beneft of t when
pad.
2. Case Dstngushed.
ar v. Commssoner (300 U. S., 5 Ct. D. 1205, C. . 1037-1,
175 ) dstngushed.
8. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, Second
Crcut (107 ed. (2d), 9: ), reversng decson of the Unted
States oard of Ta ppeas (39 . T. ., 757), reversed.
Ouy T. everng, pettoner, v. Pau R. G. orst.
1 S. Ct, 144.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Second Crcut.
November 25, 1940.
OPINION.
Mr. ustce Stone devered the opnon of the Court.
The soe queston for decson s whether the gft, durng the donor s ta abe
year, of nterest coupons detached from the bonds, devered to the donee and
ater n the year pad at maturty, s the reazaton of ncome ta abe to the donor.
In 1934 and 1935 respondent, the owner of negotabe bonds, detached from
them negotabe nterest coupons shorty before ther due date and devered
them as a gft to hs son who n the same year coected them at maturty.
The Commssoner rued that under the appcabe secton 22 of the Revenue ct
of 1934 (48 Stat., 80, (58 ), the nterest payments were ta abe, n the years
when pad, to (be respondent donor who reported hs ncome on the cash
recepts bass. The crcut court of appeas reversed the order of the oard of
Ta ppeas sustanng the ta . (107 ed. (2d), 91. 39 . T. ., 757.) We
granted certorar (309 U. S., 50), because of the mportance of the queston n
the admnstraton of the revenue aws and because of an asserted confct n
prncpe of the decson beow wth that of Lucas v. ar (2S1 U. S., I) and
wth that of decsons by other crcut courts of appeas. (See shop v. Com-
mssoner, 54 ed. (2d), 298 Ct. D. 477, C . I I, 104 (1931) Dckey .
urnet, 5 ed. (2d), 917, 921 an Meter v. Commssoner, 1 ed. (2d). 817
Ct. D. 75, C. . II-1, 207 (1933) .)
The court beow thought that as the consderaton for the coupons had
passed to the obgor, the donor had, by the gft, parted wth a contro over
then and ther payment, and for that reason the case was dstngushabe from
Lucas v. ar, supra, and urnet v. Lennyer (285 U. S., 13 ), where the
assgnment of compensaton for servces had preceded the rendton of the
servces, and where the ncome was hed ta abe to the donor.
The hoder of a coupon bond s the owner of two Independent and separabe
knds of rght. One s the rght to demand and receve at maturty the prncpa
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207
5 22(a), rt. 22(a)-.
amount of the bond representng capta Investment. The other s the rght to
demand and receve nterm payments of nterest on the nvestment n the
amounts and on the dates specfed by the coupons. Together they are an obga-
ton to pay prncpa and Interest gven n e change for money or property whch
was presumaby the consderaton for the obgaton of the bond. ere respond-
ent, as owner of the bonds, had acqured the ega rght to demand payment at
maturty of the nterest specfed by the coupons and the power to command ts
payment to others whch consttuted an economc gan to hm.
dmttedy not a economc gan of the ta payer s ta abe ncome. rom
the begnnng the revenue aws have been nterpreted as defnng reazaton
of ncome as the ta abe event rather than the acquston of the rght to receve
It. nd n reazaton s not deemed to occur unt the ncome Is pad. ut the
decsons and reguatons have consstenty recognzed that recept n cash or
property s not the ony characterstc of reazaton of ncome to a ta payer on
the cash recepts bass. Where the ta payer does not receve payment of
ncome n money or property reazaton may occur when the ast step s taken
by whch he obtans the fruton of the economc gan whch has aready accrued
to hm. (Od Coony Trust Co. v. Commssoner, 279 U. S., 71 Ct. D. 80, 0. .
III- 2, 222 (1929) Corss v. owers, 281 U. S., 37 , 378 Ct. D. 188, G. . I -1,
254 (1930) . Cf. urnet v, Wes, 289 U. S., 70 Ct D. 88, C. . II-1, 2 1
(1933) .)
In the ordnary case the ta payer who acqures the rght to receve Income s
ta ed when he receves t, regardess of the tme when hs rght to receve pay-
ment accrued. ut the rue that ncome s not ta abe unt reazed has never
been taken to mean that the ta payer, even on the cash recepts bass, who has
fuy en|oyed the beneft of the economc gan represented by hs rght to receve
ncome, can escape ta aton because he has not hmsef receved payment of t
from hs obgor. The rue, founded on admnstratve convenence, s ony one
of postponement of the ta to the fna event of en|oyment of the Income, usuay
the recept of t by the ta payer, and not one of e empton from ta aton where
the en|oyment s consummated by some event other than the ta payer s persona
recept of money or property. (Cf. umnum Castngs Co. v. Routzahn, 282 U. S.,
92, 98 Ct. D. 270, C. . -, 352 (1931) .) Ths may occur when he has made
such use or dsposton of hs power to receve or contro the ncome as to procure
n ts pace other satsfactons whch are of economc worth. The queston here
s, whether because one who n fact receves payment for servces or nterest
payments s ta abe ony on hs recept of the payments, he can escape a ta
by gvng away hs rght to ncome n advance of payment. If the ta payer
procures payment drecty to hs credtors of the tems of nterest or earnngs
due hm (see Od Coony Trust Co. v. Commssoner, supra owers v. eroaugh
mpre Co.. 271 U. S., 170 T. D. 3881, C. . -, 199 (192 ) Unted States v.
rov Lumber Co., 284 T . S., 1 Ct D. 420, C. . -2, 35 (1931) ), or f he sets
up a revocabe trust wth ncome payabe to the ob|ects of hs bounty (sectons
1 , 1 7, Revenue ct of 1934, Corss v. owers, supra cf. Dckey v. urnet,
5 ed. (2d), 917, 921), he does not escape ta aton because he dd not actuay
receve the money. (Cf. Dougas v. Weuts, 29 U. S., 1 Ct D. 1041, C. .
I -2, 250 (1935) everng v. Cfford, 309 U. S., 331 Ot. D. 1440, O. .
1940-1, 105 .)
Underyng the reasonng n these cases Is the thought that ncome s rea-
zed by the assgnor because he, who owns or contros the source of the ncome,
aso contros the dsposton of that whch he coud have receved hmsef and
dverts the payment from hmsef to others as the means of procurng the sats-
facton of hs wants. The ta payer has equay en|oyed the fruts of hs abor
or nvestment and obtaned the satsfacton of hs desres whether he coects
and uses the ncome to procure those satsfactons, or whether he dsposes of
hs rght to coect It aa the means of procurng them. (Of. urnet v. Wes,
supra.)
though the donor here, by the transfer of the coupons, has precuded any
possbty of hs coectng them hmsef he has nevertheess, by hs act, procured
payment of the nterest, as a vauabe gft to a member of hs famy. Such a
use of hs economc gan, the rght to receve Income, to procure a satsfacton
whch can be obtaned ony by the e pendture of money or property, woud seem
to be the en|oyment of the Income whether the satsfacton Is the purchase of
goods at the corner grocery, the payment of hs debt there, or such nonmatera
satsfactons as may resut from the payment of a campagn or communty chest
contrbuton, or a gft to hs favorte son. ven though he never receves the
money he derves money s worth from the dsposton of the coupons whch he has
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22(a), rt. 22(a)- .
20S
used us money or money s worth n the procurng of a satsfacton whch s pro-
curabe ony by the e pendture of money or money s worth. The en|oyment of
the economc beneft accrung to hm by vrtue of hs acquston of the coupons
s reazed as competey as t woud have been f he had coected the nterest
n doars and e pended them for any of the purposes named. ( urnet v. We ,
supra.)
In a rea sense he has en|oyed compensaton for money oaned or servces
rendered and not any the ess so because t s hs ony reward for them. To say
that one who has made a gft thus derved from nterest or earnngs pad to hs
donee has never en|oyed or reazed the fruts of hs nvestment or abor because
he has assgned them nstead of coectng them hmsef and then payng them
over to the donee, s to affront common understandng and to deny the facts of
common e perence. Common understandng and e perence are the touchstones
for the nterpretaton of the revenue aws.
The power to dspose of ncome s the equvaent of ownershp of t. The e er-
cse of that power to procure the payment of ncome to another s the en|oyment
and hence the reazaton of the ncome by hm who e ercses It. We have had
no dffcuty n appyng that proposton where the assgnment preceded the
rendton of the servces (Lucas v. ar, supra Unmet v. Lennger, supra), for t
was recognzed n the Lennger case that n such a case the rendton of the
servce by the assgnor was the means by whch the ncome was controed by the
donor and of makng hs assgnment effectve. ut t s the assgnment by whch
the dsposton of ncome s controed when the servce precedes the assgnment
and n both cases t s the e ercse of the power of dsposton of the nterest or
compensaton wth the resutng payment to the donee whch s the en|oyment by
the donor of ncome derved from them.
Ths was emphaszed n ar v. Commssoner (300 U. S., 5 (Ct. D. 1205.
C. . 1937-1, 175 ), on whch respondent rees, where the dstncton was taken
between a gft of ncome derved from an obgaton to pay compensaton and
a gft of ncome-producng property. In the crcumstances of that case the
rght to ncome from the trust property was thought to be so dentfed wth the
equtabe ownershp of the property from whch aone the benefcary derved
hs rght to receve the ncome an bs power to command dsposton of t
that a gft of the ncome by the benefcary became effectve ony as a gft of
hs ownershp of the property producng f. Snce the gft was deemed to be a
gft of the property the ncome from t was hed to be the ncome of the
owner of the property, who was the donee, not the donor, a refnement whch
was unnecessary f respondent s contenton here s rght, but one ceary nap-
pcabe to gts of nterest or wages. Unke ncome thus derved from an
obgaton to pay nterest or compensaton, the ncome of the trust was regarded
as no more the ncome of the donor than woud be the rent from a ease or a
crop rased on a farm after the easehod or the farm had been gven away.
( ar v. Commssoner, supra. 12. 1.3 and cases cted. See aso cneeke v.
Smth. 2 9 . S., 172, 177 Ct. I). 4, C. . II-1, 2.1 (1933)1.) We have
hed wthout devaton that where the donor retans contro of the trust prop-
erty the ncome s ta abe to hnt athough pad to the donee. (Corss v.
ocers. supra. Cf. ererng v. Cfford, supra.)
. The domnant purpose of the revenue aws s the ta aton of ncome to those
who earn or otherwse create the rght to receve t and en|oy the beneft of
f when pad. (See Corss v. orers, supra. 37S: n-net v. Guggenhem. 288
. S.. 280. 283 Ct. D. 3 , C. . II-1, 374 (1933) .) The ta ad by the
1934 Revenue ct upon ncome derved from wages or compensa-
ton for persona servce, of whatever knd, and n whatever form pad,
: aso from nterest therefore can not fary be nterpreted
as not appyng to ncome derved from nterest or compensaton when he who
s entted to receve t makes use of hs power to dspose of t n procurng
satsfactons whch he woud otherwse procure ony by the use of the money
when receved.
It s the statute whch ta s the ncome to the donor athough pad to hs
douee. (Lucas v. ar, supra urnet v. Lennger, supra.) True, n those cases
the servce whch created the rght to ncome foowed the assgnment and t was
arguabe that n pont of ega theory the rght to the compensaton vested nstan-
taneousy n the assgnor when pad athough he never receved t whe here
the rght of the assgnor to receve the ncome antedated the assgnment whch
transferred the rght and thus precuded such nn nstantaneous vestng. ut
the statute affords no bass for such attenuated suhfetes. The dstncton
was e pcty re|ected as the bass of decson In Lucas v. ar. It shoud be
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22(a), rt. 22(a)-.
re|ected here, for no more than In the ar case can the purpose of the statute to
ta the ncome to hm who earns, or creates and en|oys t be esca ed by an-
tcpatory arrangements however skfuy devsed to prevent the ncome from
vestng even for a second n the donor.
Nor s t perceved that there s any adequate bass for dstngushng between
the gft of nterest coupons here and a gft of saary or commssons. The owner
of a negotabe bond and of the nvestment whch t represents, f not the ender,
stands n the pace of the ender. When, by the gft of the coupons, he has
separated hs rght to nterest payments from hs nvestment and procured the
payment of the nterest to hs donee, he has en|oyed the economc benefts of
the ncome n the same manner and to the same e tent as though the transfer
were of earnngs and n both cases the mport of the statute s that the frut s
not to be attrbuted to a dfferent tree from that on whch t grew. (See Lucas v.
ar, supra, 115.)
Reversed. .,
rtce22(a)-1: What ncuded n gross ncome. 1940-50 10 0
Ct. D. 1473
ncome ta rf.ve ue act of 1932 decson of supreme cotkt.
1. Gross Income Renewa Commssons ssgnment ftkr Tr-
mn aton of agency contract ta abe to assgnor.
Renewa commssons to become payabe to a fe nsurance agent
for servces whch had been rendered, assgned by hm after the ter-
mnaton of hs agency contracts and servces as agent, consttute
ncome ta abe to the assgnor under the provsons of secton 22 of
the Revenue ct of 1932 n the year when such commssons were
pad, where no purpose of the assgnments appears other than to
confer on the assgnees the power to coect the commssons as and
when they became payabe.
2. Decson o owkd.
crTnn v. orst, decded by ths Court on November 25, 1940
Ct. D. 1472, page 200, ths uetn , foowed.
3. Decson evehbkd.
Decson of the Unted States Crcut Court of pnea s. Second
Crcut (110 ed. (2d), 737), reversng decson of the Unted States
hoard of Ta ppeas (39 . T. ., 5S3), reversed.
Supreme Cotnrr of the Unted States.
Ouy T. everng, Commssoner- of Interna Revenue, pettoner, v. Gerad .
. ubank.
_ 1 S- Gt 149.
November 25, 1940.
opnon.
Mr. ustce Stone devered the opnon of the Court.
Ths s a companon case to No. 27, everng v. orst, decded ts day
Ct D. 1472, page 20 , ths uetn , and presents Issues not dstngushabe
from those n that case.
Respondent, a genera fe nsurance agent, after the termnaton of hs
agency contracts and servces as agent, made assgnments n 1924 and 1928
respectvey of renewa commssons to become payabe to hm for servces
whch had been rendered n wrtng poces of nsurance under two of hs
agency contracts. The Commssoner assessed the renewa commssons pad
by the companes to the assgnees n 1933 as ncome ta abe to the assgnor
In that year under the provsons of the 1932 Revenue ct (47 Stat., 109),
secton 22 of whch does not dffer n any respect now matera from secton
22 of the 1934 Revenue ct nvoved In the orst case. The Court of ppeas
for the Second Crcut reversed the order of the oard of Ta ppeas sus-
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210
tanng the assessment. (110 ed. (2d), 737 39 . T. ., 583.) We granted
certorar October 14, 1940.
No purpose of the assgnments appears other than to confer on the assgnees
the power to coect the commssons, whch they dd n the ta abe year.
The Government and respondent have brefed and argued the case here on
the assumpton that the assgnments were vountary transfers to the assgnees
of the rght to coect the commssons as and when they became payabe,
and the record affords no bass for any other.
or the reasons stated at ength n the opnon In the orst case, we hod
that the commssons were ta abe as ncome of the assgnor n the year when
pad. The |udgment beow s reversed.
ROM GROSS INCOM .
R NU CT O 1034 ND TRIOR R NU CTS.
mounts receved under so-caed endowment, ncome, and fna
sum po cy. (See I. T. 3402, page 57.)
rtce 23 (c)-1: Ta es. 1940-52-10532
G. C. M. 22454
R NU CTS O 1028, 1932, ND 1934.
ea estate ta es n Nebraska accrue, for edera ncome ta
purposes, when they become a charge aganst and a en upon the
and ta ed rather than on the date as of whch they are assessed.
ecommended that I. T. 2849 (C. . I -1, 0 (1935)) be mod-
ted.
n opnon s requested whether the concuson reached n I. T. 2849
(C. . I -1, 0 (1935)) shoud be foowed n vew of the decson
of the Crcut Court of ppeas for the ghth Crcut n e verng
. Schmme ct a. (114 ed. (2d), 554 Ct. D. 1475, page 211, ths
uetn ).
It was hed n the Schmme case that Nebraska rea estate ta es
accrue, for edera ncome ta purposes, when they become a charge
aganst and a en upon the and ta ed rather than on the date as of
whch they are assessed, as hed n I. T. 2849. supra. The court reed
on Lf on et a. v. Commssoner (98 ed. (2d), 508. Ct. I). 1409. C. .
1939-2. 198, certorar dened. 305 U. S., 2), n whch t was hed that
rea estate ta es accrue n Mnnesota when they become a en on the
rea estate. The decson n the Lfson case contans reasonng con-
trary to the ureau poston that generay State property ta es accrue
on the date as of whch the assessment of the ta s made. (See
G. C. M. 15305. C. . I -2, 80 (1935), and rungs cted theren.)
owever, upon the bass of the Lfson decson, the ureau changed
ts rue as to the accrua date of rea property ta es n Mnnesota,
but hed that such decson shoud not affect e stng rungs as to the
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211
23(c), rt. 23(c)-.
accrua dates of ta es n other States. (G. C. M. 21373 C. . 1939-2,
82.) ccordngy, the decson n the Schmme case w not he gven
genera appcaton but w be apped ony n cases nvovng rea
property ta es n Nebraska. In determnng the accrua date of prop-
erty ta es n other States or n determnng the accrua date of per-
sona property ta es n Nebraska, e stng ureau rungs wth regard
thereto are not to he consdered as affected by the Schmme decson.
It s recommended that I. T. 2849. supra, whch s nconsstent wth
the Schmme decson, be modfed to accord therewth.
. P. Wenche,
Chef Counse, ureau of Interna,Revenue.
rtce 23(c)-: Ta es. 1940-52-10533
I. T. 3437
NU CTS O 102S, 1032, ND 1034.
I. T. 2849 (C. . I -1, 0 (1935)) s modfed to accord wth the
concuson reached n G. C. M. 22454 (page 210, ths uetn).
rtce 23 (c)-: Ta es. 1940-52-10534
Ct. D. 1475
INCOM T R NU CT O 1032 D CISION O COURT.
1. Deducton Ta es Pad or ccrued Wthn Ta abe Year Crrr
Rea state Ta es Len Nebraska Law.
The owner of rea estate In a cty of the metropotan cass n the
State of Nebraska who kept hs accounts and fed, hs ncome ta
returns on the accrua bass was entted to a deducton n 1932 for
cty ta es pad on the property n that year, athough assessment and
evy were made n 1931, snce under Nebraska aw such ta es be-
come due and a en on the property on May 1 of the year foowng
the year of assessment and evy.
2. Decson ffrmed.
Decson of the Unted States oard of Ta ppeas (1939) (39
. T. ., 989) affrmed.
Unted States Crcut Court of ppeas for the ohth Crcut.
Guy T. evcrng. Commssoner of Interna Revenue, pettoner, v. Mary
Schmme and bram . Schmme, ecutors of the state of Chares Schmme,
Deceased,1 respondents.
114 ed. (2d), 554.
On petton to revew decson of the Unted States oard of Ta ppeas.
efore Sanborn, Thomas, and an akenbubgh, Crcut udges.
September 13, 1940.
OPINION.
an akenbubgh, Crcut udge, devered the opnon of the court.
Ths s a proceedng to revew a decson of the oard of Ta ppeas. It
Invoves soey the queston of when, for the purpose of takng a deducton from
1 See O. C. M. 22404, page 210, ths uetn.
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23(c), rt. 23(c)- .
212
Income by a ta payer on the accrua bass, genera cty ta es on rea estate n
ctes of tbe metropotan cass n Nebraska, accrue.
s st punted :
Durng the ta abe year 1932 dares Scbmme (the ta payer, now deceased)
was a resdent of the State of Nebraska, wheren he owned and operated the
aekstono ote n the cty of Omaha, county of Dougas, whch cty was at a
tmes here matera a cty of the metropotan cass as defned by the aws of the
State of Nebraska.
Durng the year 1D82, and for severa years pror and subsequent thereto,
the ta payer kept hs books of account and fed hs edera ncome ta returns
on the accrua bass.

It was further agreed before the oard that secton 514 of chapter 14 of the
Comped Statutes of Nebraska provdes that cty ta es sha be assessed and
eved a year n advance of the year n whch they are pad and that n respect
of the aws of Nebraska n effect durng the year 1932 n the cty of Omaha, Nebr..
the cty rea estate and persona ta es were assessed and eved a year n advance
of the year n whch they were pad, the assessment beng made on pr 1 of
each year for the foowng year. Cty rea estate and persona ta es were
eved n the year before tbe year n whch they became due. Cty rea estate
ta es became a en on May 1 of the year n whch they were due, beng the year
after the year of assessment and evy. Cty persona ta es became a en on
November 1 of the year n whch they were eved, beng the year before the
year n whch they were due. Cty rea estate and persona ta es became due on
May 1 of the year after the year they were assessed and eved, and became den-
quent on uy 1. or two months after they were due.
s stated by counse for both partes n ther brefs, there s but one queston
nvoved n ths appea. The oard of Ta ppeas, hodng that the ta payer s
1932 cty ta es on rea estate accrued n 1932, when such ta es became due and
a frst en upon the property, uphed the ta payer n hs cam of deducton for
that caendar year, and accordngy reduced the amount of defcency to . f.S18T).48
from the amount of 2,387.53 determned by the Commssoner. The Comms-
soner cams the decson of the oard s erroneous because the cty rea estate
ta es whch became due aud were pad n 1932 and were deducted n the ta -
payer s 1032 return. w re eved n 1931.
The ta payer s edera ncome ta returns for the caendar year 1932 con-
taned debts on hs reserve account for payment of ta es other than 1932 cty
rea estate ta es. Snce the ssue here s confned to the atter, the others may
be dsregarded. In these returns the ta payer sted for reducton 1932 cty rea
estate ta es pad uy 1. 19 2. n the amount of 10,280.7 whe the amount of
8,878.10 aowed by the Commssoner as accrued n 1932 represented 1933 cty
rea estate ta es whch were assessed and eved n 1932, but whch wore pad
on uy 31, 1933. We have not here before us a condton where ta es were
assessed and had become ens upon the ands whe n other ownershps and
were pad by the new owner after acquston. Chares Scbmme was the owner
of the cty property when the assessment was made, when the ta en accrued,
am when the ta es were pad. nd t was ths ownershp of the property on
May 1, 1932. when such ta es became due and a frst en upon t. that n the
opnon of the oard of Ta ppeas, determned the rght of the ta payer to
cam n hs 1932 return deducton for such ta es pad n 1932.
We thnk the underyng purpose of the Congress n enactng paragraph 13d
of the Revenue ct of 1910 (ch. 4 3, 39 Stat.. 7.1 . et sec), authorzng the ta
return to he made on the bass on whch the ta payer s books were kept, provd-
ng ony that the bass was one refectng ncome, shoud have a decsve bearng
upon the decson of the queston here presented. The Supreme Court, n Unted
States v. nderson (2 9 U. S., 422, 4- 0 T. D. 3S39, C. . -, 179 (192 ) ), has
made a very cear statement of tha purpose:
It was to enabe ta payers to keep ther books am make ther returns accord-
ng to scentfc accountng prncpes, by chargng aganst ncome earned durng
the ta abe perod, the e penses ncurred n and propery attrbutabe to the
process of earnng ncome durng that perod.
The record sustans the cam of the ta payer that hs books and the returns
based thereon charged aganst ncome earned durng the ta abe perod the
e penses ncurred n and propery attrbutabe to the process of earnng ncome
durng that perod. Ths beng so, the purpose at east of the congressona act
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213
23(c), rt. 23(c)-2.
has been satsfed. We are, therefore, reegated to an e amnaton of the appro-
prate mechancs Incdenta to the e ecuton of ths ta ng aw. In so dong we
are to decde whether, under the Nebraska aw, the assessment and evy n 19: 1
or the mpressment of the ta en n 1932, couped wth the ownershp of the
property, was the event whch determned the ta payer s abty for Omaha
cty rea estate ta es, and therefore, the year n whch such ta es accrued and
were deductbe. The oard found ths ssue n favor of the ta payer.
It Is conceded that, n Nebraska, no persona abty e sts at any tme for
the payment of rea estate ta es, and ths court n Lfson ct a. v. Commssoner
(OS ed. (2d), 508 Ct. D. 1409, C. . 1939-2, 198 , certorar dened. 305 U. S.,
2) has hed that such ta es accrue n Mnnesota when they become a charge
aganst and a en upon the and ta ed, and that the ta es n that case accrued
when they became a en on the rea estate. Such, we have seen, s the rue n
Nebraska.
Concurrence n the prncpe announced by the oard of Ta ppeas s to be
found n the decsons of other crcuts: Wash-Mc ure Co. v. Commssoner
( Cr., 97 ed. (2d), 983), Commssoner v. Pcseheeff (9 Cr., 100 ed. (2d), 02
Ct. D. 1410, C. . 1939-2, 200 ), Commssoner v. Patrck Cudahy Co. (7 Cr., 102
ed. (2d), 930 Ct. D. 1411, O. . 1939-2, 202 ), and n many other cted cases.
We thnk the apparent confct n the decsons arses chefy n the appcaton
of the rue to the facts of the speca cases rather than to dsagreement wth the
rue tsef. It foows that the decson of the oard of Ta ppeas shoud be
approved and affrmed, and t s so ordered.
Processng ta es coected by the vendor from the vendee, pursuant
to the provsons of secton 25 of the Revenue ct of 15)32 (now
secton 3147 of the Interna Revenue Code), and pad to the Unted
States by the vendor are deductbe for edera ncome ta purposes
onv by the vendor.
Mn. 3988 (C. . I 2, 25 (11)32)) modfed.
Mmeograph 3988 (C. . I-2, 25 (1932)) has been gven reconsd-
eraton n vew of the decson n the case of Z ns master akng Co.
v. Commssoner (109 ed. (2d), 738).
The ne t to ast paragraph of Mmeograph 3988, under the headng
Tte I Manufacturers cse Ta es, provdes as foows:
In accordance wth the provsons of secton 25, f any person has, pror to
May 1, 1932, made a bona fde contract for the sae, after the ta takes efTect,
of any artce n respect of whch a ta s mposed under ths tte of the ct,
and such contract does not permt the addng to the amount to be pad there-
under of the whoe of such ta , then (uness the contract prohbts such add-
ton) the vendee sha, n eu of the vendor, pay so much of the ta as s not
permtted to be added to the contract prce. It foows, therefore, that n such a
case the ta , athough coected by the vendor from the vendee, s actuay eved
aganst the vendee and consequenty s deductbe from the gross ncome of the
vendee. Itacs supped.
In the Znsmaster akng Co. case, supra, the Processng Ta oard
of Revew hed that the processng ta es coectbe by the vendor from
the vendee, pursuant to the provsons of secton 25 of the Revenue ct
of 1932 (now secton 3447 of the Interna Revenue Code), are ta es
mposed upon the frst domestc processor, and therefore, the vendor,
and not the vendee, s the ta payer. The decson of the oard was
sustaned by the Crcut Court of ppeas for the ghth Crcut.
The ureau hods that edera e cse ta es upon the manufacture,
sae, or dstrbuton of any commodty are deductbe, for edera
ncome ta purposes, ony by the person, frm, or corporaton upon
rtce 23(c)-2: edera dutes and e cse
ta es.
1940-44-104 9
I. T. 3122
R NU CT O 1932.
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5 23(e), rt. 23(e)- .
214
whom such ta es are mposed. The Znsmaster akng Co. case ceary
estabshes that the vendor, and not the vendee, s the ta payer n such
cases fang under secton 025, supra.
In vew of the foregong, Mmeograph 3088 (C. . I-2, 25 (1932) )
s modfed by substtutng for the ne t to ast paragraph under the
headng Tte I Manufacturers cse Ta es (begnnng In
accordance wth the provsons of secton 25 ) the foowng para-
graph :
In accordance wth the provsons of secton :25. f any person has. pror to
May 1, 1932, made n bono fde contract for the sae, after the ta akes effect,
of any artce n respect of whch a ta s mposed under ths tte of the ct,
and such contract does not permt the addng to the amount to be pad there-
under of the whoe of such ta . thou (uness the contract prohbts such addton)
the vendee sha, n eu of the vendor, pay so much of the ta as s not permtted
to be added to the contract prce. though the ta s coected by the vendor
from the vendee, t s actuay eved aganst the vendor and consequenty n
deductbe ony from the gross ncome of the vendor. It s recognzed, of course,
that the amount pad to the vendor consttutes an addton to the purchase prce
and may be taken nto consderaton n computng the cost of goods sod durng
the ta abe year. (New matera n tacs.
S CTION 23(e). D DUCTIONS ROM GROSS
INCOM : LOSS S Y INDI IDU LS.
rtce 23(e)-: Losses by ndvduas. 1940-41-10449
G. C. M. 22272
R NU CT O 1018.
The subettng of an apartment by a tenant who s requred to
change hs-resdence to another cty s a transacton entered Into
for proft. oss sustaned n such a transacton s deductbe
for edera ncome ta purposes.
Recommended that O. D. 42 (C. . 1, 124 (1919)) be revoked.
dvce s requested whether the concuson reached n O. D. 42
(C. . 1, 124 (1919)) s correct.
The rung pubshed as O. D. 42, supra, hods that the subettng
of an apartment by a tenant who s requred to change hs resdence
to another cty s not a transacton entered nto for proft under
secton 214(a)5 of the Revenue ct of 1918. and. therefore, a oss
sustaned through such a transacton s not deductbe from gross
ncome.
In nemr v. Thdh (27 U. S., 582: T. D. 4212, C. . II-2, 272
(1928)) the Supreme Court of the Unted States hed that where
property purcbased by a ta payer as hs persona resdence s ater
approprated e cusvey to the producton of ta abe ncome a oss
resutng from ts sae s deductbe from gross ncome under secton
214(a)5 of the Revenue ct of 1918 and that the bass for determn-
ng the amount of the deductbe oss s the far market vaue of the
property when approprated to the producton of ta abe ncome.
The Court stated that the words, any transacton entered nto for
proft, as used n secton 214(a)5. supra, are broad enough to embrace
any acton or busness operaton, such as that wth whch the Court
was concerned, by whch property prevousy acqured s devoted
e cusvey to the producton of ta abe ncome.
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215
23(k), rt. 23(k)-
In Schmdapp v. Commssoner (9 ed. (2d), 80) the facts
were that the ta payer had eased and occuped an apartment whch
he abandoned, movng to another. ecause he was st responsbe
for the ease of the frst apartment, he retaned a broker n an
attempt to dspose of t. e was unsuccessfu and deducted the
rent pad for the frst apartment as a oss ncurred n a transacton
entered nto for proft. The Court sustaned the oard of Ta
ppeas n dsaowng the oss. In ts opnon the Court cted
the case of Rener v. Tnde, supra, and sad that there e sted a
dfference between a house actuay et and one unsuccessfuy put
upon the market. fter ctng other cases to the effect that ony
n actua ettng creates a transacton , the Court stated that
ony then does t become mpossbe for the owner to resume hs
orgna occupaton.
The case of ener v. Tnde, supra, ays down the test that the
transacton s entered nto for proft when there s an actua appro-
praton of the property for renta purposes. The anguage of
the Court n Schmdapp v. Commssoner, supra, ndcates that the
same reasonng shoud be apped to an apartment whch has been
eased and then subet by the orgna essee. It s the opnon of
ths offce, therefore, that O. D. 42 s n confct wth the prncpe
announced by the Supreme Court n ener v. Tnde, supra.
ccordngy, revocaton of O. D. 42 s recommended.
. P. Wenche,
rtce 23(e)-1: Losses by ndvduas. 1940-41-10450
I. T. 341
R NU CT O 1018.
In vew of G. C. M. 22272 (page 214, ths uetn), O. D. 42 (C. .
1,124 (1919)) s revoked.
INCOM : D D TS.
R NU CTS O 1032 ND 1034.
Reguatons 77 and 8 , amended. (See T. D. 4978, page 75.)
R NU CT O 1034 ND PRIOR R NU CTS.
221 3, page 7 .)
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21
S CTION 23 (mh D DUCTIONS ROM GROSS
INCOM : D PL TION.
rtc|.e 23(t)-1 3: Charges to capta and to 1940-84-10394
e pense n the case of o and gas wes. O. C M. 22224
R NT CTS O 1 24 ND 102 .
Where a contract s entered Into between the owner of an o
ease or fee property and another for the assgnment of an undvded
Interest n the ease or fee property n consderaton of an agree-
ment Iry the assgnee to dr one or more wes on the aud, drng
e pendtures made by the assgnee arc not deductbe as scpenses
but shoud be captazed, regardess of whether the assgnment was
made pror to or after the drng of the wes.
G. C. M. 1U S (C. . I 2. 257 (1932)) mofed.
Reconsderaton of G. C. M. 10 S (C. . U2, 257 (1932)) as
been requested n vew of the decson of the Unted States Crcut
Court of ppeas for the Nnth Crcut n the case of Unted State v.
Sentne O Co. (109 ed. (2d), 854, certorar dened, 0 S. Ct., 1095).
The syabus of G. C. M. 10 8 , supra, sets out brefy the concu-
sons reached n that memorandum and reads as foows:
The ta payer as the assgnee of a one-af nterest n certan o eases, the
assgnment beng made n consderaton of the drng of an o we on the
property, may deduct one-haf of the ntangbe cost of drng the Inta we
or wes as an e pense, or at ts opton same may be captazed. The ntangbe
cost of drng a test we where the ta payer dd not obtan tte to the ease
Unt after the we was competed consttutes a capta nvestment and s not
deductbe as an e pense.
It w be noted that a dstncton was drawn between the stuaton
where the assgnee receves an assgnment of an nterest n the ease
pror to the drng and the stuaton where he s not entted to the-
assgnmont unt after the we s competed. In the frst stuaton, t
was hed that the assgnee mght e pense hs proportonate share of
the ntangbe deveopment cost. In the atter stuaton, t was hed
that the assgnee must captaze a of hs ntangbe deveopment
cost.
efore dscussng the Sentne O Co. case, t s necessary to revew
a pror decson of the Crcut Court of ppeas for the Nnth Crcuty
/State Consodated O Co. v. Commssoner ( . (2d), 48, certorar
dened, 290 U. S. 704). There the ta payer made e pendtures n
connecton wth o drng operatons under a contract by the terms
of whch the ta payer was to dr two wes on two ots beongng to
the other party to the contract. The proceeds resutng from any
o and gas dscovered were to be apped, frst, to rembursng the ta -
payer for ts e penses n drng, equppng, and operatng the wes,
and, second, to payng the andowner 1,400. Thereafter the ta -
payer was to receve a deed to a one-haf nterest n the property,
whch was thenceforth to be |onty operated. The ta payer con-
tended that t shoud be aowed to deduct the ntangbe deveopment
costs of drng these wes us operatng e penses. The court hed for
the Government, sayng:
The Commssoner contends, however, that the reguatons were not Intended
to appy to one who drs a we upon and n performance of a contract to
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217
23(m), rt. 23(m)-1 .
purchase n nterest theren. In ths contenton we concur. The e pendtures
n controversy were merey to be e changed fur a capta asset or to be
recouped out of the and. Nothng n e reguatons requre ther appcaton
to such a case . The argument tb.t the e pendtures are smar n
prncpe to e pendtures made n drng on one s own or on eased and, a
stuaton coneededy wthn the reguatons, s wthout mert.
In that case, the ta payer was not entted to an assgnment of an
nterest n the property unt e had competed the drng of the
wes. owever, nothng n the court s opnon ndcated that the
decson was based upon the tme of the assgnment.
In the case of Unted States v. Sentne O Co., supra, the court
ceary ndcated that ts decson n State Consodated O Co. v.
Commssoner, supra, was not based upon the fact that the assgn-
ment n that case was not made unt after the drng of the wes.
In the Sentne O Co. case the ta payer entered nto agreements
wth the owners of three separatey owned tracts of rea property
ookng toward the drng of an o we on each tract. The ta -
payer was assgned an undvded nterest n fee n each tract and
agreed to dr an o we on each tract. The ta payer competed
the drng of two producng wes and one dry hoe. The ta payer
camed a oss for the dry hoe dred, under the authorty of ss
v. Commssoner (57 . (2d), 984). The Commssoner contended
that the ta payer coud not deduct any part of the oss occasoned
by the dry hoe unt t dsposed of ts nterest n the fee. The court
hed for the Government, statng n part as foows:
Perhaps t s unfortunate that we are not furnshed wth the te t of the
agreement between the o company and the orgna owners of the property,
but n the crcumstances we can not go behnd the foowng, taken from the
agreed statement of the case: The consderaton for the transfer
whs an understandng between the grantor and the grantee that the atter
woud proceed to dr an o we on each tract.
We thnk ths statement compes the concuson that the drng costs con-
sttuted the purchase prce for the undvded nterest n the and acqured by
ap ee, and represented a capta nvestment. The appeee s nvt tment was
therefore n the and, and tte to that aud remaned n appeee throughout
the ta abe year.

Ths court has aready spoken upon the man pont n ths case n Conso-
dated O Co. v. Commssoner (9 C r.. 1033, ed. (2d), 48).
ppeee attempts to dstngush the State Consodated O case from the
nstant one. by the fact that, n the former case tte to the property was not
to pass unt after the property owner had receved hs 1,400 from the pro-
ceeds of the we, whe n the nstant case tte passed upon the e ecuton of
the contract. We do not thnk that ths dstncton changes the stuaton. In
both cases the drng e pendtures were the consderaton for the passng of
tte to the and.
The court refused to adopt the dstncton set out n G. C. M.
10 8 , supra, and took the vew that, regardess of when the assgn-
ment s made, f the drng e pendtures are the consderaton for
the assgnment, they must be captazed.
fter reconsderng the queston, ths offce s of the opnon that
G- C. M. 10 80, supra, s ncorrect n so far as t hods that the tme
of the assgnment s determnatve. ccordngy, t s hed that f,
n the type of case consdered here, t appears that the drng
e pendtures are made by the assgnee n consderaton of an assgn-
ment of an nterest n the ease or fee property, a of such e pend-
00217 41 s
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5 51, rt. 51-f.)
218
tures shoud be captazed regardess of whether the assgnment of
the nterest s made to the assgnee pror to or after the drng of
the wes. G. C. M. 10 8 , supra, s modfed to conform wth the
vews e pressed heren. , ,
. P. Wenche,
S CTION 23(o). D DUCTIONS ROM GROSS INCOM :
C RIT L ND OT R CONTRI UTIONS.
rtce 23(o)-1 : Contrbutons or gfts by
ndvduas.
R NU CT O 1034.
Deducton of combned chartabe contrbuton by husband and wfe
fng |ont returns. adty of artce 23(o)-, Reguatons 8 .
(See Ct. D. 1478, beow.)
P RT I . CCOUNTING P RIODS ND M T ODS O
CCOUNTING.
S CTION 43. P RIOD OR W IC D DUCTIONS
ND CR DITS T N.
rtce 43-2: When charges deductbe.
R NU CT O 1934.
mounts pad or credted by processors under Charotte cause
contracts. (See G. C. M. 22404, page 204.)
S CTION 51. INDI IDU L R TURNS.
rtce 51-1: Indvdua returns. 1940-52-10539
( so Secton 23 (o), rtce 23 (o)-.) Ct. D. 1478
ncome ta revenue act of 1934 decson of supreme court.
1. Deducton Chartabe Contrbutons ont Return.
husband and wfe fng a |ont return are entted to deduct ther
combned chartabe contrbutons from ther aggregate Income,
under the provsons of secton 51(b)2 of the Revenue ct of 1934.
2. adty of Reguatons.
rtce 23(o)- of Reguatons 8 s neffectve to deprve husband
and wfe fng a ont return of the rght to deduct ther combned
chartabe contrbutons from ther aggregate ncome.
3. Decson Revebsed.
Crcut (1040) (111 ed. (2d), 145), affrmng decson of the Unted
States oard of Ta ppeas (1939) (40 . T. ., 229), reversed.
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51, rt. 51- 1.
Supreme Court of the Unted States. ..
enry W. Taft and ua W. 8. Taft, pettoners, v. Guy T. everng, Comms-
soner of Interna Revenue.
1 8. Ct, 244.
On wrt of certorar to the Unted States Crcut Court of p as for the Second Crcut.
December 9, 1940.
OPINION.
Mr. Chef ustce ughes devered the opnon of the Court.
Pettoners, husband and wfe, ted |ont ncome-ta returns for the years
1934 and 1935. In computng ther aggregate net ncome under secton 51(b) of
the Revenue ct of 1934, they made deduetons.of ther combned chartabe contr-
butons. The Commssoner rued that the deductons on account of the wfe s
chartabe contrbutons shoud be reduced to 15 per cent of her separate net
ncome and defcences were determned accordngy. The oard of Tu ppeas
sustaned the Commssoner (40 . T. ., 22 )) and the crcut court of appeas
affrmed. (I ed. (2d), 145.)
ecause the queson s cognate to that presented n the cases of everng v.
aunt y. No. 3 , and Ganes v. ererna. No. 113, decded ths day Ct. D. 1479,
page 220, ths uetn , we granted certorar. October 14, 1940.
The provson for ont returns n secton 51(b) of the Revenue ct of 1934 was
n substantay the same form as the correspondng provson n the pror Revenue
cts from 1921. The mport of that provson s that n makng a |ont return
the husband and wfe shoud report ther aggregate gross ncome md coud
combne ther deductons n reportng ther aggregate net ncome upon whch
the ta was to he computed. That was the constructon paced upon the orgna
provson for |ont returns, n the Revenue ct of 1018, by te Soctor of
Interna Revenue. e sad n hs rung: If a snge |ont return s fed
t s treated as the return of a ta abe unt and the net ncome dscosed by the
return s sub|ect to both norma and sur ta as though the return were that
of a snge ndvdua. In cases, therefore, n whch the husband or wfe has
aowabe deductons n e cess of hs or her gross ncome, such e cess may. f
|ont return s fed, be deducted from the net ncome of the other for tte purpose
of computng both the norma and sur ta . We thnk that ths was the.nte-
ton of Congress n enactng the ct of 1021 and the ater cts contanng the
same provson for |ont returns. We thnk that t was aso the far mport of
the Treasury reguatons under the ct of 1921 and of subsequent reguatons
pror to 1934.
Respondent paces emphass on the phrasng of artce 401 of Reguatons 02
under the ct of 1021, that n a snge |ont return, the ta s computed on the
aggregate ncome and a deductons and credts to whch ether s entted sha
be taken from such aggregate ncome. The argument stresses the words to
whch ether s entted and t s urged that each spouse s entted ony to
deduct 15 per cent of hs or her separate net ncome. ut we thnk that ths s
an nadmssbe constructon of the statute and s not a necessary constructon
of the reguaton. Such a constructon s nconsstent wth the premse of the
Soctor s opnon, above mentoned, that a |ont return s treated as the return
of a ta abe unt and the ta s to be ad as though the return were that of a
snge ndvdua. The more specfc anguage of the provson n the ct of
1921, whch for the present purpose s the same as that n the ct of 1034, affords
a stronger bass for ths concuson. It provdes specfcay for the ncuson
of the ncome of each spouse n a snge |ont return and n tht case that
the ta sha be computed on the aggregate ncome. The prncpe that thf
ont return s to be treated as the return of a ta abe unt and as though
were made by a snge ndvdua woud be voated f n makng a |ont
return each spouse were compeed to cacuate hs or her chartabe contrbutons
as f he or she were makng a separate return. The prncpe of a |ont return
1 4S Stat., w7.
Secton 23(o). 48 Stat.. Ono
So. Op. 00 (C. . 4, 23 (1921)). See ererna v. annru, No. 30, decded ths date
ouse ept. No. : . 0, S ty-seventh Congress, frst sesson Senate ept. No. 275, S ty-
seventh Congress, frst sesson.
Treasury Reguatons Nos. 3 and 0, artce 401 Reguatons Nos. 74 and 77,
artce 3M.
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220
permtted aggregaton of ncome and deductons and thus overrode the mtatons
ncdent to separate returns. We fnd no ndcaton n artce 401 of Reguatons 2
under the ct of 1 21 of any ntenton to depart from the Soctor s vew as to
the purport of the statute.
In 19M5, by artce 23(o)- of Treasury Reguatons 8 , the Department sought
to requre a husband and wfe, whether they make a |ont return or separate
returns, to base ther deducton for chartabe contrbutons on the separate net
ncome of the spouse makng them. We are of the opnon that under the
Revenue ct of 1934, taken wth the meanng we thnk t had when enacted,
pettoners were entted to the combned deductons they camed, and that the
departmenta reguaton to the contrary was neffectve to deprve them of that
rght.
The |udgment of the crcut court of appeas s reversed.
Mr. ustce Roberts took no part n the consderaton and decson of ths case.
rtce 51-1: Indvdua returns. 1940-52-10540
( so Secton 117, rtce 117-5.) Ct. D. 1479
ncome ta revenue act of 1934 decson of supreme court.
1. Deducton Capta Dosses Lmtaton ont Return.
In the case of a |ont return by husband and wfe, capta osses
of one spouse may be deducted from the capta gans of the other,
under the provsons of sectons 51(b)2 and 117(d) of the Revenue
ct of 1034.
2. adty of Reouattons.
rtce 117-5 of Reguatons 8 , whch provdes that the mta-
ton on the aowance of osses of one spouse from saes or e changes
of capta assets s n a cases to be computed wthout regard to
gans and osses of the other spouse upon saes or e changes of
capta assets, s nvad.
3. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Thrd Cr-
cut (1039) (108 ed. (2d), 5 4), reversng decson of the Unted
States oard of Ta ppeas (1939) (39 . T. ., 240), affrmed.
4. Dec son Reversed. r:
, Decson of the Unted States Crcut Court of ppeas. Second
Crcut (1040) (111 ed. (2d), 144), affrmng unreported decson
of the Unted Sates oard of Ta ppeas, reversed.
Supkeme Court of the Unted States.
No. 3 . Guy T. fverng, Commssoner of Interna Revenue, pettoner, v.
Water C. anney and Paune . M. unne/.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Thrd Crcut.
No. 113. Chester Games and Theresa Ganes, pettoners, v. Guy T. ererng.
TGI S. Ct., 241.
December 9, 1940.
OPINION.
Sr. Chef ustce ughes devered the opnon of the Court.
These cases present the same queston, that s, whether under the Revenue
ct of 1034, n the case of a |ont return by husband and wfe, the capta osses
of one spouse may be deducted from the capta gans of the other.
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221
51, rt. 51-1.
In ererng v. aunt p, the wfe reazed net gans from the sae of capta
assets durng 1934, and the husband reazed net osses from the sae of capta
assets durng the same year. They fed a |ont ncome ta return reportng
the capta gan, whch represented the dfference between the wfe s ad|usted
capta gans and the husband s ad|usted capta osses. The Commssoner rued
that the husband s osses coud not be apped to reduce the gans reazed by
hs wfe and accordngy determned a defcency. The oard of Ta ppeas
sustaned the Commssoner (30 . T. ., 240) but the Crcut Court of ppeas
for the Thrd Crcut reversed. (108 ed. (2d), 5G4.)
In Ganes v. everng, the husband reazed a net gan from the sae of capta
assets durng 1034, whe hs wfe sustaned a net oss from the sae of capta
assets. They red a |ont return reportng a capta oss, whch represented the
dfference between the husband s net capta gan and hs wfe s net capta oss.
The Commssoner, as n the anney case, decded aganst ths ad|ustment and
the oard of Ta ppeas affrmed. The Crcut Court of ppeas for the Second
Crcut affrmed the decson of the oard. (I ed. (2d), 144.)
In Tew of the confct between these decsons, we granted certorar. (No. 3 ,
310 U. S., 17 No. 113, October 14, 1940.)
Secton 51(b) of the Revenue ct of 19341 wth respect to the returns of
husband and wfe provded:
(b) rs ND and Wfe. If a husband and wfe vng together have an ag-
gregate net ncome for the ta abe year of 2,500 or over, or an aggregate gross
ncome fur such year of 5,000 or over
(1) ach sha make such a return, or
(2) The ncome of each sha be ncuded n a snge |ont return, n
whch case the ta sha be computed on the aggregate ncome.
The same provson n substance s found n the earer Revenue cts from
that of 1921.
The aggregate ncome, to whch paragraph 2 of secton 51(b) refers, s
ceary the aggregate net ncome as t s the aggregate ncome on whch the
ta s to be computed. In that vew the deductons to whch ether spouse
woud be entted woud be taken, n the case of a |ont return, from the aggregate
gross ncome.
That was the constructon paced upon the provson for a |ont return n
the Revenue ct of 1918 by the Soctor of Interna Revenue n an opnon ren-
dered n 1921. fter consderng the terms of the statute and the reasonabe
nference as to the ntent of Congress, the Soctor concuded:
rom the foregong t foows that the proper constructon of the Revenue
ct of 191S permts a husband and wfe vng together, at ther opton, to fe
separate returns or a snge ont return. If a snge |ont return s fed t s
treated as the return of a ta abe unt and the net ncome dscosed by the return
s sub|ect to both norma and sur ta as though the return were that of a
snge ndvdua. In cases, therefore, n whch the husband or wfe has aow-
abe deductons n e cess of hs or her gross ncome, such e cess may, f |ont
return s fed, be deducted from the net ncome of the other for the purpose of
computng both the norma and sur ta .
The terms of the Revenue ct of 1021 made ths vew even cearer. Treasury
Reguatons 2, artce 401, promugated under the Revenue ct of 1921, apparenty
foowed the same vew. That artce provded as to |ont returns of husband
and wfe
MS Stat.. 97.
The Revenue ct of fS, secton 223. aso provded for a |ont return by husband
and wfe. (40 Stt., 1074.)
Secton 223(b) of the Revenue et of 1021 provded (42 Stnt.. 2.r)0) :
(b) If a husband and wfe vng together have an aggregate net Income for the
ta abe year of 2,000 or over, or an aggregate gross ncome for such year of 5,0U0
or over
(1) ach sha make uch a return, or
(2) The ncome of each sha te Incuded n a snge |ont return. In whch case
the ta sha be computed on the aggregate ncome.
So. Op. 90 ( . . 4. 2, tf (1 21 ).
4 The Commttee on Ways and Means of the ouse of Representatves reported wth
re ect to the provson of the b whch became the Revenue ct of 1921 as foows :
Secton 231 of the h proposes to amend secton 223 of the present aw n such a
manner as to cear up the doubt now e stng as to the rght of husband and wfe n a
cases to make a |ont return and have the ta computed on the combned Income. ( ouse
Rept. No. 350. S ty-seventh Congress, frst sesson. See, aso, Senate ey , No. 273,
S ty-seventh Congress, frst sesson.)
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S 51, rt. 51-1.
222
Where the ncome of each Is ncuded n a snge |ont return, the ta s
computed on the aggregate ncome and a deductons and credts to whch ether
s entted sha he taken from such aggregate ncome. 5
The queston as to deductons for osses on saes or e changes of securtes
arose under secton1 23(r) of the Revenue ct of 1932 That provded that osses
us there descrbed shoud be aowed ony to the e tent of gans derved from
such saes or e changes. Nothng was sad n ths secton whch n any way
affected the provson of the statute as to |ont returns by husband and wfe.
The queston n that reaton, that s, as to deducton for osses on saes of
securtes, was submtted to the Commssoner of Interna Revenue and was
answered by hm on December 29, 1932, as foows: . , ,.
The specfc queston presented s whether the oss sustaned by the husband
may be apped to offset the same amount of gan reazed by the wfe n renderng
|ont ncome ta return for the year. In repy you are advsed that, n the case
of n husband and wfe vng together who re a |ont ncome ta return, the ta
abty s computed on the aggregate ncome as provded by secton 51(b)2
of the Revenue ct of 1032, and such |ont return s treated as f t was the
return of a snge ndvdua. The aggregate ncome n such case woud of
course embrace the gans as we as the aowabe deductons of each spouse.
If t s correcty understood from your etter that the gans and osses n the us-
traton presented are from transactons fang wthn the same cass wthn the
meanng of the statute such as saes of securtes not hed for a perod of more
than two years, the oss sustaned by the husband woud offset the same amount
of gan reazed by the wfe from such source.
Ths statement by the Commssoner apped the same prncpe whch had
prevousy been foowed wth respect to deductons n the |ont returns of
husband and wfe, there havng been no ndcaton by Congress of any dfferent
purpose.
Treasury Reguatons No. 77, promugated under the ct of 1932, contaned
nothng to the contrary and the reguaton theretofore obtanng as to such
|ont returns was eft unchanged. ( rtce 381.)
The Revenue ct of 1934 contnued the pror statutory provsons as to |ont
returns of husband and wfe, and secton 117(d) of that ct, as to capta osses,
dd not purport to ater the rue as to the rght of the spouses to deductons
n ther |ont return. Secton 117(d) merey mted the amount of osses whch
coud be deducted, as foows:
(d) Lmtaton on Capta Losses. Losses from saes or e changes of
capta assets sha be aowed ony to the e tent of 2,000 pus the gans from
such saes or e changes.
The concuson of the Commssoner wth respect to the ct of 1932, n the
opnon above mentoned, was equay appcabe to the new ct.
It was not unt 1935 that the Treasury Department by artce 117-5 of
Reguatons 8 undertook to provde that the aowance of osses of one spouse
from saes or e changes of capta assets s n a cases to be computed wthout
regard to gans and osses of the other spouse upon saes or e changes of capta
assets.
We are of the opnon that under the provson of the ct of 1934 as to |ont
returns of husband and wfe, whch emboded a pocy set forth In substantay
the same terms for many years, Congress ntended to provde for a ta on the
aggregate net ncome and that the osses of one spouse mght be deducted from
the gans of the other and that ths apped as we to deductons for capta
osses as to other deductons. Ths, we thnk, was the meanng of the provson
of the Revenue ct of 1934 when t was enacted, and t was sub|ect to change
ony by Congress, and not by the Department.
In No. 3 . the |udgment of the crcut court of appeas s affrmed.
In No. 113, the |udgment of the crcut court of appeas s reversed and the
cause s remanded for further proceedngs n conformty wth ths opnon.
It s so ordered.
Mr. ustce Roukkts took no part n the consderaton and decson of ths case.
The same provson was contnued In substance n succeedng reguatons. rtce
401 of Treasury Reguatons 5 and R9 tnder the Revenue cts of 1924 and 1928 artce
381 of Reguatons 74 and 77 under the Revenue cts of 1928 and 1932.
47 Stat., 1S3. Secton 23(r) provded : Losses from saes or e changes of stocks and
bonds (as defned In subsecton (t) of ths secton) whch are not capta assets (as de-
fned n secton 101) sha be aowed ony to the e tent of the gans from such saes or
e changes (ncudng gans whch may be derved by a ta payer from the retrement of
hs own obgatons).
It was aso n 1935 that the ureau of Interna Revenue announced the same rung
under the ct of 1932. (G. C. M. 15438, C. . I -2, 150.)
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223
112, rt. 577.
ON CORPOR TIONS.
rtce 101(11) 1: armers or other mutua ha,
cycone, casuaty, or fre nsurance companes or
assocatons.
R NU CTS O 1028, 1932. ND 1034.
Character of the busness actuay done as determnatve of the
rght to e empton. (See Ct. D. 1474, page 184.)
SUPPL M NT R. COMPUT TION O N T INCOM .
S CTION 112. R COGNITION O G IN OR LOSS.
rtce 577: Defntons. 1940-30-10342
G. C. M. 21873
R NU CT O 1932.
The transacton between the II Corporaton and the N Corporaton,
whereby the former acqured n of the propertes of the atter, con-
sttuted a reorganzaton as defned n secton 112(1) of the Revenue
ct of 11 32 and a ta -free e change under secton 112(b)4 of that
ct.
G. C. M. 7472 (C. . I -1, 184 (1930)) modfed. Recommended
that the nonacqueseence n Wnston ros. Co. v. Commssoner
(C. . III-2, 38 (1934)) be wthdrawn.
n opnon s requested wth respect to the effect for edera ncome
ta purposes of a certan transacton between the M Corporaton and
the N Corporaton.
In 1933 the M Corporaton owned 43,) shares of the N Corporaton
stock, the N Corporat on havng ssued 49, shares of stock whch were
then outstandng. t that tme, the M Corporaton (herenafter
referred to as M) submtted an offer to the N Corporaton (herenafter
referred to as N) to acqure a of N s propertes n e change for stock
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11 (b), rt. 113(b)-4.
224
of M. The number of shares of M stock coud, however, be reduced
by dever| of wavers of the rghts of hoders and owners of shares of
N stock then owned by M to receve upon dssouton of N any moneys
or assets whch, e cept for such wavers, woud be payabe or dstrb-
utabe wth respect to N stock, together wth the certfcates repre-
sentng such stock. The oer so made was accepted by N, and n
consummatng the transacton, M decded not to dever ts own stock
n e change for the N shares hed by t but,, n eu thereof, to fe
wrtten wavers as provded n the offer. The M shares actuay
ssued for the N propertes amounted to ony 3a shares, whch shares
were dstrbuted to the mnorty stockhoders of N.
Under the partcuar facts nvoved n ths case, t s the opnon of
ths offce that the above-descrbed transacton consttuted a reorgan-
zaton as defned n secton 112() of the Revenue ct of 1932 and that
the transfer was a ta -free e change wthn the meanng of secton
112(b)4 of that ct.
G. C. M. 7472 (C. . I -1,184 (1930)), wheren t was concuded n
a smar stuaton that the acqurng corporaton receved the prop-
ertes (to the e tent t hed stock n the other corporaton) through a
dstrbuton n parta qudaton, s modfed to accord wth the fore-
gong concuson, and t s recommended that the nonacquescence n
Wn ton ros. Co. v. Commfe oner (29 . T. ., 905, nonacquescence,
C. . III-2, 38 (1934), affrmed, 7 . (2d), 381) be wthdrawn, such
nonacquescence beng nconsstent herewth.
. P. Wenche,
ndebtedness.
R NU CT O 1934.
Reguatons 8 , amended. (See T. D. 5003, page 107.)
R NU CT O 1034.
rtce 113(b)-4: Substtuted bass.
R NU CT O 1934.
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225.
U4, rt. 114-1.
S CTION 114. SIS O D PR CI TION
ND D PL TION.
rtce 114-1: ass for aowance of depre- 194O-48-10499
caton and depeton. Ct. D. 14 9
1. Return rst Return mendment ed fter Statutohy
ekod for fng orgna return eecton aowance for
Depeton.
n amended return fed after the e praton of the statutory pe-
rod for fng the orgna return s not a frst return wthn the
meanng of secton 114(b) 4 of the Revenue ct of 1934, whch re-
qures a ta payer to eect n hs frst return whether aowance
for depeton s to be computed wth or wthout regard to percentage
depeton.
2. Decson ffrmed.
Crcut (110 ed. (2d), 55), affrmng unreported decson of the
Unted States oard of Ta ppeas, afrmed.
Spueme Court of the Unted States.
. . Rey Investment Co., pettoner, v. Commssoner of Interna Revenue.
1 S. Ct., 95.
On wrt o certorar to the Unted States Crcut Court of ppeas for the Nnth Crcut.
November 12, 1040.
opnon.
Mr. ustce Dougas devered the opnon of the Court.
Ths case s here on certorar to resove the confct of the decson beow (110
ed. (2d), 55) wth C. II. Mend Coa Co. v. Commssoner (10 ed. (2d), 388).
Pettoner s engaged n the busness of mnng god at at, aska. The
wnter ma servce to and from that remote pace was so uncertan and sow
that, n order to avod denquency n ncome ta returns, pettoner s offcers
were accustomed to use the forms for an earer year. Consequenty pettoner s
orgna return for the caendar year 1934 was fed on a 1933 form whch had
been maed to pettoner by the coector at Tacoma, Wash Ths return was
e ecuted on anuary 2, 1935, and reached Tacoma on anuary 29, 1935. When
It was e ecuted pettoner dd not know of the provson 1 n the Uevenue ct of
1934 ( 48 Stat., 80) aowng percentage depeton. Rut pettoner dd know
that uness the aw had been changed t was not entted to depeton, as t had
no bass for cost depeton. The coector n sendng the 1933 forms had not
advsed pettoner wth respect to percentage depeton. nd t was found that f
pettoner had known of the statutory provson for percentage depeton, t
1 Secton 114(b)4 provded:
The aowance for depeton under secton 23(m) sha be, In the ense of coa mnes,
5 per centum, n the case of meta mnes, 15 per centum, and. In the case of suphur mnes
or deposts. 23 per centum, of the gross ncome from the property durng the ta abe year,
e cudng from such gross ncome an amount equa to any rents or royates pad or ncurred
by rte ta payer n respect of the property. Such aowance sha not e ceed 50 per- centum
of the net ncome of the ta payer (computed wthout aowance for depeton) from the
prowrty. ta payer makng hs frst return under ths tte In respect of a property
sha state whether he eects to have the depeton aowance for such property for the ta -
abe year for whch the return s made computed wth or wthout regard to percentage
depeton, and the depeton aowance n respect of such property for such year sha bo
computed accordng to the eecton thus made. If the ta payer fas to make such state-
ment n the return, the depeton aowance for such property for such year sha be com-
puted wthout reference to percentage depeton. The method, determned as above, of
computng the depeton aowance sha be apped n the case of the property for a ta -
abe years n whch t s n the hands of such ta payer, or of any other person If the bass
of the property (for determnng gan) n hs hands s. under secton 113, determned by
reference to the bass n the hands of such ta payer, ether drecty or through one or more
substtuted bases, as denned n that secton.
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114, rt. 114-1.
22
woud have .eected to take advantage of It. Pettoner frst actuay earned
of the provson n ugust, 1935. On March 3, 193 . pettoner fed ah amended
return for 1934 upon whch a deducton of percentage depeton was taken
and t asked for a refund. The oard of Ta ppeas uphed the Commssoner s
rung denyng percentage depeton and the crcut court of appeas affrmed.
Secton 114(b)4 of the 1934 ct requred the ta payer to eect n hs frst
return whether the depeton aowance was to he computed wth or wthout
regard to percentage depeton. The method so eected s appcabe not ony
to the year n queston but to a subsequent ta abe years.
We thnk that pettoner s amended return, fed on March 3, 193 , was not
a frst return wthn the meanng of secton 114(b 4. y secton 53(a) 1
of the 1934 ct, the return was due on or before March 15, 1935. y secton
53(a)2 the Commssoner was empowered to grant a reasonabe e tenson for
fng returns 2 but, so far as appcabe here, not e ceedng s months. Iat|-
gar Co. v. evrrng (308 D. S., 389 Ct D. 1433, C. . 1940-1, 237 ) woud
compe the concuson that had the amended return been fed wthn the perod
aowed for fng the orgna return, t woud have been a frst return
wthn the meanng of secton I14(b)4. ut we can fnd no statutory support
for the vew that an amendment makng the eecton provded for n that
secton may be ded as of rght after the e praton of the statutory perod for
fng the orgna return.
We are not deang wth an amendment desgned merey to correct errors
and mscacuatons n the orgna return. dmttedy the Treasury has
been bera n acceptng such amended returns even though fed after the
perod for fng orgna returns.3 Ths, however, s not a case where a ta -
payer s merey demandng a correct computaton of hs ta for a pror year
based on facts as they e sted. Pettoner s seekng by ths amendment not
ony to change the bass upon whch ts ta abe ncome was computed for 1934
but to adopt a new method of computaton for a subsequent years. That
opportunty was afforded as a matter of egsatve grace the eecton had to
be made n the manner and n the tme prescrbed by Congress. The offer
was bera. ut the method of ts acceptance was restrcted. The offer per-
mtted an eecton ony n an orgna return or n a tmey amendment. n
amendment for the purposes of secton 114(b)4 woud be tmey ony f fed
wthn the perod provded by the statute for fng the orgna return. No
other tme mtaton woud have statutory sancton. To e tend the tme
beyond the mts prescrbed n the ct s a egsatve not a |udca functon.
Strong practca consderatons support ths poston.
If pettoner s vew were adopted, ta payers wth the beneft of hndsght
coud shft from one bass of depeton to another n ght of deveopments
subsequent to ther orgna choce. It seems cear that Congress provded
that the eecton must be made once and for a n the frst return n order to
avod any such shfts. nd to requre the admnstratve branch to e tend the
tme for fng on a showng of cause for deay woud be to vest n t dscreton
whch the Congress dd not see ft to deegate.
Pettoner urges that ths resut w produce a hardshp here. It stresses
the fact that t had no actua knowedge of the new opportunty afforded t
by secton 114(b)4 of the 1934 ct and that equtabe consderatons shoud
therefore govern. That may be the bash for an appea to Congress n ameora-
ton of the strctness of that secton. ut t s no ground for reef by the
courts from the rgors of the statutory choce whch Congress has provded.
nay, pettoner asserts that we can not consder the queston of the tme-
ness of the amended return snce before the oard of Ta ppeas and the
crcut court of appeas respondent urged ony that pettoner s cam was
b. sed upon an amended, rather than an orgna, return. ut even on the
assumpton that that ssue dd not embrace the queston of tmeness, the
crcut court, of appeas was |ustfed n affrmng the decson of the oard
of Ta ppeas. Where the decson beow s correct t must be affrmed by
the appeate court though the ower trbuna gave a wrong reason for Its
acton. ( eve ng v. Gowran, 302 U. S., 238, 245-24 Ct. D. 1292, C. . 1938-1,
3001.)
ffrmed.
3 See Treasury Reguatons No. 8f, artces 53-1 to 53-4, Incusve.
See, for e ampe, Treasury Reguatons No. SO, artce 43-2, governng the fng of
amended returns for the purpose of deductng osses whch were sustaned durng a Dror
ta abe year. (Cf. Unon Meta f|. Co., 1 . T. ., 39 .)
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227
ue.
S CTION 11 . CLUSIONS ROM GROSS INCOM .
1940-49-10507
G. C. M. 22383
NL CT O 1928.
, a master of a steamshp engaged u coastwse trade between
ports of the Unted States, was not a bona fde nonresdent ctzen
of the Unted States for more than s months of the ta abe year
wthn the meanng of secton 11 (a) of the Revenue ct of 928,
even though he was outsde the terrtora waters of the Unted
States for 234 days of hs ta abe rear.
G. C. M. 12107 (C. . II-2, 12 (1933)) revoked. Recommended
that L T. 2293 (C. . -2, 33 (192 )) be modfed.
Ths offce has reconsdered G. C. M. 121 7 (C. . II-2,12 (1933))
n vew of the apparent confct of that rung wth artce 119-4 of
Reguatons 8 , Reguatons 94, and Reguatons 101. The ast sen-
tence of that artce reads as foows:
cept as provded n secton 119(a)3, wages receved for servces rendered
nsde the terrtora mts of the Unted States and wages of an aen seaman
earned on a coastwse vesse are to be regarded as from sources wthn the
Unted States.
In G. C. M. 121 7, supra, t was hed that the ta payer, a master
of a steamshp engaged n coastwse trade between ports of the
Unted States, was a bona fde nonresdent ctzen of the Unted
States for more than s months of the ta abe year wthn the mean-
ng of secton 110(a) of the Revenue ct of 1928, by vrtue of the
fact that he was absent from the Unted States and ts terrtora
waters for 2. 4 days durng the year n queston.
In G. C. M. 220 5 (C. . 1910-1, 100) ths offce hed that to come
wthn the e empton provsons of secton 11 (a) of the Revenue
ct of 193 a ta payer must be, absent from the Unted States for
more than s fu caendar months durng the ta abe year, and that
fractona parts of months from severa trps may not be added
together to make whoe caendar months, snce whoe caendar months
must consst of consecutve days of absence from the Unted States
n any one trp. G. C. M. 121 7, supra, was modfed accordngy.
Such modfcaton appeared to have the practca effect of barrng
teamen engaged n coastwse shppng between Unted States ports
from quafyng for the e empton n queston.
It s the opnon of ths offce, however, that n so far as G. C. M.
121 7, supra, hods that the wages of a ctzen seaman earned on a
coastwse vesse whe such vesse s out of the Unted States and ts
terrtora waters are from sources wthout the Unted States, t 19
drecty contrary to the rue set forth n the ast sentence of artce
119-4 of Reguatons 101, above quoted, to the effect that wages of
an aen seaman earned on a coastwse vesse are to be regarded as
from sources wthn the Unted States. There appears to be no
dfference n prncpe between the case of ctzen seamen and the
case of aen seamen. Ths offce s of the opnon that the test as to
whether wages earned by seamen n coastwse trade are from sources
wthn or wthout the Unted States shoud be the same for a such
ta payers. It s, therefore, beeved that the rue set forth n the
reguatons respectng aen seamen shoud be apped generay.
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117, rt. 117-2.
228
ccordngy, t s concuded that wages earned by any seaman whe
engaged n coastwse trade between mercan ports shoud be re-
garded as from sources wthn the Unted States. G. C. M. 121 7,
supra, s hereby revoked. To the e tent that I. T. 2293 (C. . -2,
33 (192 )) s nconsstent wth the concuson reached n G. C. M.
220 5, supra, and n ths memorandum wth respect to the computa-
ton of tme of absence from the Unted States, t s recommended
that t be modfed.
. P. Wenche,
1940-49-10508
I. T. 3431
R NU CT O 1920.
I. T. 2293 (C. . -2, 33 (192 )) s modfed to the e tent that t
s nconsstent wth G. C. M. 22383 (page 227, ths uetn).
S CTION 117. C PIT L G INS ND LOSS S.
rtce 117-2: Lmtatons on capta gans 1940-48-10500
and capta osses. Ct. D. 1470
INCOM T R NU CT O 1032 D CISION O SUPR .M COURT.
1. Deducton Loss Lmtaton on Stock Losses Partner
Tradng n Noncapta ssets fob Partnershp and for s
Own ccount.
n ndvdua engaged n the busness of tradng n securtes
for hs own account and for a partnershp of whch he was a mem-
ber s entted, under secton 23(r) of the Revenue ct of 1932, to
deduct from hs gross ncome the amount of net oss on prvate
transactons n stocks and bonds whch were not capta assets,
where hs dstrbutve share of the noncapta se eurty gans of the
partnershp e ceeded the amount of such oss. The word gans
n secton 23(r) ncudes gans from saes or e changes of partner-
shp stocks and bonds whch are not capta assets as defned n
secton 101 of the ct.
2. Decson Reversed.
Crcut (104 ed. (2d), 40), affrmng decson of the Unted States
oard of Ta ppeas (37 13. T. ., 223), reversed.
frry . Neuberger, pettoner, v. Commssoner of Interna Revenue, respondent.
1 S. Ct., 97.
November 12, 1940.
opnon.
Mr. ustce Murphy devered the opnon of the Court.
Pettoner, a resdent of New York, was a member of the New York Stock
change. e was engaged n the busness of tradng n securtes on the
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229
8 117, rt. 117-2.
foor of the e change for the partnershp of son Neuberger, of whch he
was a member, e ecutng orders on behaf of customers of the partnershp. u
addton he made numerous purchases and saes of securtes for hs own
account.
Durng the year 1032, the one here n queston. Ison Neuberger derved
a proft of 142,802.29 from the sae of securtes whch were not capta
assets as defned n secton 101 of the Revenue ct of 1932. (47 Stat., 1 9, 191.)
The frm had other ncome of 170,830.05 and deductons of 203,9 1.78, or net
ncome of 109, 51.10. Pettoner s dstrbutve share was 44,r 8.55. Durng
the same year pettoner sustaned a net oss of 25,58S.93 on hs prvate
transactons n stocks and bonds whch were not capta assets as defned n
secton 101.
In hs ncome ta return for the year 1932 pettoner deducted from gross
ncome the oss of 25.58S.93. The Commssoner dsaowed the deducton and
assessed a defcency. The oard of Ta ppeas uphed the acton of the
Commssoner. (37 . T. ., 223.) On appea the Second Crcut Court of
ppeas affrmed. (104 ed. (2d), 49.) ecause of substanta confct wth
ennngs v. Commssoner (110 ed. (2d), 943), and Crak v. Unted States
(31 ed. Supp., 132), we granted certorar mted to the questons whether
secton 23(r) of the Revenue ct of 1932 (47 Stat., 1 9, 1S3) authorzed the
camed deducton and whether, n the event that t dd not, the statute as so
construed was consttutona. (310 U. S., 55.)
Secton 23 of the Revenue ct of 1932 sets out the aowabe deductons from
gross ncome. Secton 23(r) provdes:
Losses from saes or e changes of stocks and bonds (as defned n sub-
secton (t) of ths secton) whch are not capta assets (as defned In secton
101) sha be aowed as deductons from gross ncome ony to the e tent
of the gans from such saes or e changes.
The basc and narrow queston s whether, n computng the ncome of an
Indvdua partner, the word gans n secton 23(r) ncudes gans from
saes or e changes of partnershp stocks and bonds whch are not capta assets
as defned n secton 101. We are of opnon that t does
In computng gross ncome pror to the Revenue ct of 1932, sub|ect to certan
mtatons a ta payer was entted to deduct the fu amount of hs osses from
transactons n securtes. (Revenue ct of 1928, sectons 23(e), 23(g), 101(b),
113.) ut the growng custom of dmnshng ordnary ncome by deductng
osses reazed on the sae of securtes whch had shrunk n vaue, due no doubt
to the fa n prces after 1929, ed Congress to provde n secton 23(r) that
deductons for such osses shoud be mted to gans from smar transactons.
That ths was the purpose and the ony purpose of secton 23(r) abundanty
appears from the report of the Senate nance Commttee accompanyng the
b.1 Nowhere does there appear any ntenton to deny to a ta payer who
chooses to e ecute part of bs securty transactons n partnershp wth another
the rght to deductons whch pany woud be avaabe to hm f he had
e ecuted a of them sngy. Nowhere s there any suggeston that Congress
ntended to ta noncapta securty gans unt they e ceeded smar osses.
The anguage of secton 23(r) does not requre such a constructon. Nor
do the avaabe evdences of Congressona ntent ndcate such a purpose.
Report of Senate nance Commttee (Seventy-second Congress, frst sesson), No. 705,
page 10:
Your commttee beeves that securty gans and osses shoud be segregated, that se-
curty osses shoud be deducted soey from securty ans but that securty gans shoud
not be ta ed unt they actuay e cee d securty osses.
See aso report of ouse Ways and Means Commttee (Seventy-second Congress, frst ses-
on), No. 708, pages 12-13 :
There are no provsons In e stng aw correspondng to secton 2.1(r).
Many ta payers have een competey or partay emnatng from ta ther ncome from
saares, dvdends, rents, etc., by deductng therefrom osses sustaned In the stock and
bond markets, wth serous effect upon the revenue. Your commttee Is of the opnon that
orne mtaton ought to be paced on the aowance of such osses.
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117, rt. 117-2.
230
Respondent ponts out, however, that under sectons 181-189 of the Revenue
ct of 1932 ( 49 Stat., 1( 9, 222-223),2 partnershp ncome s computed on an entty
bass, that tems of partnershp gross ncome do not appear on a partner s re-
turn, that ony partnershp net ncome s refected n the ndvdua partner s
ncome and s reported ony n the form of a dstrbutabe or dstrbuted share.
e contends that snce partnershp ncome s computed n the same way as an
ndvdua s the deducton afforded by secton 23(r) to the partnershp s a
dstnct prvege not to be confused or combned wth that afforded to the
ndvdua. Thus, he argues, the deducton camed here s nconsstent wth
the genera scheme created for reportng partnershp ncome as we as, n effect,
a second or doube use of secton 23(r).
It s not to be doubted that n the enactment of secton 23(r) Congress
ntended not on y to dea wth ndvdua securty gans and osses, but aso to
permt osses suffered n partnershp securty transactons to be apped aganst
partnershp gans n ke transactons. It does not foow, however, and the
anguage of the statute does not provde, ether e pressy or by necessary
mpcaton, that osses sustaned n an ndvdua capacty may not be set off
aganst gans from dentca though dstnct partnershp deangs. If the ndvd-
ua osses are actuay ncurred n smar transactons t can not |usty be sad
that, the same deducton s taken a second tme, or that the rea purpose of the
statute, whch s utmatey to ta the net ncome of the ndvdua partner,
woud thereby be mpared.
Sectons 181-18 ) of the Revenue ct of 1032 (49 Stat., 1 9, 222-223), provde
generay for computaton and reportng of partnershp ncome. In requrng a
partnershp nformatona return athough ony ndvdua partners pay any ta .
Congress recognzed the partnershp both as a busness unt and as an assoca-
ton of ndvduas. Ths weakens rather than strengthens respondent s argu-
ment that the prveges are dstnct or that the unt characterstcs of the
partnershp must be emphaszed. (Compare ennngs v. Commssoner, 110
ed. (2d), 945 Grak v. Unted States, 31 ed. Supp., 132 Unted States v.
Coubu, 251 ed., S82 (affrmed, 208 ed., 27).) Nor s the deducton camed
here precuded because Congress, n sectons 184-188, has partcuarzed nstances
where partnershp ncome retans ts dentty n the ndvdua partner s return.
The ma m e presso unus est e cuso aterus s an ad to constructon
not a rue of aw. It can never overrde cear and contrary evdences of Con-
gressona ntent. (Unted States v. arnes, 222 U. S., 513.)
It s true that the Treasury Department adopted a contrary poston and
dened the camed deducton. (G. C. M. 14012, C. . I -1.145 (1935) I. T. 2892,
C. . I -1.148 (1985).) Under dfferent crcumstances great weght has been at-
Sec. 181. Indvduas carryng on busness n partnershp sha be abe for ncome ta
ony n ther ndvdua capacty.
Sec. 182. (a) There sha be ncuded n computng the net Income of each partner hs
dstrbutve share, whether dstrbuted or not, of the net ncome ot the partnershp for tbo
ta abe year.
(h)
Sec 183. The net ncome of the partnershp sha be computed In the same manner and
on the same bass as n the case of an ndvdua, e cept that the so-caed chartabe
contrbuton deducton provded n secton 23(n) sha not be aowed.
Sec. 181. The partner sha, for the purpose of the norma ta , be aowed as a credt
aganst hs net ncome, n addton to the credts aowed to hm under secton 25 hs pro-
portonate share of such amounts of dvdends and uterest specfed n secton 25 (a) and
(b) as are receved by the partnershp.
Sec. 185. In the case of the members of a partnershp the proper part of each share of
the net ncome whch conssts of earned ncome sha he determned under rues and regu-
atons to bo prescrbed by the Commssoner wth the approva of the Secretary- and sha
be separatey shown n the return of the partnershp and sha be ta ed to the member as
provded n ths Suppement.
Sbc. 18 . In the case of the members of a partnershp the proper part of each share of
the net ncome whch conssts, respectvey, of ordnary net ncome, capta net gan, or
capta net oss, sha he determned under the rues and reguatons to be prescrbed by the
Commssoner wth the approva of the Secretary, and sha he separatey shown In the
return of the partnershp and sha be ta ed to the member as provded n ths Suppement
but at the rates and n the manner provded n secton 101 (a) and (b), reatng to capta
net gans and osses.
Sec. 187. The beneft of the speca deducton for net osses aowed by secton 117 sha
be aowed to the members of a partnershp under reguatons prescrbed by the Comms-
soner wth the approva of the Secretary.
Sec. 1S8. The amount of Income, war-profts, and e cess-profts ta es mposed bv foregn
countres or possessons of the Unted States sha e aowed as a credt aganst the ta of
the member or a partnershp to the e tent provded n secton 131.
Sec. IS ). very partnershp sha make n return for each ta abe year, statng specf-
cay the tems of ts gross ncome and the deductons aowed by ths tte, and sha ncude
n the return the names and addresses of the Indvduas who woud be entted to share In
the net ncome f dstrbuted and the amount of the dstrbutve share of each Indvdua.
The return sha be sworn to by any one of the partners.
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231
117, rt. 117-5.
tactaed to admnstratve practce and Treasury rungs, but beyond queston
they can not narrow the scope of a statute when Congress pany has ntended
otherwse. (Rasqun v. upres, 308 U. S., 54 Norwegan Ntrogen Products
Co. v. Unted States, 288 U. S.. 294.)
It Is true, too, that n some cases the characterstcs of partnershps as
busness unts have been emphaszed ( orres v. Commssoner, 25 R. T. .,
154 M son v. Commssoner, 17 . T. ., 970 (appea dsmssed, 55 ed. (2d),
108 ) urnt v. Commssoner, 12 . T. ., 1209 ppea of Menken, 8 . T. .,
10 2), whe n others the characterstcs of partnershps as assocatons of
ndvduas have been stressed. (Unted States v. Couby, supra. Compare
rucc v. Unted States, 18 ed. Supp., 848.) These cases, not decded under
the Revenue ct of 19:52 and turnng, as they must, on ther own pecuar
facts, are tte ad n ascertanng the effect to be gven to secton 23(r).
It s not true, however, as respondent argues, that the asserted deducton
ea not be aowed because pettoner has suggested no way to cacuate t
propery or to mport tems of gross ncome from the partnershp nformatona
return. The Roard of Ta ppeas e pressy found the amount of partner-
shp gans from securty transactons and the proporton n whch pettoner was
to share n the profts of the partnershp. (37 R. T. ., 223, 224.) Snce
pettoner s share of these noncapta securty gans s greater than hs oss
of 25,588.93, the mt on deductons set by secton 23(r) s not e ceeded.
Our concuson that ths s the proper constructon of secton 23(r) s con-
frmed by the acton of Congress snce 1932. In 1933 Congress amended secton
182(a) of the Revenue ct of 1932 to deny to ndvdua partners deductons for
partnershp osses whch had been dsaowed n the partnershp return, the
converse of the nstant case. (48 Stat., 195, 209.8) More sgnfcanty, n 1938,
after the Treasury Department had rued to the contrary (G. C. M. 14012, C. R.
I -1, 145: I. T. 2892, C. R. I -1, 148), Congress e pressy provded for the
deducton of ndvdua securty osses from smar partnershp gans. (Rev-
enue ct of 1938, sectons 182-183 52 Stat., 447, 521. ) That the amendment of
19 3 changed and the Revenue ct of 183S restored the aw of 1932 as we have
e paned t s pan from the egsatve hstory of the two cts and of secton
23(r).
Shearer v. urnet (285 U. S., 228 TCt. D. 43 , C. R. I-1, 232 (1932) ) s
not contrary to the concuson we reach here. There the decson turned on
te proper constructon to be gven to secton 218(a) of the Revenue ct of
1924 (43 Stat., 253, 275), and the court correcty concuded that Congress had
not ntended to aow the asserted credt.
We concude that pettoner s entted to the deducton. The decson of the
Second Crcut Court of ppeas s reversed, and the case s remanded wth
drectons to remand to te Roard of Ta ppeas for proceedngs n conformty
wth ths opnon.
Reversed and remanded.
Mr. ustce Rohebts, Mr. ustce Rt.ack. and Mr. ustce Dot|gas are of
opnon that the |udgment shoud be affrmed.
rtce 117-5: ppcaton of secton 117 n the
case of husband and wfe.
R NU CT O 1934.
Deductbty of capta osses of one spouse from capta pans of
the other n |ont returns. adty of artce 117-5, Reguatons 8 .
(See Ct, D. 1479, page 220.)
In Senate nance Commttee Report No. 114 (Seventy-thrd Congress, frst sesson)
accompanyng the h, t Is stated at page 7 :
Subsecton (d) amends the partnershp provsons of e stng aw. Under e stng aw
the ndvdua members of a partnershp are entted to reduce ther ndvdua net ncomes
by ther dstrbutve shares of a net oss ncurred by the partnershp.
In ouse Ways and Means Commttee Report No. 18(50 (Seventy-ffth Congress, thrd
sesson) accompanyng the b, t s stated at pages 42-43 :
The method of treatment provded n these sectons of the h s a ogca coroary of
the prncpe that ony the partners as ndvduas, not the partnershp as an entty, are
ta abe persons and s necessary to gve the partners as ndvduas the beneft of the ater-
natve ta In the case of net ong-term capta gans, provded n secton 117(c), wth re-
spect to such gans reazed upon the sae or e change of partnershp capta assets. It
shoud be noted that ths method nvoves a departure from the prncpe adopted n the
Revenue cts of 1934 and 193 .
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1 2, rt. 1 2-1
S CTION 1 2. N T INCOM .
rtce 1 2-1: Income of estates and trusts. 1940-35-10400
Mm.5091
ppcaton of G. C. M. 21799 (O. . 1940-1, 159) wthout retro-
actve eToct n certan cases.
Washngton, D. ., ugust 1,191(0.
eads of ed Dvsons of the Technca Staff, and Other Offcers
and mpoyees of the ureau of Interna Revenue Concerned:
1. Reference s made to G. C. M. 21799 (C. . 1940-1, 159), whch
hed that, under the Revenue cts of 192 and 1928, where under
the terms of a trust nstrument payments of ncome to a certan
benefcary were to be made on anuary 2 and uy 2 of each year
provded the benefcary was vng on those dates, the ncome of the
trust for the ast haf of the year, whch was dstrbutabe on
anuary 2 of the foowng year, was ta abe to the trust and not
to the benefcary. In vew thereof, I. T. 3352 (C. . 1940-1, 1 2)
revoked I. T. 2595 (C. . -2, 353 (1931)), reatng to ncome of
estates and trusts.
2. G. C. M. 21799 revoked G. C. M. 8724 (C. . -2, 197 (1931))
and G. C. M. 15401 (C. . I -2, 242 (1935)), both of whch hed
that the entre ncome was currenty dstrbutabe to the benefcary
and ta abe to hm n the year of actua recept. G. C. M. 21799,
supra, therefore, conforms to the decson of the Crcut Court of
ppeas for the Tenth Crcut n Commssoner v. Mason L. Dean
(102 ed. (2d). 99). affrmng Dean v. Commssoner (35 . T. .,
839. acquescence, C. . 1940-1, 2).
3. Pror to the ssuance of G. C. M. 21799, the ureau foowed
the rung contaned n G. C. M. 15401, supra, whch was contrary to
the decson of the oard of Ta ppeas n ugustus . usts v.
Commssoner (30 . T. ., 820), the facts of whch, n so far as
matera, were the same as n the Dean case. Orgnay, acques-
cence n the usts case was pubshed n C. . III-2, 7 (1934)
and upon ssuance of G. C. M. 15401, nonacquescence was pubshed
n C. . I -2, 30 (1935). In vew of the decson n the Dean
case, the facts of whch, as stated, paraeed those of the usts
case, acquescence n the htter was repubshed n C. . 1940-1, 2.
4. It appears that snce 1931 many ta payers have cooperated
wth the ureau n foowng the prncpes outned n G. C. M.
8724 and G. C. M. 15401 and returns have been fed by both the
trusts and the benefcares n accordance wth such prncpes. To
appy G. C. M. 21799, supra, wthout retroactve effect w obvate
the necessty of dsturbng returns fed pursuant to G. C. M. 8724
and G. C. M. 15401, and w provde a smpe and practca method
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233
203 (a), rt. 203 (a (2)-.
of transton from compance wth the rungs contaned n G. C. M.
8724 and G. C. M. 15401 to that contaned n G. C. M. 21799, supra.
5. In vew of the foregong, the ureau w not appy the pro-
vsons of G. C. M. 21799, supra, to returns for ta abe years ended
pror to anuary 1,1940, f
(1) The trust has deducted n ts returns for such years, as
dstrbutabe wthn the current year, the entre net, ncome to
be dstrbuted, ncudng that to be dstrbuted n the succeed-
ng year, n accordance wth the prncpes of G. C. M. 8724
and G. C. M. 15401, and the benefcares have correspondngy
ncuded n ther net ncome such entre net ncome or the trust
as and when t became, dstrbutabe to them and
(2) The benefcares agree to ncude that porton of the
ncome of the trust for the ast year ended pror to anuary 1,
1940, whch becomes dstrbutabe after the cose of such year
n ther returns for the year n whch such porton becomes
dstrbutabe.
. Inqures regardng ths mmeograph shoud refer to the num-
ber thereof and to the symbos IT: TM.
Tmothy C. Mooney,
ctng Commssoner.
ohn L. Suvan,
SUPPL M NT G. INSUR NC COMP NI S.
S CTION 203(a). N T INCOM O LI INSUR NC
COMP NI S: G N R L RUL .
rtce 203(a) (2)-: Reserve funds. 1940-52-1053
Ct. D. 1477
1. Net Income Deductons Dsabty Reserves of Lfe Insur-
ance Company Incuded n Reserve unds Requred by
Law.
In computng ta abe net ncome under secton 203(a)2 of the
Revenue ct of 1032, a fe nsurance company ssung poces of
combned fe, heath, and accdent nsurance s entted to deduct
from gross ncome a percentage of the mean of ts reserves man-
taned for dsabty benefts us we as for death benefts, both such
reserves beng ncuded wthn the term reserve funds requred by
aw as used n that secton.
2. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, fth
Crcut (1 )40) (111 ed. (2d), 3 ), affrmng decson of the
Unted States oard of Ta ppeas (1938) (38 . T. ., 1430),
affrmed.
200217 11- 1
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203(a), rt. 203(a)(2)- . 234
SUP M CoU T O T UNIT D ST T S.
uy T. ererng, Commssoner of Interna Revenue, pettoner, v. Pan- mer-
can Lfe Insurance Co.
1 S. Ct, 210.
On wrt of certorar to the Unted States Crcut Court of ppeas for the fth Crcut.
December 9, 1940.
OPINION.
Ths ease nvoves respondents ncome ta for the ta year 1933. It Is n
a respects governed by our decson n ererng v. Oregon Mutua Lfe Ins. Co.,
No. 504, ths day decded Ot. D. 147 , beow , and on the authorty of that case
the decson beow s affrmed.
rtce 203(a) (2)-: Reserve funds. 1940-52-10537
Ct. D. 147
INCOM T R NU CTS O 1932 ND 1934 D CISION O SUrR M
COURT.
1. Net Income DraucnoNs Dsabtty Resek ks of Lfe Insur-
ance Company Incuded n Reserve unds Requred by
Law.
In computng ta abe net ncome under secton 203(a)2. of the
Revenue cts of 1932 and 1934, a fe nsurance company ssung
poces of combned fe, heath, and accdent nsurance s entted
to deduct from gross ncome a percentage of the mean of ts reserves
mantaned for dsabty benefts as we as for death benefts,
both such reserves beng ncuded wthn the term reserve funds
recurred by aw as used n that secton.
2. Cases Dst no wshed.
ererng v. Into--Mountan Lfe Insurance Co. (1935) TCt. D.
9f 0. C. . I -1, 3391 (294 I . S.. 8 ) and ererng v. Inos
Lfe Insurance Co. (103 ) Ct. D. 1175, C. . -2, 244 (299
U. S., 88) dstngushed.
3. Decson ffrmed.
Crcut (1940) (112 ed. (2d), 4 8), affrmng unreported decson of
the Unted States oard of Ta ppeas, affrmed.
uy T. ererng, Commssoner of Interna Revenue, pettoner, v. Oregon
Mutua Lfe Insurance Co.
1 S. Ct, 207.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Nnth Crcut.
December 9, 1940.
opnon.
In computng ts net ta abe ncome for 1933 and 1934, respondent took a
deducton of 3 per cent of the reserves t had sot asde wth respect to ts
combned poces of fe, heath, and accdent nsurance. Secton 203(a)2 of
the 1932 and 1934 Revenue cts permts a fe nsurance company to deduct from
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235 203(a), rt. 203(a)(2)- .
ts gross Income n amonnt equa to 3 per cent of the mean of the reserve
funds requred by aw . 1 That respondent was a fe nsurance com-
pany as defned by the Revenue cts and that t was requred by aw to mantan
reserves to protect both death and dsabty benefts were conceded. The Com-
mssoner aowed a deducton for death reserves, but dsaowed as to dsabty
reserves, on the hypothess that the words reserve funds requred by aw
shoud be construed to appy ony to reserves for death osses thereby e cudng
dsabty reserves. The oard of Ta ppeas hed the deductons aowabe n
both respects and reversed the Commssoner.1 The Court of ppeas for the
Nnth Crcut affrmed certorar was granted .because the Court of Cams
had reached an opposte resut on the same queston.
Note. Per curam: The |udgment s affrmed uwn the frst ground set forth
n the opnon of the Court of Cams wth respect to nvestment e penses, the
vews e pressed on the second queston consdered by the Court of Cams as to
the rght of deducton on account of nsurance reserves not beng an essenta
bass for the |udgment and beng contrary to cverng v. Oregon Mutua Lfe
Insurance Co., No. 5 4, decded ths day.
Legsatve hstory dscoses that a deducton smar to that aowed by see on
203(a)2 frst appeared n the Revenue ct of 1921, and as reappeared n every
revenue measure snce, ncudng that of 1939. Pror to 1921, nsurance com-
panes had not been aowed such a deducton, but had been sub|ect to the same
ta pan as corporatons generay the 1921 ct, however, whoy e empted
nsurance companes from the genera scheme of corporate ta aton and set
up speca systems appcabe to them aone. The new pan, as t reated to
fe nsurance companes, had as a ma|or ob|ectve the emnaton of premum
recepts from the fed of ta abe ncome. It had ong been ponted out to Congress
that these recepts, e cept as to a very mnor proporton of each premum, were
not true ncome but were anaogous to permanent capta nvestment. In a
the Revenue cts from 1921 through 1939, the gross ncome of fe nsurance
companes no onger ncuded premum recepts, but was mted to ncome from
nterest, dvdends, and rents. nd, pursuant to the conceved anaogy of
reserves to capta nvestment, net ncome was to be determned by permttng,
among other deductons from gross ncome, that same deducton here n dspute
a percentage of the reserve funds requred by aw.
s entrey new and separate ta provsons reatng ony to fe nsurance
companes were thus enacted, t became necessary specfcay to defne what
consttuted a fe nsurance company wthn the meanng of the ct. There-
fore, t was decared n the 1921 ct and a ts successors that when used n
ths tte the term fe nsurance company means an nsurance company
engaged n the busness of ssung fe nsurance and annuty contracts (ncudng
contracts of combned fe, heath, and accdent nsurance), the reserve funds
of whch hed for the fufment of such contracts comprse more than 50 per
centum of ts tota reserve funds. w
Under the Congressona pan, there s granted a deducton based on those
reserve funds requred by aw. Secton 203(a)2 grants ths deducton sec-
ton 201 defnes fe nsurance companes. It seems cear that Congress ntended
to permt the deducton of reserves based on those poces that make a company
1 47 Stat.. 224 48 Stat.. 732.
The opnon s not offcay reported: the oard reed on tf earer decsons n
qutabe Lfe, ssurance Socety v. Commssoner (33 . T. ., 70S) Monarch fe Ins.
Co. v. Commssoner (38 . T. ., 71(1) and I an- mercan Lfe Inc. Co. v. Commssoner
(38 . T. ., 1430).
112 ed. (2d), 4 8. Other crcuts reached a ke resut: Commssoner v. Pan-
mercan Lfe Ins. Co. (I ed. (2d), 3 (C. C. . 5)) Commssoner v. Monarch Lfe
Ins. Co. (114 ed. (2d), 314 (C. C. . 1)).
ew Word Lfe Ins. Co. v. Unted Staes (2 ed. Supp., 444).
42 Stat., 2 1. secton 245(a)2.
,r)3 Stat., 72.
The hstorv of ths egsaton s set out In at tona Lfe Ins. Co. . Unted States
(277 U. S., 508. 523-524. T. D. 420 . C. . 1I-2, 20 (1(128) ).
See, e. g.. S. ept. No. 17, part 1, page 0, S ty-fth Congress, thrd sesson.
. ( ., secton 244(a), ct of 1021 (42 Stat., 2 1) secton 202n), ct of 1039 (53
Star.. 711.
1U . ft., secton 242, ct of 1021 (42 Stat., 2 1) secton 201, ct of 1039 (53 Stat.,
71). The Government contends that the determnatve rato under ths secton s death
reserves to tota reserves : the nsurance companes contend that the rato Is a reserves
on the enumerated types of poces to tota reserves. Snce Oregon Mutua Is admttedy
a fe nsurance company regardess of whch of these contentons s correct, ths
queston Is not before us.
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203(n), rt. 203(a)(2)- .
23
n fe nsurance company under the t. whch, by defnton, ncudes po-
ces of combned fe, heath, and accdent nsurance. The reserves hero
reated to the dsabty provsons of such combned poces. The same under-
yng consderatons that prompted the deducton for death reserves are app-
cabe to the reserves for dsabty n these combned poces. nd dsabty
as we as death reserves fa teray wthn the anguage of the deducton
provson. It s not dsputed that admnstratve reguatons promugated under
every Revenue ct from 1021 through 1932 recognzed the rght of fe nsurance
companes to take deductons both for death and for dsabty reserves on
poces such as those here nvoved. Nor s t dened that the 1934 reenact-
uent of secton 203(a)2 foowed 13 years of admnstratve reguaton and
practce under whch substantay dentca provsons had been so con-
strued and apped that fe nsurance companes coud and dd obtan these
deductons. Durng that entre perod, the Treasury found no ambguty n
secton 2 3(a)2. and e pressed no doubt as to a fe nsurance company s rght
to make such deductons. ut on ebruary 11, 1935, reguatons were promu-
gated assortng dsabty reserves to be nondeductbe under the 1934 ct 11
and on December 18, 1935, a Treasury decson decared that ths reguaton
apped retroactvey to the 1932 and earer cts. Respondent now says that
ts former practce n permttng dsabty reserve deductons was erroneous,
and that the new reguaton shoud be gven fu retroactve effect.
It s the Government s contenton that the change n the reguatons was
partcuary approprate because nduced by |udca decson. nd t s true
that ths Court as hed that reserves set asde by fe nsurance companes to
proteft payment of pocy nvestment purchases can not be used as the bass
for deductons.1 ut those decsons rested upon the concuson that the nvest-
ment fund features had no reaton to the nsurance rsks. ere, n the com-
bned fe and heath and accdent poces, the heath and accdent reserves are
based upon contngences of the commencement and contnuance of dsabty.
They have a drect and nseparabe reatonshp to the very nsurance contracts
whch brng respondent under a speca ta scheme.1 Nor s there a dstncton,
as respondent urges, between that part of the reserve set asde to protect pocy
hoders not yet dsabed and that part set asde to protect those aready dsabed.
The abty to those who have ncurred dsabty s not a f ed sum, but
remans a contngency, st uncertan n duraton and amount. Reserves hed
for such a contngent abty are true reserves n the nsurance sense.
We fnd t unncessary to dscuss the e tent to whch such a reguaton mght,
under dfferent crcumstances, be gven retroactve effect by vrtue of the statu-
tory power of the Commssoner. Nor do we fnd t necessary to dscuss the
argument that the pocy behnd the speca treatment afforded fe nsurance
companes does not warrant aowng ths deducton. or t s our concuson
that by secton 203(a)2 of the 1932 and 1934 cts, Congress has granted fe
nsurance companes a deducton for dsabty reserves whch ony Congress
can take away.
ffrmed.
rtce st of Reguatons 02. 5. 0, and artce 071 of Reguatons 74 and 77.
rtce 20.p .ta)2 of Reguatons SIS.
UTreasurv Decson 4 15 (C. . I -2. 310).
In support of the Commssoner s unt to change the reguatons under ths sup-
pose sute m facts, the (overnment ctes Manhattan Genera qupment Co. v. Comms-
soner (297 T . S.. 1211, 134-135 ft. D. 10S0, C. It. -1, 2S0 (193 ) ) and Murphy O
Co. v. Iturnett (287 O. S., 200 Ct. D. 019, C. It. II-1, 231 (1033) ).
Cf. Monssen v. Commssoner (20 I . S.. 344. 355 Ct. I). 10 4. O. . -1, 2 4
(193 1 I). The |udca decsons reed on are those cted In the foowng footnote.
rrr, n) v. Inter-Mountan Lfe Ins. Co. (204 U. S.. SC Ct. D. 0.1O. C. . I -1,
330 (103.-)))) eherng v. Inos I./e Ins. Co. (209 D. S., 88 Ct. D. 1175, C. . -2,
214 (10.1 )1 ).
Cf. hne v. tr or Lfe Ins. Co. (273 N. Y., 1) Rubn v. Metropotan Lfe Int.
Co. (278 N Y.. 2ft).
w or the Commssoner s power to promugate retroactve reguatons, respondent rees
on secton 50 of the Revenue ct of 1934, whch amended secton 1108(a) of the
192 ct.
e v. Commssoner (302 . S.. 573. 582 Ct. D. 1303. C. . 103.8-1. 300)1
oshant1 v. eherng (298 T . S., 441, 44 -447 Ct. D. 1124, C. . -1, 219 (103 ) ).
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237 322, rt. 322-3.
S CTION 231. GROSS INCOM .
from gross ncome.
R NU CT OP 1934 ND PRIOR R NU CTS.
Incuson of terms arshp or arshps or arpane or arpanes
n term shps or shps. (See I. T. 3399, page 150.)
IN C S O D ICI NCY.
to ta for fraud. (See G. C. M. 2232 , page 159.)
SUPPL M NT O. O RP YM NTS.
S CTION 322. R UNDS ND CR DITS.
rtce 322-3: Cams for refund by ta payers.
R NU CT O 1028.
ccount stated. (See Ct. D. 14 4, page 195.)
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MPLOYM NT T S.
INT RN L R NU COD .
C PT R 9, SU C PT R . MPLOYM NT Y OT RS T N
C RRI RS.
Sectons 1400 and 1410: Rate of ta .
Reguatons 10 , Secton 402.303: When empoyees
ta attaches.
onus payments made pursuant to proft-sharng bonus pan. (See
S.S.T. 400, page 2 3.)
Sectons 1400 and 1410: Rate of ta .
Reguatons 10 , Secton 402.403: When empoyers
ta attaches.
S.S.T. 400, page 2 3.)
Secton 1401: Deducton of ta from wages. 1940-53-10544
Reguatons 10 , Secton 402.705: Speca refunds Mn. 5142
of empoyees ta on wages over 3,000.
Speca refunds of empoyees ta on wages over 3,000.
Washngton, D. C, December 13,1940.
Coectors of Interna Revenue and Others Concerned:
1. Secton 1401(d) of the Interna Revenue Code, as added by
secton 02(b) of the Soca Securty ct mendments of 1939, pro-
vdes as foows:
If by reason of an empoyee renderng servce for more than one empoyer
durng any caendar year after the caendar year 193 , the wages of the
empoyee wth respect to empoyment durng such year e ceed 3,000, the
empoyee sha be entte to a refund of any amount of ta , wth respect to
such wages, mposed by secton 1400, deducted from such wages and pad to
the coector, whch e ceeds the ta wth respect to the frst 3,000 of such
wages pad. Refund under ths secton may bo made n accordance wth the
provsons of aw appcabe In the case of erroneous or ega coecton of
the ta e cept that no such refund sha he made uness (1) the empoyee
makes a cam, estabshng hs rght: thereto, after the caendar year n whch
the empoyment was performed wth respect to whch refund of ta s camed,
and (2) such cam s made wthn two years after the caendar year n whch
the wages are pad wth respect to whch refund of ta s camed. No nterest
sha be aowed or pad wth respect to any such refund. (Secton 1401(d),
Interna Revenue Code, as added by secton 002(b), Soca Securty ct
mendments of 1030.)
2. Secton 402.705 of Reguatons 10 contans the reguatons wth
respect to cams fed under secton 1401(d) of the Code. The pro-
vsons of secton 402.705 of Reguatons 10 are summarzed as
foows:
(238)
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239
Regs. 10 , 402.705.
( ) If an empoyee receves wages n e cess of 3,000 from two or
more empoyers for servces performed durng the caendar year 1940
or any subsequent caendar year, the empoyee may fe a cam for
refund of the amount, f any, by whch the empoyees ta deducted
and pad to a coector wth respect to such wages e ceeds the
empoyees ta wth respect to the frst 3,000 of such wages.
(b) ach cam sha be made wth respect to wages for servces
performed wthn one caendar year.
(c) The empoyee sha submt wth the cam a statement from
each empoyer for whom he performed servces durng the caendar
year. If the statement of any empoyer s not submtted wth the
cam, the empoyee sha ncude n the cam an e panaton of hs
nabty to submt such statement.
(d) The empoyee s cam sha be made on orm 843 and sha be
fed wth the coector for the dstrct n whch the empoyee resdes.
(e) No refund w be made under ths secton uness (1) the em-
poyee fes a cam, estabshng hs rght thereto, after the caendar
year n whch the empoyment was performed wth respect to whch
refund of ta s camed, and (2) such cam s fed wthn two years
after the caendar year n whch the wages are pad wth respect to
whch refund of ta s camed.
3. It s e pected that shorty after anuary 1, 1941, coectors w
receve numerous requests for the proper forms to be used by em-
poyees n camng the speca refund of empoyees ta on wages
over 3,000. orm 843 shoud be furnshed to such empoyees, and
aso orm SS-9, mpoyer s Statement to Support mpoyee s
Cam for Speca Refund of mpoyees Ta . Three copes of
snch statement shoud be furnshed for eac empoyer nvoved, the
orgna to be attached to the cam when fed and one copy each to
be retaned by the empoyer and the empoyee. The ureau w
furnsh an nta suppy of orm SS-9 to each coector wthout
requston therefor. Coectors, however, shoud submt ther requ-
stons for subsequent suppes. If the empoyee n hs request for
forms fas to state the number of empoyers nvoved he shoud be
furnshed s copes of orm SS-9 and advsed that f more than two
empoyers are nvoved addtona copes (three for each empoyer)
w be supped upon request.
4. efore transmttng these cams to the ureau, a revew of the
cams and supportng statements sha be made n the coector s
offce to determne whether the cam has been propery prepared
and whether orm SS-9 has been attached for each empoyer n-
voved. If such orm SS-9 has not been attached, coectors must
requre that, n eu of such statement, the camant ncude as a part
of the cam an e panaton of hs nabty to submt such statement.
5. Snce an empoyee s requred to fe hs cam wth the coector
for the dstrct n whch he resdes t s possbe that none of the em-
poyers concerned w have fed ther returns, orm SS-a, n that
same dstrct. owever, f any of the empoyers nvoved n an em-
poyee s cam fed such returns n the same dstrct, such empoyers
accounts shoud be certfed for the perod nvoved on the reverse sde
of the empoyee s cam. ach empoyer s name shoud be shown on
the reverse sde of the cam together wth the other data caed for by
the cam. If more space s necessary to certfy empoyers accounts,
n addton to that on the reverse sde of the cam, orm 899 shoud
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Regs. 10 , 402.705.
240
be prepared and securey attached to the orm 843. In the case of an
empoyer who fed hs return, orm SS-a, n a dstrct other than that
n whch the empoyee resdes, the ureau w communcate wth the
approprate coector and request a certfcaton of such empoyer s ac-
count upon recept of the empoyee s cam.
. If an empoyee fes a cam n a dstrct other than that n whch
he resdes the approprate record w be prepared and certfcaton
made wth respect to (he payments by the empoyers, f any, who have
fed returns. orm SS-a, n hs dstrct and the cam w be for-
warded to the ureau. If no empoyer has fed such returns n the
dstrct n whch the cam s fed, the cam shoud be forwarded to
the ureau. The necessary certfcatons w then be requested of the
approprate coector.
7. The nstructons n paragraph 5 of Mmeograph 4702, whch re-
qure that reated returns shoud be transmtted wth cams, w not
appy to empoyees cams fed under secton 1401(d) of the Interna
Revenue Code. It w not be necessary for coectors to transmt any
returns to ths offce wth such cams uness they are specfcay re-
quested to do so by the ureau.
8. The nstructons n Mmeograph 5137 desgnated orm SS-c
(Revsed ugust, 1940) do not appy to cams fed under secton
1401(d) of the Interna Revenue Code. orms SS-c w not be
prepared or forwarded to the Soca Securty oard n connecton
wth speca refund cams.
9. Correspondence n regard to the procedure outned heren shoud
refer to the number of ths mmeograph and to the symbos C: .
Guy T. ever g,
Commssoner.
Secton 402.70 ) of Reguatons 10 , Reatng to Speca Refunds Under Sec-
ton 1401(d) of the Interna Revenue Code, as dded by Secton 02 of
the Soca Sec hty ct mendments of 1939. Speca Refunds of m-
poyees Ta on Wages Over 3,000.
If nn empoyee receves wages n e cess of . 3,000 from two or more empoyers
for servces performed durng the caendar year 1940 or any subsequent caendar
year, the empoyee may fe a cam for refund of the amount, f any, by whcb
the empoyees ta deducted and pad to a coector wth respect to such wages
e ceeds the empoyees ta wth respect to the frst 3,000 of such wages.
ach cam sha he made wth respect to wages for servces performed wthn
one caendar year. The empoyee sha submt wth the cam the best avaabe
nformaton estabshng, wth respect to each empoyer for whom he performed
servces durng the caendar year, (1) the name and address of such empoyer,
(2) the account number of the empoyee and the empoyee s name as reported
by the empoyer on hs returns. (3) the amount of wages pad durng the caen-
dar year to whch the cam reates for servces performed by the empoyee dur-
ng that year, (4) the amount of wages, f any, pad durng each subsequent
caendar year for servces performed by te empoyee durng the year to whch
the cam reates, (5) the amount of empoyees ta . f any, deducted from such
wages durng each of such years and pad to the coector, and ( ) the address
of the coector to whom such ta was pad. Such nformaton sha be fur-
nshed, f possbe, n the form of statements made by the empoyers, each of
whom shoud ncude n hs statement the fact that t s made n support of a
cam aganst the Unted States to be fed by the empoyee for refund of empoy-
ees ta . If the statement of any empoyer s not submtted wth the cam, the
empoyee sha ncude n the cam an e panaton of hs nabty to submt such
statement. Other nformaton may be requred, but shoud be submtted ony
upon the recept of a specfc request therefor. The empoyee s cam sha be
made on orm 843, n accordance wth these reguatons and the nstructons
reatng to such form, and sha be ted wth the coector for the dstrct n
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241
Regs. 10 , 402.705.
whch the empoyee resdes. No Interest w be aowed or pad by the Govern-
ment on the amount of any refund under ths secton. No refund w he made
under ths secton uness (1) the empoyee fes h cam, estabshng hs rght
thereto, after the caendar year n whch the empoyment was performed wth
respect to whch refund of ta Is camed, and (2) such cam s fed wthn two
years after the caendar year n whch the wages are pad wth respect to whch
refund of ta s camed.
ampe: mpoyee receves ta abe wages n the amount of 2,000 from
each of hs empoyers, . Y. and Z. for servces performed durng the caendar
year 1942, or a tota of 0,000 for such year. The frst 2,000 of such wages s
pad durng the caendar year 1942 by empoyer , who deducts empoyees ta
n the amount of 20 from s wages, and pays such ta to the coector. The
second 2,000 of such wages s pad durng the caendar year 1942 by empoyer
Y, who pays empoyees ta n the amount of 20 to the coector wthout deduct-
ng such ta from s wages. mpoyer Z pays 1,0(10 of such wages to dur-
ng the year 1942 and 1,000 durng the year 1943. The rate of such ta for the
year 1942 s 1 per cent and the rate for 1943 s 2 per cent. mpoyer Z deducts
empoyees ta n the amount of 30 from such wages ( 10 durng 1 M2 and 20
durng 1943) and pays such ta to the coector. Thus, empoyees ta In the
tota amount of . 0 s deducted from s wages and pad to a coector. The
amount of empoyees ta wth respect to the frst 3,000 of such wages Is 30.
may fe a cam for refund of 20.
orm SS 9. Treasury Department. Interna Revenue Servce. December, 1940.
empoyer s statement to support empoyee s cam for speca refund of
emp.oyees ta .
Ths statement s made by or on behaf of
(Name, address, and Identfcaton number of empoyer.)
herenafter caed the empoyer, n support of a cam fed, or to be fed, by
(Name and account number of empoyee.)
herenafter caed the camant, for speca refund of empoyees ta under sec-
ton 1401(d) of the Interna Revenue Code, as added by the Soca Securty ct
mendments of 1939. The camant earned wages n tota amount of
for servces performed durng the caendar year 194__ n the empoy of the
empoyer.1 Such wages were pad by the empoyer n the amounts, and durng
the caendar year or years, shown beow. mpoyees ta In the amounts stated
beow, wth respect to such wages, was coected by the empoyer from the
camant, and the tota amount of such empoyees ta was pad by the empoyer
to the Unted States coector of nterna revenue,
( ddress of coector.)
Caendar year of
wage payment.
mount of waRes
p:d to empoyee
durng year.
mpoyees ta co-
ected and pd
to coector.
194

194
194.
194
Totas.
The foregong statement s correct and compete to the best of my knowedge
and eef.
Name of empoyer (f other than ndvdua) .
(Sgned)
(Tte)
(Owner, presdent, partner, etc.)
Ths statement shoud be made wth respect to servces performed In ony ON caendar
year. Show the tota amount of wages RN D by the empoyee In the empoy of the
empoyer durng that ONI caendar year, whether nr. not bpch waokb were pad.
Show the tota amount of wages tad by the empoyer to the empoyee durng each
caendar year for servces performed durng the one caendar year of servces covered by
ths statement.
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Regs. 10 . Subpart .
242
Skctton 1420: Coecton and payment of ta es. 1940-33-10383
Reguatons 10 , Subpart : Returns, payment Mm. 5089
of tu , and records.
( so Subchapter C ( edera Unempoyment Ta
ct), Sectons 1 04 and 1 05 Soca Securty ct,
Sectons 807 and 905 Reguatons 91 and 90, Chap-
ters I and III Subchapter , Secton 1530
Carrers Ta ng ct of 1937, Secton 7 Reguatons
100, Chapter .)
Power of attorney form for use n grantng authorty to e ecute
and fe returns under Ttes III and I of the Soca Securty
ct. Subchapters and C, Chapter 9, of the Interna Revenue Code
( edera Insurance Contrbutons ct and edera Unempoyment
Ta ct, respectvey), as amended, Carrers Ta ng ct of 1937,
and Subchapter , Chapter 9, of the Interna Revenue Code.
(Supersedng Mmeograph 4780 (C. . 1938-1, 383).)
Washngton, D. C, uy 25, 10 0.
Coector of Interna Revenue, Interna Revenue gents n Charge,
Other Offcers and mpoyees of the ureau of Interna Rev-
enue, and Others Concerned:
The attached form of power of attorney s to he used by ta payers
n grantng to an attorney n fact authorty confned to the e ecuton
and fng of returns under Ttes III and I of the Soca Securty
ct. Subchapters and C. Chapter 9, of the Interna Revenue Code
( edera Insurance Contrbutons ct and edera Unempoyment
Ta ct. respectvey), as amended, Carrers Ta ng ct of 1937, or
Subchapter , Chapter 9, of the Interna Revenue Code. Such form
sha he used n eu of the power of attorney forms prescrbed n
Mmeograph 4780 (C. . 1938-1, 383). owever, new powers of at-
torney authorzng the e ecuton and fng of returns w not be
requred to repace those aready propery e ecuted on forms hereto-
fore, prescrbed.
The form of power of attorney prescrbed n ths mmeograph s
to be used by the ta payer ony to deegate authorty to an attorney
n fact to ereeute and fe the returns desgnated. It s not to be used,
and w not be accepted, for other or addtona purposes, such as
the deegaton of authorty to sgn cams or to otherwse act for the
ta payer. Powers of attorney other than for the e ecuton and fng
of returns shoud be prepared n accordance wth the nstructons
contaned n the Conference and Practce Requrements, ureau of
Interna Revenue, revsed ugust, 1939.
Pursuant to the provsons of Mmeograph 4 37 (C. . 1937-2,
40), whch modfed Mmeograph 4507 (C. . -2, 540 (193 )),
the statement reatve to fees, to be fed wth each power of attorney,
w not be requred n ths nstance.
Coectors shoud mmeograph a suffcent quantty of the form of
power of attorney to meet the needs n ther respectve dstrcts.
Ths mmeograph supersedes Mmeograph 4780, supra.
Correspondence reatng to ths mmeograph shoud refer to ts
number and to the symbos C: S: .
Tmothy C. Mooney,
ctng Commssoner.
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2 43
Regs. 10 , Subpart .
Power of ttorney for ecutng and ng Rett ens Under Ttes III and
I of the Soca Securty ct, Subchapters and C, Chapter 9, of the
Interna Revenue Code ( edera Insurance Contrbutons ct and edera
Unempoyment Ta ct, Respectvey), as mended, Carrers Ta ng ct of
1937, ND SC C PT , C PT R 9, O T INT RN L Rk NU COD .
now a men by these presents, That
(Name.) L , ocated at
(State whether Indvdua, partnershp, or corporaton, etc.)
, , L , , has made,
(Street addrees.) (Cty.) (State.)
consttuted, and apponted, and by these presents does hereby make, consttute,
and appont ,
(Name.) . ( ddress.)
(ts) (my) true and awfu attorney for (t) (me) and n (ts) (my) name, pace
and stead to e ecute and to fe on (ts) (my) behaf, returns requred under
(Indcate whether under Tte III or I of the Soca Securty ct,
Subchapter or C, Chapter 9, of the Code, as amended, Carrers Ta ng
ct of 1 )37, or Subchapter , Chapter 9, of the Code.)
In deegatng authorty to the attorney n fact heren desgnated to e ecute and
fe the returns specfed above t s understood that each return e ecuted by such
attorney n fact must ncude the ta abe remuneraton of a empoyees of the
empoyer-ta payer for the ta abe perod covered by the return, regardess of
where the empoyees servces are performed, and that each return must be fed
wth the coector of nterna revenue at , n whose dstrct
the ta payer s prncpa pace of busness s ocated.
Dated at ths day of , 19
(If a corporaton
aff sea) (Name of ta payer.)
y
(See nstructons.)
ttest:
(Sgnature.)
(Tte.)
(Tte.)
ecuted n the presence of:
(Wtness.)
(Wtness.)
cknowedged before me ths day of , 19 .
NOT RI L S L ,
(Sgnature of offcer (Tte.)
admnsterng oath.)
INSTRUCTIONS.
Ths form must be fed by the attorney n fact wth the frst ta return
e ecuted by hm as such attorney n fact. s ths form of power of attorney
Is not vad for the purpose of representng the ta payer generay before the
Treasury Department, It w not be necessary that a statement reatve to fees
accompany t.
power of attorney must be sgned by (1) the ndvdua, f the empoyer
Is an ndvdua (2) the presdent, vce presdent, or other prncpa offcer,
If the empoyer s a corporaton (3) a responsbe and duy authorzed mem-
ber or offcer havng knowedge of ts affars, f the empoyer s a partnershp
or other unncorporated organzaton or (4) the fducary, f the empoyer s a
trust or estate. The power of attorney must aso ether be wtnessed by two
dsnterested ndvduas, or be acknowedged before a notary pubc or other
offcer authorzed to take acknowedgments.
The ta payer and the attorney n fact are responsbe for the return, or
returns, as made and Incur abty for the penates provded for fase or
frauduent returns.
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Regs. 10 , 402. 02.
244
Secton 1420: Coecton and payment of ta es. 1940-40-10437
Regcatons 10 , Secton 402. 02: When to Sm. 5107
report wages.
ct). Secton 1 04 Reguatons 107, Secton
403.502 and Soca Securty ct, Secton 807,
Reguatons 91, rtce 402y2 Secton 905, Regu-
atons 90 (as amended), rtces 210 and 300.)
Reportng empoyment ta es wth respect to wages pad n one
ta -return perod for servces n a pror perod.
Washngton, D. C, September ,19 f.
mpoyers who have pad wages to empoyees n the year 1940 for
empoyment n pror years have made numerous nqures concernng
the method of reportng such wages for purposes of the ta es mposed
by Ttes III and I of the Soca Securty ct and Subchapters
and C of Chapter 9 of the Interna Revenue Code ( edera Insurance
Contrbutons ct and edera Unempoyment Ta ct, respec-
tvey), as amended by the Soca Securty ct mendments of 1939.
There appears to be some confuson because of the fact that such
wages are pad n a current ta -return perod for servces performed
n pror ta -return perods.
Wth respect to Tte III of the Soca Securty ct and Sub-
chapter of Chapter 9 of the Interna Revenue Code, as amended,
amounts pad n any caendar quarter of 1940 or thereafter as wages
for servces performed at any tme subsequent to December 31, 193 ,
shoud be reported by each empoyer of one or more on the return
on orm SS-a for the quarter n whch such wages are pad, n the
same manner as wages currenty earned and pad durng such quarter
are reported. or e ampe, f empoyee receves 150 durng the
quarter for servces performed durng the quarter, and aso receves
100 durng the quarter for servces performed n 1938, empoyee s
wages shoud be entered on the quartery return as 250, and no
e panaton need be made on the return regardng the perods durng
whch such wages were earned.
nnua returns on orm 940 fed by empoyers of eght or more
under Subchapter C of Chapter 9 of the Interna Revenue Code, as
amended, for the caendar year 1939 and for each caendar year there-
after shoud ncude a wages pad durng such caendar year for
empoyment after December 31, 1938. Thus, wages pad durng the
3 ear 1940 for servces performed after December 31, 1938, shoud be
ncuded n the return on orm 940 fed for the year 1940. dffer-
ent rue s appcabe, however, to wages pad for servces performed
n the year 193 , 1937, or 1938. If servces were performed n 193 ,
1937. or 1938. and the empoyer faed to ncude n hs return on
orm 910 for such year the amount of wages payabe for such serv-
ces, the empoyer must fe wth the coector of nterna revenue an
amended return or a statement under oath showng the amount of
such wages (regardess of when the wages are pad), and pay the ta
wth respect to such wages. If wages pad durng 1939 wth respect
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Regs. 10 , 403.203.
to empoyment after December 31, 1938, were not ncuded n the
return on orm 940 for the year 1939, such wages must be smary
reported to the coector n an amended return or a statement under
oath and the ta must be pad. ,
Statutory provsons mt the appcabty of certan ta es
heren consdered to the frst 3,000 of remuneraton wth respect to
empoyment durng any one caendar year pad, as ta abe Mages, to
an ndvdua by an empoyer wth respect to empoyment durng
such caendar year. The mtaton reates to wages for empoyment
durng any one caendar year and not to the amount of remuneraton
(rrespectve of the year of empoyment) whch s pad or receved n
any one caendar year. or e ampe, assume that empoyee earns
3,000 n wages durng 1939 and 3,000 n wages durng 1940. If
wages n the amount of 2,000 were pad to hm durng 1939. ony
such 2,000 w be ncuded n hs empoyer s returns on orm SS-a
and orm 940 coverng the year 1939. If the remanng wages of
4,000 are pad to durng 1940, the entre 4,000 w be ncuded n
hs empoyer s returns on orm SS-a and orm 940 coverng the
year 1940. s empoyer w not be requred to e pan on hs re-
turns coverng 1940 that the amount of 1,000 of the 4,000 was
earned n 1939, and that the remander of 3,000 was earned n 1940.
(It shoud be remembered, however, that there s no smar mta-
ton of 3,000 on the appcabty of the ta mposed by Tte I
of the Soca Securty ct wth respect to wages earned n the caen-
dar years 193 , 1937, and 1938, or the ta mposed by Subchapter C
of Chapter 9 of the Interna Revenue Code, as amended, wth respect
to wages pad n 1939 for servces performed after December 31,
1938.)
Correspondence reatng to ths mmeograph shoud refer to ts
number and the symbos C: RR.
Guy T. everno,
Commts oner.
Secton 142 : Defntons. 1940-29-10330
Reguatons 10 , Secton 402.203: mpoyment S. S. T. 395
Servces performed subsequent to December 31, 1039, by offcers
and members of the crew engaged by the M Company under a con-
tract entered nto outsde of the Unted States to operate a
cabe shp, an mercan vesse, consttute empoyment for pur-
poses of the ta es mposed by Subchapter , Chapter 9, Interna
Revenue Code, as amended by the Soca Securty ct mend-
ments of 193 ), snce durng the year 1940 such shp touched at
a port n the Unted States.
The queston s presented whether servces performed subsequent
to December 31, 1939, by offcers and members of the crew of the M
Company s cabe shp consttute empoyment for purposes of
the ta es mposed by Subchapter , Chapter 9, of the Interna Reve-
nue Code, as amended by the Soca Securty ct mendments of
1939.
The M Company s ncorporated under the aws of the State of R.
It owns and operates a cabe repar shp statoned n waters outsde
the Unted States. The offcers and members of the crew are em-
poyed under a contract whch was entered nto n the year 1939 at
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Regs. 10 , 402.204.1
a port outsde the Unted States. In carryng out ts operatons dur-
ng the year 1940, the shp touched at a port n the Unted States.
The queston arses as to the perod durng whch the remuneraton
pad to offcers and members of the crew s sub|ect to the ta es m-
posed under the above-mentoned provsons of aw.
Secton 142 (b), Subchapter , Chapter 9, of the Interna Revenue
Code, as amended, provdes n part as foows:
The term empoyment means any servce, of whatever nature,
performed after December 31, 1939, by an empoyee for the person empoyng
hm, rrespectve of the ctzenshp or resdence of ether, ( ) wthn the
Unted States, or ( ) on or n connecton wth an mercan vesse under a
contract of servce whch s entered nto wthn the Unted States or durng
the performance of whch the vesse touches at a port n the Unted States, f
the empoyee s empoyed on and n connecton wth such vesse when outsde
the Unted States .
Secton 142 (g), Subchapter , Chapter 9, of the Code, as amended,
provdes as foows:
mercan vesse. The term mercan vesse means any vesse documented
or numbered under the aws of the Unted States and ncudes any vesse
whch s nether documented or numbered under the aws of the Unted States
nor documented under the aws of any foregn country, f ts crew s empoyed
soey by one or more ctzens or resdents of the Unted States or corporatons
organzed under the aws of the Unted States or of any State.
Secton 3797(a)9 of the Interna Revenue Code provdes as
foows:
Unted States. The term Unted States when used n a geographca sense
ncudes ony the States, the Terrtores of aska and awa, and the Dstrct
of Coumba.
Inasmuch as the vesse here nvoved s owned by a corporaton
organzed under the aws of the State of R and ts crew s empoyed
by such corporaton, t s an mercan vesse wthn the meanng
of secton 142 (g), supra.
Snce the cabe shp (an mercan vesse) operated by the M Com-
pany touched at a port n the Unted States durng the year 1940,
t s hed, n vew of the provsons of secton 142 (b), supra, that
a of the servces performed subsequent to December 31, 1939, on
or n connecton wth such vesse under the contract of servce n
effect at the tme of touchng at the port n the Unted States, n-
cudng the servces performed both pror and subsequent to the date
of touchng at such port, consttute empoynent for purposes of
the ta es mposed by Subchapter , Chapter 9, of the Interna
Revenue Code, as amended by the Soca Securty ct mendments
of 1939.
Secton 142 : Defntons. 1940-30-10343
Reguatons 10 , Secton 402.204: Who are em- S. S. T. 39
poyees.
ct), Secton 1 07 Reguatons 107, Secton 403.204.)
Indvduas, known as pecemakers and skdders, engaged n cut-
tng tmber and skddng forest products for the M Company are
empoyees of that company for purposes of Subchapters and C,
Chapter ). of the Interna Revenue Code, as amended by the Soca
Securty ct mendments of 1939.
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247
Regs. 10 , 402.204.
dvce s requested whether ndvduas known as pecemakers and
skdders performng servces for the M Company are empoyees of
that company for purposes of Subchapters and C, Chapter 9, of the
Interna Revenue Code, as amended by the Soca Securty ct
mendments of 1939. ,,
The M Company s engaged n a genera oggng busness consst-
ng of the producton and sae of ogs, tes, pupwood, posts, and
poes. Indvduas known as pecemakers are engaged under ora
contracts to cut tmber .standng on strps of and assgned to them.
The strps, whch vary from 3 to 10 acres n area, are varousy desg-
nated by natura boundares, such as creeks and roads, and by bazng
or markng of trees. No other1 pecemakers are permtted by the com-
pany to enter a strp whch has been assgned to any pecemaker
e cept as herenafter ndcated. Under the ora contracts, the pece-
maker s pad an agreed prce per pece for the tmber whch s con-
verted nto specfed products of desgnated ength and dameter.
The pecemaker furnshes hs own toos and, f he desres, may engage
hs own assstants athough the mted area of the strp sedom neces-
states such acton. e may choose hs own hours of abor but t s
understood that the contract w be competed wthn the partcuar
cuttng season.
The company aso engages ndvduas known as skdders who drag
ogs and other forest products by horses or tractors from the pace
where they are cut to the bankng grounds or roads. These ndvd-
uas are engaged under ora contracts to skd ogs and wood products
from a partcuar strp to a desgnated ocaton. The same genera
arrangements e st wth respect to the skdders as above set out n
the case of the pecemakers.
The facts presented further dscose that sometmes pecemakers
and skdders, due to ness or other reasons, fa to compete ther
contract wthn the cuttng season and that, pror to the e praton of
the season, other ndvduas ace engaged to compete the work. so,
when the company fnds t necessary to e pedte operatons n a par-
tcuar area, pecemakers and skdders n other areas are moved to the
new scene of operatons pror to competon of ther orgna con-
tracts. The company empoys a foreman who nspects the varous
strps to determne whether the operatons are beng performed n
accordance wth the terms of the ora contracts. If, n the opnon
of the foreman, a pecemaker or skdder s not propery carryng out
hs contract, the foreman repaces the ndvdua by enterng nto a
new contract wth another for the cuttng or remova of the wood.
t certan tmes the wood s scaed, the determnaton of the company
beng fna, and the ndvduas are then pad. The pecemaker or
skdder receves no remuneraton for wood whch does not meet the
specfcatons or whch s skdded or ped mpropery.
ased on the foregong facts, t s the opnon of the ureau that
the pecemakers and skdders, together wth any assstants engaged
wth the e press or mped consent of the M Company, are empoyees
of that company for purposes of Subchapters and C, Chapter 9, of
the Interna Revenue Code, as amended.
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Regs. 1 0 , 402.204.
Secton 142 : Defntons. 1940-33-10384
Reguatons 10 , Secton 402.204: Who are S. S. T. 398
empoyees.
ct), Secton 1007 Reguatons 107, Secton 403.204.)
, who operates the 51 Patro Servce, s not au empoyee of the
varous merchants for whom he performs patro servces wthn the
meanng of Subchapters and C, Chapter 9. of the Interna Rev-
enue Code, as amended by the Soca Securty ct mendments
of 1930.
The queston s presented whether, for empoyment ta purposes,
s an empoyee of the merchants for whom he performs patro
servces.
, who operates the M Patro Servce, furnshes patro servces to
merchants n the cty of R. e enters nto a separate agreement
wth each merchant who engages hs servces specfyng the servces
to be rendered and the remuneraton to be pad. Such servces
usuay consst of e amnng ocks on doors, turnng off ghts, and
owerng awnngs. ppro matey 00 merchants engage these serv-
ces and each merchant s at berty to dscontnue the engagement of
at w. urthermore, the merchants contractng wth do not
act as a group n supervsng such servces, and t s e pressy agreed
that none of such merchants w requre dutes of whch can not
be carred out n con|uncton wth hs dutes to others engagng hm.
No nstructons are gven to as to the manner n whch hs servces
are to be performed, the soe requrement beng that the specfed
dutes be performed each nght. sometmes engages substtutes
and assstants to perform the requred servces. furnshes the un-
forms, badges, and a other equpment used by hm and hs assstants.
In S. S. T. 281 (C. . 1938-1, 413) t was hed that the so-caed
merchants poce under consderaton n that case were empoyees,
for purposes of the ta ng provsons of the Soca Securty ct, o
the varous merchants for whom they performed servces. In that
case the merchants had the rght to drect and contro the pocemen
n the performance of ther servces. In the nstant case, however, the
merchants do not. ether ndvduay or as a group, retan the rght
to supervse or contro the performance of the dutes requred of or
hs assstants.
On the bass of the facts n ths case, t s hed that s not an
empoyee, for purposes of Subchapters and C, Chapter 9, of the
Interna Revenue Code, as amended, of the varous merchants for
whom he performs servces. (See S. S. T. 153, C. . 1937-1, 390.)
Secton 142 : Defntons. 1940-3 -10411
Reguatons 108, Secton 402.204: Who are S. S. T. 399
empoyees.
. who contracted to cut, skd, and hau tmber for the N Com-
pany, was not an empoyee of that company for purposes of Sub-
chapters and C, Chapter 0, of the Interna Revenue Code, as
amended by the Soca Securty ct mendments of 193 ).
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249
Regs. 105. 402.204.
dvce s requested whether, for empoyment ta purposes, was
an empoyee of the N Company wth respect to servces performed
under contract n cuttng, skddng, and haung tmber for that
company.
The Company, owner of a tract of and, entered nto a contract
wth for remova of the tmber therefrom and devery of the
ogs to the company s sawm. The company agreed that shoud
have the e cusve rght to cut, skd, and hau a of the merchantabe
tmber, estmated to appro mate severa mon feet, and agreed
to compete the contract wthn the specfed tme. was pad
doars per thousand feet of tmber cut and devered.
or purposes of carryng out the terms of the contract, erected
camp budngs at hs own e pense wheren he housed and fed the
oggng crew, whch was composed of about 30 men who were hred,
pad, and controed by . e furnshed a equpment, ncudng
a es, saws, tongs, horses, tractors, and trucks. had entered nto a
number of smar contracts wth other persons n the past and s
known n hs ocaty as a oggng contractor.
Under the contract between and the N Company, was gven the
rght and was egay obgated to remove a of the merchantabe
tmber from a certan area. The operatons were e tensve n char-
acter, and requred the servces of a arge crewT and the mantenance
of a camp for ts convenence. of the equpment, whch was of
substanta vaue, was furnshed by , and a of the operatng e penses
were borne by hm. e personay hred and pad the members of
the crew and drected and controed a of the detas of ther work.
urther, he offers hs servces as a oggng contractor to the genera
pubc.
On the bass of the facts presented, t s hed that durng perform-
ance of the contract was not an empoyee of the N Company for
purposes of Subchapters and C, Chapter 9, of the Interna Revenue
Code, as amended. was, however, the empoyer of the ndvduas
comprsng the crew for empoyment ta purposes. (See S. S. T. 39 ,
page 24 , ths uetn.)
Secton 142 : Defntons. 1940-38-10425
Reguatons 10 , Secton 402.204: Who are S. S.T. 401
empoyees.
( so Subchapter C ( edera Unempovment Ta
, a free-ance |ockey who was engaged for one race under
ora arrangements wth . a race horse owner, was an empoyee of
such owner for purposes of Subchapters and C, Chapter 0. of the
mendments of 1939.
dvce s requested whether , a free-ance |ockey who was en-
gaged for one race under ora arrangements -wth , a race horse
owner, was an empoyee of for empoyment ta purposes.
Under ora arrangements for hs servces as a |ockey, rode a
horse owned by . e performed no servces for other than the
actua rdng of the horse n the race. Lke servces are performed
290217 41 17
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Regs. 10 , 402.204.
250
for other owners. contends that shoud not be cassed as hs
empoyee but as an ndependent contractor.
In S. S. T. 311 (C. . 1938-2, 284-) t was hed (syabus):
, a |ockey engaged under contract wth , a race horse owner, s an empoyee
of such owner wthn the meanng of Ttes III and I of the Soca Securty
ct
The facts nvoved n the case of a free-ance |ockey, as ds-
tngushed from a |ockey under contract to one owner, do not warrant
a dfferent concuson. The |ockey does not contract wth each owner
to produce a desred resut by methods of hs own choosng, whch
woud be true f an ndependent contractor reatonshp e sted, but
s aways sub|ect to contro and drecton by each owner for whom he
rdes as to the methods he sha foow n racng the horse. ven
though a |ockey may be so famar wth the method of rdng the
horse of a certan owner that t s not necessary for such owner to ssue
detaed nstructons to the |ockey, nevertheess the rght to drect and
contro the |ockey rests wth the owner.
In vew of the foregong, t s hed that s an empoyee of for
purposes of Subchapters and C, Chapter 9, of the Interna Revenue
Code, as amended.
Secton 142 : Defntons.
Reguatons 10 , Secton 402.204: Who are
empoyees.
ct), Secton 1 07 Reguatons 107, Secton
403.204.)
Truck owners and drvers performng servces n deverng coa
for the M Coa Co. are empoyees of that company for purposes of
Subchapters and C, Chapter 9, of the Interna Revenue Code, as
amended by the Soca Securty ct mendments of 1939.
dvce s requested whether truck owners and drvers performng
servces n deverng coa for the M Coa Co. are empoyees of that
company for purposes of Subchapters and C, Chapter 9, of the
mendments of 1939.
The M Coa Co. operates severa coa yards n the cty of R. The
company owns a number of trucks whch t uses to dever coa to
ts customers. The drvers of such trucks have been consdered em-
poyees of the company and empoyment ta es have been reported and
pad wth respect to ther wages.
In order to meet the demands for coa durng the wnter season, t
s necessary for the company to engage addtona truckng equp-
ment. The company enters nto ora agreements wth varous truck
owners who are pad on a tonnage bass. The owners may operate
ther trucks or engage others to operate them. penses ncurred n
connecton wth the operaton of the trucks (ncudng the wages of
any assstants) are borne by the owners. The company engages ds-
patchers who ssue nstructons to the drvers wth respect to the
devery of coa, such as where and when to make devery, whom to
see at the pace of devery, etc. Such dspatchers have authorty to
dscharge the drvers at any tme. The company requres the owner-
1940-42-10454
S. S. T. 403
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251
Regs. 10 , 402.204.
operators and drvers engaged by the truck owners to report for
duty at a specfed tme each day. to report when eavng the coa
yards, to reman at the yards and wat for haus, to gve notce when
they are unabe to perform servces on any partcuar day, and to
purchase ther gasone from the company. The drvers may be
transferred by the company from one of ts yards to another. ght
hours consttute a workng day but the drvers are requred to reman
onger f orders of any customers must be fed on a partcuar day.
Pubc abty nsurance coverng the drvers s carred by the com-
pany. owever, the truck owners pay the amounts of the prem-
ums. though the owner-operators and drvers are occasonay en-
gaged by other concerns, the servces performed for the company
consttute ther man source of ncome. The names of the drvers are
carred on the company s pay ro and the condtons, and crcum-
stances under whch they perform servces are substantay smar to
those under whch the drvers of company-owned trucks perform
servces. The agreements may be termnated at any tme by ether
the truck owners or the company.
On the bass of the facts presented, t s hed that the truck owners
and drvers performng servces for the M Coa Co. are empoyees
of that company for purposes of Subchapters and C, Chapter 9, of
the Interna Revenue Code, as amended by the Soca Securty ct
mendments of 1939.
Secton 142 : Defntons. 1940-53-1054
Reguatons 10 , Secton 402.204: Who are S. S. T. 408
empoyees.
( so Subchapter C ( edera Unempoyment Ta ct),
Secton 1 07 Reguatons 107, Secton 403.204.)
Speca servces, n addton to ther reguar servces as trustees,
performed by and , trustees of the M Trust, consttute empoy-
ment for purposes of the ta es mposed by Subchapters and C,
Chapter 9, of the Interna Revenue Code, as amended by the Soca
dvce s requested whether speca servces performed for the M
Trust by and , two of the trustees of that trust, consttute em-
poyment for edera empoyment ta purposes.
ach of the 10 trustees of the M Trust receves a fee of 2a doars
for attendance at meetngs of the trustees and sma aowances for
secretara or apprasa work performed soey n connecton wth
ther dutes as trustees. In addton to the above amounts, and
receve compensaton for certan speca servces apart from ther regu-
ar dutes as trustees.
devotes a substanta amount of tme, n addton to attendng
meetngs of the board, to renderng e ecutve and ega servces n
connecton wth the management of the trust. or such servces the
trust pays hm a saary of 250a doars a year n addton to hs
reguar fees as trustee. e has no defnte dutes from month to
month but prepares annua reports for and suppes nformaton con-
cernng the trust to the securty hoders, and renders whatever ega
servces are requred.
devotes hs entre tme to hs dutes for the trust. e has charge
of a constructon work, mantenance of propertes, and smar ac-
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Regs. 10 , 402.207.
252
tvtes. e supervses the recondtonng of trust property whch s
hed for sae. In addton to hs reguar fees as trustee, he receves
a saary of 1,000a doars a year for hs speca servces.
Under the facts presented n ths case, and are performng
speca servces n addton to ther reguar dutes as trustees for whch
they receve added remuneraton. Under such crcumstances, t s
hed that the speca servces performed by and consttute em-
poyment and that they are empoyees of the M Trust wth respect
to such servces for purposes of Subchapters and C, Chapter 9, of
the Interna Revenue Code, as amended. The amounts of compensa-
ton receved for such speca servces, therefore, consttute wages
sub|ect to the ta es mposed by the above provsons of aw.
Secton 142 : Defntons. 1940-40-10438
Reguatons 10 , Secton 402.207: Incuded S. S. T. 402
and e cuded servces.
ct), Secton 1 07 Reguatons 107, Secton
403.207.)
Servces performed wthn the Unted States by the fght per-
sonne of the M r Lnes, operatng between foregn and Unted
States arports, consttute empoyment for purposes of the ta es
mposed by Subchapters and C, Chapter 9, of the Interna Reve-
nue Code, as amended by the Soca Securty ct mendments of
1939.
dvce s requested whether servces performed wthn the Unted
States by the fght personne of the M r Lnes, operatng between
foregn and Unted States arports, consttute empoyment for
purposes of the ta es mposed by Subchapters and C, Chapter 9
of the Interna Revenue Code, as amended by the Soca Securty
ct mendments of 1939.
Secton 142 (b), Subchapter , Chapter 9 of the Interna Revenue
Code, as amended, provdes n part:
mpoyment. The term empoyment means any servce, of
whatever nature, performed after December 31, 1939, by an empoyee for the
person empoyng hm, rrespectve of the ctzenshp or resdence of ether,
( ) wthn the Unted States, or ( ) on or n connecton wth an mercan
vesse under a contract of servce whch Is entered nto wthn the Unted
States or durng the performance of whch the vesse touches at a port n the
Unted States, f the empoyee s empoyed on and n connecton wth such
vesse when outsde the Unted States, e cept

(5) Servce performed on or n connecton wth a vessee not an mercan
vesse by an empoyee, f the empoyee s empoyed on and n connecton wth
such vesse when outsde the Unted States .
Secton 1 07(c), Subchapter C, Chapter 9 of the Interna Revenue
mpoymknt. The term empoyment means any servce, of
whatever nature, performed after December 31, 1939. wthn the Unted States
by an empoyee for the person empoyng hm, rrespectve of the ctzenshp
or resdence of ether, e cept

(4) Servce performed as an offcer or member of the crew of a vesse on the
navgabe waters of the Unted States .
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253
Regs. 10 , 402.208.
The provsons of sectons 142 (b) and 1 07(c), supra, are specfc
n that servces performed wthn the Unted States by an em-
poyee for the person empoyng hm, rrespectve of the ctzenshp
or resdence of ether, consttute empoyment. The e ceptons
from empoyment accorded by paragraphs (5) and (4), respec-
tvey, of those sectons to servce performed by an empoyee on or
n connecton wth a vesse whch s not an mercan vesse, and to
servce performed as an offcer or member of the crew of a vesse
on the navgabe waters of the Unted States, do not appy to servce
performed on or n connecton wth arcraft. ccordngy, t s hed
that servces performed wthn the Unted States by the fght per-
sonne of the M r Lnes, operatng between foregn and Unted
States arports, consttute empoyment for purposes of the ta es
mposed by Subchapters and C, Chapter 9 of the Interna Revenue
Code, as amended.
Sectons 142 (c) and 1 07(d), Subchapters and C, respectvey,
of Chapter 9 of the Interna Revenue Code, as amended, provde m
part as foows:
Incuded and cuded Sehvce. If the servces performed durng one-haf
or more of any pay perod by an empoyee for the person empoyng hm con-
sttute empoyment, a the servces of such empoyee for such perod sha be
deemed to be empoyment hut f the servces performed durng more than one-
haf of any such pay perod by an empoyee for the person empoyng hm do
not consttute empoyment, then none of the servces of such empoyee for such
perod sha be deemed to be empoyment. s used n ths subsecton the term
pay perod means a perod (of not more than thrty-one consecutve days)
for whch a payment of remuneraton s ordnary made to the empoyee by the
person empoyng hm.
In the opnon of the ureau, sectons 142 (c) and 1 07(d), supra,
were not ntended to ncude as empoyment servces performed
outsde the Unted States or to e cude from empoyment servces
performed wthn the Unted States on the bass of the reaton n
quantty of servces performed wthn the Unted States to the entre
servces performed both wthn and wthout the Unted States.
ccordngy, t s hed that such sectons are not appcabe wth
respect to the servces performed by the fght personne of the
M r Lnes.
Secton 142 : Defntons. 1940-28-10319
Reguatons 10 , Secton 402.208: grcutura abor. S. S. T. 394
Servces performed by empoyees of the M Company on or after
anuary 1, 1940, n connecton wth the gnnng of cotton, ncud-
ng drect supervson of the gnnng process by gn managers, con-
sttute agrcutura abor wthn the meanng of Subchapters
and C, Chapter 9, of the Interna Revenue Code, as amended
by the Soca Securty ct mendments of 1939.
Cerca servces reatng to the operaton of the enterprse do
not consttute agrcutura abor wthn the above-mentoned
provsons of aw.
The queston s presented whether servces performed by empoyees
of the M Company on or after anuary 1, 1940, n connecton wth
the operaton of ts cotton gnnng busness consttute agrcutura
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Regs. 10 , 402.208.
254
abor wthn the meanng of Subchapters and C, Chapter 9, of
the Interna Revenue Code, as amended, effectve anuary 1, 1940,
by the Soca Securty ct mendments of 1939. The servces n
queston ncude servces rendered by gn managers and other em-
poyees n the course of the physca process of cotton gnnng and
cerca servces reatng to the operaton of the gnnng busness.
Secton 142 (h) of Subchapter , Chapter 9, of the Interna Reve-
nue Code provdes n part as foows:
gmcutuba. Labor. The term agrcutura abor ncudes a servces per-
formed

(3) n connecton wth the gnnng of cotton .
Secton 1 07(1) of Subchapter C, Chapter 9, of the Interna Reve-
nue Code contans dentca provsons.
It s the opnon of the ureau that the phrase the gnnng of
cotton refers to a partcuar operaton as dstngushed from a bus-
ness, and that the servces contempated by the above-quoted prov-
sons of aw, n order to consttute agrcutura abor, must be
rendered drecty n connecton wth that partcuar operaton. Mere
connecton wth the busness of whch the operaton s a part s not
suffcent. The gnnng of cotton s a physca operaton and a servce
n connecton therewth s a servce whch s a part of the gnnng
process. Inasmuch as the actua gnnng of cotton s a resut o
mechanca operaton, the aw and reguatons must refer to the
manua abor requred to begn and concude the process as we as
servces requred n the runnng of the machne tsef. It appears
that n the ordnary case the process of cotton gnnng may we be
regarded as begnnng wth the recevng and weghng of the seed
cotton and as endng wth the taggng of the bae as t comes from
the press.
It s hed that servces performed by empoyees of the M Company
on or after anuary 1,1940, n connecton wth the gnnng of cotton,
that s, servces whch are a part of the gnnng process, ncudng
drect supervson of the gnnng process by gn managers whose
servces are an ntegra part thereof, consttute agrcutura abor
wthn the meanng of Subchapters and C, Chapter 9, of the
mendments of 1939 and that cerca servces reatng to the opera-
ton of the enterprse, whch servces are not consdered to be a part
of the gnnng process, do not consttute agrcutura abor wthn
the meanng of the above-mentoned provsons of aw.
It s to be noted that sectons 142 (c) and 1 07(d) of Subchapters
and C, respectvey, Chapter 9, of the Interna Revenue Code, as
amended, provde n part as foows:
If the servces performed durng one-haf or more of any pay perod by an
empoyee for the person empoyng hm consttute empoyment, a the servces
of such empoyee for such perod sha be deemed to be empoyment but f the
servces performed durng more than one-haf of any such pay perod by an
empoyee for the person empoyng hm do not consttute empoyment, then
none of the servces of such empoyee for such perod sha be deemed to be
empoyment. s used n ths subsecton the term pay perod means a perod
(of not more than 31 consecutve days) for whch a payment of remuneraton
s ordnary made to the empoyee by the person empoyng hm.
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255
Regs. 103, 402.208.
These rues shoud be foowed r cases n whch a partcuar em-
poyee of the operator of a cotton gnnng estabshment performs
durng the same pay perod servces that consttute agrcutura
abor and servces that consttute empoyment. or e ampe, f
75 per cent of an empoyee s tme durng a pay perod s devoted to
the operaton of the gnnng machnery, whch servces consttute
agrcutura abor, and the remander of hs tme n such pay
perod s devoted to cerca dutes, whch servces consttute em-
poyment, a of hs servces rendered durng such perod shoud
be deemed to be agrcutura abor for purposes of Subchapters
and C, Chapter 9, of the Interna Revenue Code, as amended.
Secton 142 : Defntons. 1940-4 -10487
Reguatons 10 , Secton 402.208: grcu- S. S. T. 405
tura abor.
Status of varous types of servces rendered by empoyees of a
cooperatve assocaton of frut and vegetabe growers for purposes
of Subchapters and C, Chapter 9, of the Interna Revenue Code,
as amended by the Soca Securty ct mendments of 1939.
dvce s requested whether varous types of servces rendered by
empoyees of the M ssocaton, a cooperatve organzaton of frut
and vegetabe growers, are e cepted from empoyment as agr-
cutura abor for purposes of Subchapters and C, Chapter 9, of
the Interna Revenue Code, as amended by the Soca Securty ct
mendments of 1939.
The assocaton supervses the actvtes of ts members and per-
forms servces from the begnnng of the growng perod unt the
products are on ther way to market. It empoys nspectors who
advse the growers wth respect to producton methods, obtan crop
estmates from tme to tme for fnancng purposes, and durng the
packng and processng season supervse the gradng and packng of
the products and check the condton of those n storage. It ads the
growers n fnancng the growng, harvestng, and processng of ther
products, purchases materas and suppes, and stores them unt
needed by the growers, at whch tme they are dstrbuted to the
growers by truck.
The assocaton manufactures spray materas whch t ses e cu-
svey to ts members at cost. It aso manufactures cder and vnegar
from appes rased e cusvey by ts members. It packs appes, pears,
cherres, potatoes, and other fruts and vegetabes, a of whch are
rased by ts members. The assocaton operates a cannery n whch
t handes ony fruts and vegetabes produced by ts members, and a
cod storage warehouse n whch ts members products are hed for
market after they are processed and packed. Ice s manufactured
for freght cars carryng the products to market and some eectrcty
s generated for use n the above-mentoned pants. reservor and
ppe ne owned and operated by the assocaton furnsh water for
power and other purposes n ts pants. The assocaton ses a sma
amount of ce and furnshes some water to a raroad company for
the atter s engnes. The net returns from these operatons ad n
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Regs. 10 , 402.209.
25
reducng the cost of the above-mentoned servces to the members of
the assocaton. The assocaton empoys, among others, department
managers, saes promoton men, accountants, cerca workers, and
mantenance men.
Upon the bass of the facts presented and n vew of the provsons of
sectons 142 (h) and 1 07(1) of the Code, as amended, t s hed that
servces performed by empoyees of the M ssocaton n connecton
wth the cutvaton of the so and the rasng and harvestng of prod-
ucts on the farms of ts members, and n packng, packagng, process-
ng, gradng, storng (ncudng the actua operaton of packng and
cod storage equpment but not cannng equpment), and deverng to
storage or to market, or to a carrer for transportaton to market, the
fruts and vegetabes produced by ts members, together wth servces
rendered by offcers and other empoyees of the assocaton n the drect
supervson of such servces, consttute agrcutura abor for pur-
poses of Subchapters and C, Chapter 9, of the Code, as amended.
It s aso hed that servces performed by empoyees of the M ssoc-
aton n connecton wth the cannng of the products of ts members,
the manufacture of spray materas, cder, vnegar, and ce, the genera-
ton of eectrcty, the operaton of the reservor and ppe ne under the
crcumstances stated, the nspecton of members crops, the furnshng
of advce to members, the promoton of saes, the repar of the pants
and equpment, and cerca work, together wth the supervson of such
servces, consttute empoyment for purposes of such subchapters.
Secton 142 : Defntons. 1940-49-10509
Reguatons 10 , Secton 402.209: Domestc S. S. T. 407
servce.
Servces performed n the empoy of the M Unversty Women s
Cub n connecton wth the operaton of ts cubhouse are not
e cepted from empoyment under sectons 142 (b)2 and
1 07(c)2, Subchapters and C, respectvey, of Chapter 9 of the
mendments of 19. 59.
dvce s requested whether servces performed n the empoy of
the M Unversty Women s Cub n connecton wth the operaton of
ts cubhouse are e cepted from empoyment under sectons
142 (b)2 and C07(c)2, Subchapters and C, respectvey, of
Chapter 9 of the Interna Revenue Code as amended.
The M Unversty Women s Cub was ncorporated under the aws
of the State of R to promote frendy ntercourse among ts members
and to provde a pace for ther professona and soca meetngs.
Its actvtes consst of mantanng and operatng a cubhouse for
the use and beneft of the members. In addton to ts soca pro-
gram, the cub provdes a mted number of rooms for the odgng of
members and operates a cafe where meas are served to members and
ther guests. The ncome, whch s derved from dues and house
charges eved upon the members, s used to defray operatng
e penses.
Membershp s composed of four casses, referred to as actve, as-
socate, fe, and nonresdent. ctve membershp s open to women
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257
Regs. 10 , 402.209.
at the unversty who are. members of the facuty admnstratve,
scentfc, and brary staffs staffs of affated organzatons of the
unversty the board of trustees and adut women of the fames
of members and former members of the unversty organzatons n
the foregong groups. actve members who sever ther connecton
wth the unversty but contnue to resde n the communty may,
wth the approva of the board of drectors, retan such membershp.
ssocate membershp, whch carres a the prveges of actve mem-
bershp e cept those of votng and hodng offce, s open to adut
women of the fames of the members and former members of the
unversty organzatons graduate students and students n the pro-
fessona schoos, ncudng those on part-tme unversty appont-
ments chaperons of sorortes, church houses, and cooperatve houses
soca workers connected wth the student churches and other organ-
zatons connected wth the unversty secretares of the Y. W. C. .
and resdents of the communty not to e ceed 10 per cent of the tota
membershp. Lfe membershp s open to any actve member upon
the payment of doars. Nonresdent membershp s open to a
women egbe to actve membershp who ve outsde the county n
whch the unversty s ocated, and to former members of the cub
who, upon movng from the unversty communty, desre such
membershp.
Secton 142 (b), Subchapter , Chapter 9, of the Interna Revenue
The term empoyment means any servce, of whatever nature,
performed after December 31, 1939, by an empoyee for the person empoyng
hm e cept:

(2) Domestc servce n a prvate home, oca coege cub, or oca chapter
of a coege fraternty or sororty .
Secton 1 07(c), Subchapter C. Chapter 9, of the Interna Revenue
Code, as amended, contans a smar provson.
Secton 402.209 of Reguatons 10 , ssued pursuant to Subchapter
of Chapter 9 of the Code, as amended, provdes n part:
Servces of a househod nature performed by an empoyee n or
about the cub rooms or house of a oca coege cub by whch he s
empoyed, are ncuded wthn the above e cepton.
oca coege cub does not ncude an aumn cub .

In genera, servces of a househod nature n or about the cub rooms or house
of a oca coege cub ncude servces rendered by cooks, mads,
buters, aundresses, furnacemen, waters, and housemothers.
Secton 403.209 of Reguatons 107, ssued pursuant to Subchapter
C of Chapter 9 of the Code, as amended, contans substantay the
same provsons.
It s apparent that the M Unversty Women s Cub s not a stu-
dent organzaton but s composed to a arge e tent of persons whose
ony connecton wth the unversty s through famy reatonshp
of members and former members of the varous unversty depart-
ments and of persons performng servces for organzatons ony re-
motey connected wth the unversty proper. ppro matey 10
per cent of ts membershp s composed of ndvduas whose ony
quafcaton s that they resde n the communty. Therefore, t s
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Regs. 10 , 402.210.
258
the opnon of the ureau that the M Unversty Women s Cub s
not a oca coege cub wthn the meanng of sectons 142 (b)2
and 1 07(c)2 of the Code, supra. ccordngy, t s hed that the
servces performed by the ndvduas n connecton wth the operaton
of the cubhouse are not e cepted from empoyment by vrtue
of the above provson of aw.
Secton 142 : Defntons. 1940-45-10478
Reguatons 10 , Secton 402.210: Casua abor not Mm. 5121
n the course of empoyer s trade or busness.
Rues for determnng whether servces consttute casua
abor under secton 142 (b)3, Subchapter , and secton G07(c)3,
Subchapter C, of Chapter 9 of the Interna Revenue Code, as
such sectons were amended, effectve anuary 1, 1940, by sectons
00 and 14, respectvey, of the Soca Securty ct mendments
of 1939.
Washngton, D. C, October 12, 19 0.
1. Reference s made to Mmeograph 4847 (C. . 1938-2, 310), pre-
scrbng rues for determnng whether servces consttute casua
abor as used n secton 811(b)3, Tte III, of the Soca Securty
ct.
2. The purpose of ths mmeograph s to make the rues set forth
n Mmeograph 4847 appcabe n determnng whether servces con-
sttute casua abor under Subchapters and C of Chapter 9 of
the Interna Revenue Code ( edera Insurance Contrbutons ct
and edera Unempoyment Ta ct, respectvey), as amended.
3. Secton 142 (b)3 of Subchapter of Chapter 9 of the Interna
Revenue Code, as amended, provdes, n part:
The term empoyment means any servce e cept

(3) Casua abor not n the course of the empoyer s trade or busness.
Secton 1 07(c)3 of Subchapter C of Chapter 9 of the Interna
Revenue Code, as amended, contans a smar provson.
4. Secton 402.210 of Reguatons 10 , ssued pursuant to Subchap-
ter of Chapter 9 of the Code, as amended, provdes, n part:
The term casua abor ncudes abor whch s occasona, Incdenta, or
rreguar.
The e presson not n the course of the empoyer s trade or busness
Incudes abor that does not promote or advance the trade or busness of the
empoyer.
Thus, abor whch s occasona, ncdenta, or Irreguar, and does not pro-
mote or advance the empoyer s trade or busness, Is e cepted.

Casua abor, that s, abor whch s occasona, ncdenta, or rreguar, but
whch s In the course of the empoyer s trade or busness, does not come
wthn the above e cepton.

Casua abor performed for a corporaton does not come wthn ths
e cepton.
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259
Regs. 10 , 402.210.
Secton 403.210 of Reguatons 107, ssued pursuant to Subchapter
C of Chapter 9 of the Code, as amended, smary provdes.
5. The most common e ampes of cases n whch the rues set forth
heren w have appcaton are found n those nstances n whch
an ndvdua empoys workmen to bud, remode, or repar hs
home, summer cottage, garage, and other smar structures for hs
own occupancy and use and not to promote or advance hs trade or
busness.
. ach of the two rues set forth beow s a rue of presumpton
ony. If the presumpton rased by ether of the rues s that the
servce to whch the rue appes consttutes empoyment, then, n
accordance wth such presumpton, the servce s not e cepted as
casua abor and shoud not be treated as such uness and unt
the empoyer s advsed n wrtng by the coector of nterna reve-
nue or by the Commssoner that on the bass of evdence submtted
t has been determned that the presumpton has been rebutted. Ths
s true even though the presumpton rased under the other rue s
that the servce consttutes casua abor. The presumpton rased
by ether of the rues may be rebutted by any empoyer or empoyee
affected by the rue, or by the ureau of Interna Revenue. No person
s requred to submt evdence n rebutta of any such presumpton
uness caed upon by the ureau of Interna Revenue to do so. -
cept n speca cases, the controng presumpton n the case w not
be dsturbed by the ureau snce t s admnstratvey desrabe that
the queston be set at rest n the mted fed n whch the rues are
ntended to appy. The rues as stated beow cover those stuatons
where the ony queston nvoved s whether the servce s or s not
casua abor. See paragraph 7 for the appcaton of the rues n
any case n whch the servce beng performed by one or more
empoyees s otherwse e cepted, as, for e ampe, where a part of the
servce s performed by a chd under the age of 21 n the empoy
of hs father or mother or by an empoyee who n more than one-
haf of the same pay perod performs servce for the same empoyer
whch s e cepted as agrcutura abor. The rues foow:
Rue . The term casua abor means a servce performed by an em-
poyee for hs empoyer durng a perod of one caendar month or any two
consecutve caendar months f such servce s performed on not more than 10
caendar days, whether or not such days arc consecutve. Such servce does not
consttute empoyment, and s not ta abe under Subchapters and O of
Chapter 9 of the Interna Revenue Code, as amended, provded t dors not pro-
mote or advance the empoyer s trade or busness. If the empoyee performs
servce for the empoyer on 11 or more caendar days durng such perod (rre-
spectve of the duraton of performance on any such day, and whether or not
such days are consecutve), the term casua abor does not ncude any of
such servce and, whether or not t promotes or advances the empoyer s trade
or busness, a of such servce of the empoyee, Incudng that performed on the
frst 10 days, consttutes empoyment, and s ta abe under Subchapters
and C, as amended.
Rue . If the tota number of hours of servce performed by a empoyees
of the empoyer on the partcuar |ob or pro|ect s more than 200, the term
casua abor does not ncude the servce (rrespectve of ts duraton) of any
mch empoyee. Whether or not t promotes or advances the empoyer s trade
or busness, a of such servce, ncudng that performed durng the frst 200
hours, consttutes empoyment, and s ta abe under Subchapters and C
of Chapter 9 of the Interna Revenue Code, as amended.
7. In computng the tota number of hours of servce performed on
a partcuar |ob or pro|ect, for purposes of rue , the hours of serv-
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Regs. 10 , 402.210. 2 0
ce of each empoyee performed thereon must be counted whether or
not the servce of the empoyee s otherwse e cepted from empoy-
ment under Subchapters and C of Chapter 9 of the Interna Reve-
nue Code, as amended. or e ampe, servce performed by a chd
under the age of 21 n the empoy of hs father or mother (whch s
e cepted from empoyment under Subchapters and C by sectons
142 (b)4 and 1 07(c)5 thereof, as amended) must be ncuded
n computng the tota hours of servce on the |ob or pro|ect. though
e cepted servce must be ncuded for the purposes as provded n ths
paragraph, the operaton of the rues s not ntended to resut n hod-
ng servces ta abe whch are otherwse e cepted from empoyment.
Thus, n no event shoud remuneraton for servce performed by a
chd under the age of 21 n the empoy of hs father or mother be
reported as ta abe wages.
ampe (1): , , and C are hred as empoyees of M to construct
an addton to M s home. C s M s 18 year od son. and eac
work 70 hours on the pro|ect, or an aggregate of 140 hours. C works
5 hours on the pro|ect. C s hours of servce must be added to those
of and n determnng the tota number of hours of servce on the
pro|ect, brngng the tota to 205 hours. ppyng rue , the serv-
ces of and consttute empoyment and are ta abe, and do not
consttute casua abor, snce the tota number of hours of servce
performed by M s empoyees on the pro|ect s more than 200. ow-
ever, C s servce does not consttute empoyment and s not ta abe,
snce hs servce was performed n the empoy of hs father before
he attaned the age of 21. M shoud report the remuneraton of
and as ta abe wages, but not the remuneraton of C.
ampe (2 ): N, a farmer and merchant, empoys and to con-
struct an addton to hs home n town. G, one of N s farm hands
who has had e perence as a carpenter, works wth and on the
pro|ect. and each work 80 hours on the pro|ect, or an aggregate
of 1 0 hours. G works 45 hours on the pro|ect and, durng the same
pay perod, works 0 hours on N s farm n servce cassfed as agr-
cutura abor. ppyng the ncuded and e cuded servce pro-
vsons contaned n sectons 142 (c) and 1 07(d) of Subchapters
and C, as amended, the 45 hours spent by G on the constructon pro|ect
are not deemed to be empoyment snce G s servces for N durng
more than one-haf of the pay perod do not consttute empoyment.
owever G s hours of servce must be added to those of and n
determnng the tota number of hours of servce on the pro|ect, brng-
ng the tota up to 205 hours. ppyng rue , the servces of and
may not be cassed as casua abor. N shoud report the remu-
neraton of and as ta abe wages, but not the remuneraton of G.
8. ny empoyer or empoyee affected who desres to rebut the
presumpton rased by rue or s prveged to submt a compete
and detaed wrtten statement of the facts for that purpose. The
statement sha be submtted to the coector of nterna revenue for
the dstrct n whch the empoyer s prncpa pace of busness s
stuated. If the statement s submtted by an empoyer, t must
ncude
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2 1
Regs. 10 , 402.210.
(a) a descrpton of the empoyer s busness, trade, or occupa-
ton (or a of hs busnesses, trades, or occupatons, f more than
one),
(b) a descrpton of the |ob or pro|ect on whch the servces n
queston were performed,
(c) the date on whch hs empoyees began work on the |ob
or pro|ect and, f competed or the servces of the empoyees
fnay termnated, the date of such competon or termnaton,
(d) the tota number of hours worked by a of hs empoyees
on the |ob or pro|ect,
(e) a st of the names, addresses, and soca securty account
numbers of hs empoyees who worked upon t,
(/) the number of caendar days on whch each empoyee
worked thereon,
(g) the tota remuneraton pad to each empoyee for hs serv-
ces on the |ob or pro|ect,
(h) n the case of each empoyee who worked on ess than 11
caendar days and dd not, because of n|ury, dscharge, voun-
tary quttng, or any other reason, compete the work to whch
he was assgned, a statement of the ntent of the empoyer as
to the tota number of caendar days on whch the empoyee was
to work, e cudng those on whch he actuay worked (sup-
ported by such addtona evdence of that ntent as may be
avaabe), and
() any addtona facts and grounds bearng upon a deter-
mnaton of whether the servce n queston consttutes casua
abor.
If the empoyee submts the case for determnaton, he must furnsh
the nformaton caed for n (a) through () of ths paragraph n
as much deta as practcabe, and ncude n hs statement the name
and address to the empoyer.
9. It s desred to emphasze that abor whch s n the course of
the empoyer s trade or busness, that s, abor whch n any way pro-
motes or advances the trade or busness of the empoyer, s not e -
cepted under Subchapters and C of Chapter 9 of the Code, as
amended. Such abor, even though t may be casua, consttutes
empoyment, and s ta abe under Subchapters and C, as
amended, n so far as sectons 142 (b)3 and 1 07(c)3, respectvey,
are concerned. Labor performed for a corporaton s consdered n
every case to promote or advance the purposes of the corporaton,
and does not, therefore, fa wthn the e cepton provded by such
sectons.
10. Unt coectors are advsed to the contrary, statements sub-
mtted to them by empoyers and empoyees n accordance wth para-
graph 8 sha be forwarded to the ureau for consderaton.
11. Correspondence n regard to the contents of ths mmeograph
shoud refer to ts number and to the symbos C: RR.
Guy T. everng,
Commssoner.
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Regs. 10 , 402.217.
2 2
Secton 142 : Defntons. 1940-43-104 1
Reguatons 10 , Secton 402.217: Organza- S. S. T. 404
tons e empt from ncome ta .
Where a student has competed an academc year at a schoo, co-
ege, or unversty, but has not enroed for the succeedng year,
servces performed by hm durng the perod ntervenng the two
academc years n the empoy of an organzaton e empt from
ncome ta under secton 101 of the Interna Revenue Code are not
e cepted from empoyment under sectons 142 (b)10( ) and
1 07(c)10( ) of the Code, as amended by the Soca Securty ct
mendments of 1939.
dvce s requested whether servces performed by a student durng
the summer vacaton ntervenng two academc years n the empoy of
an organzaton e empt from ncome ta under secton 101 of the
Interna Revenue Code consttute empoyment for purposes of
amended.
In the partcuar case presented, the student enroed for a course
of study n a unversty on September , 1939, and reguary at-
tended casses, competng the academc year on une , 1940.
Durng that perod he was empoyed by an organzaton whch has
been hed e empt from ncome ta under secton 101 of the Interna
Revenue Code, and contnued n ts empoy durng the months of
uy and ugust, 1940. On September , 1940, he agan enroed n
the unversty for the succeedng academc year. The queston arses
as to what e tent the servces of the student consttute empoyment
for purposes of Subchapters and C, supra.
Sectons 142 (b) and 1 07(c) of the Code, as amended, provde n
part as foows:
The term empoyment means any servce performed after Decem-
ber 31, 1939, e cept

(10) ( ) Servce performed n any caendar quarter n the empoy of any
organzaton e empt from ncome ta under secton 101, f

() Such servce Is performed by a student who s enroed and Is
reguary attendng casses at a schoo, coege, or unversty.
Snce, durng the perod September , 1939 to une , 1940, the
student was enroed and reguary attended casses at a unversty,
the servces performed by hm n the empoy of the e empt organza-
ton ceary were e cepted from empoyment under the above pro-
vsons of aw. owever, snce the student was not enroed and dd
not reguary attend casses at the unversty durng the severa
months perod ntervenng the two academc years, t s evdent that
the e cepton does not appy. ccordngy, servces performed by the
student durng that perod n the empoy of the e empt organzaton
consttute empoyment uness otherwse e cepted therefrom.
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2G3
Regs. 10 . 402.227.
Secton 142 : Defntons.
Reguatons 10 , Secton 402.227: Wages.
( so Sectons 1400 and 1410 Reguatons 10 ,
Sectons 402.303 and 402.403 and Subchapter
C ( edera Unempoyment Ta ct), Sectons
1 00 and 1 07 Reguatons 107, Sectons
403.227, 403.303.)
mpoyment ta abty wth respect to bonus payments made by
the M ank to the trustees of Its empoyees proft-sharng bonus
pan s ncurred at the tme such payments are actuay or construc-
tvey made to the empoyees. Dvdends on the stock purchased and
hed by the trustees for the beneft of empoyees, as we as ncrement
n vaue of such stock, do not consttute wages.
Inqury s made whether the ta es mposed under Subchapters
and C of Chapter 9 of the Interna Revenue Code, as amended, attach
to bonus payments made by the M ank at the tme such payments are
made by the bank to the trustees of the trust fund or at the tme pay-
ments are made to the ndvdua empoyees. Inqury s aso made
whether dvdends and ncrements on stock purchased by the trustees
for the empoyees consttute wages under the above provsons of
aw.
The bonus pan was estabshed by a resouton of the board of
drectors of the M ank. Pursuant to such resouton an amount equa
to per cent of the monthy saary of each permanent, fu-tme em-
poyee s to be set asde by the bank and devered to the trustees of
the pan. Under the terms of the trust agreement, the amounts are
rrevocaby pad to the trustees. These amounts are to be used to
purchase stock of the bank and the account of each empoyee egbe
to share theren s credted wth hs proportonate share. Takng the
month of anuary, 1940, as an e ampe, the stock purchased wth the
bonus payment for that month, together wth accruas, f any, s to
be devered to the empoyees by the trustees n December, 1945, uness
sooner dstrbuted under some other provson of the pan. Dvdends
on fu shares of stock are pad to the empoyees. t the tme the
anuary payment was made to the trustees, each empoyee entted to
share theren acqured a contngent nterest n such payment, utmate
recept beng defeated f the empoyee s dscharged for cause. Snce
recept by any ndvdua empoyee may be defeated under the cond-
tons of the pan, the amount of the anuary payment was not actuay
or constructvey pad to the ndvduas nvoved.
On the bass of the facts presented, t s hed that the ta es mposed
under Subchapters and C of Chapter 9 of the Code, as amended,
attach to the bonus payments n queston when such payments are
actuay or constructvey made by the trustees to the empoyees.
It s cear that the M ank has renqushed a rght, tte, and nter-
est n the payments made to the trustees, whch payments are used to
purchase stock of the bank. ccordngy, dvdends and other ncre-
ments accrung durng the perod the stock purchased s hed n trust
do not consttute ta abe wages snce they do not represent payments
made by an empoyer to hs empoyees. The ta abe Mages of the
empoyees shoud be computed at the tme of payment by the trustees,
1940-37-10417
S.-S. T. 400
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Regs. 10 , 402.227.
2 4
and consst of those portons of the vaue of the stock and the cash
attrbutabe to the bank s contrbutons. Snce, as stated, ncrements
accrung durng the perod (ncudng any ncrease n vaue of the
stock) do not consttute wages, n no event w the ta abe wages of
an empoyee e ceed the amount ntay contrbuted by the M ank
to the trustees.
Secton 142 : Defntons. 1940-48-10495
Reguatons 10 , Secton 402.227: Wages. S. S. T. 40
Payments made by the N Company to former empoyees caed for
actve mtary servce wth the armed forces of the Unted States
or who vountary enst for such servce, whch payments suppe-
ment amounts receved by them from the edera Government, do
not consttute wages for the purposes of Subchapters and C,
Chapter 9. of the Interna Revenue Code, as amended by the Soca
The queston has arsen whether certan payments made by the N
Company to ts former empoyees who are now n the armed forces of
the Unted States consttute wages for empoyment ta purposes.
On une , 1940. the company s board of drectors by resouton
adopted the foowng pan:
ny person n the empoy of the company on une , 1940, who may be caed
or who vountary ensts for a year s actve mtary servce wth the armed
forces of the Unted States w be pad an amount equa to the dfference between
the tota remuneraton pad by the edera Government and the saary of such
person at the tme he eaves the company s empoy. If the tota remuneraton
pad by the Unted States Government to these persons s equa to or n e cess of
such saary, no payment w be made by ths company.
persons n tranng or n actve servce w be permtted to contnue n
group nsurnnee and annuty pans on bass of saary at tme of enterng mtary
servce. If payment s made by ths company to the person, deducton w be
made from such payments for premums due f no payment s made to such
person by ths company, he sha remt the necessary amount to contnue par-
tcpaton n these benefts.
Upon the return of any of these persons, or ther reease from mtary servce,
every effort w be made by the company to reempoy them at former saares,
but the company does not guarantee such reempoyment.
The company reserves the rght to modfy or abosh ths pan and to reduce
or dscontnue payments thereunder at any tme.
Wth certan e ceptons not here matera, sectons 142 (a) and
1 07(b) of Subchapters and C, Chapter 9, of the Interna Revenue
Code, as amended, defne the term wages as a remuneraton for
empoyment. The term empoyment s defned by sectons 142 (b)
and 1 07(c) of such subchapters, respectvey, to ncude any servce,
of whatever nature, performed wthn the Unted States by an empoyee
for the person empoyng hm, wth certan enumerated e ceptons.
In S. S. T. 49 (C. . -2, 420 (193 )) t was hed that payments
made by the M Company to ts empoyees equvaent to the dfference
between the norma wages of the empoyees who are absent from work
whe servng n the State Natona Guard and the amounts receved
from the State for such servces consttute wages wthn the mean-
ng of secton 907(b), Tte I , of the Soca Securty ct. Ths con-
cuson s kewse appcabe under Tte III of the Soca Securty
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Regs. 10 , 402.428.
ct and under Subchapters and C, Chapter 9, of the Code, as
amended. In that case the empoyment reatonshp between the M
Company and ts empoyees was not dsturbed by ther temporary
servce n the Natona Guard. In the nstant case, however, the em-
poyment reatonshp between the ndvduas and the N Company was
termnated when they ensted or were caed for actve mtary servce.
It s hed that payments made by the N Company, under the prov-
sons of the pan above set forth, to empoyees- caed for actve mtary
servce wth the armed forces of the Unted States, or who enst n
Mch servce do not consttute wages for purposes of Subchapters
and C, Chapter 9, of the Interna Revenue Code, as amended.
Secton 142 : Defntons. 1940-31-10357
Reguatons 10 , Secton 402.228: cusons S. S. T. 397
from wages.
ct), Secton 1007 Reguatons 107, Secton 403.22S.)
Dsmssa payments made to empoyees of the M Company In
accordance wth the company s empoyment manua are not e -
cuded from wages under sectons 142 (a)4 and 1 07(b)4 of
Subchapters and C, respectvey, Chapter 9, of the Interna Reve-
nue Code, as amended by the Soca Securty ct mendments
of 1939.
Inqury s made whether dsmssa payments made by the M Com-
pany to ts empoyees are e cuded from wages as defned n
amended.
The provsons of the company s empoyment manua reatng to
dsmssa payments are as foows:
Dsmssa Payments.
mpoyees whose servces wth the company are termnated through no faut
of ther own, e cept by death, permanent dsabty, or retrement on penson,
sha be pad a dsmssa wage based upon age and ength of servce wth the
company as provded n the schedue outned heren. mpoyees dscharged
for cause or resgnng vountary sha not be egbe.
prnted copy of the manua whch contans the above provsons
s furnshed to each new empoyee. The company reserves the rght
to amend or abosh the provsons of the manua reatng to dsmssa
payments at any tme but, because of estabshed pocy, woud take
no acton detrmenta to the .accrued rghts of the empoyees.
Sectons 142 (a)4 and 1 07(b)4 of Subchapters and C, Chapter
9, of the Interna Revenue Code, as amended, defne the term wages
as a remuneraton for empoyment e cept
Dsmssa payments whch the empoyer Is not egay requred to
make.
Secton 402.228 (d) of Reguatons 10 , promugated under secton
142 (a)4, supra, provdes as foows:
Dsmssa Payments. ny payments made by an empoyer to an empoyee
on account of dsmssa, that s, nvountary separaton from the servce of the
empoyer, are e cuded from wages, provded the empoyer s not egay bound
by contract, statute, or otherwse, to make such payments.
290217 41 18
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Regs. 100.
2
Generay, a contract of empoyment embraces rues and reguatons
promugated by an empoyer to govern the actvtes of hs empoyees,
provded the empoyees have notce thereof. (See Poton v. ab-son
Statstca Organzaton, Inc., 259 Mass., 424,15 N. ., 534 Damond-
State Iron Co. v. e, 1 Deaware, 303, 43 ., 1 1 Lehgh aey R.
Co. v. Snyder, 5 N. . L., 32 , 28 ., 37 .) In the nstant case the
M Company gves each empoyee a prnted copy of ts empoyment
manua, and t has been and s the pocy of the company to make the
dsmssa payments as provded theren. It appears that such pro-
vsons consttute a part of the empoyees contracts of empoyment
and that the M Company s egay requred to make the pay-
ments. ccordngy, t s hed that the dsmssa payments n ques-
ton are not e cuded from wages under sectons 142 (a)4 and
1 07(b)4 of the Interna Revenue Code, as amended.
C PT R 9, SU C PT R . MPLOYM NT Y C RRI RS.
Reguatons 100. 1940-45-10479
( so Carrers Ta ng ct of 1937.) T. D. 5017
TITL 2 INT RN L R NU C PT R I. Sf CII PT R D, P RT 410
SU C PT R , P RT 4 5, SU P RT .
Reguatons 1(10, and such reguatons as made appcabe to the
Interna Revenue Code by Treasury Decson 4885 C. . 1939-1
(Part 1), 39(51, amended.
cuson from I he Carrers Ta ng ct of 1937 and Subchapter 15
of Chapter 9 of the Interna Revenue (. ode of (1) certan servces
rendered outsde (he Unted States and (L ) certan servces per-
formed n the mnng, preparaton, handng, or oadng of coa.
Washngton, D. C.
In order to conform Reguatons 100 Part 410, Tte 2 , Code of
edera Reguatons , reatng to the empoyers ta , empoyees ta ,
and empoyee representatves ta under the Carrers Ta ng ct of
1937 (50 Stat., 435 45 U. S. C, Sup. , 2 1 to 273, ncusve), and
such reguatons as made appcabe to the Interna Revenue Code
(53 Stat., Part 1 2 U. S. C., Sup. ) by Treasury Decson 4885
C. . 1939-1 (Part 1), 39G Part 4 5. Subpart , of such Tte 2 ,
1939 Sup. , to secton 3 of the |ont resouton approved une 11, 1940
(Pubc Resouton No. 81, Seventy-s th Congress, thrd sesson), and
to the ct approved ugust 13, 1940 (Pubc, No. 7 4, Seventy-s th
Congress, thrd sesson), each of such reguatons s amended as
foows:
(1) Immedatey precedng artce 1 secton 410.1, Tte 2G, Code
of edera Reguatons , the foowng s nserted:
Secton 3 of the ont Resouton approved une 11, 1040 (Pubc Resouton
No. 81, Seventy-s th Congress, thrd sesson).
Subsecton (b) of secton 1532 of the Interna Revenue Code, approved
ebruary 10, 1939 (f 5 Stat. 1), s hereby amended by substtutng for the
second provso theren (e foowng: Provded, however, That an nd-
vdua sha not be deemed to be n the empoyment reaton to a carrer
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2 7
Regs. 100.
uness durng the ast pay-ro perod n whch he rendered servce to
t he was wth respect to that servce n the servce of an empoyer n
accordance wth subsecton (d) of ths secton.
Subsecton (d) of secton 1532 of sad ( ode s hereby amended by
changng the perod at the end thereof to a coon and addng the fo-
owng: Provded further. That an ndvdua not a ctzen or resdent
of the Unted States sha not be deemed to be n the servce of an em-
poyer when renderng servce outsde the Unted States to an empoyer
who s requred under the aws appcabe n the pace where the servce
s rendered to empoy theren, n whoe or n pnt, ctzens or resdents
thereof and the aws appcabe on ugust 29, 1935, n the pace where
the servce s rendered sha be deemed to have been appcabe there
at a tmes pror to that date.
The amendments n ths secton sha operate n the same manner and
have the same effect as f they had been part of the Interna Revenue
Code when that Code whs enacted on ebruary 10, 11)39, and as f they
had been part correspondngy of subsectons (b) and (d) of the Carrers
Ta ng ct of 1937 ( 50 Stat. 435) when that ct was enacted on une
29, 1937.
Sectons 1, 3, 4, and of the ct approved ugust 13, 1940 (Pubc, No. 7 4,
Seventy-s th Congress, thrd sesson).
That secton 1 (a) of the Carrers Ta ng ct of 1937, secton
1532(a) of the Interna Revenue Code, are amended, effectve
n the case of each such ct as of the date of ts enactment, by addng at
the end of each such secton the foowng new sentence: The term
empoyer sha not ncude any company by reason of Its beng engaged
n the mnng of coa, the suppyng of coa to an empoyer where devery
s not beyond the mne tppe, and the operaton of equpment or factes
therefor, or n any of such actvtes.
Sec. 3. secton 1(b) of the Carrers Ta ng ct of 1037,
secton 1532(b) of the Interna Revenue Code, are amended,
n the case of each such ct as of the date of ts enactment, by addng
at the end of each such secton the foowng new paragraph:
The term empoyee sha not ncude any ndvdua whe such
ndvdua s engaged n the physca operatons consstng of the mnng
of coa, the preparaton of coa, the handng (other than movement
by ra wth standard raroad ocomotves) of coa not beyond the mne
tppe, or the oadng of coa at the tppe.
Sec. 4. (a) The aws hereby e pressy amended sha
operate as f each amendment heren contaned had been enacted
as a part of the aw t amends, at the tme of the orgna enactment
of such aw.

Sec. . Nothng contaned In ths ct, nor the acton of Congress
n adoptng t, sha be taken or consdered as affectng the queston
of what carrers, companes, or ndvduas, other than those n ths
ct specfcay provded for, are ncuded In or e cuded from the pro-
vsons of the varous aws to whch ths ct Is an amendment.
(2) Immedatey foowng the provsons of aw under the cap-
ton Secton 1(a) of the ct precedng artce 2 secton 410.2,
Tte 2 , Code of edera Reguatons , the foowng s nserted:
Sectons 1 and 4 of the ct approved usust 13. 1940 (Pubc, No. 7 4,
That secton 1(a) of the Carrers Ta ng ct of 1937,
secton 1532(a) of the Interna Revenue Code, are amended,
effectve n the case of each such ct as of the date of Its enactment,
by addng at the end of each such secton the foowng new sen-
tence :
The term empoyer sha not ncude any company by reason of
ts beng engaged In the mnng of coa, the suppyng of coa to an
empoyer where devery s not beyond the mne tppe, and the opera-
ton of equpment or factes therefor, or n any of such actvtes.
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Regs. 100.
2 8
Sec. 4. (a) The aws hereby e pressy amended sha oper-
ate as f each amendment heren contaned had been enacted as a part
of the aw It amends, at the tkne of the orgna enactment of such
aw.

(3) rtce 2 secton 410.2, Tte 2 , Code of edera Reguatons
s amended by addng at the end thereof the foowng new para-
graph :
The term empoyer does not ncude any company by reason of ts beng
engaged n the mnng of coa, the suppyng of coa to an empoyer where
devery s not beyond the mne tppe, and the operaton of equpment or
factes for such mnng or suppyng of coa, or n any of such actvtes.
ton Secton 1(b) of the ct precedng artce 3 secton 410.3,
Subsecton (b) of secton 1532 of the Interna Revenue Code, ap-
proved ebruary 10, 1939 ( 53 Stat. 11, s hereby amended by sub-
sttutng for the second provso theren the foowng: Provded,
however, That an ndvdua sha not be deemed to be n the empoy-
ment reaton to a carrer uness durng the ast pay-ro perod n
whch he rendered servce to t he was wth respect to that servce
n the servce of an empoyer n accordance wth subsecton (d) of
ths secton.

The amendments n ths secton sha operate n the same manner
and have the same effect as f they had been part of the Interna
Revenue Code when that Code was enacted on ebruary 10, 1939,
and as f they had been part correspondngy of subsectons (b) and
(d) of the Carrers Ta ng ct of 1937 (50 Stat. 435) when that
ct was enacted on une 29, 1937.
Sectons 3 and 4 of the ct approved ugust 13, 1940 (Pubc, No. 7 4,
Sec. 3. secton b) of the Carrers Ta ng ct of 1937,
secton 1532 (b) of the Interna Revenue Code, are amended,
n the case of each such ct as of the date of ts enactment, by addng
at the end of each such secton the foowng new paragraph:
The term empoyee sha not ncude any ndvdua whe such
Indvdua s engaged n the physca operatons consstng of the mnng
of coa, the preparaton of coa, the handng (other than movement by
ra wth standard raroad ocomotves) of coa not beyond the mne
tppe, or the oadng of coa at the tppe.
Sec. 4. (a) The aws hereby e pressy amended sha op-
erate as f each amendment heren contaned had been enacted as a
part of the aw t amends, at the tme of the orgna enactment of such
aw.

ton Secton 1(d) of the ct precedng artce 3 secton 410.3,

Subsecton (d) of secton 1532 of sad Code Interna Revenue Code
s hereby amended by changng the perod at the end thereof to a coon
and addng the foowng: Provded further. That an ndvdua not a
ctzen or resdent of the Unted States sha not be deemed to be In
the servce of an empoyer when renderng servce ontsde the Unted
States to an empoyer who s requred under the aws appcabe n
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2 9
Regs. 100.
the pace where the servce s rendered to empoy theren, n whoe or
n part, ctzens or resdents thereof and the aws appcabe on
ugust 29, 1935, n the pace where the servce s rendered sha be
deemed to have been appcabe there at a tmes pror to that date.
The amendments In ths secton sha operate n the same manner
and have the same effect as f they had been part of the Interna Reve-
nue Code when that Code was enacted on ebruary 10, 1939, and as f
they had been part correspondngy of subsectons (b) and (d) of
the Carrers Ta ng ct of 1937 (50 Stat. 435) when that ct was
enacted on une 29, 1937.
( ) rtce 3(a) secton 410.3(a), Tte 2 , Code of edera Reg-
uatons s amended by strkng out the ast paragraph and nsertng
n eu thereof the foowng:
In determnng whether an ndvdua s an empoyee wth respect to servces
rendered wthn the Unted States, the ctzenshp or resdence of the nd-
vdua, or the pace where the contract of servce was entered nto s mmatera.
If an ndvdua performs servces for an empoyer who does not conduct
the prncpa part of hs busness wthn the Unted States, such ndvdua
sha be deemed to be n the servce of such empoyer ony to the e tent that
he performs servces for hm n the Unted States. Thus, wth respect to serv-
ces rendered for such empoyer outsde the Unted States, such ndvdua s
not n the servce of an empoyer.
If an ndvdua performs servces for an empoyer who conducts the prnc-
pa part of hs busness wthn the Unted States, he s n the servce of such
empoyer whether hs servces are rendered wthn or wthout the Unted States
e cept that n the case of an ndvdua, not a ctzen or resdent of the Unted
States, renderng servces n a pace outsde the Unted States to an empoyer
who s requred under the aws appcabe n such pace to empoy, n whoe
or n part, ctzens or resdents thereof, such ndvdua sha not be deemed
to be n the servce of an empoyer wth respect to servces so rendered.
The term empoyee does not ncude any ndvdua whe he s engaged
n the physca operatons consstng of the mnng of coa, the preparaton of
coa, the handng (other than movement by ra wth standard raroad oco-
motves) of coa not beyond the mne tppe, or the oadng of coa at the tppe.
(7) rtce 3( ) (2) secton 410.3( ) (2), Tte 2 , Code of ed-
era Reguatons s amended by strkng out the ast sentence, pre-
cedng the parenthetca cross reference at the end thereof, and
nsertng n eu thereof the foowng:
owever, an ndvdua sha not be deemed to be n the empoyment reaton
to a carrer uness durng the ast pay-ro perod n whch he rendered servce
to t, he was wth respect to that servce n the servce of an empoyer (see
paragraph (a) of ths artce secton 410.3(a), Tte 2 , Code of edera Regu-
atons, 1940 Sup. ).
(8) rtce 4 secton 410.4, Tte 2 , Code of edera Reguatons
s amended by strkng out the ast sentence and nsertng n eu
thereof the foowng:
In determnng whether an Indvdua Is an empoyee representatve, hs ct-
zenshp or resdence s matera ony n so far as those factors may affect the
determnaton of whether he was In the servce of an empoyer (see artce
3(a) secton 410.3(a), Tte 2 , Code of edera Reguatons, 1940 Sup. ). The
age of the ndvdua s mmatera.
(9) Immedatey foowng artce 70 secton 410.70 , Tte 2 ,
Code of edera Reguatons , the foowng s nserted:
Secton 4(b) of the ct approved ugust 13, 1040 (Pubc, No. 7 4, Seventy-s th
Congress, thrd sesson).
No person (as defned n the Carrers Ta ng ct of 1937) sha be
entted, by reason of the provsons of ths ct, to a refund of, or
reef from abty for, any ncome or e cse ta es pad or accrued,
pursuant to the provsons of the Carrers Ta ng ct of 1937 or Sub-
chapter of Chapter 9 of the Interna Revenue Code, pror to the date
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Regs. 100.
270
of the enactment of ths ct by reason of empoyment In the servce of
any carrer by raroad sub|ect to Part I of the Interstate Commerce
ct, but any ndvdua who as been empoyed n such servce of any
carrer by raroad sub|ect to Part I of the Interstate Commerce ct
as s e cuded by the amendments made by ths ct from coverage
under the Carrers Ta ng ct of 1937 and Subchapter of Chapter 9
of the Interna Revenue Code, and who has pad ncome ta es under
the provsons of such ct or subchapter, and any carrer by raroad
sub|ect to Part I of the Interstate Commerce ct whch has pad e cse
ta es under the provsons of the Carrers Ta ng ct of 1937 or Sub-
chapter of Chapter 9 of the Interna Revenue Code, may, upon mak-
ng proper appcaton therefor to the ureau of Interna Revenue, have
the amount of ta es so pad apped In reducton of such ta abty
wth respect to empoyment, as may, by reason of the amendments made
by ths ct, accrue aganst them under the provsons of Tte III of
the Soca Securty ct or the edera Insurance Contrbutons ct
(Subchapter of Chapter 9 of the Interna Revenue Code).
rt. 707 Sec. 410.707, Tte 2 , Code of edera Reguatons, 1940 Sup. .
Treatment under secton (b) of the ct approved ugust U, 0, of ta es ch
respect to certan servces performed n the empoy of carrers g raroad.
Secton 4(b) of the ct approved ugust 13. 1940 (Pubc, No. 704, Seventy-s th
Congress, thrd sesson), provdes that no person sha be entted, by reason of the
provsons of such ct, to a refund of, or reef from abty for, ta es pad or
accrued pror to ugust 13. 1940, pursuant to the Carrers Ta ng ct of 1937 or
Subchapter of Chapter 9 of the Interna Revenue Code, wth respect to empoy-
ment In the servce of any carrer by raroad sub|ect to Part I of the Interstate
Commerce ct. (See sectons 3 and 4 of the ct of ugust 13. 1940: and see
artce 3(a) of these reguatons secton 410.3(a), Tte 2 , Code of edera
Reguatons, 1940 Sap. .) owever, under further provsons of such secton
4( ) the amount of such ta es pad to the coector may n accordance wth
such secton be apped n reducton of the ta abty, under Tte III of the
Soca Securty ct or under the edera Insurance Contrbutons ct (Sub-
chapter of Chapter 9 of the Interna evenue Code), ncurred by reason of the
provsons of the ct of ugust 13, 1940. In any such case, a cam for credt
sha be made on orm 843 n accordance wth the nstructons reatng to such
form and the appcabe provsons of artce 701 secton 410.701, Tte 2 , Code
of edera Reguatons , There sha be set forth under oath a grounds n
deta and a facts aeged n support of the cam ncudng the amount and date
of each payment to the coector of the ta for whch credt s camed, the name
and address of the person who pad the ta to the coector, and the perod
covered by the return on whch such ta was reported. Such other or addtona
proof as the Commssoner may deem necessary to estabsh the rght to the
credt sha be submtted.
secton 12 of the Carrers Ta ng ct of 1937 (50 Stat., 440 45
U. S. C, Sup. , 272), sectons 1535 and 3791 of the Interna Revenue
Code (53 Stt., 183, 4 7 2 U. S. C, Sup. , 1535, 3791), secton 3 of
the |ont resouton approved une 11,1940 (Pubc Resouton No. 81,
Seventy-s th Congress, thrd sesson), and sectons 1, 3, 4, and of
the ct approved ugust 13, 1940 (Pubc, No. 704, Seventy-s th
Congress, thrd sesson).)
Gut T. everno,
pproved October 24,1940.
ohn L. Suvan,
ctng Secretary of te Treasury.
Secton 1530: Coecton and payment of ta es.
Reguatons 100, Chapter : Returns and payment of ta .
Power of attorney form. (See Mm. 5089, page 242.)
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271 Regs. 107, 403.204.
C PT R 9, SU C PT R C T ON MPLOY RS O
IG T OR MOR .
Secton 1 00: Rate of ta .
Reguatons 107, Secton 403.303: Rate and computaton
of ta .
S. S. T. 400, page 2 3.)
Secton 1 04: Returns.
Reguatons 107, Secton 403.502: When to report wages.
Wages pad n one ta -return perod for servces n a pror perod.
(See Mm. 5107, page 244.)
Secton 1 04: Returns.
Reguatons 107, Subpart : Returns, payment of ta ,
and records.
Secton 1 05: Payment of ta es.
Reguatons 107, Subpart : Returns, payment of ta ,
and records.
Secton 1 07: Defntons.
Reguatons 107, Secton 403.204: Who are empoyees.
Indvduas engaged n cuttng tmber and skddng forest products
for the M Company. (See S. S. T. 39 , page 24 .)
Indvduas performng patro servces for merchants. (See S. S. T.
398, page 248.)
Loggng contractor. (See S. S. T. 399, page 248.)
ockeys. (See S. S. T. 401, page 249.)
Coa hauers. (See S. S. T. 403, page 250.)
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Regs. 107, 403.227.
272
Secton- 1 07: Defntons.
Trustees performng speca servces. (See S. S. T. 408, above.)
Reguatons 107, Secton 403.207: Incuded and e cuded
servces.
Servces performed wthn and wthout the Unted States. (See
S.S.T. 402, page 252.)
Reguatons 107, Secton 403.208: grcutura abor.
Servces rendered by empoyees of a cooperatve assocaton. (See
S.S.T. 405, page 255.)
Reguatons 107, Secton 403.208: grcutura abor.
Indvduas performng servces n the gnnng of cotton. (See
S. S. T. 394, page 253.)
Reguatons 107, Secton 403.209: Domestc servce.
Servces performed for the M Unversty Women s Cub. (See
S.S.T. 407, page 25 .) .
Reguatons 107, Secton 403.210: Casua abor not
n the course of empoyer s trade or busness.
Casua abor. (See Mm. 5121, page 258.)
Reguatons 107, Secton 403.217: Organzatons e empt
from ncome ta .
Student performng servces n the empoy of an organzaton
e empt from ncome ta under secton 101 of the Interna Revenue
Code. (See S.S.T. 404, page 2 2.)
Reguatons 107, Secton 403.227: Wages.
Payments made by empover to former empoyees servng wth the
armed forces of the Unted States. (See S. S. T. 40 , page 2 4.)
Reguatons 107, Secton 403.227: Wages.
onus payments made pursuant to proft-sharng bonus pan.
S. S. T. 400, page 2 3.)
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273 Regs. 90, rts. 503 and 503
Reguatons 107, Secton 403.228: cusons from wages.
Dsmssa payments made by the M Company pursuant to the pro-
vsons of ts empoyment manua. (See S. S. T. 397, page 2 5.)
Secton 1 01: Credts aganst ta .
eguatons 90 (as amended), rtce 211 (1) : Credt
aganst ta for caendar year 1939 for contrbutons
pad.
Credts aganst, and refunds of, the ta mposed by the edera
Tnempovment Ta ct (Subchapter C, Chapter 9, of the Interna
evenue Code) for the caendar year 1939. (See T. D. 5022, page 275.)
Secton 1 10: Other aws appcabe.
Regt| tons 90 (as amended), rtces 503 and 503 :
Refunds and credts.
Credts aganst, and refunds of, the ta mposed by the edera
Unempoyment Ta ct (Subchapter C, Chapter 9, of the Interna
Revenue Code) for the caendar year 1939. (See T. D. 5022, page 275.)
T S UND R SOCI L S CURITY CT.
N RUPTCY CT O 1938.
mtaton perod appcabe to cams of the unted states.
1940-30-10344
Ct. D. 14 1
D R L T S N RUPTCY CT, S M ND D D CISION O COURT.
Corporaton Reorganzaton Proceedngs d|udcaton of ank-
ruptcy Cam for Soca Securty Ta es Lmtaton Pkrod
ppcabe to Cams of the Unted States.
Secton 238 of the ankruptcy ct, as amended n 1938, whch pro-
vdes that cams not theretofore fed n corporaton reorganzaton
proceedngs under Chapter of the ct, as a|nended, may, n cases
where a corporate reorganzaton resuts n bankruptcy, be fed pror
to the e praton of three months after the frst date set for the frst
meetng of credtors, does not prevent the Government from fng
a cam for soca securty ta es after three months but wthn s
months from the date sot for such meetng, snce cams of the Unted
States are not mentoned n that secton, and t s essenta that the
Unted States be specfcay mentoned n order to brng ts cams
wthn the mtaton provson.
Unted States Dstrct Court for the Western Dstrct of New York.
In the Matter of the rvn Servce Corporaton, ankrupt.
May 22, 1940.
OPINION.
nght, Dstrct udge: On ebruary 1, 1939, the rvn Servce Corporaton
fed a petton for corporaton reorganzaton, under Chapter of the ankruptcy
ct, as amended. On March 27,1939, the corporaton was ad|udcated a bankrupt
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M sc.
274
The order of ad|udcaton drected that proceedngs thereafter be taken pursuant
to the ankruptcy ct. The frst meetng of credtors was hed on March 27,
1939. On une 30, 1939, the coector of nterna revenue fed a cam on account
of soca securty ta es n the amount of 911.20, pus nterest. The trustee ob-
|ected to the aowance of the cam on the ground that t was fed after the
e praton of the tme wthn whch cams were requred to be fed. The referee
dsaowed the cam, and the coector has pettoned ths court for revew.
Secton 238 of the ankruptcy ct, as amended n 1938 (secton 38, Tte 11,
. 8. C.) (part of Chapter ), provdes that cams not theretofore fed n the
corporaton reorganzaton proceedngs may be fed pror to the e praton of
three months after the frst date set for. the frst meetng of credtors .
Secton 57(u) (secton 93(n), Tte 11, U. S. C.) reads, n part: a cams
ncudng a cams of the Unted States , sha be proved
and fed n the manner provded n ths secton. Cams whch are not fed
wthn s months after the frst date set for the frst meetng of credtors sha
not be aowed . Secton 238 does not specfcay ncude cams of the
Unted States as comng wthn the mtaton perod of three months. Pror to
the amendment of 1938, secton 57(n) ( ct of 1898) contaned no provson
specfcay ncudng cams of the Unted States. The courts defntey hed
that such cams dd not come under the requrement of od secton 57(n).
(In rc Stavn, 12 . (2d), 471 In re Moryenstern t Co., 57 . (2d), 1 3 In re
Sran, 82 . (2d), 1 0 In re anner rewng Co., 24 . Supp., 57 In re Stoever,
127 ., 394: In re . MenUt Co., Inc., 294 ., 532.)
In the ast-mentoned case, ths crcut court of appeas stated and foowng
the rue of aw ad down n bson v. Chouteau (80 U. S., 99), that
It s matter of common knowedge that statutes of mtaton do not run
aganst the State. That no aches can be mputed to the kng, and no tme can
bar hs rghts, was the ma m of the common aw, and was founded on the
prncpe of pubc pocy, . The prncpe s appcabe to a govern-
ments, whch must necessary act through numerous agents, and s essenta
to a preservaton of the nterests and property of the pubc. It s upon ths
prncpe that n ths country the statutes of a State prescrbng perods wthn
whch rghts must be prosecuted are not hed to embrace the State tsef, uness
t s specay desgnated that t necessary must he ncuded.
de aso Guarantee Co. v. Tte Guaranty Co. (224 U. S., 155) and Lews,
Truster, v. Unted States (92 U. S., 18). In the ght of these decsons t
seems to me that secton 238, supra, s nsuffcent to ncude the cam heren.
It shoud )e noted that secton 10 . whch, so far as matera, was ncuded n
od 77(b), defnes Cams as ncudng a cams of whatever character.
Under the hodng n Gbson v. Chouteau, supra, ths was nsuffcent to ncude
cams of the Unted States for ta es. It does not specfcay desgnate ths
type of cam.
Secton 355 (part of Chapter I) of the ankruptcy ct was consdered by
Dstrct udge Coddard n the case of In rc Dorb The Chemst Pharmaces (29
. Supp., 832). It was there hed that the three months mtaton perod
provson dd not appy to cams ted by a muncpaty and that the mtaton
perod was f ed by provson of 57(n). The case s parae n a respects to
the one at ar, snce the matera provsons of secton 355 are the same as
secton 328. The decson theren s based upon the poston that secton 378,
subdvson 2 (11 U. S. C. ., 778, subdvson 2), provdes that where proceed-
ngs n bankruptcy are drected to be proceeded wth, they shoud be contnued
so far as possbe n the same manner and wth ke effect as f a bankruptcy
petton for ad|udcaton n bankruptcy had been fed . It was there
sad that the ntent of Congress was that the s mouths bar shoud appy to
cams of a muncpaty presented after ad|udcaton and that such ntenton
was dscosed by the fact that Congress dd not ncude them n secton 355.
It s not necessary to dsagree wth the decson n the Dorb case. It has
been urged by counse that such a decson eads to the ogca concuson that
a cams n bankruptcy coud be fed wthn s months. It s preferred to
base the decson heren on the ground that t was an absoute essenta that
cams of the Unted States be specfcay ncuded n order to brng these
cams wthn the three months mtaton provson. In ths vew whether
that was the ntenton of Congress s mmatera. s to the Unted States
there was no mtaton perod for fng of cams n reorganzaton. Reorgan-
zaton proceedngs havng been foowed by bankruptcy, secton 57(n) appes.
The cam of the Unted States was fed wthn the perod there ed.
The order of the referee dsaowng the cam s drected to be vacated and
et asde and the cam s aowed.
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275
Regs. 90, rt. 211.
TITL III. T S WIT R SP CT TO MPLOYM NT.
Reguatons 91, Chapter I : Returns, payment of ta ,
and records.
Power of attorney form. (See Mn. 5089, page 242.)
Reguatons 91, rtce 402 : Ta abe wages when to be
reported.
(See Mm. 5107, page 244.)
TITL I . T ON MPLOY RS O IG T OR MOR .
Secton 902: Credt aganst ta . 1940-49-10510
Reguatons 90 (as amended), rtce 211: Credt T. D. 5022
of contrbutons aganst ta for caendar years
193 , 1937 and 1938.
( so Secton 905, rtces 503 and 503 Interna
Revenue Code, Chapter 9, Subchapter C ( edera
Unempoyment Ta ct), Sectons 1 01 and 1 10
Reguatons 90 (as amended), rtces 211(1),
503, and 503 .)
TITL 2 INT RN L R NU . C PT R I, SU C PT R D, P RT 400.
Reguatons 90, and such reguatons as made appcabe to the
Interna Revenue Code by Treasury Decson 4885 C. . 1939-1
(Part 1), 89 , amended to conform to secton 701 of the Second
Revenue ct of 1940.
Credts aganst, and refunds of, the ta mposed by Tte I of
the Soca Securty ct for the caendar years 193 , 1937, and 193S,
and the ta mposed by the edera Unempoyment Ta ct (Sub-
chapter C, Chapter 9, of the Interna Revenue Code) for the caendar
year 1939.
Washrgton, D. C.
Secton 701 of the Second Revenue ct of 1940, approved October
8, 1940 (Pubc, No. 801, Seventy-s th Congress, thrd sesson),
provdes:
Credt ganst edera Unempoyment Ta es.
(a) owance of Credt. ganst the ta mposed by secton 901 of the
Soca Securty ct for the caendar year 193 , 1937, or 1938, or aganst the
ta mposed by the edera Unempoyment Ta ct for the caendar year
1939, any ta payer sha be aowed credt for the amount of contrbutons
pad by hm nto an unempoyment fund under a State aw
(2) On or after such s teth day (e cept n the case of the ta for the
caendar year 1939) wth respect to wages pad after the forteth day after
such date of enactment
(3) Wthout regard to the date of payment, f the assets of the ta payer
are, at any tme durng the 59-day perod foowng such date of enactment,
n the custody or contro of a recever, trustee, or other fducary apponted by,
or under the contro of, a court of competent |ursdcton.
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Regs. 90, rt. 211.
27
The amount of such credt, n the case of contrbutons wth respect to the
caendar year 103 ) pad after the ast day upon whch the ta payer was re-
qured under secton 1 04 of the edera Unempoyment Ta ct to fe a
return for such year, sha not e ceed 00 per centum of the amount whch
woud have been aowabe as credt on account of such contrbutons had
they been pad on or before such ast day. The provsons of the Soca
Securty ct n force pror to ebruary 11, 1039 (e cept the provson mtng
the credt to amounts pad before the date of fng returns), sha, wth re-
spect to the ta for the caendar year 193 , 1937, or 1938, appy to aowance
of credt under ths secton, and the provsons of the edera Unempoyment
Ta ct (e cept secton 1 01(a)(3)) sha, wth respect to the ta for the
caendar year 1939, appy to aowance of credt under ths secton. The
terms used n ths subsecton sha, wth respect to the ta for the caendar
year 193 , 1937, or 1938, have the same meanng as when used n Tte I of
the Soca Securty ct pror to ebruary 11, 1939, and sha, wth respect
to the ta for the caendar year 1939, have the same meanng as when used
n the edera Unempoyment Ta ct. The tota credt aowabe aganst
the ta mposed by secton 901 of the Soca Securty ct for the caendar
year 193 . 1937. or 1938. or aganst the ta mposed by secton 1 00 of the
edera Unempoyment Ta ct for the caendar year 1939, sha not e ceed
90 per centum of such ta .
(b) Refund. Refund of the ta (ncudng penaty and nterest coected
wth respect thereto, f any), based on any credt aowabe under ths secton,
may be made n accordance wth the provsons of aw appcabe n the case
of erroneous or ega coecton of the ta . No nterest sha be aowed or
pad on the amount of any such refund.
Paragraph . Credt agan t, and refund of, fa for 1930, 1937,
and 1938. In order to conform Reguatons 90 Part 400, Tte 2 ,
Code of edera Reguatons , reatng to the e cse ta on empoy-
ers under Tte I of the Soca Securty ct (49 Stat., 39 42
IT. S. C, Sup. , 1101 to 1110, ncusve), to secton 701 of the Second
Revenue ct of 1940, such reguatons are amended as foows:
(1) Immedatey precedng artce 211, as amended bv Treasury
Decson 4812 C. . 1938-2, 4 2 secton 400.211, Tte 2 , Code of
edera Reguatons, 1938 Sup. and by Treasury Decson 4937 C. .
1939-2, 320 secton 400.211 of such Tte 2 , 1939 Sup. , reatng
to credt of contrbutons aganst the ta for the caendar years 193 ,
1937, and 1938, the foowng s nserted:
Secton 701 of the Second Revenue ct of 1040.
Credt ganst edera Unempoyment Ta :es.
(a) owance of Credt. ganst the ta mposed by secton 901
of the Soca Securty ct for the caendar year 193 , 1937, or 1938.
any ta payer sha be aowed credt for the amount of contr-
butons pad by hm Into an unempoyment fund under a State aw
(1) efore the s teth day after the date of the enactment of
ths ct
(2) On or after such s teth day wth respect to wages
pad after the forteth day after such date of enactment
(3) Wthout regard to the date of payment, f the assets of the
ta payer are, at any tme durng the ffty-nne-day perod foowng
such date of enactment, n the custody or contro of a recever,
trustee, or other fducary apponted by, or under the contro of, a
court of competent |ursdcton.
The provsons of the Soca Securty ct n force pror to
ebruary 11, 1939 (e cept the provson mtng the credt to amounts
pad before the date of tng returns), sha, wth respect to the ta for
the caendar year 19. . 1937, or 1938, appy to aowance of credt under
ths secton . The terms used n ths subsecton sha, wth
respect to the ta for the caendar year 193 , 1937, or 193S. have the
same meanng as when used n Tte I of the Soca Securty ct pror
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277
Regs. 90, rt. 211.
to ebruary 11,1939 The tota credt aowabe aganst the ta
mposed by secton 901 of the Soca Securty ct for the caendar year
193 , 1937, or 1938, sha not e ceed 90 per centum of such
ta .

(2) rtce 211 ( ), as amended by Treasury Decson 4812 supra
secton 400.211( ), Tte 2 , Code of edera Reguatons, 1938
Sup. and by Treasury Decson 4937 supra secton 400.211( ) of
such Tte 2 , 1939 Sup. , reatng to the mtatons on the aowance
of contrbutons as credt aganst the ta for the caendar years 193 ,
1937, and 1938, s further amended to read as foows:
( ) Lmtatons on aowance of contrbutons as credt agamst ta . The
aowance of contrbutons as credt aganst the ta for the caendar year 193 ,
1987, or 1938 s sub|ect to the foowng mtatons:
(1) The tota credt aowed to any ta payer for contrbutons to State un-
empoyment funds wth respect to empoyment durng any one year sha not
e ceed 90 per cent of the ta aganst whch such credt s apped.
(2) The contrbutons must have been actuay pad nto the State unem-
poyment fund. Such payment must have been made before December 7, 1940,
e cept that:
() The contrbutons wth respect to wages pad after September 19, 1939
(for empoyment durng the caendar year 193 , 1937, or 1938), may be pad
nto the State fund on or after December 7, 1940, sub|ect, however, to the pro-
vsons of artce 503 of these reguatons secton 400.503, Tte 2 , Code of
edera Reguatons , reatng to the statutory perod of mtatons appcabe
to credts.
() The contrbutons of a ta payer whose assets, at any tme durng the
perod ugust 11, 1939, to October 8, 1939, ncusve, or durng the perod
October 9, 1940, to December , 1940, ncusve, are n the custody or contro
of a recever, trustee, or other fducary apponted by, or under the contro of,
a court of competent |ursdcton, may be pad nto the State fund at any tme,
sub|ect, however, to the provsons of artce 503 of these reguatons secton
400.503, Tte 2 , Code of edera Reguatons , reatng to the statutory perod
of mtatons appcabe to credt.
() The contrbutons pad nto the unempoyment fund of a State whch
are requred under the unempoyment compensaton aw of that State, wth
respect to remuneraton on the bass of whch the ta payer had. pror to such
payment, erroneousy pad an amount as contrbutons under another unem-
poyment compensaton aw, sha be deemed to have been made at the tme of
the erroneous payment. If, by reason of such other aw, the ta payer was
entted to cease payng contrbutons wth respect to servces sub|ect to such
other aw, the payment nto the proper fund sha be deemed to have been
made on the date the return for the ta abe year was actuay fed under
secton 905 of the Soca Securty ct.
(3) The contrbutons must have been pad wth respect to empoyment as
defned n secton 907(c) of the Soca Securty ct, that s, wth respect to
servces performed by an empoyee wthn the Unted States and not e cepted
by such ct. (See artces 20 to 20 (7) sectons 400.20 to 400.20 (7), Tte
2 , Code of edera Reguatons , ncusve.)
(4) The contrbutons must have been pad wth respect to servces per-
formed durng the caendar year covered by the return.
(3) Immedatey precedng artce 503 , added by Treasury Dec-
son 4812 secton 400.503y2, Tte 2 , Code of edera Reguatons,
1938 Sup. , as amended by Treasury Decson 4937 secton 400.503
of such Tte 2 , 1939 Sup. , the foowng s nserted:
Secton 701(b) of the Second Revenue ct of 1940.
Refund. Refund of the ta (ncudng penaty and nterest coected
wth respect thereto, f any), based on any credt aowabe under ths
secton, may be made n accordance wth the provsons of aw app-
cabe n the case of erroneous or ega coecton of the ta . No
Interest sha be aowed or pad on the amount of any such refund.
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Regs. 90, rt. 211.
278
(4) rtce 503/o, added by Treasury Decson 4812 secton
400.503/2, Tte 2 , Code of edera Reguatons, 1938 Sup. , as
amended by Treasury Decson 4937 secton 400.5031/2 of such Tte
2 , 1939 Sup. , s amended to read as foows:
rt. 503 4 Sec. 400.503 2, Tte 2 , Code of edera Reguatons, 19-10 Sup..
Refund, under secton 90 d) of Soca Securty ct mendments of 1939 or
secton 70/( ) of Second Revenue ct of 19 t0, of ta for caendar year 19S ,
1937, or 1938. If the ta for the caendar year 193 , 1937, or 1938 aganst
whch an amount s aowabe as credt under secton 902 of the Soca Securty
ct mendments of 1939 or under secton 701 of the Second Revenue ct of
1940 (see artce 211 secton 400.211, Tte 20, Code of edera Reguatons,
1939 Sup. and 1940 Sup. ) has been pad wthout the beneft of such credt, the
ta payer sha be entted to a refund of the ta equa to the amount of such
aowabe credt. The ta payer sha aso be entted to a refund of the amount
of nterest or penaty, f any, coected from hm wth respect to the amount
of ta refunded. No nterest, however, sha be aowed or pad by the Gov-
ernment on the amount of any such refund. very cam for such refund sha
be made on orm 843 n accordance wth the provsons of ths artce and
artce 503 secton 400.503, Tte 20, Code of edera Reguatons , reatng to
refund and credt of ta es erroneousy coected. cam whch does not
compy wth these requrements w not be consdered for any purpose as a
cam for refund.
Paragraph . Credt aganst, and refund of, ta for 1939. In order
to conform Reguatons 90, ony as made appcabe to the Interna
Revenue Code (53 Stat., Part 1 2 U. S. C, Sup. ) by Treasury
Decson 4885 C. . 1939-1 (Part 1), 39 Chapter I, note, Tte 2 ,
Code of edera Reguatons, 1939 Sup. , to secton 701 of the Second
Revenue ct of 1940, such reguatons are amended as foows:
(1) Innnedatev precedng artce 211(1), added by Treasury
Decson 4953 C. . 1939-2, 297 secton 400.211(1), Tte 2 , Code
of edera Reguatons, 1939 Sup. , reatng to credt aganst the ta
for the caendar year 1939 for contrbutons pad, the foowng s
nserted:
Secton 70t of the Second Revenue ct of 1040.
Credt ganst kdeba Unempoyment Ta es.
(a) owance of Credt. aganst the ta mposed by the
edera Unempoyment Ta ct for the caendar year 1939, any ta payer
sha be aowed credt for the amount of contrbutons pad by hm nto
an unempoyment fund under a State aw
(1) efore the s teth day after the date of the enactment of
ths ct

(3) Wthout regard to the date of payment, f the assets of the
ta payer are, at any tme durng the ffty-nne-day perod foowng
such date of enactment, n the custody or contro of a recever, trustee,
or other fducary apouted by, or under the contro of, a court of
competent |ursdcton.
The amount of such credt, In the case of contrbutons wth respect
to the caendar year 1939 pad after the ast day upon whch the ta -
payer was requred under secton 1 04 of the edera Unempoyment
Ta ct to fe a return for such year, sha not e ceed 90 per centum
of the amount whch woud have been aowabe as credt on account of
such contrbutons had they been pad on or before such ast day.
the provsons of the edera Unempoyment Ta ct (e cept
secton 1001(a) (3)) sha, wth respect to the ta for the caendar year
19. 9, appy to aowance of credt under ths secton. The terms used
In ths subsecton sha, wth respect to the ta for the
caendar year 1939, have the same meanng as when used n the ed-
era Unempoyment Ta ct. The tota credt aowabe
aganst the ta mposed by secton 1000 of the edera Unempoyment
Ta ct for the caendar year 1939, sha not e ceed 90 per centum of
such ta .

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279
Regs. 90, rt. 211.
(2) rtce 211(1) (b) (e cept e ampes to , ncusve, of
such artce) , added by Treasury Decson 4953 supra secton
400.211(1) (b), Tte 2 , Code of edera Reguatons, 1939 Sup. ,
reatng to the mtatons on the aowance of contrbutons as credt
aganst the ta for the caendar year 1939, s amended to read as
foows:
( ) Lmtatons on aowance of contrbutons as credt aganst ta . The
aowance of contrbutons as credt aganst the ta for the caendar year 11)39
s sub|ect to the foowng mtatons:
(1) The tota credt aowed to any ta payer for contrbutons to State unem-
poyment funds sha not e ceed 90 per cent of the ta aganst whch such
credt s apped.
(2) The contrbutons must hare been actuay pad nto the State unempoy-
ment fund. Such payment must have been made on or before the ast day upon
whch the return for the ta abe year s requred to be fed (see artce 303
secton 400.303, Tte 2 , Code of edera Reguatons , artce 304 secton
4O0.304 of such Tte 20, and 1939 Sup. , and artce 305 secton 400.305 of
such Tte 2 ), e cept that:
() Contrbutons may be pad nto a State unempoyment fund after such
ast day but before December 7, 1940, and n such case, may be credted aganst
the ta n an amount not to e ceed 90 per cent of the amount whch woud
have been aowabe as credt on account of such contrbutons had they been
pad nto the State unempoyment fund on or before such ast day.
() Contrbutons of a ta payer whose assets, at any tme durng the perod
from such ast day for fng a return for the caendar year 1939, to une 30,
1940, both dates ncusve, are n the custody or contro of a recever, trustee,
or other fducary apponted by, or under the contro of, a court of competent
ursdcton (whether or not such assets contnue n such custody or contro
on or after October 9, 1940) may be pad nto the State fund at any tme, and
upon such payment may be credted aganst the ta n the same amount that
woud have been - aowabe as credt had the contrbutons been pad on or
before the ast day upon whch the return for the ta abe year was requred
to be fed. The contrbutons of a ta payer (other than a ta payer entted to
credt under the precedng sentence) whose assets, at any tme durng the
perod October 9, 1940, to December , 1940, ncusve, are n the custody or
contro of such a recever, trustee, or other fducary, may be pad nto the
State fund at any tme, and upon such payment may be credted aganst the
ta n an amount not to e ceed 90 per cent of the amount whch woud have
been aowabe as credt on account of such contrbutons had they been pad
on or before the ast day upon whch the return for the ta abe year was
requred to be fed. (The provsons wth respect to credt for payments made
Into the State fund at any tme are sub|ect to the provsons of artce 503
secton 400.503, Tte 2 , Code of edera Reguatons , reatng to the statutory
perod of mtatons appcabe to credts.)
) Contrbutons for the caendar year 1939 pad nto the unempoyment
fund of a State whch are requred under the unempoyment compensaton
aw of that State, but whch are pad wth respect to remuneraton on the bass
of whch the ta payer had, pror to such payment, erroneousy pad an amount
as contrbutons under another unempoyment compensaton aw, sha be deemed
for purposes of credt to have been pad at the tme of the erroneous
payment. If, by reason of such other aw, the ta payer was entted to cease
payng contrbutons for the caendar year 1939 wth respect to servces sub|ect
to such other aw, the payment nto the proper fund sha be deemed for
purposes of credt to have been made on the date the return for the caendar
year 1939 was actuay fed under secton 1004 of the edera Unempoyment
Ta ct.
(3) The contrbutons must have been pad wth respect to the caendar
year 1939.
(3) ampes , and C of artce 211(1) (b), added by Treas-
ury Decson 4953 secton 400.211(1) ( ), Tte 2 , Code of edera
Reguatons, 1939 Sup. , reatng to the mtatons on the aowance
of contrbutons as credt aganst the ta for the caendar year 1939,
are amended by strkng out the date uy 1, 1940 wherever t
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Regs. 90, rt. 211.
280
appears n each such e ampe and by nsertng n eu thereof the
date December 7, 1940.
(4) Immedatey precedng artce 503 , added by Treasury Dec-
son 4953 supra secton 400.508 , Tte 2 , Code of edera Regu-
atons, 1939 Sup. , the foowng s nserted:
Secton 701(b) of the Second Revenue ct of 1940.
Reft|nd. Refund of the ta (ncudng penaty and nterest coected
wth respect thereto, f any), based on any credt aowabe under ths sec-
ton, may be made n accordance wth the provsons of aw appcabe n
the case of erroneous or Iega coecton of the ta . No nterest sha be
aowed or pad on the amount of any such refund.
(5) rtce 503 , added by Treasury Decson 4953 secton
400.503 , Tte 2 , Code of edera Reguatons, 1939 Sup. , s
amended to read as foows:
rt. 503 Sec. 400.503 , Tte 2T , Code of edera Reguatons, 1940 Sup. .
Refund, under secton 1 01(a) (5) of edera Unempoyment Ta ct or secton
701(b) of Second Revenue ct of 19//0, of ta for caendar year 1939. If the ta
for the caendar year 1939 aganst whch an amount s aowabe as credt under
secton 1 01 of the edera Unempoyment Ta ct or under secton 701 of the
Second Revenue ct of 1940 has been pad wthout the beneft of such credt, the
ta payer sha be entted to a refund of the ta equa to the amount of such
aowabe credt. (See artce 211(1) secton 400.211(1), Tte 2 , Code of ed-
era Reguatons, 1939 Sup. and 1940 Sup. , artces 212 and 213 sectons 400.212
and 400.213 of such Tte 2 , 1939 Sup. , reatng, respectvey, to credt aganst
the ta for contrbutons pad, addtona credt, and proof of credt, for the
caendar year 1939.) The ta payer sha aso be entted to a refund of the
amount of nterest or penaty, f any, coected from hm wth respect to the
amount of ta refunded. No nterest, however, sha be aowed or pad by the
Government on the amount of any such refund. very cam for such refund
ha be made on orm 843 n accordance wth the provsons of ths artce and
artce 503 secton 400.503, Tte 2 , Code of edera Reguatons , reatng to
refund and credt of ta es erroneousy coected. cam whch does not compy
wth these requrements w not be consdered for any purpose as a cam for
refund.
(Paragraph of ths Treasury decson s ssued under the author-
ty contaned n sectons 902 and 908 of the Soca Securty ct (49
Stat., 39, 43 42 U. S. C. Sup. , 1102, 1108), secton 902 (a), (b),
(c), and (d) of the Soca Securty ct mendments of 1939 ( 3 Stat.,
1399 42 U. S. C. Sup. . 1102, note), and secton 701 of the Second
Revenue ct of 1940 (Pubc, No. 801, Seventy-s th Congress, thrd
sesson). Paragraph of ths Treasury decson s ssued under the
authorty contaned n secton 1 01 of the Interna Revenue Code, as
amended by secton 09 of the Soca Securty ct mendments of
1939 (53 Stat., 1387 2 U. S. C, Sup. , 1 01), secton 1 09 of the
Interna Revenue Code (53 Stat., 188 2 U. S. C. Sup. . 1 09), and
secton 701 of the Second Revenue ct of 1940 (Pubc, No. 801, Sev-
enty-s th Congress, thrd sesson).)
Guy T. everng,
Comm so-ner of Interna Revenue.
ohn L. Suvan,
( ed wth the Dvson of the edera Regster November 23, 1940, 9.58 a. m.)
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2S1
Regs. 100, Chap. .
Secton 905: dmnstraton, refunds, and penates.
Reguatons 90, Chapter III Returns and records.
Power of attorney form. (See Mn. 5080, page 242.)
Reguatons 90 (as amended). rtce 210: d|ustments of ta .
(See Mn. 5107, page 244.)
Reguatons 90 (as amended), rtce 300: Returns.
Wage pad n one ta -return perod for servces n a pror perod.
(See Mm. 5107, page 244.)
Rkguatons 90 (as amended), rtces 503 and 503:
Refunds and credts.
Credts aganst, and refunds of. the ta mposed by Tte I of the
Soca Securty ct for the caendar years 19:3 , 1937, and 1938. (See
T.D. 5022. page 275.)
C RRI RS T ING CT O 1937.
Reguatons 100.
cuson of certan servces rendered outsde the Unted States
and certan servces performed n the mnng of coa, Reguatons 100
amended. (See T. D. 5017, page 2G .)
Reguatons 100, Chapter : Returns and payment of ta .
2U02170 41 19
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MISC LL N OUS T RULINGS.
ST T T .
INT RN L R NU COD .
C PT R 3, S M ND D Y S CTION 20 O R NU CT O 1940.
Reguatons 80 (1937), rtce 1: state ta 1940-33-10385
statutes. T. D. 4995
rtce 8: Computaton of ta .
ST T T .
rtces 1 and 8 of Reguatons 80 (1937 edton) as made ap-
pcabe to the Interna Revenue Code, amended. Defense ta for
fve years.
Washngton, D. C.
edera Reguatons , as made appcabe to the Interna Revenue
Code (53 Stat., Part 1) by Treasury Decson 4885. approved ebru-
ary 11, 1939 C. . 1939-1 (Part 1), 39 Part 4 5, Subpart , Tte
2 , Code of edera Pecuatons, 1939 Sup. , to the Revenue ct of
1940 (Pubc, No. 5 , Seventy-s th Congress, thrd sesson), ap-
proved une 25, 1940, such reguatons are amended as foows:
1. Insert mmedatey precedng artce 1 secton 80.1 of such Tte
2 :
Sec. 20 . state Ta . (Revenue ct of 1940.)
Chapter 3 of the Interna Revenue Code s amended by nsertng at
the end thereof the foowng new subchapter:
subchaptkb c defense ta fob fve tears.
Sec. 951. Defense Ta fob ve Teabs.
In the case of a decedent dyng after the date of the enactment of
the Revenue ct of 1910 and before the e praton of fve years after
such date, the tota amount of ta payabe under ths chapter sha
he 10 per centum greater than the amount of ta whch woud be pay-
abe f computed wthout regard to ths secton. or the purposes of
ths secton, the ta computed wthout regard to ths secton sha be
such ta after the appcaton of the credts provded for n secton
813 and secton 93 .
2. The frst paragraph of artce 1 secton 80.1, Tte 2 , Code of
edera Reguatons s amended to read as foows :
edera estate ta aton under Chapter 3 of the Interna Revenue Code, as
amended, conssts of, frst, the basc estate ta , second, the addtona estate ta ,
(282,,
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283
Regs. 80 (1937)
and thrd, f the decedent ded after une 25, 1940, and before une 20, 1945, the
defense ta . The defense ta s 10 per cent of the tota of the net basc estate
ta and the net addtona estate ta (such tota beng the amount computed
after the appcaton of any credts authorsed for gft, estate, nhertance, eg-
acy, or successon ta es).
3. Insert the foowng paragraph mmedatey after the frst
paragraph of artce 8 secton 80.8, Tte 2 , Code of edera
Reguatons :
The defense ta , appcabe f the decedent ded after une 25, 1940, and before
une 2 , 1945, s obtaned by computng 10 per cent of the tota net ta (the
tota net ta beng the sum of the net basc ta and the net addtona ta ).
secton 951 of the Interna Revenue Code, as added by secton 20 of
the Revenue ct of 1940 (Pubc, No. 5 , Seventy-s th Congress,
thrd sesson), approved une 25. 1940, and secton 3791 (a) 1 of the
Interna Revenue Code (53 Stat, 4 7).)
Tmothy C. Mooney,
ohn L. Suvan,
C PT R 3.
Reguatons 80 (1937). 1940-40-10439
( so Chapter 4 Gft ta and Regua- Mm. 5109
tons 79 (193 ).)
ppcaton of the edera estate and gft ta es to Unted States
savngs bonds.
Tkeast|hy Department,
Washngton, D. C, September 9, 1940.
Numerous nqures are beng receved by the ureau, partcuary
from ta payers, regardng the status of Unted States savngs bonds
for edera estate and gft ta purposes. The purpose of ths mme-
ograph s to furnsh such nformaton as w apprse persons con-
cerned of the appcaton and effect of such ta es on savngs bonds
and thereby make unnecessary many nqures.
IN G N R L.
arous statutory provsons, whch e empt bonds, notes, bs, and
certfcates of ndebtedness of the edera Government or ts agences
and the nterest thereon from ta aton, are not appcabe to estate
and gft ta es, snce these ta es are e cses mposed on the transfer
of property and not on the property tsef. Under e stng aw,
transfers of the property n Unted States savngs bonds are not
e empt from edera estate and gft ta es (e cept n respect of such
bonds whe benefcay owned by a nonresdent aen who s not
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Regs. 80 (1937).
engaged n busness n the Unted States). Whether a partcuar
transfer of the property n such bonds entas abty for edera
estate or gft ta , and, f so, the amount thereof, depends upon the
vaue of the property transferred, the specfc e empton, etc., aow-
abe under the aw, and the ta rates n effect at the tme of the
transfer.
W N PURC S D ND R GIST R D IN C RT IN UT ORIZ D ORMS.
If ohn ones purchases wth hs separate fmds savngs bonds
and has them regstered n hs name as owner and the bonds are so hed
at the tme of hs death, the redempton vaue of the bonds consttutes
a part of hs gross estate for edera estate ta purposes.
If ohn ones purchases wth hs separate funds savngs bonds
and has them regstered n hs name as owner, payabe on death to an
ndvdua as benefcary, for e ampe, ohn ones, payabe on death
to Mss Mary ones, no gft resuts from the transacton. In such
case ohn ones aone, as the regstered owner, may durng hs fe-
tme redeem the bonds and retan the proceeds. or edera estate
ta purposes, however, upon the death of ohn ones whe the
bonds are so hed, ther entre redempton vaue at the tme of death
woud form a part of hs gross estate.
and has them gratutousy regstered n the name of Mary ones as
owner, the transacton resuts n a gft from ohn ones to Mary
ones durng the year n whch the bonds are purchased and regs-
tered, and the cost of the bonds must be consdered n determnng the
donor s gft ta abty for such year. If Mary ones des whe,
the bonds are so regstered, the redempton vaue of the bonds at the
tme of her death woud be ncudbe n her gross estate for edera
estate ta purposes.
and gratutousy has them regstered n the name of Mss Mary ones,
payabe on death to Mss een ones, he has made a gft n the
amount of the purchase prce and such amount must be consdered n
determnng hs gft ta abty, f any. for the caendar year n whch
the gft was made. ohn ones havng made, durng hs fetme,
a gft of hs nvestment n the bonds (and provded the transfer was
not made n contempaton of death), hs estate w not be sub|ect to
any edera estate ta abty n Tespect of the bonds.
and gratutousy has them regstered n the name of Mss Mary ones
or Mss een ones, he has made a gft, for edera gft ta purposes,
to each of them of one-haf of the amount of the purchase prce of the
bonds, and (provded the gfts were not made n contempaton of
death) hs estate w not be sub|ect to any edera estate ta abty
n respect of the bonds.
and has them regstered n hs name and that of another ndvdua n
the aternatve as coowners, for e ampe, ohn ones or Mrs. a S.
ones, there s no gft for edera gft ta purposes, uness and unt
he durng hs fetme gratutousy permts Mrs. a S. ones to
redeem them and retan the proceeds as her separate property, n whch
event a gft of the then redempton vaue of the bonds woufd be made.
Of course, such bonds f not prevousy redeemed woud, on the death
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285 Regs. 80 (1937), rt. 13.
of ohn onesbe ncudbe n hs gross estate for estate ta pur-
poses at ther fu redempton vaue.
If savngs bonds are purchased wth the separate funds of two nd-
vduas and regstered n ther names as coowners, for e ampe,
ohn ones or a S. ones, the amount ncudbe n the gross
estate, for edera estate ta purposes, of the frst coowner to de (f
the bonds were not prevousy redeemed) s the fu redempton vaue
of the bonds ess such part thereof as s proportonate to the amount
of the purchase prce furnshed by the survvor and not acqured
from the decedent for ess than an adequate and fu consderaton
n money or money s worth.
ST T ST T , IN RIT NC , L G CY, O GI T T S.
Statutory provsons e emptng bonds and other obgatons of the
edera Government from certan ta aton are not appcabe to estate,
nhertance, egacy or gft ta es mposed by a State Government.
The e tent to whch Unted States savngs bonds are sub|ect to such
State ta es depends upon the appcabe State aw. Inqures regard-
ng such aws shoud be addressed to the proper State ta offcas.
Inqures wth regard to the provsons of ths mmeograph shoud
be addressed to the Commssoner of Interna Revenue, Washngton,
D. C, for the attenton of MT: T: RR.
Guy T. f.vf.hno,
Commssoner.
S CTION 811. GROSS ST T .
Reguatons 80 (1937). rtce 13: Property 1940-49-10511
of decedent at tme of death. . T. 18
mounts payabe under Tte II of the Soca Securty ct, as
amended, to the wdow, chdren, or parents of a fuy nsured
or currenty nsured decedent who ded on or after anuary 1,
1940, are not ncudbe n the decedent s gross estate for edera
estate ta purposes. s to payments to the estate of a decedent
who ded pror to anuary 1, 1940, see . T. 10 (C. . 1937-2, 489).
dvce s requested whether amounts payabe under Tte II of
the Soca Securty ct, as amended by the ct of ugust 10, 19: 9
(53 Stat., oGO), to the wdow, chdren, or parents of a fuy n-
sured or currenty nsured decedent who ded on or after anu-
ary 1, 1940, are ncudbe n the gross estate of such decedent for
edera estate ta purposes.
Secton 811 of the Interna Revenue Code provdes n part as
foows:
The vaue of the gross estate of the decedent sha be determned by ncudng
the vaue at the tme of hs death of a property, rea or persona, tangbe or
ntangbe, wherever stuated, e cept rea property stuated outsde of the Unted
States
(a) Decedent s Interest. To the e tent of the nterest theren of the decedent
at the tme of hs death

The amounts n queston are payabe to the wdow, chdren, or
parents of a decedent, who at the tme of hs death on or after anu-
ary 1, 1940 (the effectve date of the amendment of Tte II of the
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Regs. 80 (1937), rt. 15. 28
Soca Securty ct by the ct of ugust 10, 1939), was a fuy
nsured or currenty nsured ndvdua wthn the meanng of
Tte II of the Soca Securty ct, as amended, supra. n e amna-
ton of secton 202 (c), (d), (e), (f), and (g) of that ct, as amended,
whch deas wth the type of payments under consderaton, shows
that the decedent has no contro over the desgnaton of the bene-
fcares or the amounts payabe to them. The benefcares and the
amounts payabe to them are f ed by the provsons of the Soca
Securty ct, as amended, and the payments are made drecty to the
benefcares. The decedent has no property nterest n the edera
Od- ge and Survvors Insurance Trust und created under secton
201(a) of Tte II of the Soca Securty ct, as amended, from whch
the amounts n queston are payabe.
In vew of the foregong, t s hed that amounts payabe under
Tte II of the Soca Securty ct, as amended, to the wdow, ch-
dren, or parents of a decedent who ded on or after anuary 1, 1940,
and who at the tme of hs death was a fuy nsured or currenty
nsured ndvdua wthn the meanng of that ct, as amended, do
not consttute property of such decedent, and are not ncudbe n hs
gross estate for edera estate ta purposes.
Ths rung does not affect . T. 10 (C. . 1937-2, 4 9), reatng
to payments under secton 203 of the Soca Securty ct to the estate
of a decedent who ded pror to anuary 1,1940.
Reguatons 80 (1937), rtce 15: Transfers 1940-40-10440
durng fe. T. D. 5008
rtce 17: Transfers condtoned upon
survvorshp.
TITL 2 INT RN L R NU . C PT R I. SU C PT R , P RT 80
ST T T .
rtces 15 and 17, Reguatons 80 (1937 edton) amended.
Transfers where the passng from the decedent of a retaned
Interest s condtoned upon hs death.
Washngton, D. C.
rtces 15 and 17, Reguatons 80, 1937 edton (sectons 80.15 and
80.17, Tte 2 , Code of edera Reguatons), and those artces as
made appcabe to the Interna Revenue Code by Treasury Decson
4885, approved ebruary 11,1939 (Part 4 5, Subpart , of such Tte
2 , 1939 Sup. (C. . 1939-1 (Part 1), 39 )), are amended as heren
ndcated.
The cause n artce 15, whch reads
(2) transfers to the e tent that tte remaned n the decedent at the tme of
hs death and the passng thereof was condtoned upon hs death (see artce
17)
s amended to read as foows:
(2) transfers condtoned upon the decedent s death (see artce 17)
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287 Regs. 80 (1937), rt. 15.
rtce 17, whch reads
bt. 17. Transfers condtoned upon survvorshp. The statutory phrase, a
transfer ntended to take effect n possesson or en|oyment at or after
bs death, ncudes a transfer hy the decedent (other than a hona tde sae for
an adequate and fu consderaton n mouey or money s worth) whereby and to
the e tent that the benefca tte to the property (f the transfer was n trust),
or the ega tte thereto (f the transfer was otherwse than n trust), remaned
n the decedent at the tme of hs death and the passng thereof was sub|ect to
the condton precedent of hs death. If the ta appes, t does so wthout
regard to the tme of the transfer, whether before or after the enactment of the
Revenue ct of 101 .
On the other hand, f, as a resut of the transfer, there remaned n the
decedent at the tme of hs death no tte or nterest n the transferred property,
then no part of the property s to be ncuded n the gross estate merey by
reason of a provson n the nstrument of transfer to the effect that the property
was to revert to the decedent upon the predecease of some other person or
persons or the happenng of some other event. (See artce 15.)
bt. 17. Transfers condtoned vpon survvorshp. The statutory phrase, a
transfer ntended to take effect n possesson or en|oyment at or after
hs death, ncudes a transfer by the decedent pror to hs death (other than a
bona fde ste for an adequate and fu consderaton n money or money s worth)
whereby and to the e tent that the benefca tte to the property transferred (f
the transfer was n trust), or the ega tte thereto (f the transfer was otherwse
than n trust), s not to pass from the decedent to the donee uness the decedent
des before the donee or another person, or ts passng s otherwse condtoned
upon decedent s death or, f tte passed to the donee, t s to be defeated and
the property s to revert to the decedent as hs own shoud he survve the donee
or another person, or the revertng of the property to the decedent s condtoned
upon some other contngency termnabe by hs death. Snce n such transfers
the decedent s death s requste to a termnaton of hs nterest n the property,
t s unmportant whether hs nterest be denomnated a reverson or a possbty
of reverter, whether t arose by mpcaton of aw or by the e press terms of the
nstrument of transfer, and whether the nterest of the donee be contngent or
vested sub|ect to be dvested, and the ta w appy, uness otherwse provded
n the ne t succeedng paragraph, wthout regard to the tme when the transfer
was made, whether before or after the enactment of the evenue ct of 101 .
Thus, upon a transfer by a decedent of property n whch an estate for fe s
gven to one and an estate n remander to another, but wth a provson added
that the estate n remander sha revest n the decedent shoud he survve the
owner of the fe estate, there s to be ncuded, n determnng the vaue of the
decedent s gross estate foowng hs death, the vaue as of the date of hs death
of the estate n remander, f the fe estate s then outstandng. The vaue of
the outstandng fe estate s not to be ncuded n determnng the vaue of the
gross estate, uness that estate had been transferred n contempaton of the
decedent s death, or otherwse as to render t a part of the gross estate. If by
reason of an eecton by the e ecutor the vauaton of the gross estate s governed
by the provsons of artce 11, ad|ustments n the vaues of such transferred
estates may be requred. (See artce 15.)
Where the transfer was made durng the perod between November 11, 1935
(that beng the date upon whch the Supreme Court of the Unted States rendered
Its decsons n the cases of cvcrn/ v. St. Lout Unon Trust Co. (29 U. S., 39
Ct. D. 1047, C. . 1 -2. 330 (1035) ) and ecker v. St. Lous Unon Trust Co.
(29 U. S., 48 Ct. D. 104 , C. . I -2, 337 (1035) ) and anuary 20, 10-10
(that beng the date upon whch such Court rendered ts decsons n cverng
v. oock and companon cases (300 U. S., 100 Ct. D. 1440, C. . 1040-1, 223 ),
and the Commssoner, whose determnaton theren sha be concusve, deter-
mnes that such transfer s cassfabe wth the transfers nvoved n such two
cases decded on November 11, )3. p. rather than wth the transfer nvoved n
the case of en v. Unted Staes (283 U. S., 231 Ct. D. 333, C. . -, 402
(1931) ). prevousy decded by such Court, theu the property so transferred sha
not be ncuded n the decedent s gross estate under the provsons of ths artce,
f the foowng condton s aso met: Such transfer sha have been fnay
treated for a gft ta purposes, both as to the caendar year of such transfer and
subsequent caendar years, as a gft n an amount measured by the vaue of the
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Regs. 80, (1937), rt. 50.
288
property undmnshed by reason of a provson n the nstrument of transfer by
whch the property, n whoe or n part, s to revert to the decedent shoud he
survve the donee or another person, or the revertng thereof s condtoned upon
some other contngency termnabe by decedent s death.
the foowng sectons of aw: Sectons 811, 937, and 3791 of the Inter-
na Revenue Code (53 Stat., 120, 143, and 4 7) secton 302 of the
Revenue ct of 192 (44 Stat., 70, 2 U. S. C, 411) secton 1101 of
the Revenue ct of 192 ( 44 Stat., I, 2 U. S. C, 1 91(a) (1)) sec-
ton 403 of the Revenue ct of 1932 (47 Stat., 245, 2 U. S. C, 537)
and secton 1108(a) of the Revenue ct of 192 , as amended by secton
05 of the Revenue ct of 1928 and by secton 50 of the Revenue ct
of 1934 (44 Stat., 114, 45 Stat., 874, 48 Stat., 757,2 U. S. C, 1 91(b).)
Gut T. everno,
ohn L. Suvan,
( ed wth the Dvson of the edera Regster September 23, 1940, 3.10 p. m.)
S CTION 8 3(b). PROP RTY WIT OUT T UNIT D ST T S N
D POSITS.
Reguatons 80 (1937), rtce 50: Stus of 1940-51-10527
property. G. C. M. 22419
The words moneys deposted. ns used n secton 8 3(b) of the
Interna Revenue ( ode and secton 303(e) of the Revenue ct of
192 , as amended by secton 403(d) of the Revenue ct of 1934,
appy to so-caed genera deposts wth a bank where the reaton-
shp of debtor and credtor between the bank and the depostor
e sts wth respect to such deposts, and do not appy to funds
hed n a fducary capacty. ccordngy, such funds hed n a
fducary capacty are ncudbe n the gross estate of a nonres-
dent not a ctzen of the Unted States who was not engaged n
busness n the Unted States at the tme of hs death.
n opnon s requested whether funds paced wth a bank wthn
the Unted States by or for a nonresdent not a ctzen of the Unted
States and hed by such bank as trustee or as custodan consttute
moneys deposted wth any person carryng on the bankng bus-
ness wthn the meanng of secton 8 3(b) of the Interna Revenue
Code or secton 303(e) of the Revenue ct of 192 , as amended by
secton 403(d) of the Revenue ct of 1934.
Secton 8 3 of the Interna Revenue Code provdes n part as
foows:
The foowng Items sha not, for the purpose of ths subchapter, be deemed
property wthn the Unted States:

(b) ank Deposts. ny moneys deposted wth any person carryng on the
bankng busness, by or for a nonresdent not a ctzen of the Unted States
who was not engaged n busness n the Unted States at the tme of hs death.
Secton 303(e) of the Revenue ct of 192 , as amended by secton
403(d) of the Revenue ct of 1934, s n substance the same as secton
8 3(b) of the Interna Revenue Code.
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289
Regs. 80 (1937), rt. 50.
Secton 8 3(b) of the Code and the correspondng provson of the
Revenue ct of 192 , as amended, are e empton provsons, and
must, therefore, be strcty construed. ank of Commerce v. Ten-
nessee, 1 1 U. S., 134.)
The term depost has a we accepted meanng n the bankng
busness, and has been defned as the act of pacng or odgng money
n the custody of a bank or banker, for safety or convenence, to be
wthdrawn at the w of the depostor or under rues and reguatons
agreed on as a sum of money eft wth a banker for safe-keepng,
sub|ect to order and payabe not n the specfc money deposted but
n an equa sum or the amount or baance due the depostor. ( ack s
Law Dctonary Cf. Peope e re. Neson v. rst State ank of
Mnera. 275 111. pp., 123 ndrew v. Iowa Savngs ank, 241 N. W.
412 In Law s state, 144 Pa., 499, 22 ., 831 In re Lqudaton of
State ank of nghamton, 274 N. Y. S., 41, 54.)
Deposts wth a bank are ether genera or speca. genera de-
post conssts of money pad to a bank for the convenence of the
depostor and to hs genera credt to be repad n current funds
on hs order or demand. Tte to the money passes to the bank
wheren the depost s made, and the money s mnged wth the gen-
era funds of the bank and used n the bankng busness. The rea-
tonshp of debtor and credtor s created by such a depost. speca
depost s made where property, or even money, s devered to a
bank for the purpose of havng t safey kept and the dentca thng
deposted returned to the depostor, or where the thng devered
to the bank s for some specfc purpose not contempatng a credt on
genera account. In the case of a speca depost the thng deposted
may not be commnged wth other funds or assets of the bank and
used n the bankng busness, and wth respect to t a fducary rea-
tonshp, of ether prncpa and agent, baor and baee, trustee and
cestu que trust, or a combnaton of such reatonshps, s created
between the bank and the depostor. (Cf. usher v. uton, 128
Oho St., 485, 191 N. ., 752 ank of merca Nat. Trust rft Savngs
ssn. v. Caforna Savngs ssn. d Commerca ank, 22 P. (2d),
704 Wasserman v. rode rck, 250 N. Y. S., 84 Meon Nat. ank v.
Ctzens ank Trust Co. of Camden. rk., 88 ed. (2d), 128
In re McCarthy unds, 248 N. Y. S., 335 Squre v. rancfort, 131
In the tra of a casher of a natona bank charged wth makng
fase entres n the books of the bank, the |ury was nstructed sub-
stantay that f a sum of 10,000 was eft wth the bank wth the
ntenton to ca for and receve the dentca sum so eft on the sur-
render of the depost sp, and f the bank so receved the same
to be returned on the surrender of the sp, then I charge you that
the bank was a baee or custodan of sad money, and had no rght
to enter the same on ts books as money deposted wth the
bank, but f you fnd that the use so permtted was that
the money was to be consdered a oan to the bank, or that t mght
be consdered a oan to the bank, or that t shoud be mnged wth
the funds of the bank as an ordnary depost, sub|ect to wthdrawa
by check n the ordnary course of busness, the entry of such tem
on the books woud be awfu and proper. In denyng a moton
for a new tra (Unted States v. Peters, 87 ed., 984, 900), ths
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Regs. 80 (1937), rt. 50. 290
charge to the |ury was sustaned agan n Peters v. Unted States
(94 ed., 127). Ths ndcates that where money or property s eft
wth a bank under crcumstances whch create a reatonshp other
than that of debtor and credtor, such transacton s not strcty a
depost.
In Genesee Weseyan Semnary v. Unted States dety Guar-
anty Co. (247 N. Y., 52, 159 N. ., 720) t was hed that a speca
depost may e st where the duty of the depostary s to hod, not
dentca bs or cons, but an equvaent sum to be kept ntact for
use of the depostor. That proposton s further supported by ank
of merca Natona Trust Savngs ssocaton v. Caforna
Savngs s. n Commerca ank, supra, wheren the Supreme
Court of Caforna n a per curam opnon stated:
Where a fungbe, such as money, s made the sub|ect of a pedge, trust, or
speca depost, n our vew t can serve no purpose, and therefore t Is not
requred that the dentty of the partcuar money devered be preserved n
spece, as by settng t asde n a marked bag or package. The test for deter-
mnng whether a genera depost or a depost for a speca purpose e sts
s not, therefore, whether t was ntended that specfc cons or currency shoud
be kept separate and apart n spece from other funds of the custodan. In
ordnary commerca transactons, ether wth banks or ndvduas, such an
ntent amost never w be present, and certany w not be presumed to e st,
n the absence of a cear e presson thereof. In the case of a genera depost
n a hank, the reatonshp of the bank and depostor s that of debtor and
credtor, and the funds deposted become a part of the genera assets of the
bank, whch t may use n makng oans and nvestments and otherwse con-
ductng a genera bankng busness. When the nature of the transacton s
such that t must be sad that the depostor does not ntend that such use sha
be made of the amount of hs depost, then t becomes the duty of the bank,
not to preserve the dentty of the specfc cons or currency devered, or to
physcay segregate a sum of money, but, rather, at a tmes to keep on hand
cash n a sum equa to sad depost and those of smar depostors, and the
amount thereof consttutes a fund whch the bank s not authorzed to use In
ts genera bankng operatons. (See Mssour Mtt. ss n v. oand ank Co.,
220 Mo. pp., 125 , 290 S. W., 100, 102.) s to such funds, the amount of whch
w be ndcated by the bank s bookkeepng records, sad depostors are entted
to a preference n the event of the banks nsovency to the e tent that the
bank s cash has not been reduced beow the amount of such deposts, as w be
more fuy dscussed herenafter.
In ths connecton, secton 9(b), Reguatons of the oard of Gov-
ernors of the edera Reserve System, provdes that funds receved or
hed by a natona bank as fducary awatng nvestment or dstrbu-
ton sha not be used by the bank n the conduct of ts busness uness
t frst devers to ts trust department, as coatera securty, certan
specfed bonds, etc. (See ed. Res. u., September, 193 , page 91.)
Ths arrangement, whe t authorzes under certan condtons funds
n a speca depost to be used n the bankng busness, does not change
the reatonshp between the depostor and the bank wth respect to
such fund.
The concuson to be drawn from the foregong s that the words
moneys deposted, as used n secton 8 3 Tb) of the Interna Revenue
Code, and secton 303(e) of the Revenue ct of 192 , as amended by
secton 403(d) of the Revenue ct of 1934, appy to so-caed genera
deposts where the reatonshp of debtor and credtor between the
bank and the depostor e sts wth respect to such deposts and where
the money so deposted may rghtfuy be used n the bankng bus-
ness, but do not appy to funds hed n a fducary capacty.
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291
Regs. 8 (1924), rt. 15
It s, therefore, the opnon of ths offce that the e empton pro-
vded n secton 8 3(b) of the Interna Revenue Code, and n secton
303(e) of the Revenue ct of 192 , as amended, does not appy to de-
posts hed by a trustee or by a custodan actng n a fducary capacty,
even though such trustee or custodan s carryng on a bankng bus-
ness. Whether deposts n a custodan account create between the
custodan and the depostor the reatonshp of debtor and credtor
or whether, on the other hand, they create a fducary or other non-
debtor-credtor reatonshp depends upon the ntent of the partes as
evdenced by the agreement creatng the reatonshp. unds hed n
a custodan account whch, under the agreement n the partcuar case,
are hed by the custodan n a fducary capacty are not moneys
deposted wthn the meanng of the sectons above ndcated, and
are, therefore, ncudbe n the gross estate of the decedent.
. P. Wenche,
S CTION 302, R NU CT O 1924.
Reguatons 8 (1924), rtce 15: Transfers 1940-27-10309
durng fe. Ct. D. 1459
estate ta . revenue act of 1024 decson of court.
1. Gross state Transfer n Trust Provson for Return of
Corpus to Donor Upon Contngency Termnar.e at Death
Intended to Take ffect n Possesson or n|oyment at or
fter Death.
The decedent n hs fetme created a trust by the terms of whch
the net ncome was to e pad to a desgnated benefcary durng her
fe, and upon her death the corpus was to be pad to hm f he survved
her, and f not, t was to be dstrbuted or hed n trust for hs ch-
dren and others. The decedent dd not survve the fe benefcary.
rd: That the vaue of the remander nterest n the trust property
s ncudbe n the gross estate of the decedent, such nterest comng
wthn the terms of the ta ng statute as a transfer ntended to take
effect n possesson or en|oyment at or after hs death.
2. Decson foowed.
IIcrcng v. uock (1940) (309 U. 8., 10 Ct. D. 1440, 1940-1,
223 ), foowed.
Dstrct Court of the Unted States for the Dstrct of Massachusetts.
Gertrude rudce et ah, ec, u/c rthur T. radee, v. Thomas W. Whte,
Coector of Interna Revenue.
31 . Supp., 509.
ebruary 2, 1940.
opnon.
Sweeney, .: Ths s nn acton to recover estate ta es aeged to have been
Iegay assessed, coected, and retaned. The pantffs arc the duy apponted
and quafed e ecutors of the w of rthur T. radee, who ded on ugust 31,
1025.
The case was tred and submtted on November 7, and decson was wthhed
pendng the Unted States Supreme Court s decson n ererng v. aoc.k and
othcnscs v. uston (00 S. Ct., 444), both of whch were decded anuary 29,
1940.
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Regs. 8 (1924), rt. 15. 292
INDINGS O CT.
The agreed statement of facts fed by the partes s adopted as my fndngs of
fact under rue 52 of the rues of cv procedure.
They dscose that on pr 24, 1922, the pantffs testator, rthur T. radee,
created a trust n whch t was provded that:
rst. The trustees sha pay the entre net ncome of the trust fund n ther
hands as trustees quartery, or oftener at ther dscreton, to Gertrude radee
Senor durng her fe.
and
Second. Upon the death of sad Gertrude radee Senor, the entre trust
fund then n the hands of the trustees sha be transferred and pad over, abso-
utey and free of a trust, to sad rthur T. radee f he survves her and f
he does not survve her, sad trust fund sha be dstrbuted or hed n trust for
the chdren of sad rthur T. radee, and others, as provded theren. The
creator of the trust dd not survve Gertrude radee, Sr.
The estate ta return fed by these pantffs dd not ncude the vaue on
ugust 31, 1925, of the remander nterest, after the death of Gertrude radee,
Sr., n the property hed under the decaraton of trust. The Commssoner rued
that ths shoud have been ncuded n the gross estate. The vaue of ths
remander Interest was 3,348.75. ventuay the pantffs pad a ta of
14,01 .14 together wth nterest n the amount of 1,11 . 1. cam for refund
havng been dened, ths sut was brought to recover the amounts pad.
It was agreed between the partes that the transfers by the deceased radee
to the trustees under the decaraton of trust were not n fact made n contem-
paton of death. The queston s therefore whether the remander nterest
shoud have been ncuded n the gross estate of the deceased radee as an n-
terest theren of whch the decedent has at any tme made a transfer, or wth
respect to whch he has at any tme created a trust, ntended to take
effect n possesson or en|oyment at or after hs death.
The pantffs rey on the decson of cverng v. St. Lous Trust Co. (29 U. S..
39), and seek to dstngush that case from en v. Unted States (283 U. S., 231
Ot. D. 333, C. . -, 4 2 (1931) ). It s unnecessary to consder ths attempted
dstngushment, snce the Supreme Court, on Monday of ths week, n the ease
of everng v. aock, supra, and assocated cases, ceary dsposed of the
seemng dsharmony of the resuts n those cases. It specfcay re|ected as
untenabe the dverstes taken n the St. Lous Trust cases n appyng the en
doctrne because they ate nto the prncpe whch those cases professed to
accept. dherng to those prncpes, and adoptng the anguage of the en
case, the court stated: It s perfecty pan that the death of the grantor was
the ndspensabe and ntended event whch brought the arger estate nto beng
for the grantee and affected ts transmsson from the dead to the vng, thus
satsfyng the terms of the ta ng ct and |ustfyng the ta mposed.
On the agreed facts I reach the concuson of aw that a remander nterest
n the trust property was retaned by rthur T. radee, the transmsson of
whch coud ony be effected upon hs death durng the fe of Gertrude radee,
Sr. When that event happened the remander vested n the erstwhe contngent
benefcares, and, beng grounded upon the death of the grantor, t pany comes
wthn the terms of the ta ng statute. The vaue of the remander nterest as
of ugust 31, 1925, has been stpuated by the partes. The assessment and
coecton of the ta es was therefore proper.
The pantff s moton for |udgment s dened. udgment may be entered for
the defendant wth costs.
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293
Regs. 79 (193 , rt. 3)
GI T T .
INT RN L R NU COD .
S CTION 1000. IMPOSITION O T .
Reguatons 79 (193 ), rtce 3: Cessaton 1940-40-10441
of donor s domnon and contro. T. D. 5010
TITL 2 INT RN L R NU C PT R I. SU C PT R , P RT 85
SU C PT R , P RT 4U5, SU P RT . GI T T .
rtce 3. Reguatons 70 (103 edton), amended. Transfers
sub|ect to a reserved power.
Tkeasukt Department,
Washngton, D. C.
To Coectors of Interna Revenue and OtIters Concerned:
rtce 3 of Reguatons 79,1930 edton (secton 85.3, Tte 2 , Code
of edera Reguatons), and that artce as made appcabe to the
Interna Revenue Code by Treasury Decson 4SS5. approved eb-
ruary 11, 1939 (Part 4 5, Subpart , of such Tte 2 (C. . 1939-1
(Part 1), 39 )), s hereby amended by strkng out the second and
thrd paragraphs thereof readng as foows:
s to any property, or part thereof or Interest theren, of whch the donor
as so parted wth domnon and contro as to eave n hm no power to cause the
benefca tte to be revested n hmsef, the Rft s compete. ut a transfer (n
trust or otherwse), though passng both ega and benefca tte, s st n
essence merey forma so ong as there remans n the donor a power to cause
the revestng of the benefca tte n hmsef, and the gft, from the standpont
of substance, remans ncompete durng the e stence of the power. donor
sha be consdered as havng the power to revest In hmsef the benefca
tte to the property transferred f he has such power n con|uncton wth any
person not havng a substanta adverse nterest n the dsposton of the prop-
erty or the ncome therefrom. trustee, as such, s not a person havng a
substanta adverse nterest n the dsposton of the trust property or the
ncome therefrom. The renqushment or termnaton of the power, occurrng
otherwse than by the death of the donor (the statute beng confned to trans-
fers by vng donors), s regarded as the event whch competes the gft and
causes the ta to appy.1 The recept of ncome or of other en|oyment of the
transferred property by the transferee or by the benefcary (other than by the
donor hmsef) durng the nterm between the makng of the forma transfer
and the renqushment or termnaton of the power operates to free such ncome
or other en|oyment from the donor s power to receve t hmsef, and const-
tutes a gft of such ncome or of such other en|oyment ta abe n the caendar
year of ts recept.
If the donor contends that a power retaned by hm consttutes benefca
domnon and contro, and that by reason thereof the transfer s not n sub-
stance a gft, the transacton sha he dscosed n the return and evdence
showng a reevant facts, ncudng a copy of the nstrument by whch the
transfer was made, shoud be submtted.
and substtutng n eu thereof the foowng:
s to any property, or part thereof or nterest theren, of whch the donor has
so parted wth domnon and contro as to eave n hm no power to change the
1 So hed In urnet v. Chtr/genhem (2R8 U. S.. 2S0, 58 S. Ct., 3 9 Ct. D. 3 , C. .
II 1, 374 (1933) ) of a transfer n trust, made n 1917, wth power n the donor to
revoke, whch power he renqushed n 192. ). the renqushment beng treated a gft
sub|ect to the ta mposed by the gft tu tte of the Revenue ct of 1924.
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Regs. 79, (193 ) rt. 3.
294
dsposton thereof, whether for hs own beneft or for the beneft of another,
the gft s compete. ut f upon a transfer of property (whether n trust
or otherwse) the donor reserves any power over the dsposton thereof, the
gft may be whoy ncompete, or may be partay compete and partay n-
compete, dependng upon a the facts n the partcuar case. ccordngy, n
every case of a transfer of property sub|ect to a reserved power, the terms
of the power must be e amned and ther scope determned.
gft s ncompete n every nstance where a donor reserves the power to
revest the benefca tte to the property n hmsef. gft s aso ncompete
where and to the e tent that a reserved power gves the donor the rght to
name new benefcares or to change the nterests of the benefcares as between
themseves. Thus, the transfer of an estate for fe where, by an e ercse of
the power, the estate may be termnated or cut down to one of ess vaue, and
wthout restrcton upon the e tent to whch the estate may be so cut down,
consttutes an ncompete gft. Modfyng the e ampe by treatng the power
as confned to the rght to cut down the estate for fe to one for a term of fve
years, the certanty of an estate for not ess than that term resuts n a gft to
that e tent compete.
gft sha not be consdered ncompete, however, merey because the donor
reserves the power to change the manner or tme of en|oyment thereof. Thus,
the creaton of a trust the ncome of whch s to be pad annuay to the donee
for a perod of years, the corpus beng dstrbutabe to hm at the end of the
perod, and the power reserved by the donor beng mted to a rght to requre
that, nstead of the ncome beng so payabe, t shoud be accumuated and ds-
trbuted wth the corpus to such douce at the termnaton of the perod, const-
tutes a competed gft.
donor sha be consdered as hmsef havng the power where t Is e ercs-
abe by hm n con|uncton wth any person not havng a substanta adverse
nterest In the dsposton of the transferred property or the ncome therefrom.
trustee, as such, s not a person havng an adverse nterest In the dsposton
of the vrust property or ts ncome.
The renqushment or termnaton of a power to change the dsposton of the
transferred property, occurrng otherwse than by the death of the donor (the
statute beng confned to transfers by vng donors), s regarded as the event
(vhch competes the gft and causes the ta to appy. The recept of ncome or of
other en|oyment of the transferred property by the transferee or by the benefcary
(other than by the donor hmsef) durng the nterm between the makng of the
nta transfer and the renqushment or termnaton of the power operates to
free such ncome or other en|oyment from the power, and consttutes a gft of
such ncome or of such other en|oyment ta abe as of the caendar year of ts
recept.
If the donor contends that the power s of such nature as to render the gft
ncompete, and hence not sub|ect to the ta as of the caendar year of the
nta transfer, the transacton sha be dscosed n the return and evdence
showng a reevant facts, ncudng a copy of the nstrument of transfer, shoud
be submtted.
If for any caendar year pror to the caendar year 1939 a transfer has been
sub|ected to payment of the ta despte the fact that the donor retaned a power
to name new benefcares or to change the nterests of the benefcares as be-
tween themseves, and f the ta for such caendar year has been fnay deter-
mned on such bass, and for a gft ta purposes such transfer has been treated,
for such caendar year and each subsequent caendar year, as sub|ect to the
ta , and the donor agrees, n a cosng agreement e ecuted under the provsons
of secton 37 0, that he w contnue so to treat such transfer, then the renqush-
ment or termnaton of the power so retaned by the donor sha not be treated
as a gft sub|ect to the ta .
the foowng sectons of aw: Sectons 1000, 1029, and 3791 of the
Interna Revenue Code (53 Stat., 144,157,4 7) sectons 501 and 530 of
the Revenue ct of 1932 (47 Stat., 245, 259,2 U. S. C, 550,579) and
secton 1108(a) of the Revenue ct of 192 , as amended by secton 05
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295 Regs. 79 (193 ), rt. 5.
of the Revenue ct of 1928 and by secton 50 of the Revenue ct of
1934 ( 44 Stat., 114, 45 Stat., 874, 48 Stat., 757,-2 U. S. C, 1 91(b).)
Gut T. everng,
ohn L. Suvan,
S CTION 1001, S M ND D Y S CTION 207 O R NU CT O 1940.
Reguatons 79 (193 ), rtce 5: Computaton 1940-33-1038
of ta . T. D. 499
GI T T .
rtce 5 of Reguatons 79 (193 edton) as made appcabe to
the Interna Revenue Code, amended. Defense ta for 1940-1945.
Washngton, D. C.
edera Reguatons , as made appcabe to the Interna Revenue
Code (53 Stat.. Part 1) by Treasury Decson 4885, approved ebru-
ary 11, 1939 C. . 1939-1 (Part 1). 39 Part 4 5, Subpart , Tte
20, Code of edera Reguatons, 1939 Sup. , to the Revenue ct of
1940 (Pubc, No. 5 , Seventy-s th Congress, thrd sesson), ap-
proved une 25, 1940. such reguatons are amended as foows:
1. Insert mmedatey precedng artce 5 secton 85.5 of such Tte
2 :
Sec. 207. Gft Ta . (Revenue ct of 1940.)
Secton 1001 of the Interna Revenue Code s amended by addng at
the end thereof the foowng new subsecton:
(d) Defense Ta fob 1940-1945. Despte the provsons of subsec-
ton (a)
(1) The ta for each of the caendar years 1941 to 1945, both
ncusve, sha be an amount equa to the e cess of
( ) 110 per centum of a ta , computed In accordance wth
the Rate Schedue herenbefore set forth, on the aggregate
sum of the net gfts for such caendar year and for each of
the precedng caendar years, over
( ) 110 per centum of a ta , computed n accordance wth
the sad Rate Schedue, on the aggregate sum of the net
gfts for each of the precedng caendar years.
(2) The ta for the caendar year 1940 sha be the sum of
( ) the ta computed under subsecton (a), pus ( ) an amount
whch bears the same rato to 10 per centum of the ta so com-
puted as the amount of gfts made after the date of the enactment
of the Revenue ct of 1940 hears to the tota amount of gfts
made durng the year. or the purposes of ths paragraph, the
term gfts does not ncude gfts whch, under secton
1003(h)(2), are not to he Incuded n computng the tota amount
of gfts made (urng the caendar year 1940, or gfts whch, n
the case of a ctzen or resdent, are aowed as a deducton by
secton 1004(a)(2), or gfts whch, n the case of a nonresdent
not a ctzen of the Unted States, are aowed as a deducton by
secton 1004(b).
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Regs. 79 (193 ), rt. 5.
29
2. rtce 5 secton 85.5 of such Tte 2 s amended by strkng
out the ast sentence of the frst paragraph and the whoe of the
second paragraph and substtutng n eu thereof the foowng:
If the return s for a caendar year pror to 1940 or subsequent to 1945, the
amount remanng after such subtracton s the ta for such caendar year.
If the return s beng prepared for the caendar year 1941, 1942, 1943, 1944, or
1945, the defense ta mposed by subsecton (d) of secton 1001 of the Interna
Revenue Code, as added by secton 207 of the Revenue ct of 1940, must be
ascertaned by computng 10 per cent of the ta determned n the manner set
forth n the frst paragraph of ths artce. or any such caendar year the
tota amount of ta payabe s the amount determned n the manner e paned
n that paragraph pus the defense ta of 10 per cent thereof. In the case of a
return for the caendar year 1940, the amount of the defense ta to be added
s that proporton of 10 per cent of the ta computed n the manner ndcated
n the frst paragraph of ths artce whch the tota amount of the gfts made
after une 25, 1940 (determned after the aowance of any appcabe e cu-
sons authorzed by secton 1003(b)2 of the Interna Revenue Code, or deduc-
tons for chartabe, etc., gfts authorzed by sectons 10O4(a)2 and 1004(b) of
the Interna Revenue Code, but wthout the aowance of the specfc e empton
or any porton thereof), bears to the tota amount of gfts made durng the
caendar year determned n the same manner.
In case no reportabe gfts were made durng the precedng caendar years,
consderng ony gfts made after une , 1932, the ta for the caendar year for
whch the return s beng prepared s the ta computed n accordance wth the
rate schedue n force for such year upon the amount of the net gfts for such
caendar year, pus the amount of the defense ta , f appcabe.
ampe (/) (showng computaton of defense ta for caendar year 1941) :
Durng the caendar year 1941 a resdent donor makes the foowng gfts:
To daughter 44,000
To son 14,000
To a chartabe organzaton 10,000
The amount of hs net gfts for precedng caendar years, subsequent to une
, 1932, s 50,000. Ony 25,000 of hs specfc e empton was camed for
such precedng years. The remanng 15,000 of hs specfc e empton s camed
for the caendar year 1941.
The amount of the net gfts for the caendar year 1941 s determned as
foows:
Tota gfts 08,000.00
Less e cusons under secton 1003(a)2 of the Interna Revenue
Code 12,000.00
Tota ncuded amount of gfts for year 50,000.00
Tota deductons for chartabe gfts ( 10,000 ess e cuson
of 4,000) ,000
Specfc e empton camed 15,000
Tota deductons 21,000.00
mount of net gfts for year 35,000.00
The tota amount of the ta payabe for the caendar year 1941 s computed
as foows:
1. mount of net gfts for year 35,000.00
2. Tota amount of net gfts for precedng years 50, 000.00
Tota net gfts S5, 000.00
4. Ta computed on tem 3 (n accordance wth rate schedue) 5, 25.00
5. Ta computed on tem 2 (n accordance wth rate schedue) 2,250.00
. Ta on net gfts for year wthout addton of defense ta (tem 4
mnus tem 5) 3,375.00
7. Defense ta (10 per cent of tem ) 337.50
8. Tota ta payabe for year (tem pus Item 7) 3,712.50
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297
Regs. 79 (193 ), rt. 5.
ampe (2) (showng computaton of defense ta for caendar year 1940) :
The facts are the same ns n the precedng e ampe e cept that the reman-
ng 15,000. of hs specfc e empton s camed for the caendar year 11 4U
md the gfts to the daughter, son, and chartabe organzaton were made dur-
ng the caendar year 1940, as foows:
To daughter before une 2 , 1940 44, 000
To son after une 25, 1940 14, 000
To chartabe organzaton after une 25, 1940 10.000
The determnaton of the amount of the net gfts and the computaton of
the ta , wthout the addton of the defense ta , s the same as n the precedng
e ampe.
The computaton of the defense ta and the tota amount of the ta payabe
for the caendar year 1940 s shown as foows:
Tota ncuded amount of gfts for year, ess amount deducted for
chartabe gft ( 5 ,000 mnus ,000) 50,000.00
Tota ncuded amount of gfts made after une 25, 1940, ess
amount deducted for chartabe gft made after une 25, 1940
( 1(3,000 mnus (5,000) 10,000.00
10 per cent of 3,375, the amount of the ta wthout the addton of
the defense ta 337. 50
/10,000
Defense ta for 1 ,50 000 337.50 7.50
Tota amount of ta payabe for caendar year 1940 ( 3,375 pus
7.50) 3,442.50
subsecton (d) of secton 1001 of the Interna Revenue Code, as
added by secton 207 of the Revenue ct of 1940 (Pubc, No. 5 ,
Seventy-s th Congress, thrd sesson), approved une 25. 1940, and
secton 3791 (a) 1 of the Interna Revenue Code (53 Stat.. 4 7).)
Tmothy C. Mooney,
ohn L. Su||va.v,
290217 41 20
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Regs. 4 (1938), rt. 41.
29S
C PIT L STOC T .
INT RN L R NU COD .
S CTION 1200, S M ND D Y S CTION 205 O T R NU CT
O 1940.
Reguatons 4 (1938), rtce 41: Nature and 1940-30-10351
rate of ta . T. D. 4983
( so rtce 1.)
TITL 2 INT RN L R NU . C PT R I, SU C PT R C, P RT 137, SU -
P RT SU C PT R , P RT 4(.|, SU P RT . C PIT L STOC T .
Secton 205, Revenue ct of 1940. rtces 41 and 1 of Regua-
tons 4 (1938), as amended, amended.
Washngton, D. C.
Secton 205 of the Revenue ct of 1940 (Pubc, No. 5 , Seventy-
s th Congress, thrd sesson), provdes that:
Sec. 205. Capta Stock Ta .
at the end thereof the foowng new subsecton:
(c) Defknse Ta fob ve Years. or the year endng une 30,1940,
and for the four succeedng years endng une 30, the rates provded n
subsectons (a) and (b) sha be . 1.10 n eu of 1.
In order to conform Reguatons 4, approved ebruary 4, 1939
(Part 137, Subpart , Tte 2 , Code of edera Reguatons, 1939
Sup.), as made appcabe to the Interna Revenue Code (53 Stat.,
Part 1) bv Treasury Decson 4885, approved ebruary 11,1939 C. .
1939-1 (Part 1), 39 (Part 4 5, Subpart , of such Tte 2 , 1939
Sup.), and as amended by Treasury Decson 4912, approved uy 24,
1939 C. . 1939-2, 347 , to the above-quoted amendment to the In-
terna Revenue Code, such reguatons are amended as foows:
1. The fourth sentence of artce 41 (secton 137.41 of such tte), as
made appcabe to the Interna Revenue Code, s amended to read as
foows:
The ta s mposed at the rate of 1 for each fu 1,000 of the ad|usted
decared vaue of the capta) stock, e cept that for the ta abe years endng une
30, 1940, to une 30, 1944, Incusve, the rate of ta s 1.10.
2. The second sentence of artce 1 (secton 137. 1 of such tte) as
made appcabe to the Interna Revenue Code, s amended to read as
foows:
The ta s mposed at the rate of 1 for each fu 1,000 of the ad|usted decared
vaue of capta empoyed by a foregn corporaton n the transacton of busness
n the Unted States, e cept that for the ta abe years endng une 30, 1940, to
une 30, 1944, ncusve, the rate of ta s 1.10.
(Ths Treasury decson s prescrbed pursuant to secton 1200(c)
as added to the Interna Revenue Code by secton 205 of the Revenue
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299 Regs. 4 (1938), rt. 41,
ct of 1940 (Pubc, No. 5 , Seventy-s th Congress, thrd sesson),
and secton 3791 of the Interna Revenue Code (53 Stat., 4 7).)
Tmothy Mooney,
pproved uy 1 , 1940.
ohn L. Suvan,
S CTIONS 1203 ND 1205.
1940-31-103 1
T. D. 4984
TITL 2 INT RN L R NU . C PT R I, SU C PT R C, P RT 137,
SU P RT D. C PIT L STOC T .
Sectons 1203 and 1205, Interna Revenue Code. tenson of
tme for fng capta stock ta returns and payng ta .
Washngton, D. C.
Sec. 137D. Genera e tenson. Returns of capta stock ta under
Chapter of the Interna Revenue Code (53 Stat, Part 1), as
amended, for the year ended une 30, 1940, are requred to be fed
and the ta pad on or before uy 31,1940, uness the tme for fng
returns and payng the ta s e tended under the provsons of sec-
tons 1203 and 1205 of the afore-mentoned chapter.
In accordance wth the provsons of these sectons, the perod dur-
ng whch the returns of capta stock ta may be fed and the ta
pad by corporatons havng no prncpa pace of busness wthn
the contnenta Unted States s e tended to September 29, 1940.
Coectors of nterna revenue are authorzed to accept returns of such
corporatons wthout asserton of penates for denquency or of
nterest f the returns of such corporatons are fed and the ta pad
on or before the e tended date. (Sees. 1203, 1205, 3791, 53 Stat.,
171, 4 7.)
Tmothy C. Mooney,
ohn L. Suvan,
( ed wth the Dvson of the edera Regster uy 22, 1940, 11.57 a. m.
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Regs. 4 (1940), 31 .2, etc. 300
M NU CTUR RS CIS T S.
INT RN L R NU COD .
C PT R 29, S M ND D Y S CTIONS 209, 210, ND 21 O T
R NU CT O 1940.
Reguatons 4 (1040), Sectons 31 .2, 31 .9, 1940-33-10387
31 .32, 31 .41, 31 .51, 31 .52, 31 .54, 31 .5 , T. D. 4998
3L . 0, 31 . 2, 31 .73, 31 .82.
TITL 20 INT RN L R NU . C PT R I. SU C PT R C. P RT 31 .
M NU CTUR RS CIS T S.
Sectons 310.2, 31(. ). 31 .32, 31 .41. 81 .51, 31 .52, 310.54, 310.50,
310.1.0. 310. 2, 310.73, and 310.82 of Reguatons 40 (1940 edton),
amended.
Offce of Cum msson eh of Interna Revenue,
Washngton, D. C.
In odor to conform Reguatons 4 (Part 31 , Tte 2 , Code of
edera Reguatons, 1939 Sup.), reatng to e cse ta es on saes by
the manufacturer under the Interna Revenue Code, to sectons 209,
210, and 21 of the Revenue ct of 1940 (Pubc, No. 5 , Seventy-
s th Congress, thrd sesson), such reguatons are amended as
foows:
Paragraph 1. Immedatey precedng secton 31 .2, there are n-
serted a headng and a quotaton of secton 209 of the Revenue ct
of 1940, as foows:
Sec. 209. Contnuaton of cse Ta es. (Revenue ct of 1940.)
Sectons 3403(f) (1), 3452 of the Interna Rev-
enue Code are amended by strkng out 1941 wherever appearng
theren and nsertng n eu thereof 1945 .
Par. 2. The second paragraph of secton 31 .2 s amended to read
as foows:
No such sae, ease, or use after .Tune 30, 1045 (or after uy 31, 1915. n the
case of artces ta abe under sectons 3400 and 3403 of the Interna Revenue
( ode. reatng to the ta on tres and nner tubes and automobes, etc.), s
ta abe under the tte e cept that wth respect to frearms, shes, and car-
trdges ta abe under secton 3407 of the Interna Revenue Code, the mtaton
does not appy.
Par. 3. Immedatey precedng secton 31 .8. there are nserted a
headng and a ( notaton of secton 210 of the Revenue ct of 1940,
as foows:
Sec. 210. Msceaneous cses. (Revenue ct of 1040.)
The Interna Revenue Code s amended by nsertng at the end of
chapter 0 the foowng new chapter:
Chapter 9 Defense Ta for ve Tears.
Sec. 1050. Defense Ta for ve Years.

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301 Regs. 4 (1940). 31 .2, etc.
(b) In the appcaton of secton 3441(c) to the artces wth
respect to whch the rate of ta s ncreased by ths secton, where
the ease, contract of sae, or condtona sae, and devery thereunder,
was made before uy 1, 1940, the tota ta referred to In such secton
sha be the ta at the rate n force on une 30, 1940, and not at the
ncreased rate.
Par. 4. Secton 31 .9 s amended by nsertng between tbe frst and
second sentences of paragraph 2 thereof a new sentence to read as
foows:
If the ease, contract of sae, or condtona sae, and devery thereunder,
was made pror to uy 1, 1940, the ta Is due at the rate n force on une 30,
1 )40, and not at the ncreased rate provded for n secton 1 50 of the Interna
Revenue Code, as added by secton 210 of the Revenue ct of 1940.
Par. 5. Immedatey precedng secton 31 .30, there are nserted a
headng and a quotaton of secton 210 of the Revenue ct of 1940,
as foows:
Chapter 9 Defense Ta fob ve Tears.
Sec. 1 50. Defense Ta for ve Tears.
(a) In eu of the rates of ta specfed n such of the sectons of
ths tte as are set forth n the foowng tabe, the rates appcabe
wth respect to the perod after une 30, 1940, and before uy 1,
1945, sha be the rates set forth under the headng Defense-Ta
Rate :
Secton.
Descrpton of ta .
Od rate.
Defense-ta rate.

400f)
Tres
2 cents..
2 4 cents.
4 2 cents,
3400(2)
Tubes
4 Wts

Par. . The frst paragraph of secton 31 .32 s amended to read as
foows:
Sec. 31 .32. Rate and compuaton of ta The ta s payabe by the manufac-
turer at the foowng rates: (a) tres, 2 cents pror to uy 1, 1940, and for
the month of uy, 1945, and 2 cents for the perod uy 1, 1940, to une 30,
1945, ncusve, a pound on tota weght (e cusve of meta rms or rm bases)
and (t ) nner tubes (for tres) 4 cents pror to uy 1, 1940, and for the mouth
of uy, 1945, and 4 cents for the perod uy 1, 1940, to une 30, 1945, ncusve,
a pound on tota weght.
headng and a quotaton of secton 210 of the Revenue ct of 1940, as
foows:
Chapter 9 Defense Ta for ve Tears.
(a) In eu of the rates of ta specfed n such of the sectons of ths
tte as are set forth n the foowng tabe, the rates appcabe wth
respect to the perod after une 30, 1940, and before uy 1, 1945, sha
be the rates set forth under the headng Defense-Ta Rate :
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Regs. 4 (1940), 31 .2, etc. 302
Secton.
Descrpton of ta .
Od rate.
Defense-ta rate.

3401
Toet preparatons
11 percent.

Par. 8. Secton 31 .41 s amended by nsertng (11 per cent for the
perod uy 1, 1940, to une 30, 1945, ncusve) after 10 per cent
wherever appearng theren.
headng and a quotaton of secton 210 of the Revenue ct of 1940,
as foows:
The Interna Revenue Code s amended by nsertng at the end of chap-
ter 9 the foowng new chapter:
Chapter 9 Defense Ta fob ve Yeaes.
Sec. 1 50. Defense Ta fob ve Years.
wth respect to the perod after une 30, 1940, and before uy 1, 1945,
sha be the rates set forth under the headng Defense-Ta Rate :
Secton.
Descrpton of ta .
Od rate.
Defense-ta rate.

3403(a)
utomobe truck chasss, etc.
utomobes, etc
2t percent.
3h percent.
3403(b)

Par. 10. Secton 31 .51 s amended by nsertng (2y2 per cent for the
perod uy 1, 1940, to une 30, 1945, ncusve) after 2 per cent
and nsertng (3/2 per cent for the perod uy 1, 1940, to une 30,
1945, ncusve) after 3 per cent.
Par. 11. Secton 31 .52 s amended by nsertng (2y2 per cent and
3y2 per cent for the perod uy 1, 1940, to une 30, 1945, ncusve)
after 3 per cent n the frst sentence and nsertng (3 per cent
and 2/2 per cent for the perod uy 1,1940, to une 30,1945, ncusve)
after 2 per cent n the second sentence.
foows:
Sec. 21 . Credts on Ta on uTOMom. s, tc. (Revenue ct of 1940.)
Secton 3403(e) of the Interna Revenue Code s amended by addng
at the end thereof the foowng new sentence: Wth respect to the
perod after une MO. 1940, and before uy 1,1945, the rates of the credts
above provded sha, n eu of 2 per centum and 3 per centum, be 2 4
per centum and 3 per centum, respectvey.
Par. 13. Secton 31 .54 s amended as foows:
( ) The ast sentence of the frst paragraph s amended to read as
foows:
or e ampe, f the sae prce of an automobe s 1,000, the ta payabe
thereon 35, and the cost to the automobe manufacturer of the tres sod on or n
connecton therewth 40, the manufacturer w be permtted to take a credt
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303 Regs. 4 (1940), 31 .2, etc.
aganst the ta payabe on the seng prce of the automobe, pror to uy 1,
1940, and for the month of uy, 1945, n an amount equa to 3 per cent of 40,
namey, 1.20, and for the perod uy 1, 1940, to une 30, 1945, ncusve, n an
amount equa to 3 2 per cent of 40, or 1.40.
( ) The frst sentence of the second paragraph s amended by n-
sertng (314 per cent for the perod uy 1, 1940, to une 30, 1945,
ncusve) after 3 per cent and nsertng (2/2 cents and 4 cents
per pound for the perod uy 1,1940, to une 30,1945, ncusve) after
4 cents per pound.
foows:
The Interna Revenue Code Is amended by nsertng at the end of
ths tte as are set forth n the foowng tabe, the rates appcabe wth
respect to the perod after une 30, 1940, and before uy 1, 1945, sha be
the rates set forth under the headng Defense-Ta Rate :
Secton.
Descrpton of ta .
Od rate.
Defense-ta rate.

3403(c)
Parts..
2 percent
2Y percent.

Par. 15. Secton 31 .5 s amended by nsertng 2y2 per cent for
the perod uy 1, 1940, to une 30, 1945, ncusve) after 2 per
cent.
Par. 1 . Immedatey precedng secton 31 . 0, there are nserted
a headng and a quotaton of secton 210 of the Revenue ct of 1940,
as foows:
The Interna Revenue Code s amended by Insertng at the end of
chapter 9 the foowng ne v chapter:
Chapter 9 Defense Ta fob ve Years.
wth respect to the perod after une 30. 1940, and before uy 1, 1945,
Secton.
Descrpton of ta .
Od rate.
Defense-ta rate.

S404
Rados
5 percent
h t percent.

t
Par. 17. The frst sentence of the ffth paragraph of secton 31 . 0
s amended by nsertng (2y2 per cent for the perod uy 1, 1940,
to une 30, 1945, ncusve) after 2 per cent,
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Regs. 4 , (1940) 31 .2, etc. 304
Par. 18. Secton 31 . 2 s amended by nsertng (5/ per cent for
cent.
Par. 19. Immedatey precedng secton 31 .70, there are nserted
a headng and a quotaton of secton 210 of the Revenue ct of 1940,
as foows:
The Interna Revenue Code Is amended by nsertng at the end of
Sec 1050. Defense Ta for ve Years.
wth respect to the perod after une 30, 1940, and before uy 1, 1945,
Secton.
Descrpton of ta .
Od rate.
Defense-ta rate.

3405
Mechanca refrgerators
5 4 percent.

Par. 20. Secton 31 .73 s amended by nsertng (5y2 per cent for
cent.
foows:
Sec 210. Msceaneous cses. (Revenue ct of 1940.)
Chapter O Defense Ta for ve Years.
Sec 1050. Defense Ta for ve Years.
tte as are sot forth n the foowng tabe, the rates appcabe wth
respect to the perod after une 30, 1940, and before uy 1, 1945, sha be
the rates set forth under the headng Defense-Ta Rate :
Secton.
Descrpton of ta .
Od rate.
Defense-ta rate.

3407
rearms
10 percent
11 percent.

...
m r,

4
Par. 22. Secton 31 .82 s amended by nsertng (11 per cent for
cent.
(Tns Treasury decson s ssued under the authorty of sectons
3403 (f) and 3452 of the Interna Revenue Code (53 Stat., 411,
420), as amended by secton 209 of the Revenue ct of 1940 (Pubc,
No. 5 , Seventy-s th Congress, thrd sesson) secton 3403(e) of
such Code (53 Stat., 410), as amended by secton 21 of such Revenue
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305
Regs. 44 (1939), 314.43.
ct sectons 3400, 3401, 3403 (a), (b), (c), 3404, 3405, and 3407 of
such Code (53 Stat., 409, 410, 411, 412), as modfed by secton 210 of
such Revenue ct and secton 3150 of such Code (53 Stat., 419).)
Tmothy C. Moonet.
ohn L. Suvan,
O 1940. T ON LU RIC TING OILS.
Reguatons 44 (1939), Secton 314.43: Saes 1940 3 -10409
of o for nonubrcatng uses. S. T. 905
Saes of certan os are not sub|ect to manufacturers e cse ta
when sod drect by the manufacturer to consumers for nonubr-
catng uses under the condtons prescrbed n secton 314.43 of
Reguatons 44 (1939).
In S. T. 558 (C. . I-2, 450 (1932)). as modfed by S. T. 839
(C. . -1, 379 (193G)), t was hed that buffng o, burnng o,
concrete form o, core o, foor o, harness o, eather o, quenchng
o, sushng o, temperng o, ard o, and refned and deodorzed
neatsfoot o were not sub|ect to ta when sod by the manufactu:er
under a name dentfyng such os for purposes other than ubrca-
ton, or when used as a component matera n the manufacture of
other artces ta abe under Tte I of the Revenue ct of 1032.
provded the manufacturer obtaned from the purchaser a certfcate
to the effect that the o so sod woud not be used for ubrcaton. It
was further hed that crude neatsfoot o and o manufactured and
sod specfcay for use n eectrca transformers and arge outdoor
o crcut breakers as an nsuatng agent, generay known as trans-
former or nsuatng o, were not sod or used for ubrcatng pur-
poses and, therefore, were not sub|ect to ta as ubrcatng o when
sod, no e empton certfcates beng requred wth respect to saes
of such os.
In addton to the os enumerated above, the foowng os are hed
not sub|ect to ta when sod drect by the manufacturer to a consumer
for nonubrcatng uses under the condtons prescrbed n secton
314.43 of Reguatons 44 (1939): agrcutura spray o, ar condton-
ng o, battery o, cordage o, cotton softener o, eectrca mpreg-
natng o, foor sweepng compound, fur dressng o, nk o, meta
wash o, meter o, modng o (for rubber tres), o used as a non-
ubrcatng component matera n the manufacture of a nonta abe
product, pant o, paper mpregnatng o, putty o, rayon o, rust
preventatve, sk o, sab o, soap stock, technca whte o, and wood-
preservng o.
Saes of any of the foregong os by the manufacturer for resae to
consumers must be made ta -pad, but credt may be camed for the
ta pad on such saes upon recept of evdence that the o was resod
to consumers for nonubrcatng uses.
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Regs. 44 (1939), 314.2, etc. 30
Reguatons 44 (1939), Sectons 314.2, 314.4, 1940-31-103 8
314.85, 314.44, 314.52. T. D. 4990
TITL 20 INT RN L R NU . C PT R I, SU C PT R C. P RT 314.
T S ON G SOLIN . LU RIC TING OIL, ND M TC S.
Sectons 314.2, 314.4, 314.33, 314.44, and 314.52 of Reguatons
44 (1039 edton) amended.
Washngton, D. G.
edera Reguatons, 1939 Sup.), reatng to ta es on gasone, ubr-
catng os, and matches under the Interna Revenue Code, to sectons
209 and 210 of the Revenue ct of 1940 (Pubc, No. 5 , Seventy-
s th Congress, thrd sesson), such reguatons are amended as
foows:
The foowng s nserted mmedatey precedng secton 314.2:
Sec. 209. Contnuaton of cse Ta ks. (Revenue ct of 1940.)
Sectons 3542 of the Interna Revenue Code are amended
bv strkng out 1041 wherever appearng theren and nsertng n eu thereof
1945 .
Paragraph 2 of secton 314.2 s amended to read as foows:
The ta Is mposed upon any sae or use pror to uy 1, 1945, of gasone,
ubrcatng os, or matches by the manufacturer or other person abe for ta
under the provsons of secton 344r of the Interna Revenue Code rrespectve
of when the artce was manufactured, produced, or mported.
The Interna Revenue Code s amended by nsertng at the end of chapter 9
the foowng new chapter:
Chapter O Defense Ta fob ve Years.
Sec. 1 50. Defense Ta for ve Years.

(b) In the appcaton of secton 3441(c) to the artces wth respect to
whch the rate of ta s ncreased by ths secton, where the ease, contract of
sae, or condtona sae, and devery thereunder, was made before uy 1, 1940,
the tota ta referred to In such secton sha be the ta at the rate n force
on une 30, 1 4(), and not at the ncreased rate.
Secton 314.4 s amended by nsertng between the frst and second
sentences of paragraph 5 thereof a new sentence to read as foows:
Where the ease, contract of sae, or condtona sae, and devery thereunder,
was made pror to uy 1. 1040, the ta s due at the rate n force 011 une 30,
1040, and not at the ncreased rate.
Sec 210. Msceaneous cses. (Revenue ct of 1040.)
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307 Regs. 44 (1939), 314.2, 314.4.
(a) In eu of the rates of ta specfed n such of the sectons of ths tte
as are set forth n the foowng tabe, the rates appcabe wth respect to the
perod after une 30. 1940, and before uy 1, 1945, sha be the rates set forth
under the headng Defense-Ta ate :
Secton.
Descrpton of ta .
Od rate.
Defense-ta rate.

3412
Gasone
cent ._
1 cents.

Chapter 9 Defense Ta for ve Years.
perod after une 30, 1940, and before uy 1, 1945, sha be the rates set forth
under the headng Defense-Ta Rate :
Secton.
Descrpton of ta .
O I rate.
Defense-ta rate.

3413
4 cents
M cents.


Chapter 9 Defense Ta for ve Years.
perod after une 30, 1940. and before uy 1, 1945, sha be the rates set forth
Secton.
Descrpton of ta .
Od rate.
Defense-ta rate.

3109
5 cents
5W cents.

Secton 314.35 s amended to read as foows:

Sec. 314.35. Rate of ta . The ta s payabe by the Importer or producer
thereof, or by any producer of gasone, at the rate of 1 cent a gaon pror
to uy 1, 1940, and at the rate of 1 cents a gaon for the perod uy 1,
1940, to une 30, 1945, ncusve.
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Regs. 44 (1939), 314.2, etc.
30S
Sec. 314.44. Rate of ta . The ta Is payabe by the manufacturer at the
rate of 4 cents er gaon pror to uy 1, 1940, and at the rate of 4 | cents per
gaon for the perod uy 1, 1940, to une 30, 1945, ncusve. manufacturer
of nonfud ubrcatng os whch are sod by weght may use 8 pounds to the
gaon as a bass for computng and reportng the ta upon the sae or use of
such os.
Sec. 314.52. Rate of ta . The ta s payabe at the rate of 5 cents per
thousand pror to uy 1, 1940, and at the rate of 5 a cents for the perod uy
1, 1940, to une 30, 1945, Incusve.
(Ths Treasury decson s prescrbed pursuant to secton 3452 of
the Interna Revenue Code (53 Stat., 420), as amended by secton 209
of the Revenue ct of 1940 (Pubc, No. 5 , Seventy-s th Congress,
thrd sesson), sectons 3409, 3412, 3413 of such Code (53 Stat.. 412,
413, 414), as modfed by secton 4210 of such Revenue ct, and secton
3450 of such Code (53 Stat., 419).)
Tmothy C. Moo ey,
ohn L. Suvan,
( ed wth the Dvson of the edera Itgster uy 22, 1940, 3.57 p. m.)
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309 Regs. 42 (1932), rt. 40.
L CTRIC L N RGY T .
O 1940.
Reguatons 42 (1932), rtce 40: Scope of ta . 1940-50-10523
S. T.909
Saes of eectrca energy to educatona nsttutons not operated
for proft, churches, convents, and chartabe organzatons for con-
sumpton n a domestc or commerca actvty of such organzatons
are sub|ect to ta under secton 3411 of the Interna Revenue Code, as
amended.
S. T. 535 (C. . I-2, 500 (1932)) and S. T. 544 (C. . I-2, 500
(1 32)) modfed.
dvce s requested whether eectrca energy sod to educatona
nsttutons not operated for proft, churches, and chartabe nsttu-
tons for consumpton n a commerca or domestc actvty of the
organzaton s sub|ect to ta under secton 3411 of the Interna Reve-
nue Code, as amended by secton 210 of the Revenue ct of 1940.
Secton 3411 of the Interna Revenue Code, as amended, provdes n
part as foows:
(a) There sha be mposed upon eectrca energy sod for domestc or com-
merca consumpton a ta to be pad by the vendor under
such rues and reguatons as the Commssoner, wth the approva of the Secre-
tary, sha prescrbe. Itacs supped.
rtce 40 of Reguatons 42 (1932), as amended by Treasury
Decson 4393 (C. . II-2, 322 (1933)), reads n part as foows:
The term eectrca energy sod for domestc or commerca consumpton
does not ncude eectrca energy sod for other uses
whch kewse can not be cassed as domestc or commerca, such as the
eectrca energy used by educatona nsttutons not operated for
proft, churches, and chartabe nsttutons.
The above-quoted provsons of Reguatons 42 were meant to
serve as an admnstratve gude and n no way were ntended to
restrct the scope of the aw. Such provsons merey attempt to
defne domestc or commerca consumpton as t appears n the
statute by pontng out typca nsttutons or organzatons whch
woud not ordnary purchase eectrca energy for a domestc or
commerca purpose. The ta abty of saes of eectrca energy s
determned by the nature of the consumpton rather than of the
consumer. Ordnary educatona nsttutons not operated for
proft, churches, convents, and chartabe nsttutons do not use eec-
trca energy n the domestc or commerca sense ntended by the
statute. ut where such an organzaton consumes through a sepa-
rate meter eectrca energy n a domestc or commerca phase of
ts actvtes, or through a snge meter f the actvty at the ocaton
served by the snge meter s prmary domestc or commerca, a
sae of eectrca energy to such an organzaton for such use s a
sae for domestc or commerca consumpton wthn the meanng
of the aw and reguatons.
In vew of the foregong, t s hed that saes of eectrca energy
to educatona nsttutons not operated for proft, churches, con-
vents, and chartabe organzatons for consumpton through a sepa-
rate meter n a domestc or commerca actvty, or through a snge
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Regs. 42(1932), rts. 1,8,25,etc.
310
meter f the actvty at the ocaton served by the snge meter s
prmary domestc or commerca, are sub|ect to ta under secton
3411 of the Interna Revenue Code, as amended.
S. T. 535 (C. . I-2, 500 (1932)) and S. T. 544 (C. . -2, 500
(1932)) are modfed accordngy.
Reguatons 42 (1932), rtce 42: Rate of ta . 1940-29-10333
Mm. 50 7
Computaton of ta on eectrca energy.
Washngton, D. C, une 29, 19 0.
queston has arsen as to the manner n whch power companes
shoud account for manufacturers e cse ta on nvoces coverng
eectrca energy furnshed or sod before and after uy 1, 1940,
n vew of the provsons of secton 210 of the Revenue ct of 1940,
whch amended secton 3411 of the Interna Revenue Code by rasng
the rate of ta on saes of eectrca energy from 3 percent of the
charge to 3 percent of the charge, effectve uv 1,1940.
It s hed that where bs rendered after uy 1, 1940, ncude
energy furnshed both before and after that date the ta on energy
so furnshed sha be computed on a pro rata bass for the number
of days covered by each perod. In other words, f a meter s read
on uy 10, 1940, and the b rendered ncudes energy furnshed
from une 10 to uy 10, the ta w be due at the rate of 3 per cent
for 20/30 of such b and at the rate of 3 per cent for 10/30 thereof.
Correspondence n regard to ths mmeograph shoud refer to ts
number and to the symbos MT: ST.
Guy T. everng,
Commssoner.
S CTIONS 209 ND 210, R NU CT O 1940 CONTINU TION O
CIS T S D NS T .
Reguatons 42 (1932), rtces 1, 8, 25, 27, 1940-31-103 3
32, 39, and 42. T. D. 498
( so Secton 210.)
TITL 2(5 INT RN L R NU . C PT R I. SU C PT R C. T RT 130: SU -
C PT R . P RT 4 3, SC P RT . T S ON T L GR P . T L P ON ,
R DIO. ND C L CILITI S TR NSPORT TION O OIL r PIP LIN
S D POSIT O S ND L CTRIC L N RGY.
rtces 1. R, 25, 27, 32, 39, and 42 of Reguatons 42, approved
October 22, 1932, amended.
Washngton, D. C.
Secton 209 of the Revenue ct of 1940, approved une 25, 1940,
reads n part as foows:
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311 Regs. 42(1932), rts. 1,8,25,etc.
Se . 209. Contnuaton of cse Ta es.
Sectons 3452, 34 0(a), 34 5, of the Interna Revenue
Code are amended by strkng out 1941 wherever appearng theren and
Insertng n eu thereof 1945 .
I conformty wth the provson of aw quoted above, artces
I, 8, 25, and 39 of Reguatons 42 (revsed October, 1932), as amended
sectons 130.1, 130.8, 130.25, and 130.39 of Tte 2 , Code of edera
Reguatons , but ony as prescrbed and made appcabe to the In-
terna Revenue Code by Treasury Decson 4885, approved ebruary
II, 1939 C. . 1939-1 (Part 1), 39 (Part 4 5, Subpart of such
Tte 2 ), are further amended to read as foows:
btce 1. ffectve perod. The ta s mposed upon payments for the trans-
msson by teegraph, teephone, cabe, or rado of dspatches, messages, and
conversatons orgnatng n the Unted States pror to uy 1, 1945, regardess
of the date of payment
rt. 8. ffectve perod. The ta mposed under secton 34 5(b) attaches
to the amount pad for any eased wre or takng crcut speca servce fur-
nshed pror to uy 1, 1945. If the rendton of the servce occurs pror to
uy 1, 1945, the ta attaches thereto notwthstandng the date of payment.
rt. 25. ffectve perod. The ta mposed under secton 34 0 appes to a
transportaton of crude petroeum and qud products thereof by ppe ne
where the movement begns pror to uy 1, 1945. In the case of any such
transportaton by ppe ne where the movement orgnates pror to uy 1,
1945, and ends on or after that date, the ta attaches to the entre amount
charged for the transportaton, athough pad on or after uy 1, 1945.
kt. 39. ffectve perod. The ta appes to eectrca energy sod pror to
uy 1, 1945.
Secton 210 of the Revenue ct of 1940 reads n part as foows:
Sec. 210. Msceaneous cses.
Sec. 1G50. Defense Ta fob ve Years.
(a) In eu of the rates of ta specfed In such of the sectons of ths tte
Secton.
Descrpton of ta .
Od rate.
Defense-ta rate.

1850(a)
10 percent
11 percent.

3 percent.
3411
3 percent.

4M percent.
34G (a) (1), (2), and
(3).

In conformty wth the provson of aw quoted above artces 27,
32, and 42 of Reguatons 42 (revsed October, 1932), as amended
sectons 130.27, 130.32, and 130.42 of Tte 2 , Code of edera
Reguatons , but ony as prescrbed and made appcabe to the
Interna Revenue Code by Treasury Decson 4885, approved eb-
ruary 11, 1939 C. . 1939-1 (Part 1), 39 (Part 4 5, Subpart
of such Tte 2 ), are further amended to read as foows:
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Regs. 42 (1932), rts. 1, 8, 25, etc. 312
rt. 27. Rate and computaton of ta . Where a far charge for the trans-
portaton s coected, the ta attaches at the rate of 4 per cent pror to
uy 1, 1040, and at the rate of 4 per cent on and after that date, of such
charge. If n a transacton not at arm s ength a charge ess than a far
charge s made for the servces rendered, or n case no charge for te trans-
portaton s made hy reason of the ownershp of the commodty transported
or otherwse, the ta w attach to a far charge for such servces, as deter-
mned by the Commssoner.
rt. 32. Rate and ba s of tu . The ta mposed s at the rate of 10 per
cent (11 per cent after une 30, 1940, and before uy 1, 1945) of the amount
pad for the use of a safe depost bo and s to be pad by the person payng
such amount.
rt. 42. Rate of ta . The ta s mposed upon eectrca energy sod for
domestc or commerca consumpton at the rate of 3 per cent pror to uy 1,
3040, and at the rate of 3 per cent on and after that date, of the prce for
whch sod.
(Ths Treasury decson s prescrbed pursuant to sectons 3452,34 0,
and 34 5 of the Interna Revenue Code (53 Stat., 420, 421, 422), as
amended by secton 209 of the Revenue ct of 1940 (Pubc, No.
5 , Seventy-s th Congress, thrd sesson), sectons 1850, 3411, and
34 0 of such Code (53 Stat., 205, 412, 421), as modfed by secton
210 of such Revenue ct, and sectons 1855, 3450, and 3472 of such
Code (53 Stat., 20 , 419, 423).)
Tmothy C. Mooney,
ohn L. Suvan,
( ed wth the Dvson of the edera Regster uy 22. 1940, 11.57 a. m.)
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313 Regs. 4 (1932), rt. 28.
TITL I . M NU CTUR RS CIS T S. (1932)
S CTION 05. T ON W LRY, TC.
Reguatons 4 (1932), rtce 28: Scope of ta . 1940-34-10395
Ct. D. 14 3
M NU CTUR RS CIS T R NU CT O 1932 D CISION O COURT.
1. Ta on ewery Saes hy Newy ormed and Whoy Owned
Corporaton to Whch anfactuker Transferred s
ntre Stock.
manufacturer of |ewery s sub|ect to e cse ta on saes
made by a whoy owned corporaton whch he had caused to be
organzed after the passage of the ct mposng the ta and before
ts effectve date, and to whch corporaton he had transferred
hs entre stock of |ewery. The saes by the controed corpora-
ton were as much saes by the manufacturer as f he had sod n
hs own name or n that of any other agent.
2. Decson oowed n Prncpe.
ggm v. Smth (19-10) (30S T . S., 473) Ct. D. 1434, C. . 1940-1,
127 foowed n prncpe.
Unted States Crcut Court of ppeas for the Second Crcut.
acob Mehrust, appeee, v. oseph T. ggns, Coector, appeant.
112 . (2d), 717.
ppea from a udgment of the Dstrct Court for the Southern Dstrct of New York n
an acton to recover e cse ta es erroneousy coected.
une 17, 1940.
opnon.
L. awd, C. .: Ths s an appea from a |udgment for the pantff n an
acton to recover ta es, erroneousy coected tnder secton 05 of the Revenue
ct of 1932. That ct was passed on une (, and became effectve on une
21 t mposed an e cse of 10 per cent on saes of |ewery by a manufacturer,
producer, or mporter. The pantff, who was such a manufacturer, on une
, 1932, had on hand a stock of |ewery, vaued at 028,243. e organzed a
corporaton on une 17, for 500 of whose 1,000 authorzed shares he pad nto
ts treasury 2,500 n cash. e thus became, and has aways remaned ts
soe sharehoder, and ts ony saared offcer. On the same day he sod to
the company a the |ewery |ust mentoned, and took n e change the com-
pany s demand note for 20,243 and 2,000 n cash out of the 2,500 he hud
|ust pad n. The company then began to se the |ewery, as the pantff
had done before t kept a fu set of books and dd ts busness n ts corporate
name, ke any other merchant. On une IS, the pantff had owed the banks
about 235,000 n notes, and he procured the company to e ecute smar notes,
whch he ndorsed and e changed for hs own at the banks. y anuary 1,
1939, the company s note to hm had been pad down to about 84,000. n part
by the notes |ust mentoned, n part n other ways. The Commssoner n-
ssted upon dsregardng the sae of une 18, 1932, and ta ed the pantff as
though he had hmsef contnued to se the |ewery after une 21. The
pantff pad the ta es so eved, and sued the coector. The case was tred
to a |udge upon an agreed statement of facts, and |udgment was entered for
the pantff.
In urnet v. Commonweath Improvement Co. (287 T . S., 415 Ct. D. 022,
C. . II-1, 277 (1933) ) where the queston was of ncome and e cess proft
ta es one, Wdener, had purchased a the shares of a corporaton to whch
he then transferred certan property n e change for the ssue of some of the
corporaton s securtes. Later the corporaton sod ths property back to Wden-
er s trustees, and then sought to mantan that, snce Wdener, or hs trustees,
290217 41 21
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Regs. 4 (1932), rt. 28. 314
had aways been the soe owners of ts shares, It was entted to take as the
bass on ths sae the vaue of the property on March 1, 1913. Ths the
court refused to aow, decarng that whe there were e ceptona crcum-
stances whch made t possbe to dsregard a corporaton as a |ura person,
the stuaton then at bar was not among them. In ggns v. Smth (308 . S.,
473 Ct. D. 1434, C. . 1940-1, 127 ), the opposte stuaton arose t was
the Treasury, not the ta payer, whch wshed to dsregard the corporate per-
sonaty. Smth, the ta payer, had sod securtes to a corporaton of whch
he was the soe sharehoder, and sought to deduct a oss based upon the prce
at whch he sod. We aowed hm to do so (102 ed. (2d), 45 ) because we
understood that under urnet v. Commonweath Improvement Co., supra (287
U. S., 415), t was rreevant to the recognton of gan or oss arsng from
a sae, that the seer was n absoute and mmedate contro of the buyer. The
Supreme Court, however, sad no t dstngushed urnet v. Commonceath
Improvement Co., supra (287 U. S., 415), because the Treasury had there merey
refused to aow the ta payer to gnore a |urstc devce of Its maker s con-
trvng havng deat wth Wdener s trustees as buyers, the corporaton was
not free to deny that t was a seer. On the other hand, the Treasury was
under no such dsabty and upon ookng at the facts, t was at once apparent
that there had been no such sae as woud defeat the ta . Tte, we sha
assume, passed to Innsfa but the ta payer retaned the contro (page 47 ).
So n the case at bar, though we assume that, n nsovency for e ampe, the
corporate property woud be sub|ect to corporate credtors aone, snce they had
wth reason ooked to the corporaton as ther debtor, nevertheess, the ta
was ad upou an act sae by a manufacturer whch the pantff coud, and
dd, perform as much by means of a corporaton, absoutey and mmedatey
responsve to hs w, as though he had sod n hs own name, or n that of
any other agent. Grffths v. Commssoner (308 U. S., 355 Ct. D. 1431, C. .
1940-1, 13 ) s to the same effect. oth were decded after the |udgment at
bar was entered.
udgment reversed compant dsmssed.
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315
Regs. 43 (1940), 101.5.
DMISSIONS T .
INT RN L R NU COD .
S CTION 1700(a), S M ND D Y S CTION 1 O T R NU CT
O 1939 ND S CTION 211 O T R NU CT O 1940.
Students 12 years of age or over, nmates of chartabe Insttutons,
members of the Cvan Conservaton Corps, and ensted men of the
Unted States rmy, Navy, or Marne Corps admtted to a theater or
other pace free or at a reduced rate (e cept to certan spoken pays)
are sub|ect to the ta mposed on free and reduced rate admssons
by secton 1700(a) 1 of the Interna Revenue Code, as amended.
dvce s requested whether students 12 years of age or over, nmates
of chartabe nsttutons, members of the Cvan Conservaton Corps,
and ensted men of the Unted States rmy, Navy, or Marne Corps
admtted to a theater or other pace free or at a reduced rate are sub-
|ect to the ta mposed on free and reduced rate admssons by secton
1700(a) 1 of the Interna Revenue Code, as amended by secton 1 of the
Revenue ct of 1939 and secton 211 of the Revenue ct of 1940.
Secton 1700(a) 1, as amended, mposes a ta of 1 cent for each 10
cents or fracton thereof of the amount pad for admsson to any pace,
ncudng admsson by season tcket or subscrpton, where the amount
pad s 21 cents or more. In the case of persons (e cept bona fde
empoyees, muncpa offcers on offca busness, and chdren under
12 years of age) admtted free or at reduced rates to any pace at a
tme when and under crcumstances under whch an admsson charge
s made to other persons, an equvaent ta based on the prce so charged
to such other persons for the same or smar accommodatons must e
pad by the person so admtted, e cept that no ta s mposed wth
respect to free admssons to certan spoken pays (not a mechanca
reproducton), as defned by the statute, and that n the case of tckets
or cards of admsson to such spoken pays sod at tcket offces of
theaters at reduced rates the ta sha be based upon the prce for
whch the tckets are sod.
Snce under the aw the ony persons who are e empt from the ta
on free or reduced rate admssons (e cept admssons to certan spoken
pays) are bona fde empoyees of the management of the theater or
other pace, muncpa offcers on offca busness, and chdren under
12 years of age, t s hed that students 12 years of age or over, nmates
of chartabe nsttutons, members of the Cvan Conservaton Corps,
and ensted men of the Unted States rmy, Navy, or Marne Corps
admtted to a theater or other pace free or at a reduced rate (e cept
admssons to certan spoken pays) are sub|ect to the ta mposed on
free or reduced rate admssons by secton 1700 (a) 1 of the Interna
Revenue Code, as amended, even though the reduced rate may be ess
than 21 cents. or e ampe, f one of the foregong persons s ad-
mtted to a theater or other pace (other than to a spoken pa| as
defned by the aw) free or at an admsson charge of 15 cents, the
reguar or estabshed prce pad by other persons for the same or
smar accommodatons beng 35 cents, the person so admtted must
pay 4 cents ta .
Reguatons 43 (1940), Secton 101.5: ree and
reduced rate admssons.
1940-50-10522
S. T.910
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Regs. 43 (1932), rt. 29.
31
S CTION 1700(a), S M ND D Y S CTION 1 O T R NU CT
O 1939 ND S CTION 211 O T R NU CT O 1940.
Reguatons 43 (1932), rtce 24: dmssons 1940-37-10418
by or for the beneft of edera, State, or mu- S. T. 907
ncpa governments.
n amount pad for admsson to a swmmng poo or any
pace operated by a cty or other muncpaty s sub|ect to ta
under secton 1700(a) 1 of the Interna Revenue Code, as amended.
If the admsson charge s 21 cents or more.
dvce s requested whether an amount pad for admsson to a
swmmng poo or any pace operated by a cty or other munc-
paty s sub|ect to ta under secton 700(a) of the Interna Reve-
nue Code, as amended by secton 1 of the Revenue ct of 1939 and
secton 211 of the Revenue ct of 1940.
Secton 1700 (a) 1, as amended mposes a ta of 1 cent for each
10 cents or fracton thereof of the amount pad for admsson to
any pace f the admsson charge s 21 cents or more.
rtce 24 of Reguatons 43 (1932) provdes as foows:
The fact that the authorty chargng admssons or recevng the
proceeds thereof s the Unted States or an agency thereof, or a State or Terr-
tory or potca subdvson thereof, such as a county, cty, town, or other
muncpaty, does not make such admssons e empt. The ct specfcay pro-
vdes that the ta es on admsson sha be pad by the person payng for adms-
son. It s not, therefore, a ta on the person or authorty seng the admssons
or recevng the proceeds thereof.
Snce the aw specfcay provdes that the ta sha be pad by
the person payng for the admsson, the cty or muncpaty coect-
ng the admsson charge does not bear the burden of the ta . No
e empton s provded wth respect to amounts pad for admsson to
any pace operated by a cty or other muncpaty where the ad-
msson charge s 21 cents or more, even though the proceeds of such
admssons nure to the beneft of such cty or other muncpaty.
In vew of the foregong, t s hed that an amount pad for adms-
son to a swmmng poo or any pace operated by a cty or other
muncpaty s sub|ect to the ta mposed by secton 1700(a) 1 of the
Interna Revenue Code, as amended, f the admsson charge s 21
cents or more.
S CTION 1700(a), S M ND D Y S CTION 211 O T R NU
CT O 1940.
Reguatons 43 (1932), rtce 29: Requre- 1940-29-10331
ments appcabe to tckets. Mm. 50 0
Overstampng admsson tckets.
Washngton, D. C, une 20, 191,0.
Secton 1700(a) 1 of the Interna Revenue Code, under whch a
ta s mposed on admssons of 41 cents or more, has been amended
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317 Regs. 43 (1932), rts. ,3,4,etc.
by secton 211 of the Revenue ct of 1940 to make the ta on adms-
sons appcabe to admssons of 21 cents or more.
Representatons have been made by the amusement ndustry to
the effect that wth respect to admssons from 21 cents to 40 cents,
ncusve, whch w be ta abe after une 30, 1940, t w n most
nstances be mpossbe to secure tckets for use by uy 1, 1940,
whch w be prnted as requred by the aw and e stng reguatons.
In recognton of the foregong stuaton, the foowng procedure
has been approved:
(a) In a nstances where t s practcabe new tckets must be
provded or the tckets on hand overprnted or overstamped, to show
the estabshed prce and the ta appcabe thereto.
(b) Secton 1702 of the Interna Revenue Code specfcay pro-
vdes that the prce for whch every admsson tcket or card s sod
sha be prnted, stamped, or wrtten on the tcket. ccordngy,
n every case where the estabshed prce of admsson s changed
new tckets w have to be provded or the tckets on hand must be
overprnted or overstamped.
(c) Where the estabshed prce s not changed, for a mted tme
unt propery prnted tckets can be obtaned the use of tckets
now on hand whch do not show the ta due under the Revenue
ct of 1940 w be permtted. owever, the manager or propretor
must keep conspcuousy posted at the outer entrance and near the
bo offce one or more sgns accuratey statng each of the estabshed
prces of admsson, and n the case of each such prce the ta due
and the sum tota.
Correspondence n regard to ths mmeograph shoud refer to ts
number and to the symbos MT: ST.
Guy T. f vkrng,
Commssoner.
S CTION 1 50, DD D Y S CTION 210 O T R NU CT O
1940, ND S CTION 1700 S M ND D Y S CTION 211 O T R -
NU CT O 1940.
Reguatons 43 (1932), rtces 1. 3. 4, . 7, 8,10, 1940-31-10371
11, 12, 29, 30, 34, 40, 41, 43, 49, and 57. T. D. 4992
TITL 20 INT RN L R NU . C PT R I, SU C PT R C, P RT 100
SU C PT R , P RT 405, SU P RT .
Reguatons 43. as amended, reatng to ta es on admssons,
duos, and ntaton fees, as made appcabe to the Interna Rev-
enue Code by Treasury Decson 4885 C. . 1038-1 (Part 1), 3 t| ,
amended.
Washngton, D. C.
Secton 210 and secton 211 of the Revenue ct of 1940 (Pubc,
No. 5 , Seventy-s th Congress, thrd sesson), approved une 25,
1940, provde n part as foows:
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Regs.43 (1932), rts. 1, 3, 4, etc. 318
The Interna Revenue Code Is amended by Insertng at the end of Chapter
9 the foowng new chapter:
(a) In eu of the rates of ta specfed In such of the sectons of ths
tte as are set forth n the foowng tabe, the rates appcabe wth respect
to the perod after une 30, 1940, and before uy 1, 1945, sha be the rates
set forth under the headng Defense-Ta Rate :
Secton.
Descrpton of ta .
Od rate.
1700(b)...
1700(c)..-
1700(e)._.
1710(a)(1)
1710(a)(2)
o seats
Saes outsde bo offce
Cabaret
Dues
Intaton fees
10 percent.
10 percent.
1 cents..
10 percent
10 percent
11 percent.
11 percent.
2 cents.
11 percent.
11 percent.
Sec. 211. dmssons Ta .
Secton 1700(a)(1) of the Interna Revenue Code Is amended by strkng
out unt uy 1. 1941, Is ess than 41 cents and. nsertng n eu thereof
unt uy 1, 1940, s ess than 41 cents, and after une 30, 1940, and before
uy 1, 1945, s ess than 21 cents and by strkng out Is ess than 41 cents,
unt uy 1, 1941 and nsertng n eu thereof s ess than 41 cents unt
uy 1, 1940, and s ess than 21 cents after une 30, 1940, and before uy
1, 1945.
In conformty wth the provsons of aw above quoted, Reguatons
43 (revsed une, 1932), as amended Part 100, Tte 2 , Code of
edera Reguatons , but ony as prescrbed and made appcabe
to the Interna Revenue Code by Treasury Decson 4885, approved
ebruary 11, 1939 C. . 1939-1 (Part 1), 39 Part 4 5, Subpart
of such Tte 2 , 1939 Sup. , are further amended as foows:
(1) rtce 1 secton 100.1 s amended as foows:
(a) y nsertng after the words 41 cents wherever appearng
theren the words, (21 cents on and after uy 1, 1940, and before
uy 1, 1945).
(b) y strkng out the s th sentence of the ffth paragraph
and nsertng n eu thereof the foowng: If, n a case smar to
the ones above, the amount pad for admsson on and after uy 1,
1940, and before uy 1, 1945, s 20 cents, and a second charge of
20 cents s made for a reserved seat, or for the use of a tabe, no ta
woud attach at the tme of the payment of the 20-cent admsson
charge, snce admssons of ess than 21 cents are not sub|ect to ta ,
but a ta of 4 cents must be coected at the tme of the payment
of the addtona 20 cents for the reserved seat or for the use of
the tabe, whch s 1 cent for each 10 cents or fracton thereof of
the tota 40 cents pad for admsson and for the reserved seat or
tabe.
(2) rtces 3, 4, 29, 30, and 43 sectons 100.3, 100.4,100.29,100.30,
100.43 are amended by nsertng after the words 41 cents
wherever appearng theren the words, (21 cents on and after uy 1,
1940, and before uy 1,1945).
(3) rtce secton 100. s amended as foows:
(a) y strkng out the ast ne of the tabe at the end of the
second paragraph whch reads as foows:
Ta due at 10 per cent .0 5
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319 Regs.43 (1932), rts. 1, 3, 4, etc.
( ) y nsertng after the words 10 per cent wherever appear-
ng theren the words, (11 per cent on and after uy 1, 1940, and
before uy 1, 1945).
(c) y nsertng at the end of e ampe (1) n the seventh para-
graph the foowng:
Note. If the resae Is made on and after uy 1, 1940, and before uy 1,
1945, the ta woud be 0,088 Instead of 0.08.
(d) y nsertng n the ast ne of e ampe (2) after the words
1 cent the words, (1.1 cents on and after uy 1, 1940, and
before uy 1,1945).
(4) rtce 7 secton 100.7 s amended by nsertng n the e -
ampe after the words 5 cents the words, (S1/ cents on and after
uy 1, 1940, and before uy 1, 1945), and after the words 10
per cent, the words (11 per cent).
(5) rtce 8 secton 100.8 s amended as foows:
(a) y nsertng n the second paragraph after the words 10
per cent wherever appearng theren the words, (11 per cent on
and after uy 1,1940, and before uy 1,1945).
(b) y nsertng at the end thereof the foowng new paragraph:
If the eases In the above three e ampes were made on and after uy 1, 1940,
and before uy 1, 1943, the rate of ta woud be 11 per cent Instead of 10 per
cent.
( ) rtce 10 secton 100.10 s amended as foows:
(a) y nsertng after the words /y cents wherever appear-
ng theren the words, (2 cents on and after uy 1, 1940, and before
uv 1, 1945).
(b) y nsertng at the end thereof the foowng new paragraph:
The e ampes In ths artce are appcabe to the perod pror to uy 1, 1940.
or the perod on and after uy 1, 1940, and before uy 1, 1945, the ta s
computed at the rate of 2 cents for each 10 cents or fracton thereof of the
amount pad Instead of 1 cents.
(7) rtce 11 secton 100.11 s amended by nsertng n eu
of the ast sentence the foowng sentence:
Ths ta appes to each ndvdua payment for a dnner tcket.
(8) rtce 12 secton 100.12 s amended by nsertng n e ampe
(1) after the words 10 cents the words, (11 cents on and after
uy 1,1940, and before uy 1, 1945).
(9) rtces 34, 40, 41, and 49 sectons 100.34, 100.40, 100.41, and
100.49 are amended by nsertng after the words 10 per cent
wherever appearng theren the words, (11 per cent on and after
uy 1, 1940, and before uy 1, 1945).
(10) rtce 57 secton 100.57 , as amended by Treasury Dec-
son 4923, approved ugust 15, 1939 C. . 1939-2, 372 , s further
rt. 57. ffectve date of change n e empton. The sums pad for admsson
pror to uy 1, 1940, whch are not sub|ect to ta under secton 1700(a)(1)
of the Interna Revenue Code, as amended, are those whch are ess than 41
cents. ffectve uy 1, 1940, any admsson charge of 21 cents or more s
sub|ect to ta . ffectve uy 1, 1945, any sum of 3 or ess pad for
admsson w not be ta abe. The tme of payment and not the tme of adms-
son w govern n determnng whch e empton s appcabe. Consequenty,
If pror to uy 1, 1940, a person shoud purchase a tcket of admsson for ess
than 41 cents where the payment was made before uy 1, 1940, for an admsson
to take pace after that date, the payment so made woud not be sub|ect to ta .
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Regs. 43 (1932), rt. 1.
320
Lkewse, f a person shoud purchase after une 30, 1940, and before uy 1,
1945, a tcket for 21 cents or more and ess than 3 for an admsson to take
pace after uy 1, 1945, the amount so pad woud be sub|ect to ta
(Ths Treasury decson s ssued under the authorty of sectons
1700(a), 1700(b), 1700(c), 1700(e), and 1710 of the Interna Revenue
Code (53 Stat., 189, 190, 192), as amended by secton 210 and secton
211 of the Revenue ct of 1940 (Pubc, No. 5 , Seventy-s th
Congress, thrd sesson) and secton 3791 of the Interna Revenue
Code (53 Stat., 4 7).)
TMOT T C. MooN Y,
ohn L. Suvan,
( ed wth the Dvson of the edera Regster uy 25, 1940, 12:11 p.m.)
T S ON DMISSIONS. DU S ND INITI TION S, ND L S S O
S D POSIT O S.
S CTION 1700(a), S M ND D Y S CTION 1 O T R NU
CT O 1939, ND S CTION 211 O T R NU CT O 1940.
S CTION 1 50, S DD D Y S CTION 210 O T R NU CT
O 1940. D NS T OR I Y RS.
Reguatons 43 (1932), rtce 1: ass, rate, 1940-32-10377
and computaton of ta . S. T. 904
( so Reguatons 43 (1932). rtce 34 Regu-
atons 42 (1932), rtce 32: Rate and bass
of ta .)
The date nn amount s pad (1) for admsson to any pace, (2) as
dues or ntaton fees, or (3) for the ease of a safe depost bo
governs n determnng whether the rates n effect pror to uy 1,
1940, or the rates n effect on and after that date, appy regardess
of whether the admsson takes pace before or on or after uy 1,
194(1, or whether the dues, ntaton fees, or safe depost bo renta
cover perods begnnng or endng pror to or on or after that date.
dvce s requested whether the date on whch an amount s pad
(1) for admsson to any pace, (2) as dues or ntaton fees, or (3) for
the ease of a safe depost bo governs n determnng whether the
rates of ta provded n secton 1700 of the Interna Revenue Code,
as amended by secton 1 of the Revenue ct of 1939, and n sectons
1710 and 1850 of such Code, effectve pror to uy 1,1940, or the rates
provded n secton 1700 of such Code, as amended by secton 211 of
the Revenue ct of 1940, and n secton 1 50 of such Code, as added by
secton 210 of the Revenue ct of 1940, effectve on and after uy 1,
1940, are appcabe regardess of whether the admsson takes pace
before or on or after uy 1, 1940, or the dues, ntaton fe s, or safe
depost bo renta cover perods begnnng or endng pror to or on
or after that date.
The ta es mposed by the foregong provsons of the Interna Rev-
enue Code are based upon the amount pad (1) for admsson to any
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321
Regs. 43 (1932), rt. 1.
pace, (2) as dues or ntaton fees, and (3) for the ease of a safe
depost bo , and attach at the tme such payments are made. ccord-
ngy, the date on whch the amount s pad governs n determnng
whether the rates of ta n effect pror to uy 1, 1940, or the rates
n effect on and after uy 1, 1940, appy regardess of whether the
admsson takes pace before or on or after uy 1, 1940, or the dues,
ntaton fees, or safe depost bo renta cover perods begnnng or
endng pror to or on or after that date.
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Regs. 71 (1932), rts. 2, 2 , etc. 322
ST MP T S.
INT RN L R NU COD .
S CTIONS 209 (CONTINU TION O CIS T S) ND 210 (MISC L-
L N OUS CIS S), R NU CT O 1940.
Reguatons 71 (1932), rtces 2, 2 , 32,
33, 9, and 121.
1940-31-103 5
T. D.4988
Reguatons 71, as amended, reatng to stamp ta es, as made
appcabe to the Interna Revenue Code by Treasury Decson 4885
C. . 1939-1 (Part 1), 39 , amended.
Washngton, D. C.
Sectons 209 and 210 of the Revenue ct of 1940, Pubc, No. 5 ,
Seventy-s th Congress, thrd sesson, approved une 25, 1940, pro-
vde, respectvey:
Sec. 209. Contnuaton of cse Ta es.
Sectons 1801, 1802, 3481(b), and 3482 of the Interna Revenue
Code are amended by strkng out 1941 wherever appearng theren and
nsertng n eu thereof 1945 .
(a) In eu of the rates of ta specfed n such of the sectons of ths tte as
are set forth n the foowng tabe, the rates appcabe wth respect to the
Secton.
Descrpton of ta .
Od rate.
Defense-ta rate.

1801
10 cents
11 cents.
11 cents.
10 cents
18112(a),
2 cents
3 cents.
8 cents.
cents.
1802(h)....
4 cents
1802(b)
5 cent3 .
1804
3 cents
4 cents.
1.10.
3.30.
5.50.
180f_.
1
180
3
180
5

3481(a)
Transfer or bonds .
4 cents ....
5 cents.
55 cents.
3482.. _
Conveyances
50 cents
#
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323 Regs. 71 (1932), rte. 2,2 , etc.
Pursuant to the above amendments, Reguatons 71, approved uy
1 , 1932, as amended Part 111 of Tte 2 , Code of edera Regu-
atons , but ony as prescrbed and made appcabe to the Interna
Revenue Code by Treasury Decson 4885, approved ebruary 11,
1939 C. . 1939-1 (Part 1), 39 Part 4 5, Subpart , of Tte 2 ,
Code of edera Reguatons, 1939 Sup. , are amended as foows:
rtce 2, as amended by Treasury Decson 4920, approved ugust
10, 1939 C. . 1939-2, 374 secton 111.2 of such Tte 2 , 1939
Sup. , s amended to read as foows:
kt. 2. ffectve perod. The stamp ta provsons of the Interna Revenue
Code, as amended by the Revenue ct of 1939 and as further amended by the
Revenue ct of 1940, are n fu force and effect. The rates of ta mposed by
sectons 1801, 1802(a), and 1802(b) of the Interna Revenue Code, whch woud
have been reduced on uy 1, 1941, and the stamp ta es mposed by sectons
3481 and 3482 of the Interna Revenue Code, whch woud have been repeaed
as of that date, w reman effectve to and ncudng une 30, 1945, sub|ect,
however, to the ncrease n rates provded for n secton 210 of the Revenue
ct of 1940, whch appy to a the stamp ta es wth respect to the perod
uy 1, 1940, to une 30, 1945, ncusve.
rtce 2 secton 111.2 s amended as foows:
(a) y nsertng n paragraph (a) after the words 10 cents the
words (11 cents on and after uy 1,1940, and pror to uy 1,1945).
( ) y nsertng n paragraph (b) after the words 10 cents the
words (11 cents on and after uy 1,1940. and pror to uy 1,1945),
and after the words 2 cents the words (3 cents on and after uy
1,1940, and pror to uy 1,1945).
(a) y nsertng n paragraphs (a) and (b) after the words 4
cents wherever appearng theren the words (5 cents on and after
uy 1,1940, and pror to uy 1,1945).
( ) y nsertng n paragraph (c) after the words 5 cents nstead
of 4 cents the words ( cents nstead of 5 cents on and after uy 1,
1940, and pror t o uy 1, 1945).
(a) y nsertng n paragraph (b) after 1 the words ( 1.25 on
and after uy 1,1940, and pror to uy 1,1945).
(b) y nsertng n paragraph (c) after the words 80 cents the
words ( 1 on and after uy 1,1940, and pror to uy 1, 1945).
(c) y nsertng n paragraph (d) after the words 5 cents nstead
of 4 cents the words ( cents nstead of 5 cents on and after uy 1,
1940, and pror to uy 1,1945).
rtce 9 secton 111. 9 s amended by nsertng after the words
3 cents wherever appearng theren the words (4 cents on and
after uy 1, 1940, and pror to uy 1, 1945), and by nsertng
after the words 33 cents the words (44 cents on and after uy
1, 1940, and pror to uy 1, 1945) .
rtce 121 secton 111.121 s amended by nsertng after the
words 4 cents the words (5 cents on and after uy 1, 1940, and
pror to uy 1, 1945).
(Ths Treasury decson s ssued under the authorty contaned
n sectons 1801.1802,1804,180 . 3481. and 3482 of the Interna Revenue
Code (53 Stat.. 195, 19 , 197, 199. 424, 425), as amended bv sectons
1 and 402 of the Revenue ct of 1939 (53 Stat., 8 2, 883) and as
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Regs. 71 (1932), rt. 31.
324
further amended by sectons 209 and 210 of the Revenue ct of 1940
(Pubc, No. 5 , Seventy-s th Congress, thrd sesson), and secton
3791 of the Interna Revenue Code (53 Stat., 4 7).)
Tmothy C. Moonet,
ohn L. Suvan,
S CTION 1 50, S DD D Y S CTION 210 O T R NU CT O
1940 D NS T OR I Y RS.
Reguatons 71 (1932), rtce 31: ass of ta . 1940-31-10358
( so rtce 120.) S. T. 902
Shares or certfcates of corporate stock and corporate bonds pre-
sented for transfer on the ssung corporaton s books on or after
uy 1, 1940, w be regarded as representng saes or transfers
effected on or after that date uness such stock and bonds are ac-
companed by a memorandum of sae dated pror to uy 1, 1940,
or bear the prescrbed certfcate showng that the sae or trans-
fer was made pror to that date.
dvce s requested whether the ncreased rates of ta provded by
secton 1 50 of the Interna Revenue Code, as added by secton 21 0
of the Revenue ct of 1940, appy to corporate stock and corporate
bonds presented for transfer on the books of the ssung corporaton
on or after uy 1, 1940, where the sae or transfer of such stock and
bonds was effected pror to that date.
Under the provsons of secton 1 50 of the Interna Revenue Code,
supra, the rates of ta mposed by sectons 1802(b) and 3481(a) of
such Code upon the sae or transfer of corporate stock (and smar
nterests) and bonds are ncreased for the perod uy 1,1940, to une
30, 1945, ncusve, from 4 cents and 5 cents to 5 cents and cents,
respectvey, n the case of stock, and from 4 cents to 5 cents n the
case of bonds.
Shares or certfcates of corporate stock (and smar nterests) and
corporate bonds presented for transfer on the books of the ssung
corporaton on or after uy 1, 1940, w be regarded as representng
saes or transfers thereof effected on or after that date whch are
ta abe at the ncreased rates, uness the shares or certfcates of stock
or bonds are accompaned by a memorandum of sae dated pror to
uy 1, 1940, or there appears thereon when presented for transfer a
certfcate n the foowng form sgned by the transferor or hs agent:
Ths s to certfy that the sae of ths nstrument or transfer of
tte thereto was made pror to uy 1, 1940.
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325
Regs. 71 (1932), rt. 8.
O 1939, ND S CTIONS 209 ND 210 O T R NU CT O
1940. CORPOR T S CURITI S.
Reguatons 71 (1932), rtce 8: onds renewed 1940-32-10375
1 S s 1 r s w
( so rtce 9.)
Where a rea estate bond and mortgage are e ecuted by a corpora-
ton n New York or n New ersey and the eor ratou thereafter
conveys the mortgaged rea estate to an ndvdua as ts nomnee,
straw man, or other type of agent who assumes the mortgage debt
and then enters nto an agreement wth the mortgagee whereby the
bond and mortgage are e tended, the orgna corporate obgor con-
tnues abe under the bond and the e tenson of the bond and
mortgage consttutes a renewa of a corporate bond sub|ect to
stamp ta .
n opnon s requested whether n the States of New York and
New ersey the e tenson of a bond and mortgage under the crcum-
stances herenafter stated consttutes a renewa of a corporate bond
sub|ect to stamp ta under secton 1801 of the Interna Revenue Code,
as amended by secton 1 of the Revenue ct of 1939, and sectons 209
and 210 of the Revenue ct of 1940.
Secton 1801. as amended, mposes a stamp ta upon every renewa
of a bond, debenture, or certfcate of ndebtedness ssued by any
corporaton, and a nstruments, however termed, ssued by any cor-
poraton wth nterest coupons or n regstered form, known generay
as corporate securtes.
The bonds and mortgages here under consderaton nvove rea
estate n the States of New York and New ersey and were e ecuted
by a corporaton. The corporaton thereafter conveyed the mort-
gaged premses to an ndvdua who assumed the mortgage debt. The
mortgagee, wthout notce to or the e press consent of the orgna
mortgagor, entered nto an agreement wth such ndvdua grantee
whereby the maturty of the bond and mortgage was e tended.
The queston arses n the determnaton of the ssue presented as
to whether under the aws of New York and New ersey the orgna
corporate obgor of the bond was reeased from ts abty there-
under by reason of the e tenson of the bond and mortgage under the
crcumstances set forth above.
In Grace v. Wson (139 Msc. Rep., 757, 250 N. Y. S., 212) the
Supreme Court of New York stated as foows:
The soe ssue presented s the effect of ths e tenson upon the abty of
the defendants who were the orgna mortgagors and sgners on the bond for
any defcency |udgment whch may resut on the sae of sad mortgaged
premses. The pantffs cam that they are abe for such defcency, and
defendants assert that they have been dscharged therefrom.
Nothng can be cearer both U m prncpe and authorty than the doctrne
that, when the mortgagor conveys the property mortgaged, and hs grantee
assumes the payment of the mortgage, the grantee thereby becomes the prncpa
debtor, and the status of hs grantor s changed to one of surety. Wagoner v.
rady, 221 pp. Dv., 405, 223 N. Y. S., 09 Pane v. ones, 7 N. Y., 274, 278.)
y the transactons here dscosed, the orgna mortgagors became suretes,
and as to them the mortgagee was under the obgaton to respect ther rghts
accordngy. The e tenson of the tme of payment of the debt mposed a
condton upon ther abty whch was fata to the rght of the mortgagee to
now assert t
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Regs. 71 (1932), rt. 8.
32
The eadng case on ths sub|ect Is that of Cavo v. Dares (73 N. Y., 211, 29
m. Rep., 130), and n that case the rue s ceary stated as foows: Where
a deed contans a covenant, upon the part of the grantee, to pay a mortgage upon
the premses, e ecuted by the grantor, the reaton of prncpa and surety s
created between the partes, and an agreement by the hoder of the mortgage wth
the grantee to e tend the tme of payment, made wthout the consent of the
grantor, dscharges the grantor.
In Wttson v. ngewood Pumbng Suppy Co. (189 ., 920) the
Court of Chancery of New ersey states the rue as foows:
It s beyond a controverson that a vad agreement e tendng the tme of
payment of the mortgage debt made between the hoder of the mortgage and the
grantee of the mortgaged premses, wth notce or knowedge by the former of
the conveyance of the mortgaged premses to, and the assumpton of the mortgage
debt by, the atter, operates to dscharge the mortgagor from abty upon hs
bond, n the event that he has not assented to sad e tenson. Ths we-recog-
nzed prncpe fnds pertnent ustraton n the dscusson of the hghest tr-
bunas of ths and other States. (Gorcnberg v. unt, 107 N. . q., 582, 153 .,
587 Reeves v. Cordes, 108 N. . q., 4 9, 155 ., 547 Deacro v. Staney. 113
N. . q., 121, 1 5 .. 882 Mann v. ugbee, 113 N. . q., 434, 1 7 ., 202
De Lotto v. Zpper, 11 N. . q., 344,173 ., 588 Meyer v. acker, 120 N. . q.,
35, 184 ., 191.)
It w be noted that the courts pace emphass upon the fact that
the e tenson agreements n the cases before them were made wthout
the consent of the orgna mortgagor. Ony n those cases where the
orgna mortgagor does not consent to the e tenson agreement entered
nto by the mortgage hoder and the grantee does the rue appy to
reeve such orgna mortgagor from abty under the bond. On
the other hand, f such orgna mortgagor does consent to the e ten-
son agreement, he contnues to be abe under the bond as e tended.
It oows that, where an orgna corporate obgor conveys the
mortgaged property securng the bond to an ndvdua as ts nomnee,
straw man, or any other type of agent, and such ndvdua enters nto
an agreement wth the mortgagee whereby the bond and mortgage are
e tended, the orgna corporate obgor upon whose nstructons such
ndvdua acted can not be heard to deny ts consent to the e tenson
agreement. The consent of a grantee who s a nomnee, straw man, or
other agent of the orgna corporate obgor s aso the consent of the
orgna corporate obgor. ccordngy where the grantee s a nom-
nee, straw man, or other agent of the orgna corporate obgor, such
corporate obgor contnues to be abe on the bond under the e ten-
son agreement.
In vew of the foregong, t s the opnon of ths offce that the
e tenson of a bond and mortgage n New York or n New ersey under
the crcumstances set forth above consttutes a renewa of the bond
sub|ect to stamp ta under secton 1801 of the Interna Revenue Code,
as amended.
. P. Wenche,
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327
Regs. 71 (1932), rt. 28.
S CTION S02(a), S M ND D Y S CTION 1 O T R NU CT
O 1939. C PIT L STOC ( ND SIMIL R INT R STS) ORIGIN L
The ssuance of new stock of the M Corporaton upon the e er-
cse of opton warrants ssued to the od stockhoders of the cor-
poraton pursuant to a pan of reorganzaton under Chapter
of the ankruptcy ct, as amended, s sub|ect to stamp ta under
secton 1802(a) of the Interna Revenue Code, as amended.
dvce s requested whether the ssuance of stock by the M Cor-
poraton upon the e ercse of opton warrants to purchase such stock
under the crcumstances herenafter stated s sub|ect to stamp ta
under secton 1802(a) of the Interna Revenue Code, as amended by
secton 1 of the Revenue ct of 1939.
Secton 1802(a) of the Interna Revenue Code, as amended, m-
poses a stamp ta on each orgna ssue, whether on organzaton or
reorganzaton, of shares or certfcates of stock, or of profts, or of
nterest n property or accumuatons, by any corporaton. (Secton
1802(a) s derved from subdvson 2 of Schedue of Tte III
of the Revenue ct of 192 .)
Under the pan of reorganzaton under Chapter of the ank-
ruptcy ct, as amended (52 Stat., 883), whch pan was confrmed
by the court n pr, 19T 9, the hoders of the od common stock of
the M Corporaton receved for each share of such stock one-s th
of a share of new common stock and an opton warrant enttng the
hoder thereof to purchase at hs eecton for a perod of 10 years
after the date of ssuance of such warrant one share of the new com-
mon stock of the M Corporaton at 15. doars per share or, for a
perod of 5 years after the date of ssuance of such warrant, and
upon the surrender thereof, one-haf share of the new common stock
at 10,r doars per share. In December, 1939, the court entered an
order n the reorganzaton proceedngs whch provded n part as
foows:
Secton 2 7 of Chapter of the Unted States ankruptcy ct whch became
effectve September 22. 1938, sha appy to the consummaton of sad pan.
Secton 2 7 of Chapter of the ankruptcy ct, as amended,
The ssuance, transfer, or e change of securtes, or the makng or devery
of nstruments of transfer under any pan confrmed under ths chapter, sha
be e empt from any stamp ta es now or hereafter mposed under the aws of
the Unted States or of any State.
Subdvson (f) of secton 77 of the ankruptcy ct, whch s
superseded by secton 2 7 above-quoted, provdes n part as foows:
The provsons of subdvsons 1, 2, and 3 of Schedue of Tte
III sha not appy to the ssuance, transfers, or e changes of se-
curtes or makng or devery of conveyances to mnke effectve any pan of
reorganzaton confrmed under the provsons of ths secton.
Under the e empton provsons of secton 77 (f) quoted above,
ony those ssuances, transfers, and e changes of securtes are e empt
whch make effectve a pan of reorganzaton. It therefore ap-
pears that the phrase to make effectve any pan of reorganzaton
ISSU .
Reguatons 71 (1932), rtce 28: Issues
sub|ect to ta .
1940-3 -10410
S. T.90
provdes:
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Regs. 71 (1932) rt. 34. 328
demonstrates that the words ssuance, transfers, or e changes of
securtes n the same secton were used, not n a broad genera
sense, but rather n one cosey reatng to corporate reorganzaton.
In other words, the terms ssuance, transfers, or e changes of secur-
tes were used by Congress to descrbe certan ncdents whch nor-
may consttute an ntegra part of a corporate reorganzaton.
though the words make effectve do not appear n secton 2 7,
t woud seem that the words ssuance, transfer, or e change of
securtes are used n that secton n the same technca sense as n
secton 77 (f). Ths vew s supported by the foowng anguage n
Report No. 191 , (page 39) of the Senate Commttee on the udcary,
dated May 27, 1938:
Secton 207 preserves an e empton from stamp ta es whch s presenty
contaned n secton 77 (f).
It foows that the ssuance of common stock upon the e ercse of
the opton warrants to purchase such stock s not e empt from stamp
ta under secton 2 7 uness such ssuance was an ncdent of the cor-
porate reorganzaton | that s, one of the steps necessary to effect the
corporate reorganzaton as set forth n the pan confrmed by the
court. Under that pan the od stockhoders were to receve for
each share of the od common stock one-s th share of new common
stock and the opton warrant to purchase more common stock under
the terms theren set forth. The ssuance of the fractona shares of
new common stock and of the opton warrants upon the surrender of
the od common stock certfcates were both ncdents of the corporate
reorganzaton and necessary to make effectve the pan of reorganza-
ton. The ssuance of the common stock upon the e ercse of the
opton warrants, whch ssuance mght occur severa years after the
corporate reorganzaton was an accompshed fact, was not an essen-
ta step to make the reorganzaton effectve. Consequenty, the e -
empton provsons of secton 207 of the ankruptcy ct, as amended,
do not appy.
In vew of the foregong, t s hed that the ssuance of the new
common stock of the M Corporaton upon the e ercse of the opton
warrants by the hoders thereof s sub|ect to stamp ta under secton
1802(a) of the Interna Revenue Code, as amended.
S CTION 1802(b), S M ND D Y S CTION 1 O T R NU
CT O 1939. C PIT L STOC ( ND SIMIL R INT R STS) S L S
ND TR NS RS.
Reguatons 71 (1932), rtce 34: Saes or 1940-30-1034
transfers sub|ect to ta . G. C. M. 221 9
( so rtce 35(r).)
n ndvdua domced n Te as was the regstered hoder of
stock at the tme of hs death ntestate, eavng hs wfe and two
chdren survvng. Under the aws of Te as the stock was com-
munty property.
ed, the wfe and chdren took ega tte to the stock as tenants
In common that such vestng of ega tte n the wfe and chdren
was whoy by operaton of aw and nvoved no transfer sub|ect to
stamp ta and that the subsequent transfer on the corporaton s
books of ther respectve nterests to ther ndvdua names s sub|ect
to stamp ta based upon the fu amount of stock so transferred.
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329
Regs. 71 (1932), rt. 34.
n opnon s requested whether the dstrbuton and transfer of
corporate stock hed as communty property by a stockhoder who was
domced n Te as at the tme of hs death ntestate, eavng hs wfe
and two chdren survvng, nvoved a transfer of ega tte to the
stock sub|ect to stamp ta under secton 1802(b) of the Interna
Revenue Code, as amended by secton 1 of the Revenue ct of 1939.
The aw mposes a stamp ta on a saes or transfers of ega tte
to shares or certfcates of corporate stock, wth certan e ceptons not
here appcabe.
rtce 2578 of ernon s nnotated Te as Statutes provdes as
foows:
Upon the dssouton of the marrage reaton by death, a property beong-
ng to the communty estate of the husband and wfe sha go to the survvor, f
there be no chd or chdren of the deceased or ther descendants but f there
be a chd or chdren of the deceased, or descendants of such chd or chdren,
then the survvor sha be entted to one-haf of sad property, and the other
haf sha pass to such chd or chdren, or ther descendants. ut such
descendants sha nhert ony such porton of sad property as the parent through
whom they nhert woud be entted to f ave.
The Te as courts have hed n the case of communty property that
the survvng spouse and chdren become tenants n common. Car
et a v. Setteffa.t, 211 S. W., 50 Spencer v. Pettt, 2 S. W. (2d), 422.)
In Spencer v. Pettt, supra, the court sad (page 424):
Upon the death of manda zabeth Pettt her one-haf of the communty
estate of hersef and husband mmedatey vested n her chdren. Thereafter,
n the absence of admnstraton or guardanshp wth partton, the survvng
husband and chdren became tenants n common of the property .
The Te as aw further provdes that when a person des testate or
ntestate hs property vests n hs egatees or hers mmedatey and
tte does not frst vest n hs persona representatve. ( rtce 3314,
ernon s nnotated Te as Statutes.)
In vew of the foregong, t s the opnon of ths offce that upon
the death of the stockhoder the ega tte to the stock vested n hs
wfe and two chdren as tenants n common, the wfe havng an un-
dvded one-haf nterest and each of the two chdren havng an
undvded one-fourth nterest: that the vestng of ega tte to such
nterests n the wfe and chdren was whoy by operaton of aw,
and, therefore, nvoved no transfer sub|ect to stamp ta (artce
35(r), Reguatons 71) and that the subsequent transfer on the books
of the corporaton of the respectve nterests of the wfe and chdren
n the stock to ther ndvdua names effected a vountary partton
of the stock hed as tenants n common and nvoved a transfer of
ega tte thereto sub|ect to stamp ta upon the bass of the fu num-
ber of shares transferred. (MS. 42, C. . I -, 338 (1925).)
. P. Wenchk.
29021T 41 M
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Regs. 71 (1932), rt. 35.
330
Reguatons 71, rtce 35: Saes or trans-
fers not sub|ect to ta .
1940-32-1037
S. T. 903
The transfer of corporate stock from the name of a guardan to
the name of a ward In the State of entucky s not sub|ect to stamp
ta .
dvce s requested whether the transfer of corporate stock from
the name of a guardan to the name of a ward n the State of entucky
s sub|ect to stamp ta under secton 1802(b) of the Interna Revenue
Code, as amended by secton 1 of the Revenue ct of 1939.
The aw mposes a stamp ta on a saes and transfers of ega
tte to any shares or certfcates of corporate stock, wth certan e -
ceptons not here appcabe. The ta abty of the transfer of cor-
porate stock from the name of a guardan to the name of a ward de-
pends upon whether, under the aws of the |ursdcton, ega tte to the
stock remans n the ward or vests n the guardan at the tme of hs
appontment. If under the aws of the |ursdcton ega tte to the
stock remans n the ward, there s no transfer of ega tte when
the stock s transferred from the name of the guardan to the name
of the ward. (S. T. 873, C. . 1938-2,410 S. T. 855, C. . 1937-1,33 .)
The Court of ppeas of entucky has hed that a guardan n that
State has the custody and contro of the ward s persona estate but
that the ega tte to such property remans n the ward durng the
guardanshp. (Spcer v. Snath (1933), 288 U. S., 430, affrmng
decson of the Court of ppeas of entucky, 244 v., 8 50 S. W.
(2d), 4 Department of Pubc Wefare v. en, 255 y., 301, 74
S. W. (2d), 329.) Snce n entucky the guardan does not acqure
ega tte to the persona property of hs ward by vrtue of hs appont-
ment as guardan, t s hed that the transfer of corporate stock from
the name of a guardan to the name of a ward n that State s not
sub|ect to stamp ta under secton 1802(b) of the Interna Revenue
Code, as amended.
transfers not sub|ect to ta . S. T. 901
the name of a ward n the State of New ersey s not sub|ect to
stamp tn .
dvce s requested whether the transfer of corporate stock from the
name of a guardan to the name of a ward n the State of New ersey
s sub|ect to stamp ta under secton 1802(b) of the Interna Revenue
The aw mposes a stamp ta on a saes and transfers of ega tte
to any shares or certfcates of corporate stock, wth certan e ceptons
not here appcabe. Where corporate stock s transferred from the
name of a guardan to the name of a ward, the transfer s sub|ect to
stamp ta f under the oca aw the guardan, and not the ward, hed
the ega tte to the stock. (S. T. 855, C. . 1937-1, 33 S. T. 873,
C. . 1938-2, 410.)
There s no provson of aw or decson by the courts of New ersey
whch ndcates that a guardan n that State acqures ega tte to the
persona property of hs ward. Snce the guardan n the nstant case
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331
Regs. 71 (1932), rt. 35.
dd not acqure ega tte to the stock by vrtue of hs appontment as
guardan, such tte remanng n the ward durng the perod of
guardanshp, the transfer of the stock from the name of the guard-
an to the name of the ward s not sub|ect to stamp ta .
S CTION 1802(b), S M ND D Y S CTIONS 1 ND 402 O T R -
NU CT O 1939, ND S CTIONS 209 ND 210 O T R NU
CT O 1940. C PIT L STOC ( ND SIMIL R INT R STS) S L S
ND TR NS RS.
transfers not sub|ect to ta . S. T. 911
the name of hs ward n the State of Georga, or from the name of
a mnor to the name of hs tutor or tutr n the State of Lous-
ana, s not sub|ect to stamp ta .
dvce s requested whether the transfer of corporate stock from
the name of a guardan to the name of hs ward n the State of
Georga, or from the name of a mnor to the name of hs tutor or
tutr n the State of Lousana, s sub|ect to stamp ta under secton
1802(b) of the Interna Revenue Code, as amended by sectons 1 and
402 of the Revenue ct of 1939, and sectons 209 and 210 of the
Revenue ct of 1940.
The aw mposes a stamp ta on a saes and transfers of ega tte
to any shares or certfcates of corporate stock, wth certan e cep-
tons not here appcabe. The ta abty of the transfer of corporate
stock from the name of a guardan to the name of a ward depends
upon whether, under the aws of the |ursdcton, ega tte to the
stock remans n the ward or vests n the guardan at the tme of
hs appontment. If under the aws of the |ursdcton ega tte
to the stock remans n the ward, there s no transfer of ega tte
when the stock s transferred from the name of the guardan to the
name of the ward. (S. T. 855, C. . 1937-1, 33 S. T. 873, C. .
1938-2, 410.) The same rue appes to the transfer of stock from
the name of a ward to the name of hs guardan.
There s no provson of aw or a decson by the courts of Georga
whch ndcates that a guardan n that State acqures ega tte
to the persona property of hs ward.
Under artce 337 of secton 11, Tte III of the Cv Code of
Lousana, the tutor or tutr for a mnor has the care of the person
and property of the mnor, as n the case of a guardan. There s
no provson of the Code of Lousana or a decson by the courts
of that State whch ndcates that the tutor or tutr for a mnor
takes ega tte to the mnor s property.
Snce n Georga the guardan does not acqure ega tte to the
persona property of hs ward, and n Lousana a tutor or tutr does
not acqure ega tte to the persona property of the mnor, t s hed
that the transfer of corporate stock from the name of a guardan
to the name of hs ward n the State of Georga, or from the name
of a mnor to the name of hs tutor or tutr n the State of Lousana,
s not sub|ect to stamp ta under secton 1802(b) of the Interna
Revenue Code, as amended.
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Regs. 71 (1932), rt. 35.
332
Reguatons 71 (1932), rtce 35: Saes 1940-41-1O451
or transfers not sub|ect to ta . G. C. M. 22315
Transfer of ega tte to corporate stock hed by a mted part-
nershp created under the Unform Lmted Partnershp ct of New
York does not resut from the death of a mted partner n such a
partnershp or from an assgnment of such a partner s nterest
theren, e cept where the certfcate of partnershp provdes that the
mted partner has an Interest In the partnershp property.
n opnon s requested whether a transfer of ega tte to cor-
porate stock hed by a mted partnershp n the State of New York
resuts from the death of a mted partner n such a partnershp
or from an assgnment of the nterest of such a partner.
Secton 1802(b) of the Interna Revenue Code, as amended by
sectons 1 and 402 of the Revenue ct of 1939 and sectons 209 and
210 of the Revenue ct of 1940, mposes a stamp ta on a saes or
transfers of ega tte to any shares or certfcates of corporate stock,
wth certan e ceptons not here appcabe.
Secton 90 of the Unform Lmted Partnershp ct of New York
(L. 1922, ch. 40 Mc nney s Consodated Laws of New York,
ook 38) provdes n part that a mted partnershp s a partnershp
formed by two or more persons under the provsons of secton 91,
havng as members one or more genera partners and one or more
mted partners and that the mted partners, as such, sha not
be bound by the obgatons of the partnershp. Secton 91 provdes,
among other thngs, that the certfcate of partnershp sha state
the amounts contrbuted by each mted partner, the tme, f agreed
upon, when the contrbuton of each mted partner s to be returned,
the share of profts or the other compensaton by way of ncome
whch each mted partner sha receve by reason of hs contrbu-
ton, and the rght, f gven, of a mted partner to demand and
receve property other than cash n return for hs contrbuton. Sec-
ton 93 provdes that contrbutons of a mted partner may be n
cash or other property but not n servces. Secton 99 provdes that
a mted partner sha have the rght to receve a share of the profts
or other compensaton by way of ncome and to the return of hs
contrbuton as provded n sectons 104 and 105. Secton 105(3)
provdes that n the absence of any statement n the certfcate to the
contrary or the consent of a members, a mted partner, rrespec-
tve of the nature of hs contrbuton, has ony the rght to demand
and receve cash n return for hs contrbuton. Secton 108 provdes
that the nterest of a mted partner s assgnabe and that the assgnee
may become a substtuted mted partner and have the rghts and
powers of hs assgnor.
In arrs v. Murray (28 N. Y, 574, 8 m. Dec, 2 8, 270) t s
hed:
The nterest of arrs a speca partner In the property of a mted part-
nershp can hardy be sad to he an nterest In the property of the frm. e
advanced to the frm a sum of money, whch he s entted to receve back, wth
nterest, at the termnaton of the partnershp. e Is aso entted to a share
n the profts. ut he s to no further e tent the owner of the property,
t pon payment of these cams, the property woud beong to the genera
partes sc .
In vew of the foregong, t s hed that a mted partner n a
mted partnershp created under the Unform Lmted Partnershp
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333
Regs. 71, rt. 84.
.ct of New York s not a coowner of corporate stock hed by such
partnershp, e cept where the certfcate of partnershp provdes
that such partner has an nterest n the partnershp property. Con-
sequenty, a transfer of ega tte to corporate stock hed by such
a mted partnershp does not resut from the death of a mted
partner n such a partnershp or from the assgnment of such part-
ner s nterest theren, e cept where the certfcate of partnershp
provdes that the mted partner has an nterest n the partnershp
property.
. P. Wenche,
O 1939 CON Y NC S.
Reguatons 71, rtce 84: What consttutes 1940-27-10310
rea property determnabe by aw of State G. C. M. 22132
where ocated.
Under the aws of Lousana, a mnera deed whch conveys the
absoute property rght to o, gas, or other mneras an o, gas,
or other mnera ease or royaty deed of ndefnte duraton (such as
those contanng the usua thereafter cause) a royaty deed of
unmted duraton or an assgnment of any of such nstruments
consttute conveyances of reaty sub|ect to stamp ta under secton
8482 of the Interna Revenue Code, as amended. royaty deed
of mted duraton wth respect to such mneras s not ta abe
as a conveyance of reaty.
G. C. M. 913 (C. . -2, 255 (192C)) Is revoked n so far as t
appes to o, gas, or other mnera deeds, and ts appcaton to o,
gas, or other mnera eases s mted to such eases e ecuted
pror to the effectve date of ct No. 205 of 1938 (Lousana).
n opnon s requested whether the nstruments herenafter de-
scrbed affectng o, gas, and other mneras, and rghts thereto, ocated
n and under ands stuated n Lousana consttute conveyances of
reaty sub|ect to stamp ta under secton 3482 of the Interna Revenue
The foowng types of nstruments are presented:
(1) mnera deed
(2) ease or royaty deed of ndefnte duraton (such as those
contanng the usua thereafter cause whereby the essee or grantee
may e pore for and e tract o and/or gas for a defnte perod and
thereafter as ong as o and/or gas s produced )
(3) royaty deed of unmted duraton
(4) ssgnments of the foregong nstruments
(5) royaty deed for a mted perod, . e., havng a f ed tme
for termnaton.
The aw mposes a stamp ta on any Deed, nstrument, or wrt-
ng whereby any ands, tenements, or other reaty sod sha
be granted, assgned, transferred, or otherwse, conveyed to, or vested
n, the purchaser or purchasers, -when the consderaton or
vaue of the nterest or property conveyed, e cusve of the vaue of
any en or encumbrance remanng thereon at the tme of sae, e ceeds
100 . What consttutes ands, tenements, or other reaty
s determnabe by the aw of the State n whch the property s stu-
ated. ( rtce 84, Reguatons 71.)
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Regs. 71, rt. 84.
334
It was hed n G. C. M. 913 (C. . -2, 255 (192 )) (syabus)
that
Instruments whch purport to convey the absoute property rght to o and
pas n pace n Lousana, or whch purport to ease property n that State wth
the attendant rght to e tract such o and gas from the so and convert the same
to the use of the essee, are not conveyances of reaty wthn the meanng of
Schedue -o of the Revenue ct of 1924, and are not sub|ect to the stamp ta
mposed thereunder.
ct No. 205 of 1938 (Lousana), approved uy 5, 1938, provdes n
part as foows:
Secton 1. That o, gas and other mnera eases, and contracts
appyng to and affectng such eases or the rght to reduce o, gas or other
mneras to possesson, together wth the rghts, prveges and obgatons resut-
ng or fowng therefrom, are hereby defned and cassfed as rea rghts and
Incorporea Immovabe property, and may be asserted, protected and defended
In the same manner as may be the ownershp or possesson of other mmovabe
property by the hoder of such rghts, wthout the concurrence, |onder or con-
sent of the andowner, and wthout mparment of rghts of warranty, n any
acton or by any procedure avaabe to the owner of mmovabe property or
and.
Sec. 2. That ths act sha appy to a such transactons whether entered Into
pror to the passage of ths act or not.
ct No. 205, supra, defnes and cassfes mnera eases, and con-
tracts appyng to and affectng such eases or the rght to reduce
o, gas or other mneras to possesson, together wth the rghts,
prveges and obgatons resutng or fowng therefrom,
as rea rghts and ncorporea mmovabe property . The
purpose of the statute was to overcome the effect of the decson of
the Supreme Court of Lousana n Guf Refnng Co. of Lousana v.
Ga-se et a. (171 So., 84G, 180 La., 190) that the hoder of a mnera
ease had not a rea rght n the eased and and therefore coud
not nsttute successfuy a pettory or possessory acton. ( son v.
Maroun, 190 So., 408 193 La., 28 .) rtce 5 of the Lousana
Code of Practce defnes a pettory acton as one by whch he who
has the property of a rea estate, or of a rght upon or growng out
of t, proceeds aganst the person havng the possesson, n order
to obtan the possesson of the mmovabe property, or the en|oyment
of the rghts upon t, to whch he s entted. rtce 45 of the
code of practce provdes that The pettory acton may be brought
by one who has the ownershp ony of an undvded part of an
estate, or of a rea rght to whch such an estate s sub|ected, though
hs ownershp may be mted to a certan perod, or end by the
occurrence of a certan event.
The court n Guf Refnng Co. of Lousana v. Gasse et a.,
supra, stated at page 849:
We stress the fact that n every nstance where the court had squarey before
It the |urdca nature or the proper ega cassfcaton of a mnera, o, and
gas ease the concuson was reached that t was a contract of ettng and
hrng, and therefore dd not create a rea rght In the and, or rght of
servtude on the property.
The statute, then, n effect redefned the nature of mnera eases
and not mnera deeds, snce the atter were aways consdered as
rea rghts under the aw of Lousana. The court further stated
at pages 848-850:
On the other hand, n a those cases n whch there had been a sae or
conveyance of the mnera rghts or a sae or conveyance of the and, wth
reservaton of the mnera rghts, ths court hed that the ega effect produced
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335
Regs. 71, rt. 84
by such a transfer was a rght of servtude on the reaty or a rea rght n
the and. Ctng eases.

O and gas are fugtve mneras, and the owners of the and whch contaD
such deposts are not the owners of the o and gas unt they reduce the
fugtve mneras to actua possesson. The owners of and have a rea rght
n ther property to go upon t and e pore t for these mneras, n order
to gan ownershp thereof by securng possesson of them. Ctng cases.
They may se ths rea rght separate from the fee of the reaty, or reserve
ths rea rght when they se the and, and, n both nstances, a rea rght
n the and e sts. They may ease ths rght to a thrd person who obtans
thereby a persona rght.
The effect of ct No. 205, supra, was to pace the easng of the
rght referred to above n the same category as a sae or reservaton
or the rght. The queston then arses whether such rea rght n
the and or rght of servtude on the reaty s wthn the meanng
of the phrase ands, tenements, or other reaty as used n sec-
ton 3482, supra. In ths connecton t s to be observed, as hereto-
fore ponted out, that under the present status of the Lousana aw a
mnera deed and a mnera ease are n the same category for the
purpose of determnng ths queston.
In G. C. M. 11732 (C. . II-1, 439 (1933)) t was hed:
The terms ands, tenements, or other reaty, as used n the statute, ceary
means that estate or nterest n and known as rea property, whch must be
an estate for fe or greater estate. ny ess estate, as for a number of years,
does not amount to a fee but s a chatte rea, or persona property.
In G. C. M. 20898 (C. . 1938-2, 414) t was hed that a grant of
perpetua fowage rghts to the Unted States wth respect to ands
n Lousana consttuted a conveyance of reaty sub|ect to stamp ta .
That memorandum reads n part as foows:
In Lousana, where the cv aw, as dstngushed from the common aw,
prevas, an easement s caed a servtude, and servtudes are of two genera
casses rea or preda servtudes and persona servtudes. The rea or preda
servtude takes the pace of the common-aw appurtenant easement and s so
caed because t s attached to another estate. The persona servtude takes
the pace of the common-aw easement n gross and s so caed because t at-
taches to a person, not to another estate. It s mmatera whether the serv-
tude descrbed n the deed be consdered a rea or a persona servtude. In
ether ease t s an nterest n rea property and a rea obgaton (as ds-
tngushed from a persona obgaton of the grantor), and t s to ast forever.
(See rost- ohnson Lumber Co. v. Sang s ers (La., 1922), 01 So., 207,
214, 245.)
The court n rost- ohnson Lumber Co. v. Sang s ers, supra,
stated at page 245:
s to the nature of the rght reserved mnera reservaton we ken t to
the rght to draw water from another s and and that s a rght of servtude.
In S. T. 8 0 (C. . 1937-1, 341) t was hed that a deed conveyng
water rghts n Caforna, the oca aw construng same as a serv-
tude, was sub|ect to stamp ta . See aso G. C. M. 13035 (C. .
III-1, 427 (1934)), wheren t was hed that a servtude or ease-
ment s, generay, an ncorporea heredtament, and as such const-
tutes an nterest m rea property and that a deed conveyng such a
rght n perpetuty s sub|ect to stamp ta .
Wth respect to royaty deeds, the Supreme Court of Lousana n
ncent et a. v. uock et a. (187 So., 35,192 La., 1) hed:
The reservaton n controversy here royaty as shown herenabove, Is a
rea obUgaton n favor of the pantffs, ther hers or assgns, and n our
opnon s a speces of rea rght .
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Regs. 71 (1932), rt. 84.
33
The royaty reservaton n that case was by the terms of the nstru-
ment of unmted duraton. See aso Summers, O and Gas, voume
3, secton 578, page 3 , wheren t s stated:
State and edera courts In Lousana have hed that the essor s royaty
Interest under an o and gas ease s an nterest n and and rea property
whch may be conveyed n whoe or n part.
In vew of the foregong, t s the opnon of ths offce that, under
the aws of Lousana, mnera deeds whch convey the absoute
)roperty rght to o, gas, or other mneras o, gas, or other mnera
eases or royaty deeds of ndefnte duraton (such as those contan-
ng the usua thereafter cause) royaty deeds of unmted
duraton or an assgnment of any of the foregong nstruments, con-
sttute conveyances of reaty sub|ect to stamp ta under secton 3482
of the Interna Revenue Code, as amended and that a royaty deed
of mted duraton wth respect to such mneras s a chatte rea
or persona property and s not ta abe as a conveyance of reaty.
G. C. M. 913 (C. . -2, 255 (192 )) s revoked n so far as t
appes to o. gas, or other mnera deeds, and ts appcaton to o,
gas, or other mnera eases s mted to such eases as were e ecuted
pror to the effectve date of ct No. 205 of 1938, supra.
. P. Wench ,
O 1939, ND S CTIONS 209 ND 210 O T R NU CT O 1940.
CON Y NC S.
Reguatons 71 (1932), rtce 84: What con- 1940-50-10521
sttutes rea property determnabe by aw of G. C. M. 22393
State where ocated.
n o, gas. or other mnera ease or a royaty deed coverng
ands n Lousana, regardess of the date of e ecuton or whether
of defnte or ndefnte duraton, or an assgnment of any such
Instrument, consttutes a conveyance of reaty sub|ect to stamp ta
under see on 3-182 of the Interna Revenue Code, as amended.
G. C. M. 22132 (page 333, ths uetn) modfed.
G. C. M. 913 (C. . -2, 255 (19_ )) revoked.
n opnon s requested whether an o, gas, or other mnera ease
or a royaty deed coverng ands n Lousana, whether of defnte or
ndefnte duraton, or an assgnment of any such nstrument, const-
tutes a conveyance of reay sub|ect to stamp ta under secton 3482
of the Interna Revenue Code, as amended by secton 1 of the Rev-
enue ct of 1939, and sectons 209 and 210 of the Revenue ct of
1940. The queston s presented n connecton wth a request for
reconsderaton of G. C. M. 22132 (page 333, ths uetn).
The aw mposes a stamp ta on any Deed, nstrument, or wrt-
ng whereby any ands, tenements, or other reaty sod
sha be granted, assgned, transferred, or otherwse conveyed to, or
vested n, the purchaser or purchasers, when the consd-
eraton or vaue of the nterest or property conveyed, e cusve of the
vaue of any en or encumbrance remanng thereon at the tme of
sae, e ceeds 100 . What consttutes ands, tenements,
or other reaty s determnabe by the aw of the State n whch
the property s stuated. ( rtce 84, Reguatons 71.)
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337
Regs. 71 (1932), rt. 84.
In G. C. M. 22132, supra, t was hed (syabus):
Under the aws of Lousana, a mnera deed whch conveys the absoute
property rght to o, gas, or other mneras an o, gas, or other mnera ease
or royaty deed of ndefnte duraton (such as those contanng the usua
thereafter cause) a royaty deed of unmted duraton or an assgnment
of any of such nstruments consttute conveyances of reaty sub|ect to stamp
ta under secton 3482 of the Interna Revenue Code, as amended. royaty
deed of mted duraton wth respect to such mneras s not ta abe as a
conveyance of reaty.
G. C. M. 913 (C. . -2, 2. 5 (192G)) s revoked n so far as t appes to o,
gas, or other mnera deeds, and ts appcaton to o, gas, or other mnera
eases s mted to such eases e ecuted pror to the effectve date of ct No.
205 of 1938 (Lousana).
Subsequent to the rendton of G. C. M. 22132, the Supreme Court
of Lousana, n Tynan v. Surf O Co. (195 La., 248, 19 So., 33 ),
consdered the effect of ct No. 205 of 1938 (Lousana), approved
uy 5, 1938. The foowng appears n the opnon of the court:
Ths court has consstenty apped the coda provsons, whenever possbe,
to o and gas eases for many years. avng decned to enact aws for
the reguaton of the o ndustry and, partcuary, havng decned to adopt
a mnera code, the egsature has paced the stamp of approva upon the
system of nterpretaton of o and gas contracts whch ths court has
foowed for so many years. Ony a few stuatons have arsen whch the
awmaker has seen ft to correct, the prncpa one beng the want of an
adequate remedy n the o and gas essee to protect or assert hs rghts,
wthout concurrence of hs essor, as deat wth by ths court n Guf Refnng
Co. of Lousana v. Gaw (1S La., 190, 171 So., 84 ). In that case t was
hed that a essee of the usua mnera or gas and o ease can not, n hs
own rght or name, nsttute a pettory or possessory acton, as he has no rea
rght n or servtude on the eased and.
Ths defect or defcency n procedure was provded for by the passage
of ct 205 of 1938. ( Uon v. Maroun, 193 La., 28 , 190 So., 408.)
ct 205 of 1938, athough t decares that rghts created by an o and gas
ease sha be ncorporea mmovabe property, smpy supped a name
for those characterstcs whch ths court has decared many tmes were
nherent n such agreements ncorporea mmovabe property beng merey
a synonym for ncorporea rea rght, or a rea servtude mposed upon the
and eased n favor of the essee.
Wthout e pressng an opnon as to whether the Supreme Court
of Lousana n effect overrued ts decson n Guf Refnng Co. of
Lousana v. Gasse (18 La., 190, 171 So., 84 ), n whch t was
hed that a mnera ease dd not create a rea rght n the and,
or a rght of servtude on the property, but ony a persona rght,
ths offce w foow the Lousana Supreme Court s constructon of
ct 205, supra, and ts characterzaton of a mnera ease n deter-
mnng what consttutes ands, tenements, or other reaty for
purposes of the edera stamp ta . ( rtce 84, Reguatons 71.) So
dong, t appears that ct 205 s ony procedura n purpose but that
a mnera ease, even wthout ct 205, confers a rea servtude on
the eased and n favor of the essee. It foows that G. C. M.
22132, supra, shoud be modfed n so far as ts appcaton was
mted to mnera eases e ecuted after the effectve date of ct
205. In other words, f G. C. M. 22132, supra, s otherwse correct,
t foows that that opnon shoud be apped to mnera eases
wthout regard to the date of ther e ecuton, and that G. C. M.
913, supra, shoud be revoked n ts entrety.
The contenton has been advanced that an o, gas, or other mnera
ease s, under the aw of Lousana, ony a contract of ettng and
hrng and that, consequenty, the edera stamp ta s nappcabe
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Regs. 71 (1932), rt. 84. 338
to such eases. Ths poston s predcated on the anguage of secton
3482 of the Interna Revenue Code, whch mposes a ta on any deed,
nstrument, or wrtng whereby any ands, tenements, or
other reaty sod sha be granted, assgned, transferred, or otherwse
conveyed to, or vested n, the purchaser or purchasers. dmttedy,
f the contract nvoved s onv a ease of rea property, t s not
sub|ect to ta . ( rtce 108, Reguatons 71.) owever, ths ques-
ton s so nterwoven wth the proposton that t must be ands,
tenements, or other reaty whch are sod n order to make the stamp
ta appcabe that both shoud be consdered together, bearng n
mnd that the determnaton of the queston as to what consttutes
ands, tenements, or other reaty s to be determned by the aw of
Lousana.
It s recognzed that n certan cases and for certan purposes the
Supreme Court of Lousana has characterzed a mnera ease as a
contract of ettng and hrng Guf Refnng Co. of Lousana v.
G-asse, supra Guf Refnng Co. of Lousana v. ayne (138 La.,
555, 70 So.. 509)), and has ndcated that t w treat mnera eases as
eases and w appy to them the coda provsons appcabe to
ordnary eases, n so far as they may be, unt the egsature of
Lousana sha have passed aws specfcay appcabe to the ndustry
of mnng. (Spence v. Lucas. 138 La., 703. 70 So., 79 Logan v. State
Grave Co., 158 La., 105, 103 So., 52 Tyson v. Surf O Co., supra.)
On the other hand, there are decsons by the Supreme Court of Lous-
ana and the edera courts hodng that under the Lousana aw a
mnera ease s a conveyance of an nterest n rea property. In ths
connecton see 13 Tuane Law Revew, 41 , ctng and e panns the
foowng cases: Rves v. Guf Refnng Co. of Lousana (133 La.,
178, 2 So., 23) Cooke v. Guf Refnng Co. (135 La.. 09, 5 So., 758)
anbyv. Te as Co. (140 La., 189,72 So., 933) Nabora O d: Gas Co. v.
Lousana O Refnng Co. (151 La.. 3 1, 91 So., 7 5) Shaw v. Watson
(151 La., 893, 92 So., 375) Nobe v. Pouf (154 La., 429, 97 So.. 599)
Wey v. Davs (1 4 La., 1090, 115 So., 280) Rochm v. N on (182
La., 597,1 2 So., 191) Payne v. Wamsey (185 So.. 88).
In Iamton v. Gasse (57 ed. (2d), 1032) the Unted States
Crcut Court of ppeas for the fth Crcut stated that: They o
and gas eases are kewse mmovabe property n Lousana. In
ngtchodo v. Ceram (28 ed. Supp., 720) the Unted States Dstrct
Court for the Dstrct of Lousana hed that: n o and mnera
ease, or a royaty nterest, s an nterest n rea property and s gov-
erned by the same rue as that whch governs property rghts. In
Munn v. Wadey (192 La., 874, 189 So., 5 1) the Supreme Court of
Lousana had before t a case where an rkansas corporaton sod
and n Lousana, reservng the mnera rghts for 35 years. Later
the corporaton dssoved. One of ts stockhoders was a mnor. The
queston was whether the prescrptve perod had been suspended
because of the mnor nvoved. Under the rkansas aw. the property
of a dssoved corporaton goes to the stockhoders. In Lousana t
does not. In determnng whch aw shoud govern, the court, statng
t to be mmatera whether the rghts reserved under the deed were
a ease or a mandate couped wth an nterest, hed : ut the mnera
rght that s n contest n ths case s not persona property but rea
estate, and hence the aw of Lousana s the aw whch governs the
transfer of the tte.
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339 Regs. 71 (1932), rt. 84.
rtce 731 of the Lousana Cv Code, whch deas wth rea serv-
tudes, provdes as foows:
It s not suffcent to be an owner n order to estabsh a servtude, one must
bo master of hs rghts and have the power to aenate for the creaton of a
servtude s an aenaton of a part of the property.
Thus mnors, marred women, persons nterdcted, can not estabsh servtudes
on ther estates, e cept accordng to the forms prescrbed for the aenaton of
ther property. Itacs supped.
rtce 817, bd., provdes:
The e press reease must be made n wrtng, and s confned to what Is
ceary e press n the act contanng t, because one s not easy presumed to
have renounced hs rght.
esdes, the owner who makes the reease must be capabe of dsposng of m-
movabes ths reease of a servtude beng a rea aenaton. Itacs supped.
The case of arthod v. Dover (153 So., 49), nvovng the queston
of whether a ta deed carres the whoe ownershp of the and where
there s a mnera deed outstandng, s pertnent. The Crcut Court of
ppeas of Lousana for the Second Crcut n that case, after stat-
ng the rue that mnera rghts consttute a servtude or mere rght
to go upon the and and e pore for and reduce to possesson mn-
eras, hed as foows:
Unquestonaby, a ta sae transfers the whoe ownershp of the property
where there has been no dsmemberment of the tte pror to the sae. sae of
mnera rghts consttutes such a dsmemberment of the ownershp and s a
transfer of one of ts matera eements and amounts to a parta
aenaton of property.
Under the Lousana Cv Code, unke the common aw, the
character of the estate transferred s not determned by ts tenure.
The ony estates n and recognzed by the aw of Lousana are (1)
smpe ownershp of the so and (2) servtude thereon (ncudng
usufruct). no ndvdua s free to estabsh any other
estate theren, whether by w or by contract. such nhb-
ton aganst the estabshment of nove estates and new tenures s con-
formabe to genera aw, and a matter of hgh pubc pocy. (Wempe
v. Nabors O Gas Co., 154 La., 483, 97 So., .) Snce under the
aws of Lousana, tenure does not determne the nature of the estate
conveyed, and snce artce 84 of Reguatons 71 provdes that what
consttutes ands, tenements, or other reaty s determnabe by the
aw of the State wheren the property s stuated, t s concuded that
o and gas eases and royaty deeds of defnte duraton coverng ands
n Lousana are not dstngushabe from such nstruments of n-
defnte duraton. Under ths theory, t s mmatera whether the
estate created be of defnte or ndefnte duraton.
In vew of the foregong, t s the opnon of ths offce that an o,
gas, or other mnera ease or a royaty deed coverng ands n Lous-
ana, regardess of the date of e ecuton or whether of defnte or n-
defnte duraton, or an assgnment of any such nstrument, consttutes
a conveyance of reaty sub|ect to stamp ta under secton 3482 of the
Interna Revenue Code, as amended.
G. C. M. 22132, supra, s modfed to the e tent that t s nconsstent
wth ths opnon, and G. C. M. 913, supra, s revoked.
. P. We che,
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Regs. (1933), rt. 8.
340
PL YING C RDS.
O 1940.
Reguatons (1933), rtce 8: Ta on pay- 1940-31-103 4
ng cards. T. D. 4987
rtce 19: Imported payng cards.
TITL 2 INT RN L R NU . C PT R I, SU C PT R C, T UT 305
SU C PT R , P RT 40. SU P RT . T ON PL TING C RDS.
Increase of rate of ta under secton 1807 of the Interna Revenue
Code, as amended by the Revenue ct of 1940.
Washngton, D. C.
In order to conform Reguatons (Part 305, Tte 2 , Code of
edera Reguatons), reatng to the ta on payng cards under
the Interna Revenue Code, to secton 215 of the Revenue ct of
1940 (Pubc, No. 5 , Seventy-S th Congress, thrd sesson), ap-
proved une 25, 1940, amendng secton 1807 of the Interna Revenue
Code, such reguatons, but ony as prescrbed and made appcabe
ebruary 11, 1939 C. . 1939-1 (Part 1). 39 (Part 4 5, Subpart
of such Tte 2 . 1939 Supp.). are amended as foows:
Immedatey pror to artce 8 secton 305.8 there are substtuted
for the quotatons of aw shown, a headng and quotaton of secton
1807 of the Interna Revenue Code and a headng and quotaton of
secton 215 of the Revenue ct of 1940, as foows:
Secton 1807 of the Interna Revenue Code.
Sec. 1S07. Payng Cards.
Upon every pack of payng cards contanng not more than ffty-four
cards, manufactured or mported, and sod, or removed for consump-
ton or sae, a ta of 10 cents per pack. Ths ta sha be n addton
to any mport dutes mposed on such artces of foregn manufacture.
Secton 21 of the Revenue ct of 1040.
Sec. 215. Payng Cakds.
(a) Genera Rce. before the frst paragraph and nsertng at the
(b) Defense Ta fob ve Years. In eu of the rate of ta specfed
n subsecton (a), the rate of ta for the perod after une 30, 1940, and
before . uy 1, 194. ), sha be 11 cents.
The frst paragraph of artce 8 s amended to read as foows:
kt. 8. Ta ov ph/nn cards. Pror to uy 1, 1040. and after une 30, 1945,
the rate of ta on payng cards s 10 cents per pack contanng not more than
54 cards. or the perod uy 1, 1940, to une 30, 1945, ncusve, the rate of
ta s 11 cents on each such pack. ach addtona 54 cards or fracton
thereof n a pack consttutes a new pack on whch ta must be pad. or e am-
pe, f a pack contans 120 cards t must be consdered as consttutng three packs,
two packs of 54 cards and one pack of 12 cards, and each such pack s
sub|ect to ta at the rate n effect when abty s ncurred.
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341
Regs. (1933), rt. 8.
Immedatey pror to artce 19 secton 305.19 there are subst-
tuted for the quotatons of aw shown, a headng and quotaton of
secton 1807 of the Interna Revenue Code and a headng and quota-
ton of secton 215 of the Revenue ct of 1940, as foows:
Secton 1807 of the Interna Revenue Code.
Sec. 1807. Patng Cards.
Upon every pack of payng cards contanng not more than ffty-four
cards, manufactured or mported, and sod, or removed for consumpton
or sae, a ta of 10 cents per pack. Ths ta sha be n addton to any
Import dutes mposed on such artces of foregn manufacture.
Secton 215 of the Revenue ct of 1940.
Sec. 1807. Payng Cards.
(a) Genera Rue. before the frst paragraph and nsertng at the
(b) Defense Ta for ve Years. In eu of the rate of ta spec-
fed n subsecton (a), the rate of ta for the perod after une 30,
1940, and before uy 1, 1945, sha be 11 cents.
The frst paragraph of artce 19 s amended to read as foows:
rt. 19. Imported payng cards. (a) Labty to ta . Pror to uy 1, 1940,
and after une 30, 1945, payng cards mported from foregn countres must be
ta -pad at the rate of 10 cents per pack of not more than 54 cards. or te
perod uy 1, 1940, to une 30, 1945, ncusve, the rate of ta s 11 cents on each
such pack. Such ta s n addton to any mport duty and must be pad by
aff ng the requred stamps pror to reease of the cards from customs custody.
(Ths Treasury decson s prescrbed pursuant to secton 1807 of
the Interna Revenue Code, as amended by secton 215 of the Revenue
ct of 1940, and sectons 1835 and 3791 of such Code (53 Stat., 204,
4 7).)
Tmothy C. Mooney,
ohn L. Suvan,
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Regs. 88 (1934), rt. 20. 342
IR RMS.
INT RN L R NU COD .
S CTION 2733. D INITIONS.
Reguatons 88 (1934), rtce 20: Meanng 1940-42-1045
of terms. S. T. 908
Luger or Mauser psto equpped wth a ug. spur, sot, or other
devce for the attachment of a shouder stock s a frearm
wthn the meanng of secton 2733(a) of the Interna Revenue
Code.
dvce s requested whether a Luger or Mauser psto equpped
wth a ug, spur, sot, or other devce for the attachment of a shouder
stock s a frearm wthn the meanng of secton 2733(a) of the
Interna Revenue Code, whch provdes n part as foows:
The term frearm means a shotgun or rfe havng a barre of
ess than 18 nches In ength, or any other weapon, e cept a psto or revover,
from whch a shot Is dscharged by an e posve f such weapon Is capabe
of beng conceaed on the person .
It s the evdent purpose of the aw to sub|ect to ts provsons
every weapon hed out as and adapted to use as a frearm, as de-
fned n the above-quoted provsons of secton 2733(a), even though
t may be capabe of other use. (S. T. 788, C. . III-2, 430 (1934).)
psto equpped wth a ug, spur, sot, or other devce for the
attachment of a shouder stock can not propery be cassed as a
mere psto. It s ceary a weapon from whch a shot
s dscharged by an e posve and s capabe of beng conceaed
on the person. urthermore, t s. adapted to use as a frearm.
It s hed that a Luger or Mauser psto equpped wth a ug, spur,
sot, or other devce for the attachment of a shouder stock s a
frearm wthn the meanng of secton 2733(a) of the Interna
Revenue Code.
Under the provsons of secton 2730(a) of the Interna Revenue
Code any frearm whch has at any tme been transferred n voa-
ton of the appcabe provsons of aw s sub|ect to sezure and
forfeture.
It appears that pstos equpped as above stated have been trans-
ferred wthout compance wth the provsons of aw appcabe to
frearms, such pstos not havng been consdered frearms wthn
the meanng of the aw. ny such psto reported after the pub-
caton of ths rung to have been so transferred wthout any ntenton
of voatng any aw w not be sezed and forfeted f the owner or
possessor of the psto wthn a reasonabe tme removes the ug,
spur, or other devce or fs n the sot, as the case may be, and
presents the psto to the coector of nterna revenue for nspecton.
ny such psto whch s not so atered and presented w be sub|ect
to sezure and forfeture and the owner or possessor thereof w be
sub|ected to the prescrbed penates.
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343 IMsc
LOOR STOC S T ON CIG R TT S.
S CTION 2005, S DD D Y S CTION 212 O T R NU CT O
1940. LOOR STOC S T .
1940-29-10332
Mm. 50
Procedure respectng the fng of returns and payment of the
ta mposed by secton 2005 of the Interna Revenue Code on foor
stocks of cgarettes hed for sae on uy 1, 1940.
Washngton, D. C, une 29, 19. ,0.
Secton 2005 of the Interna Revenue Code (as added by secton
212 of the Revenue ct of 1940, approved une 25, 1940) mposes a
foor stocks ta on sma and arge cgarettes hed by any person
for sae on uy 1, 1940. Pendng the ssuance of reguatons and
further nstructons regardng the admnstraton of ths ta , the
nstructons contaned heren are to be foowed:
1. Lac. Secton 212 of the Revenue ct of 1940 reads as foows:
Sec. 212. Cgarettes.
Subchapter of Chapter 15 of the Interna Revenue Code s
amended by nsertng at the end thereof the foowng new sectons:
In eu of the rates of ta specfed n secton 2000(c)(2), the
rates of ta for the perod after une 30, 1940, and before uy 1,
1945, sha be 3.25 and 7.80, respectvey.
Seo. 2005. oor Stocks Ta .
(a) oor Stocks Ta . Upon cgarettes sub|ect to ta under sec-
ton 2000(c) (2) whch on uy 1, 1940, are hed by any person for sae,
there sha be eved, assessed, coected, and pad a foor stocks ta at
a rate equa to the ncrease n rate of ta made appcabe to such
artces by secton 2004.
(b) Returns. very person requred by ths secton to pay any
foor stocks ta sha, on or before ugust 1, 1940, under such regu-
atons as the Commssoner wth the approva of the Secretary sha
prescrbe, make a return and pay such ta , e cept that n the case
of artces hed by manufacturers and mporters the Commssoner may
coect the ta wth respect to a or part of such artces by means
of stamp rather than return, and n such case may make an assess-
ment aganst such manufacturer or mporter havng tobacco ta
stamps on hand uy 1, 1940, for the dfference between the amount
pad for such stamps and the ncreased rates specfed n secton 2004.
(c) Laws ppcabe. provsons of aw, ncudng penates,
appcabe n respect of the ta es mposed by secton 2000 sha, nsofar
as appcabe and not nconsstent wth ths secton, be appcabe wth
respect to the foor stocks ta mposed by subsecton (a).
2. Labty for the ta . persons hodng cgarettes for sae
at the frst moment of uy 1, 1940, are abe to the ta . The ta
s mposed on the hodng of such artces and not on the actua
sae. Cgarettes are regarded as hed for sae by the owner thereof
on uy 1, 1940, athough they may be at that tme n transt to
the owner or n a warehouse, storeroom, or dstrbutng depot of the
owner.
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344
In the case of manufacturers, a ta s aso mposed on unattached
cgarette stamps hed at the frst moment of uy 1, 1940, purchased
at the rates of ta n effect pror to uy 1, 1940.
orm 187 s prescrbed as the return form for persons other than
manufacturers and orm 188 as the return form for manufacturers.
3. Rate of ta . The rates of ta are:
Sma cgarettes 25 cents per thousand.
Large cgarettes 0 cents per thousand.
4. Inventory. (a) Genera. cept as to unstamped cgarettes
hed by manufacturers, every person abe to the ta sha prompty
make an temzed nventory of a cgarettes hed for sae at the
frst moment of uy 1, 1940. The nventory sha be prepared n
accordance wth the nventory schedues on the back of orms 187
and 188.
Persons hodng cgarettes at more than one ocaton sha prepare
n trpcate a separate nventory for each such ocaton. One copy
sha be retaned on the premses, one copy sha be forwarded to
the ta payer s prncpa pace of busness, and one copy sha be
forwarded to the coector of nterna revenue for the dstrct n
whch the partcuar premses are ocated.
The copy of each separate nventory forwarded to the coector
of nterna revenue sha show the ta payer s name, the ocaton of
the partcuar premses for whch the nventory s made, and the
name and address of the prncpa offce from whch the consodated
return and nventory w be fed. (See paragraph 5 herenafter.)
Separate nventores whch have been forwarded to the ta payer s
prncpa pace of busness sha there be consodated nto a snge
nventory for the purposes of return and payment of ta .
(b) Manufacturers. In addton to preparng nventores of
stamped cgarettes, manufacturers sha prepare nventores of unat-
tached cgarette ta stamps hed or n transt from the coector or a
stamp deputy at the frst moment of uy 1, 1940, purchased at rates
of ta n effect pror to uy 1, 1940. Such stamp nventores sha
be prepared and handed n the same manner as cgarette nventores.
5. Return and payment of ta . (a) Genera. oor stocks ta
return and nventory of cgarettes and unattached cgarette ta
stamps sha be made n dupcate on the form prescrbed and sha
be fed wth the coector of nterna revenue for the dstrct n whch
s ocated the ta payer s prncpa pace of busness on or before
ugust 1, 1940, accompaned by remttance of the ta due.
Where a ta payer hods cgarettes at more than one ocaton and
separate nventores have been prepared, as requred by paragraph
4. the copes of the separate nventores sha be retaned by the ta -
payer at hs prncpa pace of busness and sha not be fed wth
the consodated ta return and nventory.
(b) Manufacturers. The return of manufacturers sha ncude
stamped cgarettes and unattached cgarette stamps but sha not
ncude unstamped cgarettes. The foor stocks ta appcabe to
unstamped cgarettes hed at the frst moment of uy 1, 1940, w
be pad by aff ng to such cgarettes ta stamps pad for at the rate
of 3.25 per thousand n the case of sma cgarettes and 7.50 per
thousand n the case of arge cgarettes. Ta pad by stamp h ths
manner w thus ncude the manufacturers ta at the od rates of
3 per thousand and 7.20 per thousand, respectvey, pus the foor
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345 Regs. 8 (1934), rts. 194-200.
stocks ta of 25 cents per thousand and 0 cents per thousand,
respectvey.
. Cgarettes n customs custody and contro. No return and n-
ventory sha be fed wth respect to cgarettes n customs custody
and contro at the frst moment of uy 1, 1940. s n the case of
unstamped cgarettes hed by manufacturers, the foor stocks ta
appcabe to such cgarettes w be pad by aff ng at the tme of
remova ta stamps pad for at the rate of 3.25 per thousand n the
case of sma cgarettes and 7.80 per thousand n the case of arge
cgarettes. (See subparagraph (b) of paragraph 5.)
7. Penaty and nterest. The penaty and nterest provsons of
sectons 215 , 3 12, and 3 55 of the Interna Revenue Code are ap-
pcabe to the cgarette foor stocks ta .
Correspondence n regard to the procedure descrbed heren sha
refer to the number of ths mmeograph and to the symbos MT: T.
Gut T. everng,
Commssoner.
Reguatons 8 (1934), rtces 194 200 (added). 1940-33-10388
T. D. 4997
SU C PT R , P RT 405, SU P RT .
Reguatons 8, as amended, reatng to ta es on tobacco products,
etc., as made appcabe to the Interna Revenue Code by Treasury
Decson 4885 C. . 1939-1 (Part 1), 39 , amended.
Washngton, D. C.
Reguatons 8 (revsed November, 1934) Part 140, Tte 2 , Code
of edera Reguatons , but ony as prescrbed and made appcabe
ebruary 11, 1939 fC. . 1939-1 (Part 1), 39 Part 4 5, Subpart
of such Tte 2 , 1939 Sup. , are amended as foows:
rtce 194 secton 140.194, Tte 2 , Code of edera Reguatons
s renumbered as artce 200 Secton 140.200 .
Immedatey foowng artce 193 secton 140.193 the foowng
new Chapter s added:
Chapter .
LOOR STOC S T ON CIG R TT S.
S C. 212. CtG TTS. (R NU CT O 1940.)
Subchapter of chapter 15 of the Interna Revenue Code s amended
by nsertng at the end thereof the foowng new sectons:
In eu of the rates of ta specfed n sectfon 2000 (c) (2), the rates of
ta for the perod after une 30, 1940, and before uy 1, 1945, sha
be 3.25 and 7.80, respectvey.
290217 41 23
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Regs. 8 (1934), rts. 194-200. 34
14 Sec. 2005. Yook Stocks Ta .
(a) oor stocks ta . Upon cgarettes sub|ect to ta under sec-
ton 2000 (c) (2) whch on uy 1, 1940, are hed by any person for sae,
a rnte equa to the ncrease In rate of ta made appcabe to such
artces by secton 2004.
(b) Returns. very person requred by ths secton to pay any
foor stocks ta sha, on or before ugust 1, 1940, under such regu-
atons as the Commssoner wth the approva of the Secretary sha
prescrbe, make a return and pay such ta , e cept that n the case
of artces hed by manufacturers and mporters the Commssoner
may coect the ta wth respect to a or part of such artces by means
of stump rather than return, and In such case may make an assess-
ment aganst such manufacturer or mporter havng tobacco ta stamps
on hand uy 1, 1940, for the dfference between the amount pad for
such stamps and the ncreased rates specfed n secton 2004.
(c) Lacs appcabe. provsons of aw, ncudng penates,
appcabe In respect of the ta es mposed by secton 2000 sha, nsofar
as appcabe and not nconsstent wth ths secton, be appcabe wth
respect to the foor stocks ta mposed by subsecton (a).
ht. 194 Secton 140.194 . Scope of ta . The foor stocks ta tnder
secton 2005 of the Interna Revenue Code s Imposed upon a cgarettes,
whether arge or sma, whch on the frst moment of uy 1, 1940, are hed
by any person for sae. The ta appes wthout regard to where the cga-
rettes are hed. Sub|ect to the e emptons provded for wth respect to the
wthdrawa of tobacco products for e port (see artce 185 secton 140.1851),
the wthdrawa of tobacco products for use as sea stores (see artce 18
secton 140.18 ), and the wthdrawa of tobacco products for use of the
Unted States (see Reguatons 34 Part 450, Tte 2 , Code of edera Regu-
atons ), the ta appes aso wthout regard to the dsposton of the cga-
rettes on or after uy 1, 1940.
The term sma cgarettes means cgarettes weghng not more than 3
pounds per thousand, and the term arge cgarettes means cgarettes wegh-
ng more than 3 pounds per thousand.
kt. 195 Secton 140.195 Rates of ta The rate of ta appcabe to
sma cgarettes s 25 cents per thousand. The rate appcabe to arge cga-
rettes s 0 cents per thousand, e cept that cgarettes measurng more than
P -_ nches In ength are ta abe as sma cgarettes countng each 2 nches
(or fracton thereof) of the ength of each cgarette as one sma cgarette.
These rates are equa to the ncreases In the rates of ta made appcabe
to cgarettes by secton 2004 of the Interna Revenue Code.
rt. 19 Secton 140.19 . Payment of ta . The ta s payabe on or before
ugust 1, 1940, by every person who at the frst moment of uy 1, 1940, hed
cgarettes for sae. The ta sha be pad at the tme of fng the return on
orm 187, or orm 188 (see artce 197 secton 140.197 ).
Manufacturers who hed unstamped cgarettes on uy 1, 1940, sha pay the
ta appcabe to such cgarettes by aff ng, at the tme of the wthdrawa of
such cgarettes from the factory, stamps pad for at the Increased rates n effect
on and after uy 1, 1940. To permt the use for ths purpose of unattached
cgarette stamps purchased at the rates n effect on une 30, 1940, manufacturers
sha, wth respect to such stamps, pay as part of ther foor stocks ta abty
an amount equa to the dfference between the amount pad for such stamps and
the amount whch woud have been pad If they had been purchased on or after
uy 1, 1940.
rt. 197 Secton 140.197 . Inventory and return. (a) Genera. very
person who hed stamped cgarettes for sae on the frst moment of uy 1, 1940,
sha make and fe an Inventory and return of the cgarettes so hed. The Inven-
tory and return sha be made on orm 187 by persons other than manufacturers
and on orm 188 by manufacturers.
Where the stamped cgarettes were hed by a ta payer at ony one pace of
busness, tre nventory and return sha be fed n dupcate wth the coector
of the dstrct n whch such pace of busness Is ocated.
Where the stamped cgarettes were hed at more than one pace of busness, a
consodated nventory and return of the stamped cgarettes hed at each pace
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347
Regs. 8 (1934), rts. 194-200.
of busness sha be fed n dupcate wth the coector for the dstrct In whch
s ocated the ta payer s prncpa pace of busness. In addton thereto, a
separate Inventory sha be prepared n trpcate on orm 187 or orm 188
(whchever s appcabe) wth respect to the stamped cgarettes hed at each
pace of busness one copy of whch sha be retaned at the partcuar premses
where the cgarettes were hed, one copy sha be fed wth the coector for
the dstrct n whch the partcuar premses are ocated, and one copy sha be
forwarded to and be retaned at the prncpa pace of busness of the ta payer
for use n preparng and verfyng the consodated nventory and return. The
copy of each separate nventory forwarded to the coector of nterna revenue
sha show the ta payer s name, the ocaton of the partcuar premses for
whch the nventory s made, and the name and address of the prncpa offce
from whch the consodated return and nventory w be fed.
Stamped cgarettes n transt at the frst moment of uy 1, 1940, sha be
ncuded n the Inventory of the person havng tte thereto at that tme.
The nventory and return sha be fed on or before ugust 1, 1940. aure
to fe the Inventory and return and pay the ta due thereon wthn the tme
specfed w sub|ect the ta payer to the penates set forth In artce 199
secton 140.199 .
The oath requred on orm 187 may be admnstered by any offcer author-
zed to admnster oaths for genera purposes, or by a deputy coector or n-
terna revenue agent. If the tota amount of ta shown to be due by the re-
turn s 10 or ess, the return may be acknowedged before two subscrbng
wtnesses n eu of an oath.
( ) Manufacturers. In addton to the requrements set forth n subsecten
(a) of ths artce, manufacturers sha, for the purpose of the addtona pay-
ment specfed n artce 19 secton 140.19 , ncude n ther nventory and
return an nventory of a unattached cgarette stamps hed at the frst moment
of uy 1, 1940, and of a cgarette stamps ordered and pad for at the rates n
effect on une 30, 1940, but not receved unt after the frst moment of uy
1, 1940.
(c) Records. very person requred by ths artce to fe an nventory and
return sha keep, at the premses where the cgarettes Inventored were o-
cated, accurate records showng the detas of the nventory, and how and by
whom the nventory was taken. Such records sha at a tmes be open for n-
specton by nterna revenue offcers, and sha be retaned for a perod of at
east four years from ugust 1, 1940.
rt. 198 Secton 140.198 . Refunds. cam for refund may be fed by
any person who has pad a foor stocks ta on cgarettes (ncudng unattached
cgarette stamps) and who cams that he made an overpayment of such ta .
Such cam must be made under oath on orm 843, contan the Informaton re-
qured by the form, and be supported by a statement of the facts and evdence
upon whch the cam s based. The cam sha be fed wth the coector of
nterna revenue to whom the ta was pad.
rt. 199 Secton 140.199 . Penates and nterest. The penaty under sec-
ton 3 12 (d) (1) and (e) of the Interna Revenue Code for denquency In
fng an Inventory and return s 5 per cent of the amount of the ta f the
faure s for not more than 30 days, wth an addtona 5 per cent for each
addtona 30 days or fracton thereof durng whch faure contnues, not to
e ceed 25 per cent In the aggregate. The penaty does not appy where the
return s ater fed and faure to fe the return wthn the prescrbed tme
s shown to the satsfacton of the Commssoner to be due to reasonabe cause
and not to wfu negect.
Where an assessment of the foor stocks ta s made, and payment s not
made wthn 10 days after the ssuance of the frst notce and demand ( orm
17), there w accrue, under secton 3 55 of the Interna Revenue Code, a 5
per cent penaty and nterest at the rate of per cent per annum computed
upon the entre assessment from the date of ssuance of orm 17 unt date of
payment.
In case a fase or frauduent Inventory and return Is wfuy made, the
penaty under secton 3 12 (d) (2) and (e) of the Interna Revenue Code a
50 per cent of the tota ta due.
The severa crmna penates set out n artce 113 secton 140.113 are
aso appcabe to the foor stocks ta .
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Regs. 8 (1984), rts. 1.4 200.) 348
(Ths Treasury decson s ssued under authorty of sectons 2004
and 2005 of the Interna Revenue Code as added Dy secton 212 of
the Revenue ct of 1940 (Pubc, No. 5 , Seventy-s th Congress,
thrd sesson) and secton 3791 of such Code (53 Stat., 4 7).)
Tmothy C. Moonet,
ctng Comm oner of Interna Revenue.
ohn L. Su van,
( ed wth the Dvson of the edera Regster ugust 5. 1940, 3.54 p. m.)
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349 Regs. 8 (1934), rt. 72.
TO CCO, TC., T S.
S CTION 2004, S DD D Y S CTION 212 O T R NU CT
O 1940. CIG R TT S.
Reguatons 8 (1934), rtce 72: Rates of ta 1940-31-103 2
on cgars and cgarettes Date effectve. T. D. 4985
Reguatons 8, as amended, reatng to ta es on tobacco products,
etc., as made appcabe to the Interna Revenue Code by Treasury
Decson 4885 C. . 1939-1 (Part 1), 39 , amended.
Washngton, D. C.
Secton 212 of the Revenue ct of 1940 (Pubc, No. 5 , Seventy-
s th Congress, thrd sesson) provdes as foows:
Sec. 212. Cgabettes.
Subchapter of chapter 15 of the Interna Revenue Code s amended by
nsertng at the end thereof the foowng new sectons:
Sec. 2004. Defense Ta fob ve Yeabs.
In eu of the rates of ta specfed n secton 2000(c) (2), the rates of ta for
the perod after une 30, 1940, and before uy 1, 1945, sha be 3.25 and 7.80,
respectvey.

In conformty wth the provson of aw quoted above, Reguatons
8 (revsed November, 1934) Part 140, Tte 2 , Code of edera Reg-
uatons , but ony as prescrbed and made appcabe to the Interna
Revenue Code by Treasury Decson 4885, approved ebruary 11,1939
C. . 1939-1 (Part 1), 39 Part 4 5, Subpart of such Tte 2 ,
1939 Sup. , s amended as foows:
rtce 72 secton 140.72 s amended by addng the foowng note
at the end of paragraph (a):
Nora. or the perod after une 30, 1940, and before uy 1, 1945, the rates
of ta on cgarettes as specfed n the above tabe, namey, 3, 7.20, and 3
are 3.25, 7.80, and 3.25, respectvey.
(Ths Treasury decson s ssued under the authorty of secton
2004 of the Interna Revenue Code as added by secton 212 of the
Revenue ct of 1940 (Pubc, No. 5 , Seventy-s th Congress, thrd
sesson) and secton 3791 of such Code (53 Stat., 4 7).)
Tmothy C. Mooney,
pproved uy 18,1940.
ohn L. Suvan,
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Regs. 99, rt. 300.)
350
T ON M NU CTUR O M NU CTUR D SUG R.
S CTION 3493 O T INT RN L R NU COD , S M ND D Y
CT O OCTO R 8, 1940 (PU LIC, NO. 807, S NTY-SI T CON-
GR SS).
Reguatons 99, rtce 300: Who may fe the 1940-48-10502
cam. T. D. 5021
rtce 303: Lmtatons on aowance.
TITL 2 INT RN L R NU . C PT R I, P RT 812, SU P RT D. PORT
P YM NTS.
Manufactured sugar ta . mendng Reguatons 99 as made
appcabe to the Interna Revenue Code by Treasury Decson
4885 C. . 1939-1 (Part 1), 39 .
Washngton, D. O.
edera Reguatons reatng to the ta on the manufacture of manu-
factured sugar as made appcabe to the Interna Revenue Code (53
Stat., Part I) by Treasury Decson 4885, approved ebruary 11.1939
C. . 1939-1 (Part 1), 39 Part 4 5, Subpart , Tte 2 , Code of
edera Reguatons, 1939 Sup. , to the provsons of the ct ap-
proved October 8, 1940 (Pubc, No. 807, Seventy-s th Congress,
thrd sesson), such reguatons are amended as foows:
Paragraph 1. In eu of the headngs and quotatons of aw appear-
ng after the words port Payments and precedng artce 300
secton 312.300 of such Tte 2 substtute the foowng:
Secton 3403 of the Interna Revenue Code, as amended by the ct approved
October 8, 1040 (Pubc, No. 807, Seventy-s th Congress).
Sec. 3493. portaton.
(a) Refund of Ta Pad. Upon the e portaton from the Unted
States to a foregn country, or the shpment from the Unted States to
any possesson of the Unted States e cept Puerto Rco, of any manu-
factured sugar, or any artce manufactured whoy or party from man-
ufactured sugar, wth respect to whch ta under the provsons of sec-
ton 3490 has been pad, the amount of such ta sha be pad by the
Commssoner of Interna Revenue to the consgnor named In the b of
adng under whch the artce was e ported or shpped to a posses-
son, or to the shpper, or to the manufacturer of tbe manufactured
sugar or of the artces e ported, f the consgnor waves any cam
thereto n favor of such shpper or manufacturer: Provded, That no
such payment sha be aowed wth respect to any manufactured sugar,
or artce, upon whch, through substtuton or otherwse, a drawback of
any ta pad under secton 3500 has been or s to be camed under any
provsons of aw made appcabe by secton 3501.
(b) Pemod for ung Refund Cam. No payment sha be a-
owed under ths secton uness wthn two years after the rght to
such payment has accrued a cam therefor s fed by the person
entted thereto.
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351
Regs. 99, rt. 300.
Par. 2. rtce 300 secton 312.300 of such Tte 2 s amended
to read as foows:
bt. 300. Who may fe the cam. The person named as consgnor In the
b of adng under whch the manufactured sugar, or an artce processed
whoy or party therefrom, s e ported or shpped has the prmary rght to
cam the e port payment provded for n secton 3493(a) of the Interna
Revenue Code, as amended. Such person may, however, wave any cam
thereto n favor of the shpper or the manufacturer, n whch case the shpper
or the manufacturer, as the case may be, w be recognzed as the proper
camant.
waver n substantay the foowng form sha be used:
, the consgnor(s) named n the b of adng to
whch ths waver s aff ed or attached, do(es) wave n favor of
(shpper) (manufacturer) any cam for payment aow-
abe under the provsons of secton 3493(a) of the Interna Revenue Code by
reason of the e portaton or shpment of the artces descrbed n such b
of adng, and state(s) that such party s the actua shpper or the actua
manufacturer of the artce or artces e ported.
(Consgnor named In the b of adng.)
Par. 3. Subdvson (a) of artce 303 subsecton (a) of secton
312.303 of such Tte 2 s amended to read as foows:
bt. 303. Lmtatons on aowance. (a) Tme for fng cam. No e port
payment sha be aowed uness cam therefor s fed by the person entted
thereto wthn two years from the date the rght to such payment accrued.
The rght to payment accrues as of the date the artces are e ported.
(Ths Treasury decson s prescrbed pursuant to the authorty
conferred by secton 3497 and secton 3791 of the Interna Revenue
Code.)
Guy T. everng,
ohn L. Suvan,
( ed wth the Dvson of the edera Regster November 22, 1940, 10.28 a. m.)
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Regs. 9 , rt. 202 352
PROC SSING T S.
TITL II. R UNDS O MOUNTS COLL CT D UND R
T GRICULTUR L D USTM NT CT. (193 )
Reguatons 9 , rtc| 202: acts and evdence 1940-39-10431
n support of cam. Ct. D. 14 5
processng ta revenue act of 193 agrcutura ad|ustment
act decson op court.
1. Petton fob Revew Cam for Refund Suffcency of Cam.
The Unted States Processng Ta oard of Revew propery ds-
mssed a petton to revew the acton of the Commssoner n dsa-
owng a cam for refund of processng ta es pad on the ground that
the cam faed to compy wth the requrements of Tte II of the
Revenue ct of 193 and the reguatons promugated thereunder.
The functon of the facts caed for by the schedues of the prescrbed
form Is to factate research, and the Commssoner s entted to
nsst upon compance wth ther drectons. cam that refers
to no facts upon whch t may be founded s neffectve and w not
suppy a bass for a sut aganst the Government when there has been
nether waver by the Commssoner nor amendment by the ta payer.
2. Moton to Dsmss ursdcton of oard of Revew.
The aegaton n the petton for revew that a cam for refund
had been fed was |ursdctona In character and was appropratey
chaenged by a moton to dsmss. The oard of Revew was re-
qured to determne that ssue before proceedng to a hearng on
the merts. The cear ntent of secton 903 of the Revenue ct of
193 s to requre a camant to seek a rung by the Commssoner
on the merts of a cam before appyng to the oard for a revew,
and the power of the oard to aow a refund s dependent upon
whether a cam for refund has been fed n compance wth the
statute. cam that fas to meet the statutory requrements and
that has been propery dsaowed by the Commssoner as defectve
eaves the oard wthout ursdcton to grant a refund.
3. Consttutonaty of Statute.
Tte II of the Revenue ct of 193 s not unconsttutona on the
ground that t Imposes an mpossbe burden of proof upon a ta -
payer who faed to keep records to show that t bore the burden of
the ta .
Unted States Crcut Court of ppeas fob the ghth Crcut.
Lee Wson d Co., pettoner, v. Commssoner of Interna Revenue, respondent.
I ed. (2d), 313.
On petton to revew decson of Unted States Trocessng Ta oard of Revew.
efore Gardner, Woodrough, and Thomas, Crcut udges.
pr 22, 1940.
OPINION.
Thomas, Crcut udge, devered the opnon of the court
Ths s a petton to revew an order of the Unted States Processng Ta
oard of Revew. It nvoves a cam for refund of the sum of 2,218. 1
coected from the pettoner as a ta on the domestc processng of hogs
pursuant to the provsons of the grcutura d|ustment ct (ch. 25, 48
Stat., 31, 7 U. S. C. ., secton 01 et seq.). The Commssoner of Interna
Revenue dsaowed the pettoner s cam on the grounds (1) that the cam s
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353
Regs. 9 , rt. 202.
rot founded on the bass that pettoner had borne the burden of the ta (2)
that no evdence was submtted to estabsh that the burden of the ta was
borne by the pettoner (3) that the cam as fed does not conform to the
provsons of sectons 902 and 903 of Tte II of the Revenue ct of 193
(ch. 90, 49 Stat, 1747, 7 U. S. C. ., sectons 44, 45) and (4) that the
cam as fed afforded no bass for the Commssoner to consder t on ts
merts.
The pettoner thereupon sought a revew of the decson of the Comms-
soner before the oard of Revew created by the ct, prayng that t be
granted a hearng that the decson of the Commssoner be reversed and
aegng that Tte II of the Revenue ct of 193 s unconsttutona, nu,
and vod, n so far as t purports to condton refund of the ta upon proof
that the ta payer bore the burden of the ta , or n so far as t requres
proof based upon records not theretofore requred to be kept by the ta payer.
Upon moton of the respondent the oard dsmssed the petton on the
ground that the cam for refund, the dsaowance by the respondent of
whch s sought to be revewed, fas to compy wth the requrements of Tte
II of the Revenue ct of 193 and of the Treasury reguatons promugated
thereunder.
The appea s before ths court pursuant to secton 90 (g) of the Revenue
ct of 193 (ch. 90, 49 Stat., 1 48, 1750, 7 D. S. C. , secton 48(g) ). The
snge queston presented s the proprety of the oard s order. The pet-
toner contends: (1) that the cam fed by t was a good cam under the
aw (2) that the petton fed wth the oard stated a good cause of acton
(3) that the oard s wthout power to dsmss a propery drawn petton and
thus refuse a hearng on the merts and (4) that f Tte II of the Revenue
ct of 193 s to be construed as respondent urges, t s nu and vod as an
nfrngement of the pettoner s consttutona rghts.
The respondent denes each of the pettoner s contentons and urges that
the pettoner, by proceedng upon a cam propery re|ected by the Comms-
soner as defectve, faed to compy wth an essenta prerequste to the
mantenance of ts cause of acton before the oard.
The vadty of the cam must be determned n the ght of the reevant
statute and the reguatons promugated thereunder. The pertnent sectons
of the Revenue ct of 193 are set out n the margn.1
Secton 91 of the Revenue ct of 193 ( 7 U. S. C. ., secton 58) empowers
the Commssoner to prescrbe such rues and reguatons as may be deemed
necessary to carry out the provsons of ths tte. Proceedng under ths
grant of authorty the Commssoner promugated Treasury Reguatons 9
desgned to prescrbe the essentas of the cam requred by secton 903 of
the ct, and ntended to provde the necessary nformaton requste to the
aowance of a refund under the condtons set forth n secton 902 of the
1 Sec. 902. Condtons of owance of Refunds. No refund sha be made or
aowed, n pursuance of court decsons or otherwse, of any amount pad by or coected
from any camant as ta under the grcutura d|ustment ct. uness the camant
estabshes to the satsfacton of the Commssoner n accordance wth reguatons pre-
scrbed by hm. wth the approva of the Secretary, or to the satsfacton of the tra
court, or the oard of Revew n cases provded for under secton 000, as the case may be
(a) That he bore the burden of such amount and has not been reeved thereof nor
rembursed therefor nor shfted such burden, drecty or ndrecty, (1) through ncuson
of such amount by the camant, or by any person drecty or ndrecty under hs contro,
or havng contro over hm, or sub|ect to the same common contro, n the prce of any
artce wth respect to whch a ta was mposed under the provsons of such ct, or In
the prce of any artce processed from any commodty wth respect to whch a ta was
mposed under such ct, or n any charge or fee for servces or processng: (2) through
reducton of the prce pad for any such commodty or (3) n any manner whatsoever
and that no understandng or agreement, wrtten or ora, e sts whereby he may be
reeved of the burden of such amount, be rembursed therefor, or may shft the burden
thereof- or
(b) That he has repad uncondtonay such amount to hs vendee (1) who bore the
burden thereof, (2) who has not been reeved thereof nor rembursed therefor, nor shfted
such burden, drecty or ndrecty, and (3) who s not entted to receve any remburse-
ment therefor from any other source, or to be reeved of such burden n any manner
whatsoever. (D. S. C, Supp. I , Tte 7, secton 044.)
Sec. 903. ng of Cam. No refund sha be made or aowed of any amount pad
by or coected from any person as ta under the grcutura d|ustment ct uness,
after the enactment of ths ct, and pror to uy 1, 1937. a cam for refund has been
fed by such person In accordance wth reguatons prescrbed by the Commssoner wth
the approva of the Secretary. evdence reed upon In support of such cam sha
be ceary set forth under oath. (U. S. C, Supp. I , Tte 7, secton 845.)
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Regs. 9 , rt. 202.
354
ct. The pertnent artces of Treasury Reguatons 9 promugated under
the Revenue ct of 193 w be found n the footnote.
The cam for refund fed wth the coector was made on P. T. orm 79 prescrbed
by the reguatons. The camant fed n the banks on the frst page, statng ts
name and address, the name of the commodty processed, and the amount of the
ta and of the refund camed. oowng these banks on the frst page of the
form s a prnted affdavt to be e ecuted by the camant. The affdavt sets out n
seven numbered paragraphs the essenta eements of a cam to conform to the
provsons of the statute wth an averment that they are true and correct. The
camant crossed out paragraph number 4 of the affdavt The deeted paragraph
reads as foows:
4. (a) That the amount of the burden of the processng ta on the processng
of the commodty named above whch was borne by the camant as set forth n
coumn 2 above s true and correct that the camant has not been reeved thereof
nor rembursed therefor nor shfted such burden, drecty or Indrecty, (1) through
ncuson of such amount by the camant, or by any person drecty or ndrecty
under hs contro, or havng contro over hm, or sub|ect to the same common contro,
n the prce of any artce processed from such commodty (2) through reduc-
ton of the prce pad for such commodty or (3) n any manner whatsoever and
that no understandng or agreement, wrtten or ora, e sts whereby he may be
reeved of the burden of such amount, be rembursed therefor, or may shft the
burden thereof and ( ) that the data and statements submtted n and made a
part of Schedue D are true and correct
The remanng seven pages of the prescrbed form contan Schedues , , C, D,
, and a detaed set of nstructons as to the nformaton desred. Schedue re-
qures the date, pace, and amount of each ta payment. Schedues and C ca
for nformaton as to amounts of the ta refunded to, or for whch credt has been
taken by, the camant or by others. Schedue D provdes for data reatve to the
computaton of the average margn for the ta perod necessary to the prma fade
showng referred to n secton 907 of the ct and n artce 05 of the reguatons.
Schedue asks for nformaton as to vendees to whom the processng ta was
repad and who bore the burden of such ta .
The pettoner fed n Schedue and eft the remanng schedues bank
wthout e panaton. In eu, apparenty, of ts faure to provde the desred
nformaton t appended to the cam the foowng statement:
rt. 201. Cams orm and trhere to fe. Cams for the refund of ta sha be
made on the prescrbed forms. Such cams sha be prepared n accordance wth the
Instructons contaned on the forms and n accordance wth the provsons of these
reguatons.
rt. 202. acts and evdence n support of cams. ach cam sha set forth n
deta and under oath each ground upon whch the refund Is camed. It Is ncumbent
upon the camant to prepare a true and compete cam and to substantate bv cear and
convncng evdence a of the facts necessary to estabsh hs cam to the satsfacton of
the Commssoner faure to do so w resut n the dsaowance of the cam.
The provsons of these reguatons requre that certan specfc facts sha be stated In
support of any cam for refund. The camant Is prveged to prove those facts In anv
manner avaabe to hm and to submt such evdence to that end as he may desre.
rt. 01. Cam form prescrbed.. Cams for refund of amounts pad as processng
ta (as denned n secton )13(b of the ct) sha be fed on P. T. orm 79.
ht. 0:s. Payment of ta . The camant sha set forth n the cam compete data
wth respect to the amount of processng ta whch he has pad on the processng of the
commodty. (Detaed Instructons foow.)
rt. 05. vdence as to margn . Secton 907 of the ct (ch. 90, 49 Stat.. 1751
7 U. S. C. ., secton 49) provdes that n cams for refund of amounts pad as processng
ta It sha be prma face evdence that the burden of such amount was borne bv the
camant to the e tent (not to e ceed the amount of the ta ) that the average margn per
unt of the commodty processed was ower (urng the ta perod than the average margn
per unt of such commodty was durng the perod before and after the ta . If the average
margn durng the ta perod was not ower, t sha be prma face evdence that none of
the burden of such amount was borne by the camant but that t was shfted to others.
There sha be submtted wth, and as a part of. each cam, a statement showng the
average margn for the ta perod and for the perod before and after the ta .
(Detaed nstructons for the computaton of the average margn foow.)
In support of such statement there sha be submtted, verfed by approprate affdavt
a detaed showng of the manner n whch the margns for each month and the averase
margns for each perod were ascertaned, the data and records on whch they were based
the ocaton of such data and records, and n other reated matters ncudng the ac-
countng procedure of the camant, whch entered nto the computatons of such margns
eements, factors, unts, or measures enterng nto the computaton of such margns
and any departure from unformty In the use thereof n makng such computaton for
any part of ether perod, must be fuy e paned and ustfed.
rt. 0 . Other evdence. In addton to the showng as to margns, the camant Is
prveged to submt wth hs cam any other evdence avaabe to hm tendng to
estabsh that he bore the burden of the ta . Such evdence may be submtted to support
the prma face presumpton, f such presumpton s In favor of the camant, or to rebut
5 n presumpton t t Is aganst hm. (See secton 902 and subsecton (e) of secton
MI7 nf the rt 1
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Regs. 9 , rt. 202
It s mpossbe to determne and prove how much of the ta , f any, was not
absorbed by camant and camant beeves and therefore asserts that t
absorbed a the ta .
Camant demands refund of the entre amount pad because the Supreme Court
has hed that t was egay assessed and coected and because any attempt to
condton or restrct the refund thereof, by requrng proof that the ta was ab-
sorbed by the camant, s unconsttutona and vod.
It s obvous that the pettoner dd not fe a cam for refund that met the
requrements of secton 903 of the statute. The unsworn statement that the
entre amount of the ta was borne by the pettoner and not shfted to others s
not supported by a snge statement of fact that woud have permtted the Com-
mssoner to determne the merts of the pettoner s rght to a refund under
secton 902. The reguatons, the substance of whch s set forth n the nstruc-
tons accompanyng the form, are dsregarded wthout other e panaton than
that the condtons mposed by the ct and requred by the reguaton are
unconsttutona.
The functon of the facts caed for by the schedues s to factate research and
the Commssoner was entted to nsst upon compance wth ther drectons as
to the desred nformaton. cam that refers to no facts upon whch t may be
founded s neffectve and w not suppy a bass for a sut aganst the Govern-
ment when there has been nether waver by the Commssoner nor amendment by
the ta paver. (Unted States v. Memphs Cotton O Co., 288 U. S., 2. 72 Ct. D.
2 , C. . II-1, 307 (1933) Unted States v. et f Tarrant Co., 283 U. S., 2 ),
272 Ct. D. 33 , C. . -, 431 (1931) Maas d WaMsten Co. v. Unted States, 283
U. S., 583, 589 Ct. D. 353, C. . -, 433 (1931) Unted States v. ndrews, 302
U. S., 517, 521 Ct. D. 1300, C. . 1938-1, 322 Dascomb v. McCuen, 2 Cr., 73 ed.
(2d), 417, 419 Contnenta-Inos Nat. ank t Trust Co. v. Unted States, 1
Cr., 7 ed. (2d), 153, 155 Sncad v. more, 5 Cr., 59 ed. (2d), 312. 314
Taber v. Unted States, 8 Cr., 59 ed. (2d), 5 8, 571 Weagant v. owers, 2 Cr.,
57 ed. (2d), 79, 80. )
It w be observed that secton 903 of the ct provdes that no refund of any
processng ta sha be aowed uness a cam therefor sha have been ted n
accordance wth reguatons prescrbed by the Commssoner pror to uy 1, 1937.
There s then added: evdence reed upon n support of such cam sha be
ceary set forth under oath. It s apparent from the second paragraph of the
statement attached to the cam, supra, that at the tme the cam was fed the
pettoner was of the Impresson that Congress coud not condton or restrct
the refund of processng ta es, and that the camant coud not be requred to
furnsh evdence to support the burden cast upon t by paragraph 4 whch t
deeted from the affdavt on the frst page of the cam. The ct was subse-
quenty hed to be vad by the Supreme Court n nnston Mfg. Co. v. Davs (301
U. S., 337 Ct. D. 1234, C. . 1937-1, 485 ). Now t s camed the requrement
of the statute that the evdence reed upon to support the cam must be set forth
under oath s not sub|ect to the mtaton of tme for fng the cams provded n
the frst sentence of secton 903. The argument s opposed to the pan mandate
of the statute. Ths secton of the statute provdes for fng cams, and requres
that evdence reed upon n support of such cam must be set forth under
oath. Where must such evdence be set forth Ceary t must be n connecton
wth the cam. nd that evdence set forth n accordance wth reguatons
prescrbed by the Commssoner must be suffcent to estabsh to the satsfac-
ton of the Commssoner of the tra court, or the oard of Revew
That he bore the burden prescrbed by the statute.
The pettoner contends further that It was entted to a hearng before the
oard on the merts of the aegatons n ts petton wthout regard to whether
the Commssoner was rght In dsaowng the cam for noncompance wth the
reguatons. The argument s that the pettoner was entted under secton 902
to present evdence as to ts rght to a refund to ether the Commssoner or the
oard that secton 90 (7 U. S. C. ., 48 (b)), whch provdes that upon pet-
tonng the oard the camant sha be entted to a hearng as provded
heren, s mandatory n ts terms that the oard s gven no authorty by statute
to dsmss a propery drawn petton and deny a hearng on the merts and that
for the purposes of rung on the moton to dsmss the oard was requred to
accept as true a we peaded facts aeged In the petton ( . d . Laboratores,
Inc., v. Commssoner, 7 Cr., 104 ed. (2d), 5 3 Ct. D. 1418, C. . 1939-2, 39 )
wthout reference to the attached cam.
In substance the petton to the oard aeges that pettoner pad processng
ta es on hogs In the amount of 2,218. 1 n 1935 that It bore the burden of such
G
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Regs. 9 . rt. 204.
35
ta es and was not reeved therefrom, or rembursed therefor, and dd not shft
that burden to others, ether drecty or ndrecty that on une 25,1937, after the
enactment of the Revenue ct of 193 , t ted a cam for refund of the processng
ta es pad by t that sad cam was dsaowed by the Commssoner of Interna
Revenue on March 10, 1939. Certan errors commtted by the Commssoner n
dsaowng the cam and certan consttutona questons are aeged. hearng
on the merts s requested.
ssumng that the aegatons wth respect to the burden of the ta are suff-
cent to estabsh the vadty of the pettoner s cam for purposes of the
moton to dsmss, t does not foow that a cause of acton was stated whch
the oard had authorty to hear and determne on the merts. The aegaton
that a cam had been fed was ursdctona n character and was appropr-
atey chaenged by the moton to dsmss. The oard was requred to deter-
mne that ssue before proceedng to a hearng on the merts. Under secton
903 of the ct the power of the oard to aow a refund s dependent upon
whether a cam for refund has been fed n compance wth the statute. The
cear ntent of the statute s to requre a camant to seek a rung by the Com-
mssoner on the merts of the cam before appyng to the oard for a revew.
cam that fas to meet the statutory requrements and that has been prop-
ery dsaowed by the Commssoner as defectve eaves the oard wthout
|ursdcton to grant a refund. (See Unted States v. et Tarrant Co.,
supra.) If t were otherwse the camant coud proceed drecty to the oard
merey by fng a forma cam for refund unsupported by any facts that woud
permt the Commssoner to rue on ts merts. The acton of the oard n ds-
mssng the petton upon respondent s moton was proper and there s no mert
n the contenton that t was wthout power so to do. ( rab Packny Co. v.
Commssoner, 5 Cr., 109 ed. (2d), 278 Oswad aeger akng Co. v. Com-
mssUmer, 7 Cr., 108 ed. (2d), 375 Gran et Suppy Co. v. Commssoner.
8 Cr., 109 ed. (2d), 490 . . Laboratores v. Commssoner, supra.)
nay, the pettoner contends that, as construed by the respondent. Tte
II of te Revenue ct of 193 s unconsttutona. The argument s that f tho
margn data requred by Schedue D of P. T. orm 79 and artce 05, supra,
s a mandatory prerequste under secton 907, supra, to the rght to a refund
the ct mposes an mpossbe burden of proof upon a ta payer who faed to
keep records to show that t bore the burden of the ta . Secton 907, supra,
specfcay provdes for the case of a ta payer n ths stuaton, and, asde from
the fact that there s an entre absence n ths record of any facts showng
mpossbty of proof under ths secton of the statute, the pettoner s conten-
ton s whoy wthout mert. ( nnston Mfg. Co. v. Davs, 301 U. S., 337
Unted States v. efferson ectrc Co., 291 U. S., 38 Ct. D. 803, C. . III-1,
3 ).S (1931) urnet v. ouston, 283 U. S., 223, 228 Ct. D. 328, C. . -, 343
(1931) .)
The order of the oard of Revew s affrmed.
S CTION 902.
Reguatons 9 , rtce 204: Condtons as to 1940-28-10320
ta burden wth respect to amount of refund Ct. D. 14 0
aowabe.
PROC SSING T S GRICULTUR L D USTM NT CT R NU CT OP
103 D CISION O COURT.
1. Cam fob Refund Ta es Pad by Pbocessobs Wth Money d-
vanced Y N D CONDITIONS ON LLOW NC O R UND
Consttutonaty of Statute.
Manufacturers of serum who purchased hogs for use n ther bus-
ness, processed them, and sod the carcasses to a packng company,
are not entted to recover from the Commssoner the amount of
processng ta es pad by them, the vendee company havng ad-
vanced suffcent money for payment of the ta es wth the under-
standng that t woud be repad ony f and to the e tent that the
ta es were refunded, and the camants havng faed to fuf the
condtons necessary to entte them to a refund under secton 902
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357
Regs. 9 , rt. 204.
of the Revenue ct of 193 , n that t affrmatvey appeared from
ther pettons that they dd not bear the burden of the ta es pad
by them and that they had not repad uncondtonay such amounts
to the vendee. The statutory restrcton of the rght to refund to
those who bore the burden of the ta does not Infrnge due process.
2. Certorar Dened.
Petton for certorar dened May , 1940.
Unted States Crcut Court or ppeas for the Tenth Crcut.
Southwestern Serum Co., pettoner, v. Commssoner of Interna Revenue,
respondent.
Coorado Serum Co., pettoner, v. Commssoner of Interna Revenue, respondent.
108 . (2d),843.
Pettons for revew of decsons of the Unted States Processng Ta oard of Revew.
efore Phps, ratton, and u man, Crcut udges.
anuary 4, 1940.
opnon.
batton, Crcut udge, devered the opnon of the court.
These are two separate pettons to revew orders of the Unted States Process-
ng Ta oard of Revew n accordance wth the provsons of Tte II of the
Revenue ct of 193 ( 49 Stat., 1 48, 1747). One pettoner pad processng
ta es for the perod commencng ebruary 1, 1934, and endng ugust 31, 1934,
and for the perod commencng pr 1, 1935, and endng ugust 31, 1935, n the
amount of 10,837.42 and the other pettoner pad ke ta es for the perod
commencng ebruary 1, 1934, and endng October 31, 1935, n the amount of
35,853.92. Separate cams for refund were submtted to the Commssoner
of Interna Revenue, and dsaowed. Separate pettons to revew the acton
of the Commssoner were seasonaby odged wth the oard. cept n respect
to the perod of tme covered and the amount of ta es pad, the aegatons n
the two pettons were substantay dentca. ccordngy, they may be stated
together. These facts were aeged n the pettons and the attached copes of
the cams. Pettoners were at a matera tmes engaged one at Wchta,
ans., and the other at Denver, Coo. n the busness of manufacturng ant-
choera serum and other serum for use on hogs. In the course of that busness
they rased, fattened, purchased n the open market, Inocuated, and then
saughtered hogs, and used the bood e tracted from them n tte manufacture
of the serum. Immedatey after the bood had been e tracted, the carcasses
were sod and devered to Cudahy Packng Co. Lve hogs were purchased at
fat prces n the open market n competton wth other buyers, ncudng the
Cudahy company. There was no contract, understandng, or agreement, e press
or mped, between pettoners and the vendors from whom they purchased
ve hogs that any amount of processng ta shoud be ncuded n or deducted
from the prces pad, and no such amount was ncuded or deducted. The prces
whch the Cudahy company pad pettoners for the carcasses were the fat,
open market prces computed on the ve weght of the hogs, and pad soey
to obtan the carcasses and for nothng ese. Pettoners and the Cudahy
company dd not have any contract, understandng, or agreement, e press or
mped, aocatng any porton of the prces pad to processng ta es and no
amount.was added, aocated, or apportoned to such ta es, or stated n any
saes nvoce as a separate tem or otherwse, or ncuded n any dentfabe
manner n such prces. nd the prces at whch pettoners sod serum dd not
n any dentfabe manner, or otherwse, ncude or recognze processng ta es.
Processng ta es were pad on the tota ve weght of the hogs. The bood
e tracted for use n the manufacture of the serum had a reatvey sma weght
and vaue when compared wth the tota weght and vaue of the carcasses.
Due to these factors, pettoners were unabe wthout fnanca assstance to
fnance the payment of the ta es mposed. To do so woud have forced them
to suspend busness. In order that they mght not be compeed to suspend
busness and the Cudahy company thus ose vauabe sources of nog carcasses,
the Cudahy company oaned and advanced to each pettoner suffcent money
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Regs. 9 , rt. 204.
358
to enabe It to pay the ta es asserted aganst It, and the money was used for
that purpose. Pettoners are defntey and uncondtonay obgated to repay
such advances, respectvey, ony to the e tent that any of the ta es pad are
refunded.
The oard dsmssed the pettons for faure to aege the condtons neces-
sary to authorze refunds n that t affrmatvey appeared from such pettons
that the burden of the amount of the ta es had been borne soey by the vendee
of pettoners, and that pettoners had not repad uncondtonay such amount
to such vendee.
The processng ta es whch pettoners pad wth the money advanced for
that purpose by the Cudahy company were mposed under the grcutura
d|ustment ct of May 12, 1933 ( 48 Stat., 31). The ct was decared uncon-
sttutona n anuary, 193 . (Unted States v. uter, 297 U. S., 1, 5 S. Ct.,
312, 80 L. d., 477. 102 . L. R., 914 Ct. D. 1070, C. . -1, 421 (193 ) .)
Thereafter Congress enacted Tte II of the Revenue ct of 19P , supra. Sec-
ton 902 provdes that no refund sha be made or aowed, pursuant to a court
decson or otherwse, of any amount pad by or coected from a camant as
ta under the grcutura d|ustment ct, uness such camant estabshes to
the satsfacton of the Commssoner, or the satsfacton of the oard of Revew
n a case comng before t, or the satsfacton of the tra court n a case comng
before the court, that he bore the burden of such amount and has not been
reeved thereof or rembursed therefor or shfted such burden, drecty or
ndrecty, (1) through ncuson of such amount n the prce of any artce
wth respect to whch a ta was mposed under the provsons of such ct, or n
any charge or fee for servces or processng, (2) through reducton of the prce
pad for any such commodty, or (3) n any manner whatsoever and that no
understandng or agreement e sts whereby he may be reeved of the burden
of such amount, be rembursed therefor, or shft t or tat he has repad un-
condtonay such amount to hs vendee (1) who bore the burden, (2) who has
not been reeved thereof or rembursed therefor or shfted It, and (3) who Is
not entted to receve rembursement from any source, or to be reeved of the
burden n any manner.
The ntent of the statute Is pan. Its broad anguage ndcates ceary a
deberate and studed egsatve purpose to confne the rght of refund to
those who bore the burden of the payment of processng ta es wrongfuy
e acted, and to deny such rght to a others. Pettoners pad money n e -
tngushment of such ta es, but the money was furnshed for that purpose by
the Cudahy company wth the understandng and agreement that pettoners
woud not repay It uness and ony to the e tent that t was refunded. That
appears from the cams and the pettons, and t was freey admtted at the
bar of ths court n the course of ora argument. Pettoners dd not bear the
burden of the payment of the ta es even though they had the technca, ega
tte to the money wth whch such ta es were pad. They were out nothng
when the ta es were pad, and they woud be n nothng f refunds were made.
They suffered no fnanca n|ury, and they seek no reef for ther own beneft
or gan. In ratonae and effect, they seek refunds wthout havng borne the
nta burden of the ta es, and n dong so they are met wth the etter and
sprt of the statute.
It s contended that pettoners pad the ta es wth ther own money to
whch they had tte as aganst the word that the rght to refund mmedatey
arose and became vested that under the procedure then e stng and recognzed
by aw they were requred to show merey that the coecton was ega, and
that the ta es were pad and that f secton 902, supra, s construed to make a
substantve change n such rght of pettoners, t s unconsttutona and vod.
The statute merey provdes that ony those who bore the burden of the Iega
ta es and have not shfted such burden or been reeved of t n any manner
sha be entted to reef. It does no more than provde that refunds sha be
made ony to those who suffered n|ury and are therefore the r a partes n
nterest. That s an eement of the rght to a refund of such ta es. The re-
strcton of the rght to camants comng wthn that cass does not Infrnge
due process. ( nnston Mfg. Co. v. Davt, 301 U. S., 337 Ct. D. 1234. C. .
1937-1, 485 Unted States v. efferson ectrc Co., 291 U. S., 38 Ct D. 803,
C. . III-1, 393 (1934) .)
Other questons are presented, but our concuson upon those dscussed
emnates need to consder them.
The decsons of the oard are severay affrmed.
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Msc.
TITL I . PORT, C RIT L , TC., R UNDS ND
LOOR STOC S D USTM NT UND R GRICULTUR L
D USTM NT CT (193 ).
1940-49-10512
Ct. D. 1471
PROC SSING T R NU CT OP 193 GRICULTUR L D USTM NT CT-
decson of supreme court.
1. Sut Cams for Refund Ta es Pad wth Respect to
Products ported ursdcton of Court.
The Court of Cams s wthout ursdcton of suts based upon
the dena by the Commssoner of Interna Revenue of cams
for the refundng of processng and foor stock ta es pad wth re-
spect to products e ported, under sectons 9(a) and 1 (a), re-
spectvey, of the grcutura d|ustment ct. Such cams are
governed by the mtatons mposed by secton 01(e) of Tte
I of the Revenue ct of 193 , whch prevents udca revew of
the Commssoner s acton.
2. Decson ffrmed.
Decson of the Unted States Court of Cams (30 P. Supp., 72)
affrmed.
Wson t Co., Inc., pettoner, v. Unted States, respondent.
Wson Co., Inc., of ansas, pettoner, v. Unted States, respondent.
T. M. Sncar t Co., Ltd., pettoner, v. Unted States, respondent.
1 S. Ct., 120.
On wrts of certorar to the Unted States Court of Cams.
November 18, 1940.
opnon.
Mr. ustce Murphy devered the opnon of the Court.
Pettoners are corporatons engaged In the preparaton, packng, and sae
of meat products n foregn and domestc commerce. etween November 5,
1933, and anuary , 193 , they e ported to foregn countres arge quanttes
of hog products wth respect to whch they pad processng ta es under secton
9(a) and foor stock ta es under secton 1 (a) of the grcutura d|ustment
ct. (48 Stat., 31, 35, 40.) Subsequent to e portaton pettoners fed cams
for refunds under secton 17(a). (48 Stat., 31, 40.) The Commssoner of
Interna Revenue dened a of the cams and sut In the Court of Cams
foowed. The Unted States thereupon moved to dsmss the pettons on
the ground that the Court of Cams was wthout ursdcton because of certan
provsons of Tte II of the Revenue ct of 193 . (49 Stat., 1 48, 1747-1755.)
The Court of Cams dsmssed the actons for want of ursdcton, on the
ground, however, that secton 01(e) of Tte I of the Revenue ct of 193
(49 Stat, 1 48, 1740) prevented udca revew of the Commssoner s acton.
(30 . Supp., 72.) To resove the confct wth Ctdahy ros. Co. v. La udde
(92 ed. (2d), 937) and Neuss, essen d Co., Inc., v. Unted States (30 ed.
Supp., 595), we granted certorar. (309 U. S., 51.)
The snge queston presented s whether the Court of Cams was wthout
ursdcton of pettoners suts. We hod that t was.
Tte II condtons payment of refunds upon proof that the camant actuay
bore the burden of the ta sought to be refunded or that he uncondtonay
repad t to hs vendee who bore the burden. Snce pettoners do not aege
satsfacton of these condtons t s pan that they do not cam under Tte
II. Indeed, they dsown any attempt to brng ther cams wthn ts
provsons.
Tte I provdes for refunds to e porters of products upon whch processng
or foor stock ta es have been pad. It s true that secton 17(a) of the gr-
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3G0
cutura d|ustment ct provded for these refunds before the ct was hed
unconsttutona n Unted States v. uter (297 U. S., 1 Ct. D. 1070, C. . -1,
421 (193 ) ). Whether pettoners coud st estabsh refund cams under
that secton f the ct had never been Invadated s a queston we need not
consder. or whatever the effect of that decson on secton 17(a), Congress
e pressy made t a part of Tte I by reenactng t n secton 01(a). (49
Stat., 1 48, 1739. ) It foows that pettoners cams, purportedy based on
secton 17(a), must be governed by Tte I and the mtatons t mposes.
Secton 01(e) of Tte I provdes:
The determnaton of the Commssoner of Interna Revenue wth respect
to any refund under ths secton sha be fna and no court sha have
|ursdcton to revew such determnaton.
Pettoners contend that Congress Intended to commt to the fna determna-
ton of the Commssoner ony such matters as fndngs of fact, computatons,
and the ke. ute apart from the fact that n secton 01(d) Congress
uses vrtuay the quoted words In mtng revew by admnstratve offcers,
we fa to see how the argument can ad pettoners here because the record
does not show why ther cams were dened. Snce the record Is sent on
ths pont, such decsons as Unted States v. Wams (278 U. S., 255) and
SUberschen v. Unted States (2 U. S., 221) are pany dstngushabe.
We hod that upon ths record the determnaton of the Commssoner s
fna. Thus we see no occason to narrow the effect of secton 01(e). The
decson of the Court of Cams was correct and must be affrmed.
ffrmed.
1 Sec. C01. (a) The provsons of sectons 17(a) of the grcutura d|ust-
ment ct, as amended, are hereby reenacted but ony for the purpose of aowng refunds
In accordance therewth In cases where the e portaton took pace
pror to anuary . 193 .
9 Sec. 01. (d) In the absence of fraud, the fndngs of fact and the decson of the
Commssoner of Interna Revenue upon the merts of any cam ad|usted pursuant to
ths secton and the mathematca cacuaton theren sha not be sub|ect to revew by any
admnstratve or accountng offcer, empoyee, or agent of the Unted States.
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DISTILL D SPIRITS.
INT RN L R NU COD .
1940-27-10314
T. D.497
TITL 2 INT RN L R NU . C PT R I. SU C PT R C MISC LL N OUS
CIS T S. P RT 171 MISC LL N OUS R GUL TIONS R L T D TO
LI UOR.
oor stocks ta on dsted sprts and fermented mat quors.
Washngton, D. C.
To Coectors of Interna Revenue, Dstrct Supervsors, and Others
Concerned:
Sectons 213 and 214 of the Revenue ct of 1940, approved une 25,
1940 (Pubc, No. 5 , Seventy-s th Congress), read as foows:
Sec. 213. Dsted Spbts.
(a) Secton 2800 of the Interna Revenue Code s amended by
nsertng at the end thereof the foowng new subsectons:
(g) Defense Ta fob ve Yeabs.

(h) oor Stocks Ta .
(1) Upon a dsted sprts produced n or mported nto the
Unted States upon whch the nterna-revenue ta mposed by aw
has been pad, and whch on uy 1, 1940, are hed and ntended for
sae or for use n the manufacture or producton of any artce n-
tended for sae, there sha be eved, assessed, coected, and pad a
foor stocks ta of 75 cents on each proof-gaon, and a proportonate
ta at a ke rate on a fractona parts of such proof-gaon. The
ta mposed by ths subsecton sha not appy to 100 wne gaons of
the reta stocks of dsted sprts hed by a person on premses as
to whch such person has ncurred occupatona ta as a reta dener
n quors for the perod begnnng on uy 1, 1040, and as to whch
no other occupatona ta wth respect to deang n dsted sprts
has been ncurred by such person for a perod begnnng on such
date.
(2) very person requred by ths subsecton to pay any foor
stocks ta sha, on or before ugust 1, 1940, under such reguatons
as the Commssoner, wth the approva of the Secretary, sha pre-
scrbe, make a return and pay such ta . Payment of the ta shown
to be due may be e tended to a date not ater than ebruary 1, 1941,
upon the fng of a bond for payment thereof n such form and
amount and wth such surety or suretes as the Commssoner, wth
the approva of the Secretary, may prescrbe. very reta deaer n
quors (even though not abe to pay such ta ) sha make the
return requred by ths paragraph.
(3) provsons of aw, ncudng penates, appcabe n re-
spect of nterna-revenue ta es on dsted sprts sha, nsofar ns
appcabe and not nconsstent wth ths subsecton, be appcabe n
respect of the foor stocks ta mposed hereunder.
Seo. 214. Wnes and ermented Mat Lquors.
Chapter 2 of the Interna Revenue Code s amended by nsertng at
the end thereof the foowng new subchapter:
Subchapter Defense Ta for ve Yeabs.

290217 41 24
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3 2
Sec. 3191. ook Stocks Ta on ermented Mat Lquobs.
(a) oob Stocks Ta . Upon a fermented mat quors upon
whch the nterna-revenue ta mposed by aw has been pad, and
whch on uy 1, 1940, are hed by any person and ntended for sae
a rate equa to the ncrease n rate of ta made appcabe to sucb
artces by secton 3190. The ta mposed by ths subsecton sha not
appy to the reta stocks of fermented mat quors hed by a person
on premses as to whch such person has ncurred occupatona ta as
a reta deaer n quors or a reta deaer n mat quors for the perod
begnnng on uy 1, 1940, and as to whch no other occupatona ta
wth respect to deang n dsted sprts, wnes, or mat quors, has
been Incurred by such person for a perod begnnng on such date.
(b) Returns. very person requred by subsecton (a) to pay any
foor stocks ta sha, on or before ugust 1, 1940, under such regua-
tons as the Commssoner wth the approva of the Secretary sha
prescrbe, make a return and pay such ta . Payment of the ta
shown to be due may be e tended to a date not ater than ebruary
1, 1941, upon the fng of a bond for payment thereof n such form
and amount and wth such surety or suretes as the Commssoner, wth
the approva of the Secretary, may prescrbe.
(c) Laws ppcabe. provsons of aw, ncudng penates,
appcabe n respect of the ta es mposed by secton 3150(a) sha.
Insofar as appcabe and not nconsstent wth ths subsecton, be
appcabe wth respect to the foor stocks ta mposed by subsecton
(a).
Pursuant to the above sectons of aw, the foowng reguatons
are prescrbed:
DISTILL D SPIRITS.
1. ach dster, propretor of an ndustra acoho pant, Interna revenue
bonded warehouse, acoho bonded warehouse, or ta -pad bottng house, rect-
fer, whoesae deaer n quors, reta deaer n quors, manufacturer, or any
other person, corporaton, partnershp, or assocaton hodng on uy 1, 1940,
ta -pad acoho or other ta -pad dsted sprts ntended for sae or for use
n the manufacture or producton of any artce Intended for sae, sha before
begnnng busness on that date prepare an nventory of a such ta -pad
dsted sprts.
2. The nventory sha be prepared In trpcate on sheets of paper not
arger than 10 by 1 Inches to be furnshed by the ta payer. The dsted
sprts sha be sted separatey by knds, that s, there w be a separate st-
ng of acoho, whsky, brandy, gn, rum, cordas, queurs, cocktas, etc.
The Inventory w consst of two sectons.
The frst secton w cover botted dsted sprts and w be dvded Into
s coumns whch w be desgnated:
(a) nd.
( ) Sze of botte.
(c) Number of bottes.
(d) Wne gaons.
(e) Proof of sprts.
f) Proof gaons.
The name of the dster, rectfer, mporter, or botter, and the sera
numbers need not be shown n the nventory of unbroken cases, e cept when
such cases are n transt on uy 1, 1940. The sze of the bottes contaned In
the cases must be stated. otted dsted sprts removed from the orgna
cases sha be sted as separate tems, showng the number of bottes of eacb
sze contanng sprts of the same knd and proof, the wne gaons, proof, and
proof gaons.
The second secton w cover dsted sprts In packages (barres or drums)
and tanks. The sera numbers of packages and the name of the dster must
be shown.
Sprts n process of rectfcaton and n bottng or storage tanks sha be
measured and proofed and the wne gaons, proof, and proof-gaon content of
each tank reported separatey on the nventory. The number and knd of
receptace contanng the sprts shoud aso be shown.
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3. The term dsted sprts sba ncude, among others, the foowng
whch are sub|ect to the foor ta of 75 cents a proof gaon when they have
been ta -pad accordng to aw pror to uy 1, 1940, and on that date are
Intended for sae or for use n the manufacture or producton of any artce
Intended for sae:
(a) coho.
( ) Sprts gran, sprts cane, and sprts frut,
(c) Whsky, mm, gn, and brandy.
d) ermouth contanng dsted sprts or brandy,
(e) Cocktas contanng dsted sprts or brandy.
f) Lqueurs, cordas, and smar compounds contanng dsted sprts
or brandy.
(ff) Dsted sprts of any knd hed by any person for use In the manu-
facture of any artce ntended for sae, regardess of whether the artce
to be produced s n tsef unft for beverage purposes.
4. n e empton of 100 wne (qud) gaons Is aowed to each reta deaer
n quors (a person who ses or offers for sae dsted sprts, wnes, or mat
quors n quanttes of ess than 5 wne gaons to the same person at the same
tme).
person operatng more than one reta estabshment s entted to the e -
empton of 100 wne gaons for the stocks at each such pace of busness.
person engaged n the busness of seng dsted sprts at both whoesae and
reta on the same premses may not cam the e empton on any sprts on such
premses.
To be egbe for ths e empton, a person must se, or offer for sae, ds-
ted sprts durng uy, 1940, at reta ony, and he must not make saes n
arger quanttes durng the entre month of uy. The e empton appes ony
to dsted sprts on the premses of the person camng the e empton. It s
not appcabe to sprts stored esewhere or n transt.
Persons camng ths e empton must seect the tems on whch the e empton
s camed and st them separatey on the nventory. The wne gaons of such
seected tems must be converted nto proof gaons, and the amount n proof
gaons thus obtaned sba be nserted at ne 2 on orm 758.
ny reta deaer n quors entted to ths e empton must prepare the n-
ventory and fe a return, even though he has ess than 100 wne gaons on hs
premses.
RM NT D M LT LI UORS.
5. ach brewer, whoesae deaer n quors, whoesae deaer n mat quors,
or any other person, corporaton, partnershp, or assocaton (e cept such reta
deaers as are herenafter e empted) hodng on uy 1, 1940, ta -pad fermented
mat quors ntended for sae sha aso before begnnng busness on that date
prepare an nventory of a such ta -pad fermented mat quors.
The nventory of fermented mat quors sha be prepared n trpcate on
sheets of paper not arger than 10 by 1 nches to be furnshed by the ta -
payer. The nventory w be made n three sectons.
The frst secton w cover mat quors In packages or barres and w be
dvded nto 7 coumns n the foowng order:
(a) barre.
( ) barre.
(c) barre
(d) barre.
(e) barre.
(/) 1 barre.
g) quvaent In barres of 31 gaons.
The second w cover mat quors n bottes or cans and w be dvded
nto 5 coumns n the foowng order:
(a) Number of cases.
( ) Sze of bottes or cans.
(c) Number of bottes or cans n case.
d) Number of gaons per case.
(e) quvaent n barres of 31 gaons.
The thrd secton w cover fermented mat quors n tanks n bottng
houses. Mat quors n such tanks w be measured and reported n terms
of barres of 31 gaons.
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3 4
The Inventory of fermented mat quors may be made a part of the nventory
of dsted sprts f the person preparng the nventory aso hods dsted
sprts sub|ect to the foor stocks ta .
. The foor ta of 1 a barre on fermented mat quors s not appcabe
to reta stocks of mat quors hed by a person on premses as to whch such
person ncurs abty to speca (occupatona) ta as a reta deaer n quors
or as a reta deaer n mat quors for the perod begnnng uy 1, 1940, and
as to whch premses no other speca (occupatona) ta wth respect to deang
n dsted sprts, wnes, or mat quor s ncurred by such person for the
perod begnnng uy 1, 1940.
To be egbe for ths e empton, a person must ncur speca ta abty
durng uy, 1940, as a reta deaer n quors or reta deaer n mat quors
ony, on the premses where the mat quor stocks are hed. ny person cam-
ng ths e empton must not ncur speca ta abty as a whoesae deaer
In mat quors, or as a whoesae deaer n quors on the same premses at any
tme durng the month of uy, 1940.
The e empton appes ony to fermented mat quors on the premses of the
person camng the e empton. It s not appcabe to mat quors stored ese-
where or n transt.
Persons entted to ths e empton are not requred to pay a foor stocks ta
on fermented mat quors and need not prepare an nventory of such fermented
mat quors, but f such person hods dsted sprts, he must make an nventory
and fe a return coverng such dsted sprts.
SPIRITS O M LT LI UORS ON OT R PR MIS S OR IN TR NSIT.
7. The nventory sha show separatey a ta -pad dsted sprts and fer-
mented mat quors not on the premses of the ta payer, but owned by hm and
stored esewhere, or consgned to hm and n transt at 12.01 a. m. on uy 1,
1940, gvng the name of the consgnor. ny sprts or mat quors whch have
been consgned to other persons by the person makng the nventory and the
tte thereto has not been transferred to the consgnee sha aso be ncuded by
the person makng the Inventory, gvng the name of the consgnee.
When ta -pad dsted sprts or fermented mat quors are consgned by
the shpper to hs own order wth nstructons on the shppng tag to notfy the
person named thereon, who s a bona fde purchaser, and b of adng s
ndorsed n good fath to the person named on the shppng tag and draft
attached for the sum due, and b of adng wth draft attached Is sent to a
bank or other coecton agency for coecton, the purchaser ony s abe for
the foor ta and sha ncude such sprts or mat quors n hs nventory.
If ta -pad dsted sprts or fermented mat quors are n transt under
bs of adng n whch the shpper s named as consgnee and the bs of
adng are not ndorsed or are ndorsed n bank, the sprts or mat quors w
be presumed to be the property of the shpper hed for sae and the shpper
sha Inventory such sprts or mat quors.
ILING O R TURN ND P YM NT O T .
8. ach ta payer desgnated n paragraphs 1 and 5 sha make a return on
orm 758 (revsed 1940), n trpcate, for each pace where dsted sprts or
fermented mat quors are hed, n accordance wth the nstructons thereon.
The orgna and dupcate copes must be fed wth the coector of nterna
revenue of the dstrct n whch the dsted sprts or fermented mat quors
are hed not ater than ugust 1, 1940. The trpcate copy w be retaned at
the ocaton covered by the return. copy of the nventory must be attached
to each copy of orm 758.
9. The foor ta shown by the return to be due sha be pad to the coector
of nterna revenue at the tme the return s fed, e cept that the tme for
payment of ths ta may be e tended to a date not ater than ebruary 1, 1941,
upon the fng of a bond on orm 723- . n dupcate, n a pena sum of not ess
than the amount of the ta , ncudng penaty, f any.
Gt|t T. evertng,
pproved une 2 , 1940.
errert . Gaston,
( ed wth the Dvson of the edera Regster une 27, 1940, 11.43 a. m.)
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Reguatons 4(1940), Sectons 183. 0, 183.95, 1940-39-10433
183.13 (a), (b), 183.1 1, 183.1 7, 183.1 8, T.D.5007
183.1 9, 183.25 , 183.2 4, 183.2 5, 183.295,
183.309, and 183.390.
TITL 28 INT RN L R NU . C PT R I, SU C PT R C, P RT 183.
PRODUCTION O DISTILL D SPIRITS
mendng Reguatons 4.
Washngton, D. C.
To Dstrct Supervsors, Coectors of Interna Revenue, and Others
Concerned:
Secton 213 of the ct of une 25, 1940 (Pubc, No. 5 , Seventy-
s th Congress), s as foows:
(a) Secton 2800 of the Interna Revenue Code s amended by nsertng at
the end thereof the foowng new subsectons:
(g) Defense Ta fob ve Years. In eu of the rates of ta specfed n
such of the sectons of ths tte as are set forth n the foowng tabe, the
rates appcabe wth respect to the perod after une 30, 1940, and before uy
1, 1945, sha be the rates set forth under the headng Defense-Ta Rate :
Secton.
Descrpton of tar.
Od
rate.
Defense-
ta rate.
2800(a)(1)
Dsted sprts generay
2.25
2.00

3.00
2.75

2800(a)(1)
randy

Pursuant to the foregong provson of aw, sectons 2802(a), 2812,
317 , and 3254(g) of the Interna Revenue Code, and sectons 3 and
of the edera coho dmnstraton ct, as amended (27 U. S. C,
Sup., 203, 20 ), secton 183.95 of Reguatons 4 s hereby revoked, and
the tte to rtce I and sectons 183. 0, 183.13 (a), (b), 183.1 1,
183.1 7,183.1 8,183.1 9,183.25 ,183.2 4,183.2 5,183.295,183.309, and
183.390 of the sad reguatons are hereby amended to read as foows:
RTICL I . D R L LCO OL DMINISTR TION CT P RMIT.
Sec. 183. 0. Permt requred. Under the edera coho dmnstraton ct
and the reguatons Issued pursuant thereto (27 C R, Tart 1), any person, e cept
an agency of a State or potca subdvson thereof, or any offcer or empoyee
of any such agency, Intendng to engage n the busness of producng dsted
sprts, s requred to procure a permt therefor. (Sec. 3, 49 Stat., 978 27 U. S. C,
Sud.. 203.)
Sec. 183.13 . Change n ndvdua, frm, or corporate name. Where there s a
change n the ndvdua, frm, or corporate name of the dster, he must compy
wth the foowng regurements:
(a) mended permt. Procure from the dstrct supervsor under the edera
coho dmnstraton ct an amended basc permt authorzng operaton of
the dstery under the new name.
( ) mended notce, orm 27- . Submt to the dstrct supervsor an amended
notce on orm 27- , n trpcate, coverng the new name, whch notce must
be approved before operatons may be commenced under the new name.
Sec. 183.1 1. amnaton of other quafyng documents. Upon recept of
notce, pat, pans, bond, consent ( orm 1 02), f any, or Indemnty bond n eu
The astersk at end of sectons refers to secton 3170 of Ihe Interna Revenue Code.
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thereof, and other documents requred by these reguatons of persons ntendng
to quafy as dsters, the dstrct supervsor w e amne the same to determne
whether they have been propery e ecuted, and whether they refect compance
wth the requrements of the aw and reguatons. Where any requred docu-
ment has not been fed, or where errors or dscrepances are found In those
fed, or where the documents fed do not refect compance wth these reguatons,
acton thereon w be hed n abeyance unt the omsson, or error, or ds-
crepancy has been rectfed, and there has been fu compance wth a
requrements.
Sec. 183.1 7. pprova of quafyng documents. If the dstrct supervsor
fnds, upon e amnaton of the nspecton report, that the person seekng to qua-
fy as a dster has comped n a respects wth the requrements of aw and
these reguatons, and the dster s bond ( orm 30) and the consent ( orm
1 02), f any, or ndemnty bond fed n eu thereof, may propery be approved
under secton 183.1 , and f the appcant s entted to a permt, he w note
hs recommendaton for approva on a copes of the dster s bond, consent or
ndemnty bond, and notce, and hs approva on a copes of the pat and pans,
and w forward a copes of the dster s bond, consent or ndemnty bond, and
notce, and the orgna copy of the pat, pans, and other quafyng documents,
together wth a copy of a nspecton reports, to the Commssoner for fna
acton. The Issuance of a permt shoud be wthhed pendng approva by the
Commssoner of the notce, bond, and other quafyng documents requred under
the nterna revenue aws.
Sec. 183.1 8. Dsapprova of quafyng documents. If the dstrct supervsor
fnds that the appcant has not comped n a respects wth the requrements
of the aw and reguatons, or that the stuaton of the dstery s such as woud
enabe the dster to defraud the Unted States, or that the bond shoud be
dsapproved under secton 183.1 , he w note hs recommendaton for ds-
approva on the bond, and w forward to the Commssoner for fna acton
such copes of the quafyng documents as are requred to be so forwarded by
the precedng secton n the case of recommendaton for approva, together wth
a copy of a nspecton reports. Where a bond s recommended for dsapprova,
the dstrct supervsor w furnsh the Commssoner wth a fu statement of
the reasons therefor. If the appcant s not entted to a permt, the dstrct
supervsor w, upon dsapprova of the appcaton therefor, return a copes
of the quafyng documents to the appcant wthout acton thereon or reference
to the Commssoner.
Sec. 183.1 9. Dsposton of quafyng documents. Where the dster s bond
( orm 30), consent ( orm 1 02), f any, or ndemnty bond fed n eu thereof,
notce ( orm 27- ), and speca appcaton ( orm 1 13), f any, are approved
by the Commssoner, the dstrct supervsor w, upon recept of approved copes
of such documents from the Commssoner, as provded n rtce II. forward
one copy of the dster s bond, consent or ndemnty bond, speca appcaton,
notce, pat, pans, and other quafyng documents to the dster and w retan
one copy of such quafyng documents for the fe of the dster. The e tra
copy of the speca appcaton ( orm 1 13), f any, receved from the Com-
mssoner w be paced by the dstrct supervsor n the fe of the rectfer. If
the dster s bond, consent or ndemnty bond, or speca appcaton, s ds-
approved, the dstrct supervsor w, upon recept from the Commssoner of the
dsapproved copes of such documents and other quafyng documents submtted
therewth, return a copes of the quafyng documents to the propretor, wth
advce as to the reasons for dsapprova.
Sec. 183.25 . Rate of ta . The aw mposes a ta on dsted sprts produced
n or mported nto the Unted States at the rate of 3 on each proof gaon or
wne gaon when beow proof and a proportonate ta at a ke rate on a
fractona parts of such proof or wne gaon, to be pad when wthdrawn from
bond, e cept brandy dsted at ess than 190 degrees proof, on whch the ta s
mposed at the rate of 2.75 on each proof gaon or wne gaon when beow
proof and a proportonate ta at a ke rate on a fractona parts of such proof
or wne gaon. ( Sec. 2800(a), I. R. C, as amended.)
Sec. 183.2 4. Unfnshed sprts. The dster may take sampes of sprts
n the course of dstaton and pror to ther depost n the cstern room. ach
sampe may not e ceed one-haf pnt, uness t s shown that such s an nsuff-
cent quantty for the purpose for whch the sampe s desred, and the Com-
mssoner authorzes the takng of a arger sampe, not to e ceed one pnt The
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tota number of sampes must be restrcted to the muraum necessary to deter-
mne the quaty of the sprts beng produced.
Sec. 183.2 5. nshed sprts. The dster may take from the cstern room
of the dstery sampes of dsted sprts for chemca anayss or organoeptc
e amnaton ony. Such sampes may not e ceed one pnt for each dstaton
of each knd of dsted sprts produced day, uness t s shown that such
s an nsuffcent quantty for the purpose for whch the sampe s desred,
and the Commssoner authorses the takng of a arger sampe, not to e ceed
one quart.
Sec. 183.295. Issuance of ta -pad stamps. The coector w ssue the requ-
ste ta -pad stamps. ach ta -pad stamp sha bear the sgnature of the
coector, who sha wrte or stamp thereon the date of payment of the ta ,
by whom pad, the number of gaons and tenths of gaons of proof sprts,
and the sera number of the cask. acsme sgnatures of coectors may be
aff ed by the use of hand stamps to the ta -pad stamps, care beng taken
to use ony such nk as w nether fade nor bur. The coector w enter
the sera numbers of the stamps n the approprate spaces on a copes of
orms 179 and 1520, sgn the certfcate of ta -payment on each copy of orm
179, retan one copy of each orm 179 and orm 1520, and return the remanng
three copes of orm 179 and two copes of orm 1520 to the dster wth the
stamps. ( Sec. 2802(a), I. . C.)
Sec. 183.309. M ng of dfferent sprts prohbted. The product of two or
more dsters sha not be mnged n a storage tank nor sha sprts dsted
from dfferent materas, or dfferent combnatons of the same materas at
ess than 190 degrees proof, or whch dffer n knd accordng to the standards
of dentty estabshed under the edera coho dmnstraton ct, be mnged
n a storage tank nor sha sprts dsted durng dfferent dstng seasons,
or at proofs dfferng more than 10 degrees, be so mnged. ( Sec. 3254(g),
I. R. C.)
Sec. 183.390. uk contaners. Under the reguatons ssued pursuant to the
edera coho dmnstraton ct (27 C , Part 3), dsters may se or
dspose of dsted sprts n buk, that s, contaners havng a capacty n e cess
of 1 gaon, (1) to other dsters and propretors of nterna revenue bonded
warehouses, ndustra acoho pants and ndustra acoho bonded warehouses,
ncudng those operatng ta -pad bottng houses (2) to propretors of cass 8
customs bonded warehouses (mported sprts ony) (3) to rectfers (4) to
wnemakers (brandy or acoho) for fortfcaton of wne (5) to any agency of
the Unted States, or of any State or potca subdvson thereof ( ) for
e port (7) on warehouse recepts, conformng to the reguatons ssued under
the edera coho dmnstraton ct, for dsted sprts n Interna revenue
bonded warehouses and (8) for ndustra use, as foows: or e permenta
purposes, and for use n the manufacture (a) of medcna, pharmaceutca, or
antseptc products, ncudng prescrptons compounded by reta druggsts
(8) of toet products (c) of favorng e tracts, srups, or food products or
(d) of scentfc, chemca, mechanca, or ndustra products provded such
products are unft for beverage use. Dsted sprts produced at a proof n
e cess of 159 degrees and reduced n the recevng csterns to not more than 159
and not ess than 100 degrees of proof may, however, upon ta -payment, as
provded n secton 183.272(d), be transported for beverage purposes ony and
under the reguatons ssued pursuant to the edera coho dmnstraton
ct (27 C R, Part 3) dsters may not se n buk for ndustra use other
dsted sprts produced under these reguatons, uness such sprts are shpped
or devered drecty to the ndustra user thereof. (Sec. , 49 Stat., 985 27
U. S. C, Sup., 20 .)
Gut T. everng,
pproved September 1 ,1940.
ohn L. Suvan,
( ed wth the Dvson of the edera Regster September 18, 1940, 11.05 a. m.)
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3 8
Reguatons 10 (1940), Sectons 185.27, 185.54, 1940-39-10432
185.84, 185.90. 185.103, 185.109, 185.110,185.112, T. D. 5000
185.125, 185.131, 185.231, 185.234, 185.238,
185.27 , 185.3 9, 185.844, 185.4 1.
TITL 2G INT RN L R NU . C PT R I. SU C PT R C, P RT 185
W R OUSING O DISTILL D SPIRITS.1
mendng Reguatons 10.
Washngton, D. C.
Concerned:
(a) Secton 2800 of the Interna Revenue Code s amended by Insertng at the
end thereof the foowng new subsectons:
(g) Defense Ta for ve Yeabs. In eu of the rates of ta specfed n
such of the sectons of ths tte as are set forth n the foowng tabe, the rates
appcabe wth respect to the perod after une 30, 1040, and before uy 1,
1945, sha be the rates set forth under the headng Defense-Ta Rate :
Secton.
Descrpton of ta .
Od rate.
Defense- ta
rate.
2800( )(1)
Dsted sprts generay
2.25
2.00
S. 00
2.75
2800(a)(1)

Pursuant to the foregong provson of aw, sectons 2802(a). 2872,
2873, 2883, 2904, 3031(a), as amended, 3037, and 317 of the Interna
Revenue Code, and sectons 5(e) and of the edera coho d-
mnstraton ct, as amended (27 U. S. C, Sup., 205, 20 ), secton
185.54 of Reguatons 10 s hereby revoked, and sectons 185.27,185.84,
185.90 (a), (b), 185.103, 185.109, 185.110. 185.112, 185.125. 185.131,
185.231, 185.234, 185.238, 185.27 , 185.3 9, 185.444, and 185.4 1 of the
sad reguatons are hereby amended to read as foows:
Sec. 185.27. Wefhng tank . Where dsted sprts deposted n storage tanks
n a warehouse ocated on the dstery premses are to be wthdrawn for trans-
fer by ppe ne to the fortfyng room of a bonded wnery on contguous premses,
or to a denaturng bonded warehouse on the dstery premses, or to a tank
car for shpment, as herenafter provded n these reguatons, the propretor
of the warehouse must provde for use n weghng such sprts one or more
sutabe weghng tanks constructed n accordance wth the foowng secton:
Provded, That where brandy ony s to be transferred by ppe ne from ware-
house storage tanks, and such transfer s to be made drect to a weghng tank
n the fortfyng room of a contguous wnery and weghed theren as provded
n secton 185.444, no weghng tank need be nstaed on the warehouse premses.
( Sec. 1 873, I. R. C.)
Sec. 185.84. Coors for ppe nes. The ppe nes of warehouses ocated on
dstery premses must be shown on the pans n the coors n whch they
are requred to be panted, as foows:
The astersk at end or sectons refers to secton 317 of the Interna Revenue Cod .
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Whte-
umnum.
Orange
Dsted sprts.
Water.
Steam.
r.
( Sec. 2873, I. R. C.)
Sec. 185.90. Change n name. Where there s a change n the ndvdua, frm,
or corporate name of the propretor of an nterna revenue bonded warehouse, he
must compy wth the foowng requrements:
(o) mended permt. If engaged n the busness of warehousng and bottng
dsted sprts, and If other than an agency of a State or potca subdvson
thereof, or an offcer or empoyee of any such agency, procure from the dstrct
supervsor under the edera coho dmnstraton ct an amended basc
permt authorzng the warehousng and bottng of dsted sprts under the
new name.
( ) mended appcaton. orm 27-D. Submt to the dstrct supervsor an
amended appcaton on orm 27-D, In trpcate, coverng the new name, whch
appcaton must be approved before operatons may be commenced under the
new name.
Sec 185.103. amnaton of quafyng documents. Upon recept of appca-
ton, pat, pans, transportaton and warehousng bond, e port storage bond, f
any, and other documents requred by these reguatons, of persons desrng the
estabshment of nterna revenue bonded warehouses, the dstrct supervsor
w e amne the same to determne whether they have been propery e ecuted
and whether they refect compance wth the requrements of the aw and
reguatons. Where any requred document has not been fed, or where errors
or dscrepances are found n those fed, or where the documents fed do not
refect compance wth these reguatons, acton thereon w be hed n
abeyance unt the omsson, or error or dscrepancy, has been rectfed, and
there has been fu compance wth a requrements.
Sec. 185.109. Other causes for dsapprova. The dstrct supervsor w not
recommend approva of any appcaton for the estabshment of an nterna
revenue bonded warehouse uness (1) the capacty of the warehouse s com-
mensurate wth the prospectve needs of the area or ocaty n whch t s
stuated and n any event not ess than 10,000 barres, or the equvaent thereof
n tank or case storage, (2) the ocaton s sutabe, (3) the transportaton
factes adequate, (4) the desgn and constructon of the warehouse are such as
to nsure economca supervson by Government offcers, and (5) the prospec-
tve voume of sprts that w be receved, stored, wthdrawn, and botted at
the warehouse s suffcent to warrant the estabshment of the warehouse
and the e pense of Government supervson: Provded, That these provsons
sha not be appcabe where the warehouse s an orgna warehouse to be
operated by the dster (not ncudng essee dsters) on or contguous to
the dstery premses, or s a second warehouse whch the dster desres to
operate on premses contguous to or near such orgna warehouse on account
of ack of storage space n the orgna warehouse and the mpractcabty
of e pandng such warehouse. In any case where the warehouse has a bottng-
In-bond department and the appcant s not entted to a permt, the dstrct
supervsor w, upon dsapprova of the permt appcaton, return a copes
to the Commssoner. ( Sec. 2872, I. R. C.)
Sec. 185.110. pprova of quafyng documents. If the dstrct supervsor
fnds, upon e amnaton of the nspecton report and quafyng documents,
that the person seekng the estabshment of the nterna revenue bonded
warehouse has comped n a respects wth the requrements of the aw
and these reguatons, and that the appcaton and other quafyng docu-
ments may propery be approved under sectons 185.108 and 18 .10 . he w
note hs recommendaton for approva on a copes of the appcaton, trans-
portaton and warehousng bond, and the e port storage bond, f any, and
hs approva on a copes of the pat and pans, and w forward a copes
of the appcaton, transportaton and warehousng and e port storage bonds,
and the orgna copy of the pat and pans and other quafyng documents,
together wth a copy of a Inspecton reports, to the Commssoner for fna
acton. If the warehouse has a bottng-n-bond department, the ssuance of
a permt shoud be wthhed pendng approva by the Commssoner of the
appcaton, bond, and other quafyng documents requred under the nter-
na revenue aws.
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370
Sko. 185.112. Dsposton of quafyng documents. Where the appcaton.
orm 27-D, transportaton and warehousng bond, orm 1571, and the e port
storage bond, orm 54, If any, are approved by the Commssoner, the ds-
trct supervsor w, upon recept of approved copes of such documents
from the Commssoner, as provded In rtce I, forward one copy of
the appcaton, bonds, pat, pans, and other quafyng documents to the
propretor, and w retan one copy of such quafyng documents on fe.
If the appcaton, transportaton and warehousng bond, and e port storage
bond, f any, are dsapproved, the dstrct supervsor w, upon recept from
the Commssoner of the dsapproved copes of such documents, and a
quafyng documents submtted therewth, return a copes of the quafyng
documents to the propretor, wth advce as to the reasons for dsapprova.
Sec. 185.125. Transportaton and warehoustg bonds. Transportaton and
warehousng bonds, orm 1571, may be termnated as to abty (1) for
sprts consgned to the nterna revenue bonded warehouse after a specfed
future date, pursuant to appcaton by the surety as provded n secton
185.131, (2) for transactons subsequent to the effectve date of an approved
supersedng bond, or (3) for future transactons upon dscontnuance of
busness by the prncpa after wthdrawa of a sprts from the warehouse.
( Sec. 2872, I. R. O)
Sec. 185.131. ppcaton of the surety for reef from bond. surety on
any bond requred by these reguatons may at any tme In wrtng notfy the
prncpa and the dstrct supervsor n whose offce the bond s on fe that he
desres, after a date named, whch sha be at east 0 days after the date of
notfcaton, to be reeved of abty under sad bond. The notce sha be
e ecuted n trpcate by the surety, who sha dever one copy to the prn-
cpa and the other two to the dstrct supervsor, who w retan one copy
and transmt the remanng copy to the Commssoner. If such notce s not
thereafter n wrtng wthdrawn the rghts of the prncpa as supported by
sad bond sha be termnated on the date named In the notce, and the
surety sha be reeved (1) In the case of a transportaton and warehousng
bond, orm 1571, from abty for sprts consgned to the Interna revenue
bonded warehouse whoy subsequent to the date named n the notce, (2) n
the case of an e port storage bond, orm 54, from abty for sprts botted
n bond for temporary storage for e port whoy subsequent to the date named
n the notce, or (3) n the case of drect e port bonds, orms 547 and 57,
transportaton for e port bonds, orms 548 and 58, bonds coverng transporta-
ton to customs manufacturng bonded warehouses. orms 43 and 1(118, or
bonds for the wthdrawa of sprts for the use of the Unted States, orm 544,
from abty for dsted sprts wthdrawn for drect e portaton, transpor-
taton for e port, transportaton to customs manufacturng bonded ware-
houses, or for the use of the Unted States, as the case may be, whoy subse-
quent to the date named n the notce. Ths notce may not be gven by an
agent of the surety uness It s accompaned by a power of attorney duy
e ecuted by the surety authorzng hm to gve such notce or by a verfed
statement that such power of attorney s on fe wth the Department. The
surety must aso fe wth the dstrct supervsor an acknowedgment or other
proof of servce of such notce on the prncpa.
Sec 185.231. Rate of tan. The aw mposes a ta on dsted sprts pro-
duced n or mported nto the Unted States at the rate of 3 on each proof
gaon or wne gaon when beow proof and a proportonate ta at a ke
rate on a fractona parts of such proof or wne gaon, to be pad when wth-
drawn from bond, e cept brandy dsted at ess than 190 degrees of proof,
on whch the ta s mposed at the rate of 2.75 on each proof gaon or wne
gaon when beow proof and a proportonate ta at a ke rate on a frac-
tona parts of such proof or wne gaon. ( Sec. 2800(a) (1), I. R. C.)
Sec. 185.234. Number and sze. Sampes of brandy or frut sprts for ab-
oratory anayss must be taken from packages desgnated as sampe packages.
Such sampes may not e ceed one-haf pnt from any package at any one
tme, uness It s shown that such s an nsuffcent quantty for the purpose
for whch the sampe Is desred, and the Commssoner authorzes the takng
of a arger sampe, not to e ceed 1 pnt. The number of packages from whch
sampes are taken must be restrcted to the mnmum necessary to accompsh
the purpose of the aboratory anayss. s a rue, not more than one or two
sampes shoud be requred at any one tme from a gven ot of brandy or
frut sprts of the same dstaton, knd of cooperage, etc. When the ware-
houseman desres to procure sampes from a gven ot of brandy or frut
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sprts n warehouse, he w mt the number of packages from whch t Is
desred to take sampes to the mnmum necessary to procure representatve
sampes of such sprts. Thereafter, f t s desred to procure addtona
sampes from the same ot of sprts, the sampes shoud be taken from the
same packages. ( Sec. 3037, I. R. C.)
Sec. 185.238. Number, sze, and use. The warehouseman may remove from
contaners n the warehouse sampes of dsted sprts other than brandy or
frut sprts, for anaytca purposes or organoeptc e amnaton ony. Packages
from whch such sampes are taken w be desgnated as sampe packages. Such
sampes may not e ceed one-haf pnt from any contaner at any one tme, uness
t Is shown that such Is an nsuffcent quantty for the purpose for whch the
sampe Is desred, and the Commssoner authorzes the takng of a arger sampe,
not to e ceed 1 pnt. The tota number of sampes from a contaners must be
restrcted to the mnmum necessary to determne the quaty of the sprts. s
a rue, not more than one or two sampes shoud be requred from a gven ot of
pprts of the same dstaton, knd of cooperage, storage, etc. When the ware-
houseman desres to procure sampes from a gven ot of sprts n warehouse, he
w mt the number of packages from whch t Is desred to take sampes to the
mnmum necessary to procure representatve sampes of such sprts. There-
after, If It Is desred to procure addtona sampes from the same ot of sprts,
the sampes shoud be taken from the same packages.
Sec. 185.270. Issuance of ta -pad stamps. The coector w ssue the ta -
pad stamps. ach ta -pad stamp sha bear the sgnature of the coector,
who sha wrte or stamp thereon the date of payment of the ta , by whom pad,
the number of gaons and tenths of gaons of proof sprts, and the sera number
of the cask. acsme sgnatures of coectors may be aff ed by the use of hand
stamps to the ta -pad stamps, care beng taken to use ony such Ink as w
nether fade nor bur. The coector w enter the sera numbers of the stamps
n the approprate spaces on a copes of orms 179 and 1520, sgn the certfcate
of ta -payment on a copes of orm 179, retan one copy each of orm 179 and
orm 1520, and return the remanng three copes of orm 179 and two copes
of orm 1520 to the warehouseman wth the stamps. ( Sec. 2802(a),
I. R. C.)
Sec. 185.3 9. Records. When the sprts have been removed from the e port
storage warehouse the storekeeper-gauger sha make approprate entres on
orm 151 n the statement port Storage Warehouse Transactons, and the
propretor sha report the remova on orm 52C. ( Sec. 2904, I. R. C.)
Sec. 185.444. Gauge of brandy. The brandy w be gauged n weghng
tanks n the warehouse and run drecty from such tanks to fortfyng tanks or
brandy storage tanks n the fortfyng room of the wnery, e cept that where
no weghng tank s provded n the warehouse the brandy may be gauged n a
weghng tank In the fortfyng room, n whch case the brandy w be run
drect from the storage tanks n the warehouse to the weghng tank In the
fortfyng room. ( Sees. 2883, 3031 (a), I. R. C.)
Sec. 185.4 1. uk contaners. Under the reguatons ssued pursuant to the
edera coho dmnstraton ct (27 C R, Part 3), propretors of nterna
revenue bonded warehouses may se or dspose of dsted sprts n buk, . e.,
n contaners havng a capacty n e cess of 1 gaon, (1) to dsters and
propretors of nterna revenue bonded warehouses, ndustra acoho pants
and ndustra acoho bonded warehouses, Incudng those operatng ta -pad
bottng houses (2) to propretors of cass 8 customs bonded warehouses (m-
ported sprts ony) (3) to rectfers (4) to wnemakers (brandy or acoho)
for fortfcaton of wne (5) to any agency of the Unted States, or of any
State or potca subdvson thereof ( ) for e port (7) on warehouse re-
cepts, conformng to the reguatons ssued under the edera coho dmns-
traton ct, for dsted sprts n nterna revenue bonded warehouses and
(8) for ndustra use n accordance wth the reguatons ssued under the
edera coho dmnstraton ct (27 C R, Part 2), as foows: or e per-
menta purposes, and for use In the manufacture (a) of medcna, pharmaceu-
tca, or antseptc products, ncudng prescrptons compounded by reta drug-
gsts (ft) of toet products (c) of favorng e tracts, srups, or food products
or (d) of scentfc, chemca, mechanca, or ndustra products provded such
products are unft for beverage use. Dsted sprts produced at a proof n
e cess of 159 degrees and reduced In the recevng csterns to not more than
159 and not ess than 100 degrees of proof may, however, upon ta -payment, be
transported for beverage purposes ony and under the reguatons ssued pur-
suant to the edera coho dmnstraton ct (27 C R, Part 3) warehouse-
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372
men may not se In buk for ndustra use other dsted sprts (e cept
sprts frut or acoho) uness such sprts are shpped or devered drecty to
the ndustra user thereof. (See. , 49 Stat., 985 27 U. S. C, Sup., 20 .)
Gut T. everng,
ohn L. Suvan,
( ed wth the Dvson of the edera Regster September 1 , 1940, 3.44 p. m.)
Reguatons (1938), Secton 21: changes 1940-34-1039
and redempton of botted-n-bond stamps, etc. T. D. 5001
TITL 2 INT RN L R NU . CII PT R I, SU C PT R C, P RT 1S8.
OTTLING O DISTILL D SPIRITS IN OND.
mendng Reguatons (1938).
Washngton, D. C.
Concerned:
Secton 2 of the ct of une 24, 1940 (Pubc, No. 54, Seventy-
Seo. 2. Secton 2903, Interna Revenue Code, s hereby amended by reetterng
subsectons (e), (f), and (g) as (f), (g), and (h), respectvey, and by nsert-
ng a new subsecton (e) to read as foows:
(e) Unused Stamps change, Refund, tc. The Commssoner of In-
terna Revenue, under reguatons prescrbed by hm and approved by the
Secretary of the Treasury, may redeem or make aowance for any unused case
stamp, wth a coupon strp stamps attached thereto, ssued under secton 1 of
the ct entted n ct to aow the bottng of dsted sprts n bond ,
approved March 3, 1897 (29 Stat. 02 ), or under sad secton 1, as varousy
amended, and may redeem or make aowance for unused strp stamps Issued
for bottes of dsted sprts botted n bond under sad secton 1, as amended
by the ct of uy 9, 1937 (50 Stat 487), or under subsecton (d) of ths secton,
by e changng them for strp stamps for botted-n-bond sprts, or by refundng
moneys receved-therefor: Provded, That stamps may be e changed or the vaue
thereof refunded ony n quanttes of the vaue of 5 or more: nd provded
further. That no cam under ths subsecton for redempton or aowance In
respect of case or strp stamps sha be aowed uness presented wthn two
years after the date on whch such case or strp stamps were awfuy ssued.
There are hereby authorzed to be approprated annuay, out of any money In
the Treasury not otherwse approprated, such sums as may be necessary to
carry out ths provson.
Secton 3 of the ct of une 24,1940 (Pubc, No. 54, Seventy-s th
Congress), s as foows:
Sec. 3. Notwthstandng the mtatons contaned n sectons 2803(c) and
2903(e), Interna Revenue Code, as amended and Inserted, respectvey, by ths
ct, as to the tme wthn whch cams under such sectons must be presented,
cams under such sectons for the e change of or refund for stamps awfuy
ssued pror to the date of enactment of ths ct may be aowed If presented
wthn two years from the date of enactment of ths ct.
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Pursuant to the foregong provsons of aw and to sectons 2905
and 317 of the Interna Revenue Code, secton 21, Reguatons (2
C R, 1938 Sup., secton 188.21), s amended and a new secton num-
bered 3 added, both to read as foows:
Sec. 21. change and redempton of botted-n-bond stamps for dsted
sprts for domestc use. Unused botted-n-bond case stamps, wth a coupon
strp stamps attached thereto, Issued under secton 1 of the ct of March 3,
1897 (29 Stat, 2 ), or under sad secton 1, as varousy amended, and unused
strp stamps ssued under sad secton 1, as amended by the ct of uy 9, 1937
(50 Stat., 487), or under subsecton (d) of secton 2903 of the Interna Revenue
Code, n quanttes of the vaue of 5 or more, may be e changed for botted-n-
bond strp stamps, of equa vaue and n any prescrbed denomnaton, or the
vaue thereof may be refunded, provded that a cam for such e change or
refund, estabshng the awfu ssuance and ownershp of the stamps, s fed
wth the coector of nterna revenue who Issued the stamps (1) wthn two
years after the date on whch such stamps were awfuy ssued or (2) f the
stamps were awfuy ssued pror to une 24, 1940, wthn two years from the
atter date: Provded, hocever. That the vaue of unused stamps whch have
been destroyed may be refunded upon the fng of a cam as provded heren
wth proof to the satsfacton of the Commssoner of the destructon of the
stamps. Cams for e change of stamps w be fed on orm 1579 and cams
for refund of the vaue of stamps on orm 843, n accordance wth procedure
prescrbed by t e Commssoner.
(a) Dsposton of botted-n-bond stamps. unused botted-n-bond stamps,
If any, beongng to the propretor at the tme of permanent dscontnuance of
busness w be nventored by denomnaton, sera number, and quantty by
the storekeeper-gauger or other offcer desgnated by the dstrct supervsor to
perform such duty. The offcer w dever such stamps to the propretor and
take hs recept therefor, n trpcate. When deverng the stamps the offcer
w advse the propretor that the vaue of the stamps, f n quanttes of
the vaue of 5 or more, may be refunded provded that a cam for such refund
on orm 843, estabshng the awfu ssuance and ownershp of the stamps, s
fed wth the coector of nterna revenue who ssued the stamps (1) wthn
two years after the date on whch such stamps were awfuy ssued or (2) f
the stamps were awfuy ssued pror to une 24, 1940, wthn two years from
the atter date or that such unused stamps may be destroyed n the presence
of a Government offcer, and the propretor thereby reeved from further
accountabty for the stamps. If the stamps are not surrendered to the coec-
tor for refund of ther vaue or are not destroyed, the propretor must account
for the stamps each month by renderng orm 9 , propery modfed, n dup-
cate, to the dstrct supervsor. The offcer sha make a notaton on the recept
as to the dsposton made or to be made of the stamps. One copy of the recept
w be devered to the propretor and the orgna and one copy w be
devered to the dstrct supervsor, who w forward the orgna to the Com-
mssoner. (Sectons 2D03, 317 , I. R. C. secton 3, ct of une 24, 1940 (Pubc,
No. 54. Seventy-s th Congress).)
Sec, C3. change and redempton of botted-n-bond stamps for dsted
sprts for e port. Provsons of secton 21 are appcabe to botted-n-bond
stamps for dsted sprts for e port. (Sectons 2903, 2905. 3170, I. R. C.
secton 3, ct of une 24. 1940 (Pubc, No. 54. Seventy-s th Congress).)
Tmothy C. Moonet,
pproved ugust 7,1940.
ohn L. Suvan,
( ed wth the Dvson of the edera Regster ugust 10, 1940, 10.03 a. m.)
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374
S CTION 2810, M ND D Y R NU CT O 1940.
Reguatons 23 (1940), Secton 181.15: Regstry 1940-32-10378
of sts. T. D. 4993
TITL 28 INT RN L R NU . Cn PT R I, SU C PT R C, P RT 181.
STILLS ND DISTILLING PP R TUS.
Regstraton of petroeum sts and dstng apparatus not
requred.
Washngton, D. C.
To Dstrct Supervsors and Others Concerned:
The ct of uy 2, 1940 (Pubc, No. 705, Seventy-s th Congress),
provdes as foows:
That secton 2810(a), Interna Revenue Code, s amended by addng an
addtona paragraph at the end thereof to read as foows:
Sts and dstng apparatus set up at refneres for the refnng of crude
petroeum or the producton of petroeum products and not used n the manufac-
ture of dsted sprts are not requred to be regstered under ths secton.
Pursuant to the foregong provson of aw, secton 181.15 (d) of
Reguatons 23 (Part 181, Tte 2 , Code of edera Reguatons) s
(d) Regstraton not requred n certan case . The regstraton of sts and
dstng apparatus Is not requred when set up for use by the Unted States or
any governmenta agency thereof, other than for dstng as defned by secton
181.12, or when set up at refneres for the refnng of crude petroeum or the
producton of petroeum products and not used n the manufacture of dsted
sprts.
Tmothy C. Mooney,
ohn L. Suvan,
Reguatons 11, Sectons 189. 5,189.78,189.79, 1940-34-10397
189.95, 189.111, 189.11 , 189.153. T. D. 5002
OTTLING O T -P ID DISTILL D SPIRITS.
Washngton, D. C.
Concerned:
Secton 2803(c) of the Interna Revenue Code, as amended by sec-
ton 1 of the ct of une 24, 1940 (Pubc, No. 54, Seventy-s th
Congress), reads as foows:
(c) Unused Stamps change, Refund, tc. The Commssoner of Interna
Revenue, under reguatons prescrbed by hm and approved by the Secretary
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of the Treasury, may redeem or make aowance for any unused stamps ssued
under secton 203 of the Lquor Ta ng ct of 1934 or subsecton (b) of ths
secton by e changng them for other stamps of the same knd or by refundng
moneys receved therefor: Provded, That stamps may be e changed or the vaue
thereof refunded ony n quanttes of the vaue of o or more: nd provded fur-
ther, That no cam for the e change of strp stamps or refund therefor sha be
aowed uness presented wthn two years after the date on whch such stamps
were awfuy ssued. There are hereby authorzed to be approprated annuay,
out of any money n the Treasury not otherwse approprated, such sums as may
be necessary to carry out ths provson.
s th Congress), reads as foows:
2803(e), Interna Revenue Code, as amended and nserted, respectvey, by ths
Issued pror to the date of enactment of ths ct may be aowed f presented
wthn two years from the date of enactment of ths ct.
Pursuant to the foregong provsons of aw and to sectons 2803(d),
2871,3030(a), and 317 of the Interna Revenue Code, and secton 5(e)
of the edera coho dmnstraton ct, as amended (27 U. S. C.
Sup., 205), secton 189.31 of Reguatons 11 s hereby revoked, and
sectons 189. 5, 189.78, 189.79, 189.95, 189.111, 189.11 , and 189.153 of
Reguatons 11 are hereby amended to read as foows:
Sec. 189. 5. ppcaton, orm 230. Propretors of ta -pad bottng houses
desrng to botte ta -pad sprts w e ecute appcaton on orm 230, n dup-
cate, gvng a of the data caed for by the form as ndcated by the headngs
of the coumns and nes and the nstructons prnted thereon. The propretor
w enter on orm 230 the detas of the wthdrawa gauge for ta -payment
when packages of sprts are to be dumped for bottng, or when queurs or
cordas are authorzed to be botted from the orgna package as provded n
secton 189.78. n actua gauge of the sprts w, however, be made n ether
case before the bottng begns, and the detas of such gauge w aso be entered
on the form, as provded n sectons 189.77 and 189.7a ach orm 230 w be
gven a sera number begnnng wth 1 for the 1st day of anuary of each
year and runnng consecutvey thereafter to December 31, Incusve. separate
appcaton on orm 230 must be prepared for each ot of ta -pad sprts to be
botted.
Sec. 189.78. ottng tank to be used. sprts botted at a ta -pad bot-
tng house must be botted from approved bottng tanks: Provded, That the
dstrct supervsor may authorze the bottng from the orgna package of
queurs and cordas whch t s mpractcabe to botte from an approved bot-
tng tank. Where queurs or cordas are authorzed to be botted from the
orgna package, the propretor w gauge such queurs or cordas before the
bottng begns and enter the detas thereof on a copes of orm 230.
Sbo. 189.79. Reducton of ta -pad rectfed sprts prohbted. The reducton
In proof or the ncreasng n voume, at a ta -pad bottng house, of rectfed
sprts on whch the rectfcaton ta has been pad s prohbted by aw. Ths
prohbton does not forbd the reducton of mported sprts rectfed abroad, or
of sprts rectfed n Puerto Rco, the rgn Isands, or the Phppne Isands,
or of domestcay rectfed sprts e empt from rectfcaton ta . Lqueurs and
cordas may not be reduced n proof or ncreased n voume, nor may wnes be
ncreased n voume or n ta abe grade, at a ta -pad bottng house. ( Sec-
tons 2801(h), 3030(a), I. R. C.)
Sec. 189.95. Rebottng, reabeng, and restampng of botted sprts. Where
dsted sprts packaged n bottes are to be rebotted for domestc sae, the
bottes, f of a capacty of one-haf pnt or greater and not e ceedng 1 gaon,
must conform to the requrements of Reguatons 13 (2 C R, Part 175). The
sprts may be rebotted n the same bottes from whch removed f such bottes
contanng the sprts orgnay conform to the requrements of Reguatons 13
and have not been sod to the consumer or opened, and the use of such bottes s
authorzed by the dstrct supervsor n accordance wth the sad reguatons.
The new abe must be covered by an approprate certfcate of abe approva or
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37
a certfcate of e empton from abe approva Issued under the edera coho
dmnstraton ct. If the new abe s covered by a certfcate of e empton
from abe approva, t must conform to the requrements of Reguatons 13. If
the sprts have eft the possesson of the orgna botter and are to be reabeed
wthout rebottng, authorzaton to reabe the sprts must be obtaned n
accordance wth reguatons ssued under the edera coho dmnstraton
ct and submtted to the Government offcer supervsng operatons of the pant,
or to the dstrct supervsor or other desgnated approvng offcer. Whenever
botted dsted sprts are dumped for rebottng, the red strp stamps on the
bottes must be destroyed at the tme of dumpng, and new red strp stamps must
be aff ed to the bottes n whch the sprts are rebotted.
Sec. 189.111. change and redempton of stamps. Unused red strp stamps.
In quanttes of the vaue of 5 or more, ssued under secton 203 of the Lquor
Ta ng ct of 1934 or subsecton (b) of secton 2803, Interna Revenue Code,
may be e changed for other stamps of the same knd and n any prescrbed
denomnaton, or the vaue thereof may be refunded, provded that a cam
for such e change or refund, estabshng the awfu Issuance and ownershp
of the stamps, s fed wth the coector of nterna revenue who ssued the
stamps (1) wthn two years after the date on whch such stamps were
awfuy ssued or (2) f the stamps were awfuy ssued pror to une 24,
1940, wthn two years from the atter date: Provded, however, That the vaue
of unused stamps whch have been destroyed may be|refunded upon the fng
of a cam as provded heren wth proof to the satsfacton of the Com-
mssoner of the destructon of the stamps. Cams for e change of stamps
w be fed on orm 1579 and cams for refund of the vaue of stamps on
orm 843, n accordance wth procedure prescrbed by the Commssoner.
( Secton 3, ct of une 24, 1940 (Pubc, No. 54, Seventy-s th Congress).)
Sec. 189.11 . Wthhodng reease of sprts. Where botters of dsted sprts
are found to be usng abes other than those covered by a certfcate of
approva of abes, or a certfcate of e empton from abe approva, or to be
aff ng abes conformng to those on certfcates of abe approva to sprts
whch do not conform to such approved abes or to the Government abe, or
where botters bottng sprts mported In buk do not have n ther possesson
such certfcates of orgn, age, and cass and type as are requred, the offcer
w wthhod reease of the sprts and w make a report of the facts to the
dstrct supervsor, accompaned by copes of the abes In queston. (Secton
505, 49 Stat., 1905 27 U. S. . Sup., 205.)
Sec. 189.153. Dsposton of strp stamps. unused red strp stamps, f
any. beongng to the propretor at the tme of permanent dscontnuance of
busness w be nventored by denomnaton, sera number, and quantty, by
the storekeeper-gauger or other offcer desgnated by the dstrct supervsor to
perform such duty. The offcer w dever such stamps to the propretor and
take hs recept therefor, n trpcate. When deverng the stamps the offcer
w advse the propretor that the vaue of the stamps, f n quanttes of the
vaue of 5 or more, may be refunded, provded that a cam for such refund
on orm 843, estabshng the awfu Issuance and ownershp of the stamps.
Is fed wth the coector of nterna revenue who ssued the stamps (1)
wthn two years after the date on whch such stamps were awfuy ssued
or (2) f the stamps were awfuy ssued pror to une 24, 1940, wthn two
years from the atter date or that such unused stamps may be destroyed n
the presence of the Government offcer and the propretor thereby reeved
from further accountabty for the stamps. If the stamps are not surrendered
to the coector for refund of ther vaue or are not destroyed, the propretor
must account for the stamps each month by renderng orm 9 , n dupcate,
to the dstrct supervsor. The offcer sha make a notaton on the recept
as to the dsposton made or to be made of the stamps. One copy of the
recept w be devered to the propretor and the orgna and one copy w be
devered to the dstrct supervsor, who w forward the orgna to the
Commssoner. ( Secton 3, ct of une 24, 1940 (Pubc, No. 54, Seventy-
th Congress).)
Tmothy C. Mooney,
pproved ugust 7,1940.
ohn L. Suvan,
ed wth the Dvson of the edera Regster ugust 10, 1940, 10.03 a. m.)
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PRODUCTION, ORTI IC TION, T -P YM NT, TC,
O WIN .
TITL 2 INT RN L R NU . C PT R I, SU C PT R C MISC LL N OUS
CIS T S. P RT 178 PRODUCTION. ORTI IC TION, T P YM NT,
TC., O WIN .
Credts for ta es on fortfed wnes (amendng Reguatons 7).
Washngton, D. C.
To Coectors of Interna Revenue, Dstrct Supervsors, and Othert
Concerned:
Sectons 4 and 5 of the ct of une 24, 1940 (Pubc, No. 55,
Seventy-s th Congress), read as foows:
Sec. 4. Upon the fng of a cam therefor by the propretor of any
bonded wnery or bonded storeroom n whch there was stored on une
30, 1940, or to whch there was n transt ou that date, wne awfuy
fortfed wth brandy or wne sprts, and contanng more than 14 per
centum of absoute acoho by voume, and not e ceedng 24 per centum
of absoute acoho by voume, the Commssoner of Interna Revenue s
authorzed to ssue to such propretor sutabe documents enttng such
propretor to a credt of 5 cents per gaon n respect of each gaon of
such fortf. d wne whch the Commssoner sha fnd was on such pro-
pretor s bonded wnery or bonded storeroom premses on une 30, 1940,
or n transt thereto. The amount of such credt sha be aowed n
whoe or n part n the purchase of wne stamps. The cam sha be
supported by an nventory, prepared, and fed by the propretor n such
form and manner as the Commssoner of Interna Revenue sha pre-
scrbe by reguatons, approved by the Secretary of the Treasury, and by
such other proof as the Commssoner may from tme to tme requre.
The aforesad credt to the propretor may be transferred by the pro-
pretor to whom ssued to the propretor of any other bonded wnery or
bonded storeroom. cams under ths secton must be fed on or
before October 1, 1940.
Sec. . The Commssoner of Interna Revenue, wth the approva of
the Secretary of the Treasury, sha prescrbe and pubsh a needfu
rues and reguatons for the enforcement of ths ct.
Pursuant to the foregong sectons of aw, Reguatons 7 (Part 178,
Tte 2 , Code of edera Reguatons) are hereby amended by addng
thereto a new artce and new paragraphs readng as foows:
Par. 3 3. Inventory of fortfed cnes. ny propretor of a bonded wnery or
bonded storeroom desrng to secure the credts, authorzed by secton 4 of the
ct of une 24. 1940, sha, at any tme on une 30, 1940, f no wne s receved
nto or removed from the wnery or storeroom on that date, or at the cose of
busness on une 30, 1940, f wne s receved or removed on that date, make nn
nventory of a unta -pad wne awfuy fortfed wth brandy or wne sprts
and contanng more than 14 per centum, but not e ceedng 24 per centum, of
absoute acoho by voume then on hand or n transt to such bonded wnery or
storeroom.
I ab. 3tS4. Detas of nventory. (a) The nventory sha be prepared n trp-
cate on sheets of paper not arger than 10 - by ( nches to be furnshed by the
ta payer. The nventory w consst of two sectons. The frst secton w
290217 41 25
Reguatons 7 (1937), rtce L III.
1940-27-10315
T. D.4977
rtce I. III. Credts for Ta es on ortfed Wnes.
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378
cover a untn -pad fortfed wnes on hand or stored on the bonded wnery or
bonded storeroom, and w be dvded nto 8 coumns desgnated as foows:
( ) nd of wne.
( ) Name of producer.
(C) Sera number of tank.
(D) Sera number of packages.
( I Sera number of cases.
( ) Sze of bottes.
(G) Per cent of acoho.
( ) Gaons of fortfed wne.
( ) The second secton of the nventory w cover a unta -pad fortfed wne
n transt to the premses of the bonded wnery or bonded storeroom, aud w
be dvded nto 7 coumns desgnated as foows:
( ) nd of wne.
( ) Name and address of shpper.
(C) Name of producer.
(D) nd of contaner.
( ) Sera number of contaner.
( ) Per cent of acoho.
(G) Gaons of fortfed wne.
Pab. 3 5. Remova of wne shown on nventory. The fortfed wne shown n
the nventory to be on hand sha not be removed from the bonded wnery or
bonded storeroom before uy 1, 1940, and sha on or after that date be tn -pad
on remova at the rates of ta mposed by aw n effect on the date of remova.
Pab. 3 . erfcaton of nventores. Dstrct supervsors w assgn nspec-
tors or storekeeper-gaugers to verfy and certfy Inventores made by propretors
of bonded wneres and bonded storerooms.
Par. 3 7. ng of appcaton for certfcate of credt. very propretor
of a bonded wnery or storeroom havng on hand or n transt thereto unta -pad
fortfed wne contanng more than 14 per centum, but not e ceedng 24 per
centum, of absoute acoho by voume, as ndcated above, desrng to secure
the credts mentoned heren, sha, on or before October 1, 1940, fe an appca-
ton, under oath, wth the Commssoner of Interna Revenue, Washngton,
D. C., for the Issuance of a certfcate enttng the propretor to a credt of 5
cents a gaon n respect of each gaon of fortfed wne whch the Commssoner
sha fnd was on the propretor s wnery or storeroom premses or n transt
thereto. No partcuar form of appcaton w be provded. The appcaton
may be made on etter sze paper and sha set forth the bass of the cam n
suffcent deta to enabe the Commssoner to determne the nature thereof.
Two copes of the nventory w be attached to the appcaton. The remanng
copy of the nventory w be retaned by the appcant
Pab. 3 8. cton by Commssoner. The appcaton and supportng docu-
ments w be e amned by the Commssoner, who may ca upon the appcant
for such other proof and nformaton as he may deem necessary to the con-
sderaton of the cam. When the Commssoner determnes the quantty of
unta -pad fortfed wne whch was on hand on the appcant s estabshment
or n transt thereto on une 30, 1940, he w Issue to the appcant a certfcate
or certfcates n an amount equa to 5 cents per gaon for the gaonage thus
ascertaned.
Par, 3 9. Certfcates to be used for purchase of wne stamps. These cer-
tfcates mny be apped n whoe or n part to the purchase of wne ta stamps
on presentaton to the coector of nterna revenue, accompaned by orm
427- , Order for Stamps Wne, n quadrupcate.
Par. 370. Transfer of certfcates. (a) The certfcates may be transferred
by the propretor of a bonded wnery or bonded storeroom to whom ssued to the
propretor of any other bonded wnery or bonded storeroom who may aso
appy the certfcates n whoe or n part to the purchase of wne ta stamps,
as provded by paragraph 309, or transfer them to another propretor of a
bonded wnery or storeroom for such purpose.
(b) In such case, the transferor sha ndorse the certfcate on the back
thereof as foows:
Tte to ths certfcate Is hereby transferred to
Propretor of . W. (or . S.) No
ddress
Sgnature of transferor
Propretor of . W. (or . S.) No
ddress
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If the transferred certfcate s to be presented to a coector of nterna revenue
of a dstrct other than that n whch the transferor s ocated, the transferor
sha have a sgnatures of the ndorsement guaranteed by a bank or by the
coector of nterna revenue of hs dstrct. In addton to such guaranty, the
transferee sha, f he requests stamps n a esser amount than the face vaue
of the certfcate, on presentng the certfcate to the coector of such other
dstrct, dever to hm a photostatc copy of the face and back of the certfcate.
Par. 371. Lost or destroyed certfcates. The Commssoner may ssue a
certfcate to repace any ost or destroyed certfcate upon recept of an appca-
ton therefor from the person entted to possesson thereof, f the appcant
submts satsfactory proof (1) of hs rght to possess the certfcate, (2) of
the oss or destructon of the certfcate, and (3) of the efforts made to recover
the certfcate. The appcaton must be aceompaned by a bond n doube the
amount of the face vaue of the certfcate, wth surety or suretes approved
by the Commssoner, ndemnfyng the Unted States aganst oss n ease the
mssng certfcate shoud be used.
Par. 372. Payment of fortfraton tares. assessments of ta es on brandy
wthdrawn and used n the fortfcaton of wne pror to uy 1, 1940, w be
due and payabe wthn 18 months from the date of notce of assessment
thereof.
Guy T. everng,
pproved une 2 , 1940.
erbekt . Gaston,
( ed wth the Dvson of the edera Regster une 27, 1940, 11.43 a. m.)
Reguatons 7 (1937), Paragraphs 48, 112, 113. 1940-32-10380
114,155,1 1, 205, 215,284, 285, 291, 309, 310, 311. T. D 4994
TITL 20 INT RN L R NU . C PT R I, SU C PT R C, T RT 178.
PRODUCTION, ORTI IC TION, T P YM NT, TC., O WIN .
Ta on wne and wthdrawa of brandy for fortfcaton (amend-
ng Reguatons No. 7).
Washngton, D. C.
To Coectors of Interna Revenue, Dstrct Supervsors, and Others
Concerned:
The ct of une 24, 1940 (Pubc, No. 55, Seventy-s th Con-
gress), reads n part as foows:
That, effectve uy 1, 1940, secton 3030(a)(1)( ), Interna Revenue Code,
( ) Imposton. Upon a st wnes, ncudng vermouth, and a artfca
or mtaton wnes or compounds sod as st wne produced n or mported nto
the Unted States after une 30, 1940, or whch on uy 1, 1940, were on any
wnery premses or other bonded promses or n transt thereto or at any cus-
tomhouse, there sha be eved, coected, and pad ta es at rates as foows,
when sod or removed for consumpton or sae:
On wnes contanng not more than 14 per centum of absoute acoho, 5
cents per wne-gaon, the per centum of acoho under ths secton to be reckoned
by voume and not by weght
On wnes contanng more than 14 per centum and not e ceedng 21 per
centum of absoute acoho, 15 cents per wne-gaon
On wnes contanng more than 21 per centum and not e ceedng 24 per
centum of absoute acoho. 25 cents per wne-gaon
such wnes contanng more than 24 per centum of absoute acoho by
voume sha be cassed as dsted sprts and sha pay ta accordngy.
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380
ny such wnes may, under such reguatons as the Commssoner may
prescrbe, wth the approva of the Secretory, he sod or removed ta -free for
the manufacture of vnegar, or for the producton of deacohozed wnes con-
tanng ess than one-haf of 1 per centum of acoho by voume.
The ta es mposed by ths subparagraph ( ) of ths paragraph sha not
appy to deacohozed wnes contanng ess than one-haf of 1 per centum
of acoho by voume nor, sub|ect to reguatons prescrbed by the Comms-
soner, wth the approva of the Secretary, to wnes produced for the famy
use of the duy regstered producer thereof and not sod or otherwse removed
from the pace of manufacture and not e ceedng n any case two hundred
gaons per year.
Sec. 2. ffectve uy 1, 1940, secton 3030(a)(2), Interna Revenue Code, s
(2) Sparkng wnes, queurs, and cordas. Upon the foowng artces
whch are produced n or mported nto the Unted States, after une 30, 1940,
or whch on uy 1, 1940, are on any wnery premses or other bonded premses
or n transt thereto or at any customhouse, there sha be eved, coected, and
pad, n eu of the nterna-revenue ta es mposed thereon by aw pror to such
date, ta es at rates as foows, when sod, or removed for consumpton or sae:
On each botte or other contaner of champagne or sparkng wne, 2 4
cents on each one-haf pnt or fracton thereof
On each botte or other contaner of artfcay carbonated wne, 1 cents
on each one-haf pnt or fracton thereof
On each botte or other contaner of queurs, cordas, or smar com-
pounds, by whatever name sod, or offered for sae, contanng sweet wne, ctrus-
frut wne, peach wne, cherry wne, berry wne, aprcot wne, prune wne,
pum wne, pear wne, or appe wne, fortfed, respectvey, wth grape brandy,
ctrus-frut brandy, peach brandy, cherry brandy, berry brandy, aprcot brandy,
prune brandy, pum brandy, pear brandy, or appe brandy, 1 4 cents on each
one-haf pnt or fracton thereof.
ny of the foregong artces contanng more than 24 per centum of abso-
ute acoho by voume (e cept vermouth, queurs, cordas, and smar com-
pounds made n rectfyng pants and contanng ta -pad sweet wne, ctrus-
frut wne, peach wne, cherry wne, berry wne, aprcot wne, prune wne,
pum wne, pear wne, or appe wne, fortfed, respectvey, wth grape brandy,
ctrus-frut brandy, peach brandy, cherry brandy, berry brandy, aprcot brandy,
prune brandy, pum brandy, pear brandy, or appe brandy) sha be cassed as
dsted sprts and sha be ta ed accordngy.
The Commssoner under reguatons prescrbed by hm, wth the approva
of the Secretary, s authorzed to remt, refund, and pay back the amount of a
ta es on such queurs, cordas, and smar compounds pad by or assessed
aganst rectfers at the dsted sprts rate pror to une 2 , 193 .
Sec. 3. ffectve uy 1, 1940, secton 3031(a), Interna Revenue Code, Is
(a) Wthdrawa of sprts for fortfcaton. Under such reguatons and
offca supervson and upon the gvng of such notces and entres as the Com-
mssoner, wth the approva of the Secretary, may prescrbe, any producer of
wnes defned under the provsons of ths subchapter may wthdraw from any
frut dstery or nterna revenue bonded warehouse grape brandy (hereafter
n ths secton ncuded n the term brandy ), or wne sprts, for the fortfca-
ton of such wnes on the premses where actuay made, and any producer of
ctrus-frut wnes, peach wnes, cherry wnes, berry wnes, aprcot wnes, prune
wnes, pum wnes, pear wnes, or appe wnes (hereafter n ths secton ncuded
n the term wnes ) may smary wthdraw ctrus-frut brandy, peach brandy,
cherry brandy, berry brandy, aprcot brandy, prune brandy, pum brandy, pear
brandy, or appe brandy (hereafter n ths secton ncuded n the terra
brandy ) for the fortfcaton of wnes as set forth n secton 3032, Interna
Revenue Code, on the premses where actuay made. The amounts of ta at
the rate mposed by aw on such brandy or wne sprts sha be charged
mmedatey upon wthdrawa aganst the producer wthdrawng the same:
Provded, That whenever such brandy or wne sprts sha be awfuy used n
the fortfcaton of wnes and accounted for n the manner provded by aw and
reguatons, the producer sha be credted n the amount of the nterna-
revenue ta on so much of the brandy or wne sprts so wthdrawn as was so
used. very producer of wnes who wthdraws such brandy or wne sprts
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381
Msc.
sha gve bond to fuy cover at a tmes the payment of the Internn-revenne
ta at the rate mposed by aw due on such brandy or wne sprts, whch bond
sha be n such form as the Commssoner, wth the approva of the Secretary,
sha, by reguatons, prescrbe. On and after uy 1, 1940, the nterna-revenue
ta on such brandy or wne sprts sha be assessed aganst the producer of
such wnes who has wthdrawn brandy or wne sprts for use n the fortfca-
ton of such wnes when such brandy or wne sprts are not awfuy used In the
fortfcaton of wnes, or when such brandy or wne sprts are not so accounted
for n the manner provded by aw and reguatons as to warrant remsson
of the ta .
Nothng contaned n ths secton sha be construed as e emptng any wnes,
cordas, queurs, or smar compounds from the payment of any ta provded
for n ths subchapter.
ny such wnes may, under such reguatons as the Commssoner may
prescrbe, wth the approva of the Secretary, be sod or removed ta -free for
the manufacture of vnegar, or for the producton of deaeohozed wnes con-
tanng ess than one-haf of 1 per centum of acoho by voume.
The ta es mposed by ths subchapter sha not appy to deaeohozed wnes
contanng ess than one-haf of 1 per centum of acoho by voume.
Secton 210 (Msceaneous cses) of the Revenue ct of 1940
(Pubc, No. 5 , Seventy-s th Congress), approved une 25, 1940,
reads n part as foows:
Chapter O Defense Ta fob ve Yeabs.
Sec. 1050. Defense Ta fob ve Ye- ks.
to the perod after une 30, 1910. and before uy 1, 1945, sha be the rates
set forth under the headng Defense-Ta Rate :
Secton.
Descrpton of ta .
Od rate.
Defense-ta rate.

3250(a)(1)
100
110.
27.50.
3250(b)
25

Secton 214 (Wnes and ermented Mat Lquors) of the Revenue
ct of 1940 (Pubc, No. 5 , Seventy-s th Congress), approved
une 25, 1940, reads n part as foows:
Chapter 20 of the Interna Revenue Code s amended by nsertng at the end
thereof the foowng new subchapter:
subchapter f defense ta fob fve years.
In eu f the rates of ta specfed n such of the sectons of ths tte as
arc set forth n the foowng tabe, the rates appcabe wth respect to the
perod after une 30, 1940, and before uy 1, 1945, sha be the rates set
forth under the headng Defense-ta Rate :
Secton.
Descrpton of ta .
Od rate.
Defense-ta rate.
3030(a)(1)( )
:vwt(a)()( )
3030(a)(1)( )
3030(a)(2).---
3030(a)(2)...-
St wnes
St wnes -
St wnes.
Sparkng wnes
Sparkng wnes
5 cents.,. __
15 cents
25 cents
2y cents
1M cents
cents.
18 cents.
30 cents.
3 cents.
cents.
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382
Pursuant to the above provsons of aw, paragraphs 48, 112, 113,
114, 155, 1 1, 205, 215, 284, 285, 291, 309, 310, and 311 Reguatons
No. 7, as amended (Part 178, Tte 2 , Code of edera Reguatons),
are hereby amended to read as foows:
Par. 48. ond orm 700-4. cept as otherwse provded heren, propretors
of bonded wneres and bonded storerooms sha furnsh a separate bond on
orm 700- , n trpcate, wth surety or securty to cover each wnery or
storeroom. No wne may be produced or receved, and no brandy may be wth-
drawn for fortfcaton unt proper bond s fed and the notce and bond are
approved by the dstrct supervsor. onds on orm 700- w be n a pena
sum suffcent:
(1) To cover the amount of the ta on a wne to be produced, receved,
and stored at the bonded wnery, receved and stored at the bonded store-
room, and n transt from such premses to other bonded premses, at any
one tme and
(2) To cover the amount of the ta at the rate Imposed by aw on a
brandy or wne sprts to be wthdrawn for use n the fortfcaton of wne
and n transt to, or stored at, the bonded wnery at any one tme.
The pena sum of the bond sha be cacuated on the bass of the wne and
brandy or wne sprts ta rates, and the ma mum quantty of ether or both
wne or brandy nvoved, and sha not be ess than 500 nor more than T0,OO0
but where the aggregate amount of ether or both such ta es e ceeds the
amount of bond, addtona bond or bonds wth surety or securty sha be
furnshed, provded that where the abty to such ta es e ceeds 50,000, the
pena sum of the addtona bond or bonds sha be cacuated on the bass
of the ta on the e cess brandy or wne sprts ony. Shoud the wnemaker
negect to fe the requste bond, the dstrct supervsor w refuse to aow
hm to produce or receve wne or wthdraw brandy or wne sprts for fort-
fcaton unt the charges aganst the outstandng bond are reduced suffcenty
to permt such further operatons. The fng of banket bonds by wuetnakers
s not permssbe.
onds guaranteeng the payment of outstandng assessments of ta es on
brandy wthdrawn and used n the fortfcaton of wnes sha contnue n
effect as to such ta es e cept that n the case of a supersedng or succeedng
bond, the abty sha be assumed by consent of surety on the supersedng
or succeedng bond.
Par. 112. Ta on st wnes. The foowng are the rates of ta on st
wnes, artfca or mtaton wnes or compounds sod as st wnes, and ver-
mouth produced n a bonded wnery, the per cent of acoho to be reckoned by
voume:
(a) cents per wne gaon when contanng not more than 14 per cent
of absoute acoho
(ft) 18 cents per wne gaon when contanng more than 14 per cent and
not e ceedng 21 per cent of absoute acoho
(c) 30 cents per wne gaon when contanng more than 21 per cent and
not e ceedng 24 per cent of absoute acoho
(d) When contanng more than 24 per cent of absoute acoho, cassed
as dsted sprts and ta ed accordngy.
Par. 113. Ta on effervescent wne. The foowng are the rates of ta on
champagne or sparkng wne and artfcay carbonated wne:
(a) On each botte or other contaner of champagne or sparkng wne,
3 cents on each one-haf pnt or fracton thereof:
(ft) On each botte or other contaner of artfcay carbonated wne, 1,
(p) ny of the foregong artces contanng more than 24 per cent
of absoute acoho by voume sha be cassed as dsted sprts and sha
be ta ed accordngy.
Par. 114. Computng ta on champagne. The ta on champagne, sparkng
wne, and artfcay carbonated wne must be computed on each botte, and
not on the aggregate contents of the case. Thus, the ta on a one-ffth gaon
botte of sparkng wne amounts to 12 cents, and on a case of 12 such bottes
the ta amounts to 1.44.
Par. 155. arkng of packages. When shpped each package must be pany
marked or deacohozaton, n addton to bearng the marks requred by
paragraph 102 of these reguatons.
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Par. 1 1. Retenton of arctc acd on wnery premses. Wnemakers may not
retan acetc acd on the wnery or storeroom premses. Where wne s to be
converted nto vnegar stock n accordance wth the foregong, the matera
requred for such converson must be brought nto the wnery or storeroom at
the tme of converson, and any resdue not used must be mmedatey removed
from the wnery or storeroom. Wne converted nto vnegar stock must be kept
separate and apart from other wnes n the wnery or storeroom durng the
perod necessary for converson and shpment. The vnegar stock must be removed
from the wnery or storeroom mmedatey after converson. The offcer super-
vsng the converson w see that these requrements are comped wth.
Dstrct supervsors w advse the Commssoner of a conversons under
supervson of ther offcers.
Pab. 205. Denomnatons. Stamps for the ta -payment of wnes w be pro-
vded n denomnatons of cent, / cent, 1 cent, 114 cents, y, cents, 2 cents,
2 cents, 3 cents, 4 cents, 5 cents, cents, 7 cents, 10 cents, 12 cents, 15 cents,
18 cents, 20 cents, 24 cents, 30 cents, 3 cents. 40 cents, 48 cents, 50 cents, 0
eents, 72 cents, 80 cents, 1, 1.20, 1.44, 1.50, 1. 0, 2, 2.50, 4, 4.80, 5,
9. 0. 20, 40, 50, and 100.
Par. 215. Reta and whoesae quor deaer. Uness e empted by aw, a
persons who se wnes n quanttes of ess than 5 wne gaons to the same
person at the same tme are abe for speca ta as reta deaers n quors
at the rate mposed by aw, and a persons who se wnes n quanttes of 5 wne
gaons or more to the same person at the same tme are abe for speca ta
as whoesae deaers n quors at the rate mposed by aw. Persons seng wne
both n reta and whoesae quanttes are abe for speca ta es as both
reta and whoesae deaers n quors, e cept that no reta deaer ncurs
abty as a whoesae deaer soey by reason of saes of 5 wne gaons or
more to the same person at the same tme f such saes are for mmedate
consumpton on the premses where sod.
Pah. -84. ppcaton on orm 27 . When the wnemaker desres to begn
fortfcaton of wne, he w make appcaton on part 1 of orm 270, ortfca-
ton of Wne, n trpcate, to the dstrct supervsor for the assgnment of an
offcer to supervse fortfcaton of the wne, e cept that where the dstrct super-
vsor has assgned an otcer to the wnery and authorzed hm to supervse fort-
fcaton upon appcaton of the wnemaker, orm 27 w be fed drecty wth
such offcer. separate appcaton w be made for each month n whch t s
desred to fortfy wne.
Par. 285. cton bu dstrct supervsor. If the appcaton s propery prepared
and the wnemaker s notce of ntenton to fortfy wne, orm 05, has been
fed wth the dstrct supervsor, and the use of a ppe ne for the transfer of
brandy has been approved, and the wnemaker has procured or been authorzed
to procure brandy to fortfy the wne, the dstrct supervsor w, e cept n
cases where the appcaton s fed drecty wth a desgnated offcer, as provded
n paragraph 284, e ecute part 2 of the form and dever a three copes to the
offcer desgnated to supervse fortfcaton.
Par. 291. Losses. ach day wnes are fortfed the offcer w aso enter on
orm 27 the nformaton caed for on that form, as ndcated by the headngs
of the varous coumns and nes and the nstructons prnted on the form.
Where osses have been sustaned the offcer w show the sera numbers of
the packages nvoved, the quantty ost from each package, and the appnrent
reason for the oss. Losses from storage tanks w be determned at the end
of the month durng whch wnes are fortfed or upon competon of fortfcaton
for the month, as provded n paragraph 29 a. t the cose of the month or
upon competon of fortfcaton for the month, the offcer w compete the form,
retan one copy at the wnery as a permanent record, and forward the other
two copes to the dstrct supervsor, who w transmt one copy to the Comms-
soner wth hs brandy account, orm 2 0.
rtce L II Ta Labty o randy or Wne Sprts Wthdrawn for
ortfcaton.
Par. 309. Charge aganst rnemaker. The amounts of ta at the rates mposed
by aw on brandy or wne sprts wthdrawn from a frut dstery or an nterna
revenue bonded warehouse for the fortfcaton of wne sha be charged aganst
the wnemaker mmedatey upon wthdrawa of such brandy or wne sprts.
When the brandy or wne sprts have been used awfuy n the fortfcaton of
wne and accounted for satsfactory, the wnemaker sha be gven approprate
credt.
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384
Pae. 310. Record. The dstrct supervsor sha mantan a record whch w
enabe a ready determnaton regardng the amount of brandy or wne sprts
representng a potenta ta abty under the wnemaker s bond. The amount
of fortfyng brandy or wne sprts on hand at or deposted n the fortfcaton
room of the wnery the amount of brandy or wne sprts ost n transt to or
n the fortfcaton room of the wnery and the amount of brandy specfed n
approved appcatons on orm 257, but not reported deposted n the fortfca-
ton room, sha be consdered charges aganst the wnemaker. The amounts
of brandy or wne sprts shown on orm 275 (Storekeeper-Gauger s Report of
ortfcaton of Wne) sha be consdered credts for brandy or wne sprts used.
Such credts sha be entered n the record by the dstrct supervsor mmedatey
upon recept of orm 275. The wnemaker sha aso be gven credt In the
record where the ta has been remtted or pad on osses of brandy or wne
sprts. The dstrct supervsor sha not dsapprove a wnemaker s appcaton
on orm 257 for the wthdrawa of brandy or wne sprts uness he has reason
to beeve that the pena sum of the wnemaker s bond s not suffcent, under
the provsons of paragraph 48 of these reguatons, to cover the ta abty on
the amount of brandy or wne sprts covered by the appcaton.
Pab. 311. ssessment of ta . Where t appears that brandy or wne sprts
wthdrawn by a wnemaker have not been used awfuy n the fortfcaton of
wne or that the ta shoud not be remtted on a oss of brandy n transt to or at
the fortfcaton room of a wnery, the dstrct supervsor w transmt a
pertnent papers wth approprate comment to the Commssoner. If ta s
found to be due, t w be assessed by the Commssoner.
Paragraphs 49, 312, 313, 314, 315, and 315a, Reguatons No. 7, as
amended (Part 178, Tte 2 , Code of edera Reguatons), are hereby
revoked, e cept as to rghts or abtes arsng pror to uy 1,1940.
Tmothy C. Mooney,
ohn L. Suvan,
( ed wth the Dvson of the edera Regster ugust 1,1940,12.52 p. m.)
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MISC LL N OUS RULINGS.
OINT RUL S UND R CUTI ORD R No. 84 5.
1940-30-10352
TITL 2G INT RN L R NU . C PT R I, SU C PT R , P RT 27.
C SS PRO ITS ON CONTR CTS OR N L SS LS ND RMY ND N Y
IRCR T.
ont rues for admnstraton of secton 4 of the ct of une 2S,
1940, and ecutve Order No. 84 5.
Tabe of Contents.
eet on.
27.0. Introductory.
27.1. Defntons.
27.2. Speca addtona equpment and factes.
27.3. Informaton as to other arrangements affectng cost to be borne by Gov-
ernment.
27.4. Descrpton of equpment and factes.
27.15. Types of certfcatons.
27. . Certfcaton upon bass of estmated cost of equpment and factes.
27.7. Certfcaton as to necessty.
27.8. Suppementa certfcaton as to percentage.
27.9. Percentage of cost of equpment and factes chargeabe aganst contract
or subcontract.
27.10. ffect of subsequent changes affectng Government s nterest.
2T.11. When certfcaton s e cusve procedure.
27.12. ffect of contractng party s faure to request certfcaton.
27.13. Certfcaton to be separate document.
Secton 27.0. Introductory. Pursuant to the authorty prescrbed
by secton 4 of the ct of une 28. 1940 (Pubc, No. 71, Seventy-
s th Congress, thrd sesson), and ecutve Order No. 84 5, une
29,1940, the foowng |ont rues are hereby prescrbed for the admn-
straton of such secton 4 and such ecutve Order:
Sec. 27.1. Defntons. s used n these rues the term
(a) ct. means the ct of une 28, 1940 (Pubc, No. 71, Sev-
enty-s th Congress, thrd sesson), entted n ct to e pedte
natona defense, and for other purposes.
( ) ecutve Order means ecutve Order No. 84 5 sgned
by the Presdent une 29, 1940, prescrbng reguatons under secton
4 of the ct.
(c) Secretary of the department concerned means the Secretary
of War or the Secretary of the Navy as the case may be.
(d) Certfcaton means a certfcaton made by the Secretary
of the department concerned to the Commssoner of Interna Reve-
nue under the provsons of secton 4 of the ct and n accordance
wth the ecutve Order.
(e) Natona emergency means the natona emergency decared
bv the Presdent on September 8, 1939, to e st.
(385)
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(/) Contractng party means the contractor or subcontractor
as the case may be.
(a) Contract or subcontract means a contract or subcontract
wth respect to whch the partcuar request for certfcaton s made.
Sec. 27.2. Speca addtona equpment and factes. certf-
caton w be made ony wth respect to speca addtona equpment
and factes acqured to factate, durng the natona emergency,
the competon of any compete nava vesse or rmy or Navy ar-
craft or any porton thereof n prvate pants. ddtona equpment
and factes w generay be consdered to be of ths character,
f necessary acqured specay to factate, durng the natona
emergency, the competon of a compete nava vesse or rmy or
Navy arcraft or any porton thereof. The speca addtona equp-
ment and factes may have been acqured before or after the ap-
prova of the ct. It s not essenta that such speca addtona
equpment and factes be desgned e cusvey for any speca type
of work to be performed under the contract or subcontract or that
such speca addtona equpment and factes be adaptabe ony
for work requred under the contract or subcontract. owever, no
certfcaton w be made n the case of any tem of addtona equp-
ment and factes whch, n the absence of the contract or sub-
contract, woud be reasonaby necessary n the contractng party s
operatons.
Sec. 27.3. Informaton as to other arrangements affectng cost to he
borne, by Government. t a tmes pror to the frst day on whch
the certfcaton becomes bndng upon the Commssoner of Interna
Revenue, the contractng party sha keep the Secretary of the de-
partment concerned and the Commssoner of Interna Re enue ad-
vsed as to whether any other department or agency of the Govern-
ment has agreed to bear any porton of the cost of such speca
addtona equpment and factes, or whether t s contempated
that any porton of such cost w be so borne, or whether such
addtona equpment and factes have been or w be used by the
contractng party n connecton wth any work other than that re-
qured under the contract or subcontract.
Sec. 27.4. Descrpton of equpment and factes. In the certf-
caton to the Commssoner of Interna Revenue, the Secretary of
the department concerned w, for the purposes of paragraph (8) of
the ecutve Order, descrbe the speca addtona equpment and
factes n suffcent deta to enabe the Commssoner of Interna
Revenue to dentfy a such speca addtona equpment and fac-
tes for admnstratve purposes, as, for e ampe, n connecton wth
the audt of the contractng party s report. The Secretary of the
department concerned sha n each case determne what nforma-
ton, other than that necessary to compy wth paragraph (3) of the
ecutve Order, sha be submtted by the contractng party for the
purpose of enabng such Secretary so to descrbe each tem of such
speca addtona equpment and factes.
Sec. 27.5. Types of certfcatons. The certfcatons whch may be
made n the case of a partcuar contract or subcontract, wth re-
spect to one or more tems of speca addtona equpment and fac-
tes comng wthn the scope of secton 4 of the ct and the ecutve
Order (sr secton 27.2 of these rues), are as foows:
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(a) Certfcaton upon the bass of estmated cost. Pror to the tme
when the cost of any partcuar tem or group of tems of speca add-
tona equpment and factes s ascertaned, a certfcaton may be
made n the case of such contract or subcontract upon the bass of est-
mated cost of such tem or tems, whch certfcaton sha be made as
to (a) the necessty and estmated cost of such tem or tems and (b)
the percentage of cost of each such tem to be charged aganst the con-
tract or subcontract. ut see secton 27. of these rues. Such certf-
caton sha be entted orm Certfcaton upon the bass of est-
mated cost.
(b) Suppementa certfcat/ms. Subsequent to the makng of a cer-
tfcaton upon the bass of estmated cost n the case of such contract
or subcontract and after the cost of the tem or tems covered by such
certfcaton s ascertaned
(1) s to cost. suppementa certfcaton sha be made as
to the cost of such tem or tems covered by the certfcaton upon
the bass of estmated cost (see secton 27. of these rues), whch
suppementa certfcaton sha be entted orm Suppe-
menta certfcaton as to cost.
(2) s to cost and necessty. suppementa certfcaton may
be made as to the necessty of the part of the cost of any such
tem or tems whch s n e cess of the estmated cost thereof, but n
such case (n eu of a suppementa certfcaton as to cost) a
suppementa certfcaton sha be made ss to (a) the cost of a
tems covered by the certfcaton upon the bass of estmated cost
and (b) the necessty of the part of the cost of any such tem whch
s n e cess of the estmated cost thereof, whch certfcaton sha
be entted orm 2 Suppementa certfcaton as to cost and
necessty.
(c) Certfcaton as to necessty, cost and percentage. If n the case
of a contract or subcontract no certfcaton upon the bass of est-
mated cost has been made wth respect to a partcuar tem or group of
tems, a certfcaton may be made after the cost thereof s ascertaned,
whch certfcaton sha be as to (a) the necessty and cost of such tem
or tems and (b) the percentage of cost of each such tem to be charged
aganst the contract or subcontract. Such certfcaton sha be en-
tted orm C Certfcaton as to necessty, cost and percentage.
(d) na certfcaton as to percentage. If n the case of any con-
tract or subcontract a certfcaton upon the bass of estmated cost has
been made wth respect to any partcuar tem or tems (see subsecton
(a), above) and a suppementa certfcaton as to cost or a suppe-
menta certfcaton as to cost and necessty has been made as to such
tem or tems (see subsecton ( ) (1) and (2), above), or f a certf-
caton as to necessty, cost and percentage has been made wth respect
to any partcu ar tem or tems (see subsecton (c), above), thereafter
a certfcaton n the case of such contract or subcontract may be made
after competon of the contract or subcontract, fnay determnng the
percentage of cost of each such tem to be charged aganst the contract
or subcontract (see secton 27.8 of these rues), whch certfcaton sha
be entted orm D na certfcaton as to percentage.
No certfcaton sha be made uness a proper request therefor has
been fed by the contractng party.
Sec. 27. . Certfcaton upon bass of estmated cost of equpment
and factes. In any case n whch the Secretary of the depart-
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388
ment concerned consders t necessary or advsabe n the case of
any contract or subcontract to make a certfcaton to the Comms-
soner of Interna Revenue upon the bass of the estmated cost
of any tem or tems of speca addtona equpment and factes,
a certfcaton may be made as to (a) the necessty and estmated
cost of each such tem of such speca addtona equpment and
factes and (b) the percentage of the cost of each such tem to be
charged aganst the contract or subcontract. Ony one certfcaton
sha be made upon the bass of estmated cost of any such tem
n the case of any contract or subcontract. The certfcaton upon
the bass of estmated cost, though not ob|ected to by the Comms-
soner of Interna Revenue n the manner provded for by secton
4 of the ct, w not be bndng upon hm wth respect to the
necessty for the tems whch are the sub|ect of the certfcaton
e cept to the e tent of the aggregate cost of such tems or the
aggregate estmated cost of such tems, whchever s the smaer.
In determnng the e tent to whch such certfcaton sha not be
bndng as to the necessty for a partcuar tem, the e cess of
aggregate cost of a tems over the aggregate estmated cost of
a tems sha be dstrbuted among the tems the cost of whch
e ceeds the estmated cost, accordng to the proporton whch the
e cess of cost over estmated cost of a partcuar tem bears to the
tota amount by whch the cost of a such tems e ceeds the est-
mated cost thereof. The certfcaton w be bndng upon the
Commssoner of Interna Revenue wth respect to the percentage
of cost of each such tem to be charged aganst the contract or sub-
contract, but no amount may be charged aganst the contract or
subcontract n pursuance of such certfcaton, uness a suppementa
certfcaton as to the cost of such tem (agreed to by the contractng
party and not ob|ected to by the Commssoner of Interna Reve-
nue) s made to the Commssoner of Interna Revenue wthn the
tme prescrbed by paragraph (7) of the ecutve Order. Thus,
though a suppementa certfcaton as to cost s ater made, a cer-
tfcaton upon the bass of estmated cost w not be bndng e cept
to the e tent of the specfed percentage as apped to estmated cost
or cost, whchever s the smaer, but ths mtaton does not pre-
vent the makng (after fu compance wth the provsons of the
ecutve Order and these raes) of a suppementa certfcaton
as to necessty and cost after cost s ascertaned, whch suppe-
menta certfcaton may, as to necessty, supersede the certfcaton
made upon the bass of estmated cost.
Sec. 27.7 Certfcaton as to necessty. In any case n whch a
certfcaton s made to the Commssoner of Interna Revenue as
to the necessty of any tem of speca addtona equpment and
factes, the certfcaton sha, n conformty wth the provsons
of paragraph (8) of the ecutve Order, state the necessty n
reasonabe deta. owever, f n the opnon of the Secretary of
the Department concerned t woud be aganst the pubc nterest
to ncude n the certfcaton a the reasons why such necessty
s deemed to e st, then the reasons not set forth n the certfcaton
may be transmtted to the Commssoner of Interna Revenue by
a confdenta statement, accompanyng the certfcaton.
S|ec. 27.8. Suppementa certfcaton as to percentage. The fact
that n the case of any contract or subcontract a certfcaton s
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made wth respect to any tem or tems of speca addtona equp-
ment and factes, upon the bass of estmated cost (see secton
2T.5( ) and secton 27. of these rues), or that a certfcaton as
to necessty, cost and percentage has been made (see secton 27.5(c)
of these rues), w not precude the makng of a fna certfcaton
as to percentage (see secton 27.5(d) of these rues) after the cost
of such tems s ascertaned and after the contract or subcontract
s competed, fnay determnng the percentage of cost of any
such tem to be charged aganst the contract or subcontract, whch
percentage (snce t must be agreed to by the contractng party)
may be greater or ess than the percentage prevousy certfed
but no such certfcaton sha be made uness a request therefor
s fed n accordance wth paragraphs (3), (4), and (5) of the
ecutve Order, reatng to the contents of, and tme for fng,
such request, and the fng of copes thereof wth the Commssoner
of Interna Revenue.
Sec. 27.9. Percentage of cost of equpment and factes chargeabe
aganst contract or subcontract. Wth respect to any tem of speca
addtona equpment and factes, the percentage of cost thereof
to be charged aganst a contract or subcontract w depend upon the
facts n the partcuar case. Due regard must be gven prmary to
the nature of the acton whch w be taken to effect a compance
wth the provsons of paragraph ( ) of the ecutve Order, reat-
ng to protecton of the nterest of the Government, provson for
prorty for Government work, and preservaton for natona defense
purposes. or e ampe, the reasonabeness of the cost of a par-
tcuar tem of speca addtona equpment and factes s a pert-
nent factor n f ng the percentage.
Sec. 27.10. ffect of subsequent changes affectng Government s
nterest. No certfcaton w be consdered to be bndng upon
the Commssoner of Interna Revenue as to the percentage of cost
to be charged aganst a contract or subcontract n respect of any tem
of speca addtona equpment and factes f, subsequent to the
makng of such certfcaton, a change adversey au eetng the nterest
of the Government s made n any of the measures taken to effect a
compance wth paragraph ( ) of the ecutve Order. owever,
n the event such a change s made, a new certfcaton may there-
after be made, provded the requrements of the reguatons pre-
scrbed by the ecutve Order are met.
Sec. 27.11. When certfcaton s e cusve procedure. If n the
case of any contract or subcontract a certfcaton s made wth re-
spect to any tem or tems of speca addtona equpment and fac-
tes comng wthn the scope of secton 4 of the ct and f any such
certfcaton has become bndng upon the Commssoner of Interna
Revenue, the percentage of the cost of each such tem to be charged
aganst the contract or subcontract sha be determned ony n
accordance wth the procedure provded for by secton 4 of the ct
and the reguatons prescrbed by the ecutve Order, and no
amount or aowance of any character sha be charged aganst the
contract or subcontract n respect of any such tem e cept to the
e tent of the percentage of cost of such tem whch s chargeabe
aganst the contract or subcontract n accordance wth any such
certfcaton whch has become bndng upon the Commssoner of
Interna Revenue. In hs request for certfcaton, or pror to mak-
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390
ng of a certfcaton, the contractng party sha agree to the fore-
gong provsons of ths secton.
Sec. 27.12. ffect of contractng party s faure to request certf-
caton. If n the case of any contract or subcontract a contractng
party fas to ava hmsef of the procedure provded for by sec-
ton 4 of the ct and the reguatons prescrbed by the ecutve
Order n respect of any tem of speca addtona equpment and
factes comng wthn the scope of such secton 4, then n deter-
mnng the cost of performng such contract or subcontract t w
be presumed (a) that such tems of speca addtona equpment and
factes w be usefu n the contractng party s busness through-
out the norma usefu fe of such tem and (b) that deprecaton
and obsoescence ony as computed upon such bass s aowabe as
an eement of cost of performng the contract or subcontract.
Deprecaton and obsoescence w not be determned upon any other
bass n the absence of cear and convncng evdence by the con-
tractng party as to the usefu fe of such tem. ny deprecaton
and obsoescence whch s aowabe as an eement of cost of per-
formng the contract or subcontract w be determned (for the
purposes of the proft-mtng provsons of secton 2(b) of the
ct and secton 3(b) of the ct of March 27, 1934, as amended, and
such secton 3(b) as apped to rmy arcraft) by the Commssoner
of Interna Revenue, but no amount of deprecaton and obsoescence
w be aowed by the Commssoner of Interna Revenue for such
purposes unt after the e praton of the perod wthn whch a
certfcaton may be made by the Secretary of the department con-
cerned wth respect to the contract or subcontract. See paragraph
(7) of the ecutve Order.
Sec. 27.13. Certfcaton to be separate document. separate cer-
tfcaton sha be made wth respect to each contract or subcontract.
Such certfcaton, agreed to by the contractng party, need not be,
and preferaby sha not be, ncuded n the contract or subcontract,
whch may contan such reference to the certfcaton or request for
certfcaton as may be agreed upon by the Secretary of the depart-
ment concerned and the contractng party.
Lous ohnson,
ctng Secretary of War.
Lews Compton,
ctng Secretary of the Navy.
Tmothy C. Mooney,
CUTI ORD R NO. 84 .1 R GUL TIONS GO RNING C RTI IC TIONS O
T S CR T RY O W R ND T S CR T RY O T N Y WIT R SP CT
TO SP CI L DDITION L UIPM NT ND CILITI S R UIR D TO CILI-
T T CONSTRUCTION O N L SS LS ND RMY ND N Y IRCR T.
y vrtue of and pursuant to the authorty vested n me by secton
4 of the ct of une 28, 1940 (Pubc, No. 71, Seventy-s th Con-
gress, thrd sesson), and as Presdent of the Unted States, I hereby
prescrbe the foowng reguatons governng certfcatons to the
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Msc.
Commssoner of Interna Revenue by the Secretary of War or the
Secretary of the Navy as to the percentage of cost of speca add-
tona equpment and factes to be charged aganst a contract or
subcontract for the constructon or manufacture of any compete
nava vesse or rmy or Navy arcraft or any porton thereof:
(1) s used n these reguatons the term
(a) Secretary of the department concerned means the Secre-
tary of War or the Secretary of the Navy as the case may be.
(b) Contractng party means the contractor or subcontractor
a.s the case may be.
(2) No certfcaton under the provsons of secton 4 of the ct of
une 28,1940 (Pubc, No. 71, Seventy-s th Congress, thrd sesson),
sha be made, n the case of any contract or subcontract or any
eontract or subcontract as modfed, to the Commssoner of Interna
Revenue by the Secretary of the department concerned (and any
certfcaton made sha be neffectve) uness a the requrements
of these reguatons are met.
(3) efore a certfcaton s made to the Commssoner of Interna
Revenue, the contractng party sha fe wth the Secretary of the
department concerned a request for certfcaton. Such request for
certfcaton sha
(a) Specfy and temze the speca addtona equpment and
factes acqured (or to be acqured) to factate, durng the na-
tona emergency decared by the Presdent on September 8, 1939,
to e st, the competon of any compete nava vesse or rmy or
Navy arcraft or any porton thereof
(b) State the necessty and cost (or estmated cost) of each tem
of such equpment and the percentage of cost of each such tem whch
the contractng party proposes to charge aganst the contract or
subcontract and
(c) State the acton whch the contractng party proposes to take
n order that there sha be a compance wth the provsons of para-
graph ( ) of these reguatons. If the request for certfcaton s
fed n the case of a subcontract or proposed subcontract, t sha
be accompaned by a copy of such subcontract or proposed subcon-
tract.
(4) Such a request for certfcaton sha be fed by the contractng
party pror to the s teth day after the cose of the contractng
party s frst ncome-ta abe year wthn whch s competed a contract
or subcontract wth respect to whch the partcuar request for cer-
tfcaton s made.
(5) On or before the date on whch such request for certfcaton
s fed wth the Secretary of the department concerned, the contract-
ng party sha fe wth the Commssoner of Interna Revenue at
east three copes of such request for certfcaton, together wth at
east three copes of e cerpts of a such provsons of the contract,
subcontract, or proposed contract or subcontract as are pertnent to
such request for certfcaton.
( ) No certfcaton sha be made to the Commssoner of Interna
Revenue wth respect to any speca addtona equpment and fac-
tes uness adequate measures have been taken by the Secretary of
the department concerned
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392
(a) To protect the nterest of the Government n such speca add-
tona equpment and factes, the cost, or porton of the cost, of
whch s borne by the Government and s chargeabe aganst the
contract or subcontract n accordance wth the provsons of secton 4
of the above-mentoned ct and
(b) To provde that throughout the usefu fe of such speca add-
tona equpment and factes the Government sha be gven prorty
n the use thereof and that such speca addtona equpment and
factes sha be preserved for natona defense purposes.
(7) The certfcaton to the Commssoner of Interna Revenue n
the case of any contract or subcontract may be made at any tme pror
to the one hundred and eghteth day after the cose of the contract-
ng party s ncome-ta abe year wthn whch the contract or sub-
contract s competed, or pror to such ater tme as may be specfed
by the Commssoner of Interna Revenue, but no certfcaton sha
be made n the case of any contract or subcontract uness a certfca-
ton has been made on a contracts or subcontracts prevousy com-
peted on whch the speca addtona equpment and factes were
used.
(8) very certfcaton made to the Commssoner of Interna
Revenue by the Secretary of the department concerned sha be
e ecuted n trpcate and sha
(a) Specfy and temze the speca addtona equpment and
factes acqured (or to be acqured) to factate, durng the na-
tona emergency decared by the Presdent on September 8, 1939,
to e st, the competon of any compete nava vesse or rmy or
Navy arcraft or any porton thereof
(b) State the necessty and cost (or estmated cost) of each tem
of such equpment and factes, and the percentage of cost of each
such tem to be charged aganst the contract or subcontract
(o) Descrbe the measures whch have been taken by the Secretary
of the department concerned to effect a compance wth the prov-
sons of paragraph ( ) of these reguatons and
(d) Contan, or be accompaned by, the contractng party s agree-
ment to such certfcaton.
(9) The Secretary of the department concerned and the Comms-
soner of Interna Revenue may ssue |ont rues for the admns-
traton of secton 4 of the above-mentoned ct and ths ecutve
Order.
rankn D. Roosevet.
The Whte ouse,
une SO, 191,0.
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393
Msc.
S CTION 3 O T INSON CT (48 ST T., 503. 505), S
M ND D Y CT O UN 25, 193 (49 ST T., 192 ),
ND Y CT O PRIL 3 1939 (53 ST T., 555, 5 0).
1940-29-10334
I. T. 3393
The contract awarded to the M Company by the Navy Depart-
ment for corroson-resstng stee sheets and pates to become com-
ponent parts of compete nava vesses, or any porton thereof,
beng constructed n navy yards to repace e stng nava vesses, s
wthn the scope of the proft-mtug provsons of the nson ct,
as amended.
dvce s requested reatve to the appcaton of secton 3 of the
nson ct of March 2 , 1934, as amended by the ct of une 25,
193 , and as further amended by the ct of pr 3, 1939, to a
contract awarded to the M Company n 1940 by the Navy Depart-
ment.
The contract award was 4 doars for corroson-resstng sheets
and pates of severa dmensons to be used n the constructon of
nava vesses to repace e stng vesses. The M Company agreed
theren to the mtaton on proft provded n the nson ct, as
amended, to submt upon competon of the contract a report n
accordance wth the prescrbed reguatons, and pay nto the Treasury
any e cess proft reazed thereon.
It s contended that the contract s not.for the constructon
and/or manufacture of any compete nava vesse or arcraft, or any
porton thereof wthn the meanng of secton 3 of the nson
ct, and, therefore, s not sub|ect to the mtaton on proft pro-
vded n that secton notwthstandng the agreement thereto n the
contract. In support of such contenton t s ponted out that the
schedue states specfcay that the matera s for the repacement
of nava vesses and that the matera s ntended for severa vesses
beng constructed at certan navy yards.
Secton 2 of the nson ct of March 27,1934, provdes n part:
That the Presdent of the Unted States s hereby authorzed to
repace, by vesses of modern dessrn and constructon, vesses n the Navy n the
categores mted by the treates sgned at Washngton, ebruary , 1922, and
at London, pr 22, 1930, when ther repacement s permtted by the sad
treates .
Secton 3 of the ct, as amended, provdes n part:
That no contract sha he made by the Secretary of the Navy for
the constructon and/or manufacture of any compete nava vesse or arcraft,
or any porton thereof, heren, heretofore, or hereafter authorzed uness the
contractor agrees
(a) To make a report, as herenafter descrbed, under oath, to the
Secretary of the Navy upon the competon of the contract.
(b) To pay nto the Treasury proft, us herenafter provded sha be
determned by the Treasury Department, n e cess of 10 per centum of
the tota contract prces for the constructon and/or manufacture of any
compete nava vesse or porton thereof, of such contracts wthn
the scope of ths secton as are competed by the partcuar contractng
party wthn the ncome ta abe year, such amount to become the property
of the Unted States .
The ureau has been advsed by the Navy Department that the
term repacement of nava vesses as used n the nstant contract
290217 41 2
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394
s the term used n the Nava ppropraton ct appropratng
funds for constructon of new nava vesses to repace od and obso-
ete nava vesses, and that the matera w enter nto the construc-
ton of new vesses. It s apparent, therefore, that the matera was
ntended to become and w be component parts of compete nava
vesses, or any porton thereof, constructed and/or manufactured
under the ct.
In vew of the foregong, t s hed that the nstant contract s
wthn the proft-mtng provsons of the nson ct, as amended.
ccordngy, the M Company, after competng the contract, w be
requred to make and fe reports of proft and e cess proft n respect
thereof as prescrbed n sectons 17.15 and 17.1 of the appcabe reg-
uatons, contaned n Treasury Decson 490 (C. . 1939-2, 404),
and to pay nto the Treasury any e cess proft on the contract, ess
the amount of any edera ncome ta es pad or remanng to be
pad on the amount of such e cess proft.
1940-29-10339
I. T.3394
CT O UN 28, 1040 (PU LIC, NO. 71).
ppcaton of sectons 2(b) nnd 3 of the ct of une 28, 1940,
to subcontracts entered nto after une 28. 1940, where the prme
contract wth the War or Navy Department was entered nto on
or before such date.
Request has been ma.de for a rung as to whether sectons 2(b)
and 3 of the ct of une 28. 1940, Pubc. No. 71 (e cess profts on
contracts for nava vesses and for arcraft), are appcabe to sub-
contracts entered nto after une 28, 1940, where the prme contract
wth the. War or Navy Department was entered nto on or before
such date.
Secton 2(b) of that ct provdes as foows:
fter the date of approva of ths ct no contract sha be made for the
constructon or manufacture of any compete nava vesse or any rmy or
Navy arcraft, or any porton thereof, tnder the provsons of ths secton or
otherwse, uness the contractor agrees, for the purposes of secton 3 of the ct
of March 27, 1934 (48 Stat. 505 34 U. S. C. 49 ). as amended
(1) to pay nto the Treasury proft n e cess of 8 per centum (n eu
of the 10 per centum and 12 per centum specfed n such secton 3) of
the tota contract prces of such contracts wthn the scope of ths sub-
secton as are competed by the partcuar contractng party wthn the
ncome ta abe year
(2) that any proft n e cess of 8.7 per centum of the cost of performng
such contracts e cept prme contracts made on a cost-pus-a-f ed-fee bass
as are competed by the contractng party wthn the ncome ta abe year
sha be consdered to be proft n e cess of 8 per centum of the tota
contract prces of such contracts and
(3) that he w make no subcontract whch s wthn the scope of such
secton 3, uness the subcontractor agrees to the foregong condtons.
The 8 per centum and 8.7 per centum specfed n such secton 2(b)
are appcabe to a subcontract n a case where the prme contract
wth the War or Navy Department s entered nto after une 28, 1940.
If, however, such prme contract was entered nto on or before that
date, the 10 per centum or 12 per centum, as the case may be, as
specfed n secton 3 of the ct of March 27, 1934 (48 Stat., 503, 505),
as amended, s appcabe, n the opnon of the ureau, to both the
prme contract and any subcontract made wth respect thereto, even
though the subcontract s entered nto after such date.
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395
Msc.
Secton 3 of the ct of une 2 , 1940, provdes as foows:
The provsons of secton 3 of the ct of March 27, 1934 ( 48 Stat. 505),
as amended by the cts of une 25, 1 )3 (49 Stat. 1920), and pr 3, 1939
(53 Stat. 5 0 U. S. C, Supp. , tte 34, sec. 49 ), and as made appcabe to
contracts for arcraft or any porton thereof for the rmy by such ct f
pr 3, 1939, sha, n the case of contracts or subcontracts entered nto after
the date of approva of ths ct and durng the perod of the natona emer-
gency decared by the Presdent on September 8, 1939, to e st, be mted
to contracts or subcontracts where the award e ceeds 25,000.
In the opnon of the ureau, the provsons of such secton 3 are
appcabe n the case of a subcontract entered nto after une 28,
1940, and durng the perod of the natona emergency referred to
n that ct, even though the prme contract wth the War or Navy
Department was entered nto on or before that date.
1940-37-10419
I. T. 3405
Where the M Company was performng two Navy contracts tor
the devery of materas to be used n the constructon of certan
nava vesses, the materas to be ordered from tme to tme as
needed, the date of the etter from the Navy Department to the M
Company advsng t that no further orders on the contract woud
be paced s the date of the competon of the contract n each case.
dvce s requested as to the dates of competon of two Navy con-
tracts, sub|ect to proft-mtng provsons of the nson ct, as
amended, performed by the M Company.
The contracts were for matera to be used n the constructon of
nava vesses and were sub|ect to the proft-mtng provsons of the
nson ct, as amended. y the terms of the contracts, deveres
were to be made from tme to tme as ordered durng the constructon
perod of the vesses. s deveres were contngent on the need for
the matera for the budng of such vesses, t was mpossbe to
determne n advance of an actua need what quanttes woud be
requred or the dates of dever - thereof. The ast devery under
the frst contract was made on ugust , 1938, and the ast devery
under the second contract w:s made on anuary , 1939. On anu-
ary , 1940, t was ascertaned that the constructon of the vesses for
whch the matera was requred had reached a stage where no fur-
ther deveres woud be requred under the frst contract. The M
Company was, therefore, advsed by the Navy Department n a etter
dated anuary . 1940, that ths contract woud be consdered com-
pete as of that date. On ebruary , 1940, t was ascertaned that
the constructon of the vesses for whch the matera was requred
under the second contract had reached a stage where no further dev-
eres woud be requred. The company was, therefore, advsed by
the Navy Department n a etter dated ebruary , 1940, that ths
contract coud be consdered compete as of that date.
Under the facts set forth above, t s hed that the date of com-
peton of the frst contract was anuary , 1940, and that the date
of competon of the second contract was ebruary , 1940, the re-
spectve dates of the etters of notfcaton referred to above. (See
generay artce 5 (a), T. D. 4723, C. . 1937-1, 519 secton 17.5,
T. D. 490 , C. . 1939-2,404.)
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S CTION 3 O T INSON CT (48 ST T., 503, 505), S
M ND D Y CT O UN 25, 1930 (49 ST T., 19-2 ). ND
Y CT O PRIL 3. 1939 (53 ST T., 555, 500). CT O
UN 28, 1940 (PU LIC, NO. 71).
1940-31-10370
I. T. 3398
Incuson of cortnn tems as eements of cost of performng a con-
tract or subcontract for the constructon or manufacture of nava
vesses or rmy or Navy arcraft or any porton thereof, for purposes
of secton 3 of the nson ct (48 Stat., 503, 505), as amended, and
for purposes of the ct of une 2S, 11)40 (Pubc, No. 71).
dvce s requested reatve to ncudng certan tems as eements
of cost of performng a contract or subcontract for the construc-
ton or manufacture of nava vesses or rmy or Navy arcraft or any
porton thereof for purposes of secton 3 of the nson ct (48 Stat..
503, 505), as amended by the ct of une 25. 193 (49 Stat., 192 ),
and by the ct of pr 3, 1939 (53 Stat., 555, 5 0), and for pur-
poses of the ct of une 28,1940 (Pubc, No. 71).
ueston: W the fact that ne perenced abor s empoyed n
operatng machnery be taken nto consderaton n determnng the
amount of deprecaton on such machnery to be aocated to the cost
of performng a contract or subcontract
nswer: Tn determnng the amount of deprecaton aowabe for the
purposes of aocatng such deprecaton to the cost of performng a
contract or subcontract, a factors affectng the usefu fe of the
equpment and factes, ncudng the use of ne perenced abor,
w be taken nto consderaton.
ueston : Reference s made to the provsons of secton 17.9( 7) of
the reguatons contaned n Treasury Decson 490 (C. . 1939-2,
404) and secton 1 .9(g) of the reguatons contaned n Treasury De-
cson 4909 (C. . 1939-2, 422), whch prohbt the ncuson of
State ncome and e cess profts ta es and surta es as an eement of
cost of performng a contract or subcontract. Do these provsons
prohbt ncudng as an eement of such cost a State franchse ta m-
posed upon the prvege of dong busness as a corporaton wthn a
State n case the ta pad s measured by ncome
nswer: No, f such ta s truy a franchse ta upon the prvege
of dong busness as a corporaton and does not have the characterstcs
whch requre the dsaowance of ncome ta es. The name by whch
the ta s descrbed n the statute s, of course, mmatera. (Davcsan
v. entucky Dsteres Warehouse Co., 255 U. S., 288.)
ta , though denomnated a franchse ta upon the prvege of dong
busness as a corporaton, s nevertheess wthn the prohbton of
the reguatons f n character t s essentay an ncome ta .
In the hearngs before the Commttee on Nava ffars of the ouse
of Representatves on sundry egsaton affectng the Nava stab-
shment (1935) (Seventy-fourth Congress, frst sesson), page 1508,
t was ponted out that ncome ta es are not aowabe as an ee-
ment of cost of performng a contract or subcontract for the foow-
ng reasons:
Income ta es, both State and edera, have been e cuded by specfc rungs
because such ta es merey represent a payment of a part of the net profts to the
Government. Uness net profts are earned no payments are requred. It w
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Mac.
he sef-evdent to the commttee that you cannot determne ncome ta unt
after you determne proft. Under accepted accountng prncpes ncome tu es
are treated as a reducton of ncome receved from operaton.
ueston: Suppose that a contractor dsposes of machnery and
equpment n connecton wth the acquston of speca addtona
machnery and equpment whch s acqured to perform a contract or
subcontract. Is a oss upon such dsposton ncudbe as an eement
of cost of performng such contract or subcontract
nswer: If the contractor estabshes that such dsposton was made
n connecton wth such acquston, and that the dsposton woud
not have been made but for the acquston of the speca addtona
machnery and equpment whch s necessary requred to perform
the contract or subcontract wthn the tme, at the rate, and n the
3uantty specfed, the net oss upon a machnery and equpment so
sposed of may be charged off and a proper proporton thereof ao-
cated to the cost of performng such contract or subcontract.
The genera provson n the reguatons whch forbds the aow-
ance of osses from saes or e changes of capta assets s not coe -
tensve wth the ncome ta provsons reatve to osses from saes or
e changes of capta assets, as that term s defned n secton 117 of
the Interna Revenue Code. Whe under ordnary crcumstances
the provson n the reguatons e cudes from the cost of performng
a contract or subcontract osses from saes or e changes of machnery
and equpment, such provson s not to be construed as e cudng a
oss such as that descrbed above, where the purpose s to make poss-
be an acquston of factes under the crcumstances stated.
194O-33-10390
T. D.5000
TITL 2 INT RN L R NU . C PT R I, SU C PT R , P RT 2 .
C SS PRO ITS ON CONTR CTS OR N L SS LS ND RMY ND
N Y IRCR T.
Reguatons under secton 2(b) of the ct of une 28, 1940, and
other provsons.
Offce of the Secretary of the Treasury,
Washngton, D. C.
War Department,
Offce of the Secretary of War,
Washngton, D. C.
Navy Department,
Offce of the Secretary of the Navy,
Washngton, D. C.
To Offcers and mpoyees of the Treasury Department, the War
Department, the Navy Department, and Others Concerned:
Tabe of Contents.
Secton.
2 .0. Introductory.
2 .1. Defntons.
28.2. Scope of reguatons.
2 .3. Contracts and subcontracts under whch e cess proft abty may be
ncurred.
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398
Secton.
2 .4. Contracts or subcontracts for scentfc equpment.
2 ..r . Competon of contract defned.
2 . . Manner of determnng abty.
2 .7. Computaton of e cess proft abty.
2 .8. Tota contract prce.
2 .9. Cost of performng a contract or subcontract.
2 .10. Credt for net oss or for defcency n proft n computng e cess proft.
2 .11. Credt for edera ncome ta es.
2 .12. aure of contractor to requre agreement by subcontractor.
2 .13. vason of e cess proft.
2 .14. ooks of account and records.
2 .15. Report to Secretary of Department concerned.
2 .1 . nnua reports for ncome-ta abe years.
2 .17. Payment of e cess proft abty.
2 .18. Labty of surety.
2 .19. Determnaton of abty for e cess proft, nterest and penates assess-
ment, coecton, payment, refunds.
2C.20. ppcabty of pror reguatons.
Secton 2 .0. Introductory. (a) Secton 2(b) of the ct entted
n ct to e pedte natona defense, and for other purposes,
approved une 28, 1940 (Pubc, No. 71, Seventy-s th Congress,
thrd sesson), reads as foows:
(b) fter the date of approva of ths ct no contract sha he made for
the constructon or manufacture of any compete nava vesse or any rmy
or Navy arcraft, or any orton thereof, under the provsons of ths secton
or otherwse, uness the contractor agrees, for the purposes of secton 3 of the
ct of March 27, 1934 (48 Stat. 505 34 U. S. C. 49 ), as amended
(1) to pay nto the Treasury proft n e cess of 8 per centum (n eu of
the 10 per centum and 12 per centum specfed n such secton 3) of the
tota contract prces of such contracts wthn the scope of ths subsecton as
are competed by the partcuar contractng party wthn the ncome ta abe
year
(2) that any proft n e cess of 8.7 per centum of the cost of performng
such contracts e cept prme contracts made on a cost-pus-a-f ed-fee bass as
are competed by the contractng party wthn the ncome ta abe year sha
be consdered to be proft n e cess of 8 per centum of the tota contract
prces of such contracts and
(3) that he w make no subcontract whch s wthn the scope of such
(/ ) Secton 14 of the ct entted n ct to provde more effec-
tvey for the natona defense by carryng out the recommendatons
of the Presdent n hs message of anuary 12, 1939, to the Congress,
approved pr 3, 1939 (53 Stat., 5 0 10 U. S. C, Sup., 311), reads
n part as foows:
Sec. 14. the provsons of secton 3 of the ct of March 27,1934. as amended
(48 Stat. 505 4 ) Stat. 192 ), and as amended by ths secton sha be appcabe
wth respect to contracts for arcraft or any porton thereof for the rmy to the
same e tent and n the same manner that such provsons are appcabe wth
respect to contracts for arcraft, or any porton thereof for the Navy: Provded.
That the Secretary of War sha e ercse a functons under such secton wth
re.spect to arcraft for the rmy whch are e ercsed by the Secretary of the
Navy wth respect to arcraft for the Navy .
(c) Secton 3 of the ct entted n ct to estabsh the compos-
ton of the Unted States Navy wth respect to the categores of vesses
mted by the treates sgned at Washngton, ebruary , 1922, and
at London, pr 22, 1930, at the mts prescrbed by those treates
to authorze the constructon of certan nava vesses and for other
purposes, approved March 27. 1934 (48 Stat,., 505 34 U. S. C, 49 ),
as amended by the ct of une 25, 193 (49 Stat., 192 84 U. S. C,
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399
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Sup., 49 ), and as further amended by secton 14 of the ct of pr
3,1939 ( 53 Stat., 5 0 34 U. S. C, Sup., 49 ), reads as foows:
S . 3. The Secretary of the Navy s hereby drected to sumbt annuay to the
ureau of the udget estmates for the constructon of the foregong vesses
and arcraft and there s hereby authorzed to be approprated such sums as
may be necessary to carry nto effect the provsons of ths ct: Provded, That
no contract sha be made by the Secretary of the Navy for the constructon
and/or manufacture of any compete nava vesse or arcraft, or any porton
thereof, heren, heretofore, or hereafter authorzed uness the contractor agrees
(a) To make a report, as herenafter descrbed, under oath, to the Secretary
of the Navy upon the competon of the contract.
(b) To pay nto the Treasury proft, as herenafter provded sha be be de-
termned by the Treasury Department, n e cess of 10 per centum of the tota
contract prces for the constructon and/or manufacture of any compete nava
vesse or porton thereof, and n e cess of 12 per centum of the tota contract
prces for the constructon and/or manufacture of any compete arcraft or
porton thereof, of such contracts wthn the scope of ths secton as are com-
peted by the partcuar contractng party wthn the ncome ta abe year,
such amount to become the property of the Unted States, but the surety under
such contracts sha not be abe for the payment of such e cess proft: Pro-
vded, That f there Is a net oss on a such contracts or subcontracts for the
constructon and/or manufacture of any compete nava vesse or porton
thereof competed by the mrtcuar contractor or subcontractor wthn any
ncome ta abe year, such net oss sha be aowed as a credt n determnng
the e cess proft, f any, for the ne t succeedng ncome ta abe year, and that
f there s a net oss, or a net proft ess than 12 per centum, as aforesad on
a such contracts or subcontracts for the constructon and/or manufacture of
any compete arcraft or porton thereof competed by the partcuar contractor
or subcontractor wthn any ncome ta abe year, such net oss or defcency
In proft sha be aowed as a credt In determnng the e cess proft, f any,
durng the ne t succeedng four ncome ta abe years, and that the method of
ascertanng the amount of e cess proft, ntay f ed upon sha be deter-
mned on or before une 30, 1039: Provded further, That f such amount a
not vountary pad the Secretary of the Treasury sha coect the same under
the usua methods empoyed under the nterna-revenue aws to coect edera
ncome ta es: Provded further. That a provsons of aw (ncudng pena-
tes) appcabe wth respect to the ta es mposed by Tte I of the Revenue
ct of 1934, and not nconsstent wth ths secton, sha be appcabe wth
respect to the assessment, coecton, or payment of e cess profts to the Treas-
ury as provded by ths secton, and to refunds by the Treasury of overpay-
ments of e cess profts nto the Treasury: nd provded further, That ths sec-
ton sha not appy to contracts or subcontracts for scentfc equpment used
for communcaton, target detecton, navgaton, and fre contro as may be
so desgnated by the Secretary of the Navy, and the Secretary of the Navy
sha report annuay to the Congress the names of such contractors and sub-
contractors affected by ths provson, together wth the appcabe contracts
and the amounts thereof: nd provded further. That the ncome-ta abe years
sha be such ta abe years begnnng after December 31, 1935, e cept that the
above provsos reatng to the assessment, coecton, payment, or refundng
of e cess proft to or by the Treasury sha be retroactve to March 27, 1934.
(c) To make no subdvsons of any contract or subcontract for the same
artce or artces for the pur ose of evadng the provsons of ths ct, but any
subdvson of any contract or subcontract nvovng an amount n e cess of
10,000 sha be sub|ect to the condtons heren prescrbed.
(d) That the manufacturng spaces and books of ts own pant, affates,
and subdvsons sha at a tmes be sub|ect to nspecton and audt by any
person desgnated by the Secretary of the Navy, the Secretary of the Treasury,
and/or by a duy authorzed commttee of Congress.
(e) To make no subcontract uness the subcontractor agrees to the foregong
condtons.
The report sha be n form prescrbed by the Secretary of the Navy and
sha state the tota contract prce, the cost of performng the contract, the
net ncome, and the per centum such net ncome bears to the contract prce.
copy of such report sha be transmtted to the Secretary of the Treasury
for consderaton n connecton wth the edera ncome ta returns of the
contractor for the ta abe year or years concerned.
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400
The method of ascertanng the amount of e cess proft to he pad nto the
Treasury sha be determned by the Secretary of the Treasury n agreement
wth the Secretary of the Navy and made avaabe to the pubc. The method
ntay f ed upon sha be so determned on or before une 30, 1934: Provded.
That n any case where an e cess proft may be found to be owng to the
Unted States n consequence hereof, the Secretary of the Treasury sha aow
credt for any edera ncome ta es pad or remanng to be pad upon the
amount of such e cess proft.
The contract or subcontracts referred to heren are mted to those where
the award e ceeds 10,000.
(d) Sectons 3, 4, and 12 of the ct of une 28, 1940, approved
une 28, 1940 (Pubc, No. 71, Seventy-s th Congress, thrd ses-
son), read, respectvey, as foows:
Sec. 3. The provsons of secton 3 of the ct of March 27, 1934 (48 Stat.
505), as amended by the cts of une 25, 193 (49 Stat. 192 ), and pr a
1939 (53 Stat. 5 0 U. S. C, Supp. . Tte 34, secton 490), and as made ap-
pcabe to contracts for arcraft or any porton thereof for the rmy by such
ct of pr 3, 1939, sha, n the case of contracts or subcontracts entered nto
after the date of approva of ths ct and durng the perod of the natona
emergency decared by the Presdent on September 8. 1 39, to e st, be mted
to contracts or subcontracts where the award e ceeds 25,000.
Sec. 4. In the case of every contract or subcontract for the constructon or
manufacture of any compete nava vesse or rmy or Navy arcraft or any
porton thereof whch s entered nto (whether before or after the date of
approva of ths ct), the Secretary of War or the Secretary of the Navy,
as the case may be, after agreement wth the contractor or subcontractor, sha
certfy to the Commssoner of Interna Revenue as to (a) the necessty and
cost of speca addtona equpment and factes acqured to factate, durng
the natona emergency decared, by the Presdent on September 8, 1939. to
e st, the competon of such nava vesse or rmy or Navy arcraft or porton
thereof n prvate pants and (b) the percentage of cost of such speca add-
tona equpment and factes to be charged aganst such contract or subcon-
tract. or a purposes of secton 3 of the ct of March 27, 1934 ( 48 Stat. 505
34 U. S. C. 49 ), as amended, such certfcaton sha be sub|ect to such regu-
atons as the Presdent may prescrbe, but sha be bndng upon the Comms-
soner of Interna Revenue, uness, wthn fve days after recept of such
certfcaton, e make forma ob|ecton thereto to the Secretary of the Navy or
the Secretary of War as the case may be. The part of such cost chargeabe
aganst the contract or subcontract n pursuance of such certfcaton, sha,
for the purposes of such secton 3, be consdered to be a reducton of the contract
prce of the contract or subcontract. The amount charged aganst the contract
or subcontract n pursuance of such certfcaton sha, for the purposes of
such secton 3. be apped aganst and reduce the cost or other bass of such
speca addtona equpment and factes as of the date of nstaaton thereof:
Provded, That the Secretary of War or the Secretary of the Navy, as the
case may be, sha report to the Congress, every three months, the cost of such
speca addtona equpment and factes to be borne by the Government
under each contract.
Skc. 12. The provsons of n precedng sectons of ths ct sha termnate
une 30, 1942, uness the Congress sha otherwse provde.
Pursuant to the authorty prescrbed bv secton 2(b) of the ct
of une 28, 1940 (Pubc, No. 71, Seventy-s th Congress, thrd
sesson), secton 14 of the ct of pr 3, 1939, and secton 3 of
the ct of March 27, 1934, as amended, the foowng reguatons are
hereby prescrbed:
Sec 20.1. Defntons. s used n these reguatons the term
(a) ct means the ct of une 28, 1940 (Pubc, No. 71, Seventy-s th
Congress, thrd sesson).
( ) ct of March 27, 3934, as amended means secton 3 of the ct of
March 27, 1934 ( 48 Stat., 505 34 T . S. C. 49 ), as amended bv the ct of
une 25, 193 (49 Stat., 1920 34 U. S. C. Sup. 49 ), and as further amended
and made appcabe to contracts and subcontracts for rmy arcraft by the
ct of pr 3, 1939 ( 53 Stat., 5 0 34 U. S. C, Sup., 490).
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(c) Secretary of the department concerned means the Secretary of War
or the Secretary of the Navy as the ease may be.
(d) Person, ncudes an ndvdua, a corporaton, a partnershp, a trust
or estate, a |ont-stock company, an assocaton, or a syndcate, group, poo,
|ont venture, or other unncorporated organzaton or group, through or by means
of whch any busness, fnanca operaton, or venture s carred on.
(c) Contract means an agreement, made by authorty of the Secretary
of the department concerned for the constructon or manufacture of any com-
pete nava vesse or rmy or Navy arcraft, or any porton thereof, entpred
nto after the date of enactment of the ct ( une 28, 1940) and before
u 1. 1942.
(/) Contractor means a person enterng Into a drect contract wth the
Secretary of the department concerned or hs duy authorzed representatve.
(g) Subcontract means an agreement entered nto by one person wth
another person for the constructon or manufacture of any compete nava
vesse or rmy or Navy arcraft, or any porton thereof, the prme contract
for such vesse or arcraft or porton thereof havng been entered nto between
s contractor and the Secretary of the department concerned or hs duy au-
thorzed representatve after the date of enactment of the ct ( une 28, 1940)
and before uy 1, 1942. The term subcontract does not ncude such an
agreement even though entered nto after une 28, 1940, f the prme contract
wth respect thereto was entered nto on or before une 28, 1940, but does n-
cude such an agreement entered nto after une 30, 1942, f the prme contract
wth respect thereto was entered nto on or before une 30, 1942.
( ) Subcontractor means any person other than a contractor enterng
nto a subcontract.
() Contractng party means a contractor or subcontractor as the case
may be.
( ) Contract prce or tota contract prce means the amount or tota
amount to be receved under a contract or subcontract as the case may be.
(fc) Income-ta abe year means the caendar year, the fsca year endng
durng such caendar year, or the fractona part of such caendar or fsca
year upon the bass of whch the contractng party s net ncome s computed
and for whch ts ncome ta returns are made for edera ncome ta
purposes.
Sec. 2 .2 Scope of reguatons. These reguatons dea wth abty for
e cess proft on (1) contracts for the constructon or manufacture of any com-
pete nava vesse or rmy or Navy arcraft, or any porton thereof, entered
Into after the date of enactment of the ct ( une 28, 1940) and before uy
1, 1942, and (2) subcontracts made wth respect to any such contract. s to
contracts for nava vesses and arcraft, entered nto on or before une 28,
1940, and subcontracts made wth respect to any such contract, see Treasury
Decson 490 C. . 1939-2, 404 (sectons 17.0 to 17.19, ncusve, Tte 2 ,
Code of edera Reguatons, 1939 Sup.). s to contracts for rmy arcraft
entered nto on or before une 28, 1940, and subcontracts made wth respect
to any such contract, see Treasury Decson 4909 C. . 1939-2, 422 (sectons
1 .0 to 1 .18, ncusve, Tte 2 , Code of edera Reguatons, 1939 Sup.). s
to the date of competon of a contract or subcontract wthn the scope of
these reguatons, see secton 2 .5 of these reguatons.
Sec. 2 .3. Contracts and subcontracts under whch e cess proft abty may
be ncurred. cept as otherwse provded wth respect to contracts or sub-
contracts for certan scentfc equpment (see secton 2 .4 of these regua-
tons), every contract entered nto after une 28, 1940, and before uy 1,
1942, s sub|ect to the provsons of the ct reatng to e cess proft abty f
(1) t s entered nto pror to the termnaton of the perod of natona
emergency decared by the Presdent on September 8, 1939, to e st (see
Procamaton No. 2352), and s awarded for an amount e ceedng 25,000
or
(2) t s entered nto after the termnaton of such perod of natona
emergency and s awarded for an amount n e cess of 10,000.
very subcontract made pursuant to such a contract s sub|ect to the provsons
of the ct reatng to e cess proft abty f
(a) t nvoves an amount n e cess of 25,000 and was entered nto
pror to the termnaton of such perod of natona emergency and before
uy 1, 1942 or
( ) t nvoves an amount n e cess of 10,000 and was entered nto after
the termnaton of such perod of natona emergency or after une 30, 1942,
whchever s the earer.
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402
If a contractng party paces orders wth another party, aggregatng an
amount n e cess of 25,000 (or 10,000 as the ease may be), for artces or
materas whch are destned to become a component part of a compete nava
vesse or rmy or Navy arcraft, or any porton thereof, the pacng of such
orders sha consttute a subcontract wthn the scope of the ct, uness t s
ceary shown that each of the orders nvovng 25,000 (or 10,000 as the case
may be) or ess s a bona fde separate and dstnct subcontract for artces or
materas whch are not destned to become and do not become a component part
of any such vesse or arcraft, or any porton thereof, constructed or manufac-
tured under one partcuar contract or subcontract by the contractng party
pacng the orders, and s not a subdvson made for the purpose of evadng the
provsons of the ct.
Sec. 2(5.4. Contracts or subcontracts for scentfc equpment. No e cess proft
abty s ncurred upon a contract or subcontract f at the tme or pror to
the tme such contract or subcontract s made t s desgnated by the Secretary
of the department concerned as beng e empt under the provsons of the ct
of March 27, 1934, as amended, pertanng to scentfc equpment used for com-
muncaton, target, detecton, navgaton, and fre contro.
Skc. 2 .5. Competon of contract defned. The date of devery of the vesse,
arcraft, or porton thereof, covered by the contract or subcontract sha be
consdered the date of competon of the contract or subcontract uness other-
wse determned |onty by the Secretary of the department concerned and the
Secretary of the Treasury or ther duy authorzed representatves. In case
a contract s for two or more vesses or arcraft, f t appears that the contract
consttutes a snge undertakng as to such vesses or arcraft and f the work
of constructng or manufacturng such vesses or arcraft s prosecuted as a
snge under nkng, then the date of devery of the vesse or arcraft ast
devered tnder such contract sha be consdered the date of competon of
the contract. cept as otherwse provded n the frst sentence of ths secton,
the repacement of defectve parts of devered artces or the performance of
other guarantee work n respect of such artces w not operate to e tend the
date of competon. s to the treatment of the cost of such work as a cost
of performng a contract or subcontract, see secton 2 .9(ft) of these regua-
tons. s to n refund n case of ad|ustment due to any subsequenty ncurred
addtona costs, see secton 2(5.19 of these reguatons. If a contract or sub-
contract s at any tme canceed or termnated, t s competed at the tme of the
canceaton or termnaton.
Skc. 2t. . Manner of determnng abty. The frst step n the determna-
ton of the e cess proft to be pad to the Unted States by a contractng party
wth res| t to contracts and subcontracts competed wthn an ncome-ta abe
year s to ascertan the tota contract prces of a contracts and subcontracts
competed by the contractng party wthn the ncome-ta abe year. s to tota
contract prces, see secton 2 .8 of these reguatons.
The second step s to ascertan the cost of performng such contracts and
subcontracts and to deduct snch cost from the tota contract prces of such
contracts and subcontracts as computed n the frst step. See secton 2 .9 of
these reguatons.
The amount remanng after such subtracton s the amount of net proft or
net oss upon the contracts and subcontracts competed wthn the ncome-
ta abe year.
Th thrd step, n case there s a net proft upon such contracts and sub-
contracts, s to subtract from the amount of such net proft as computed n
the second step the sum of
(1) Whchever s the esser of the foowng: ( ) n amount equa to
8 per cent of the tota contract prces of the contracts (ncudng prme
contracts made on a cost-pus-a-f ed-fee bass) and subcontracts com-
peted wthn the ncome-ta abe year, or ( ) an amount equa to 8.7 per
cent of the tota cost of performng such contracts (e cept prme contracts
made on a cost-pus-a-f ed-fee bass) and subcontracts pns 8 per cent of
the tota contract prces of prme contracts made on a cost-pus-a-f ed-fee
bass
(2) The amount of any net oss sustaned n a pror ncome-ta abe
year and aowabe as a credt n determnng the e cess proft for the
Income-ta abe year (see secton 2 .10 of these reguatons) and
(3) The amount of any defcency n proft sustaned n a pror neome-
tu abe year (on a contract or subcontract for rmy or Navy arcraft or
any porton thereof) and aowabe as a credt n determnng the e cess
proft for the Income-ta abe year (see secton 2 .10 of these reguatons).
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Msc.
The amount remanng after such subtracton s the amount of e cess proft
for the ncome-ta abe year.
The fourth step s to ascertan the amount of credt aowed for edera
ncome ta es pad or remanng to be pad upon the amount of such e cess
proft (see secton 2C.11 of these reguatons) and then subtract from the amount
of such e cess proft the amount of credt for edera ncome ta es.
The amount remanng after ths subtracton s the amount of e cess proft
to be pad to the Unted States by the contractng party for the ncome-ta abe
year.
Sec. 2G.7. Computaton of e cess proft abty. The appcaton of the pro-
vsons of secton 2 . of these reguatons may be ustrated by the foowng
e ampes:
ampe (/): On ebruary 1, 1041, the Corporaton whch keeps ts books
and makes ts edera ncome ta returns on a caendar year bass entered nto
a contract conng wthn the scope of the ct, the tota contract prce of whch
was 200,000. On March 1, 1941, the corporaton entered nto another such
contract, the tota contract prce of whch was 40,000. oth contracts (nether
of whch was made on a cost-pus-a-f ed-fee bass) were competed wthn the
caendar year 1941, the frst at a cost of 155,000 and the second at a cost of
45,000. Durng the year 1940 the Corporaton sustaned an aowabe net
oss of 2,500 and an aowabe defcency n proft of 1,000 on contracts and
subcontracts comng wthn the scope of the ct and competed wthn the
ncome-ta abe year 1940. or purposes of the edera ncome ta . the net
ncome of the Corporaton for the year 1941 amounted to 9 ,000, whch
ncuded the tota net proft of 40,000 upon the two contracts. or the purposes
of ths e ampe, t s assumed that for the year 1041 the Corporaton pad a
edera ncome ta of 20,500 upon ts entre net ncome. The e cess proft
abty s 14, 00 computed as foows:
Tota contract prces:
Contract No. 1 200,000
Contract No. 2 40. 000
240,000
Less: Cost of performng contracts
200,000
Net proft on contracts 40,000
Less: (1) 8.7 per cent of cost of performng contracts (8.7 per
cent of 200,000 7,400), whch amount s ess
than 8 per cent of tota contract prces (8 per
cent of 240.0OO 19,2O0) 17,400
(2) Net oss from 1940 2,500
(3) Defcency n proft from 1940 1,000
20,900
cess proft for year 1941 19,100
Less: Credt for edera ncome ta es (assumed edera ncome ta
on 19,100 at the rates for 1941) _ 4,500
mount of e cess proft payabe to the Unted States 14, 00
ampe (2): On ebruary 1, 1041, the Corporaton whch keeps ts books
and makes ts edera ncome ta returns on a caendar year bass entered nto
a contract comng wthn the scope of the ct, the tota contract prce of whch
was 200,000. On March 1, 1041, the corporaton entered nto another such
contract on a cost-pus-a-f ed-fee bass, the estmated cost beng 100,000 and
the stpuated fee beng 7,000. oth contracts were competed wthn the
caendar year 1041, the frst at a cost of 155,000 and the second at a cost of
90,000. Durng the year 1040 the Corporaton sustaned an aowabe net
oss of 2,500 and an aowabe defcency n proft of 1,000 on contracts and
subcontracts comng wthn the scope of the ct. or purposes of the edera
Income ta , the net ncome of the Corporaton for the year 1941 amounted
to 9 ,000, whch ncuded the tota net proft of 52,000 on the two contracts.
or the purposes of ths e ampe. It s assumed that for the year 1941 the
corporaton pad a edera ncome ta of 20,500 upon ts entre net ncome.
The e cess proft abty s 21,255 computed as foows:
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404
Tota contract prces:
Contract No. 2 ( 00,000 cost phs 7,000 fee) 97,000
207,0 0
Less: Cost of performng contracts
245,000
Net proft on contracts 52, 000
Less: (1) 8.7 per cent of cost of performng contract No. 1
pus 8 per cent of tota contract prce of con-
tract No. 2 (8.7 per cent of 155,000 pus 8 per
cent of 07,000 21,245), whch amount s ess
than 8 per cent of tota contract prces (8 per
cent of 207,000 23,7 0) 21,245
(2) Net oss from 1040 2. 500
(3) Defcency n proft from 1040 1. 000
24,745
cess proft for year 1041 27. 255
Less: Credt for edera ncome ta es (assumed edera ncome ta
on 27,255 at the rates for 1941) , 000
mount of e cess proft payabe to the Unted States 21,255
Sec. 2 .8. Tota contract prce. The tota contract prce of a partcuar con-
tract or subcontract (see secton 2G.1 of these reguatons) may be receved n
money or ts equvaent. If somethng other than money s receved, ony the
far market vaue of the thng receved, at the date of recept, s to Ik ncuded
n determnng the amount receved. onuses earned for betterng performance
and penates ncurred for faure to meet the contract guarantees are to be
regarded as ad|ustments of the orgna contract prce. Trade or other dscounts
granted by a contractng party n recept of a contract or subcontract performed
by such party are aso to be deducted n determnng the true tota contract
prce of such contract or subcontract. In the case of a contract made on a
cost-pus-a-f ed-fee bass the tota contract prce s the actua, rather than the
estmated, cost of performng the contract pus the stpuated fee and any other
amounts receved by the contractng party for performng such contract.
or the purposes of the ct and these reguatons, the contract prce of a
contract or subcontract sha be reduced by the part of the cost of speca
addtona equpment and factes acqured by the contractng party and
chargeabe aganst the contract or subcontract n pursuance of a certfcaton
made by the Secretary of the department concerned n accordance wth the
provsons of secton 4 of the ct. See ecutve Order No. 84 5 and ont
Rues ssued under such order (page 385. ths uetn),
Sec. 20.0. Coat of performng a contract or subcontract. (a) (atera rue. -
Te cost of performng a partcuar contract or subcontract sha be the sum
of (1) the drect costs, ncudng theren e pendtures for materas, drect abor
and drect e penses, ncurred by the contractng party n performng the con-
tract or subcontract: and (2) the proper proporton of any ndrect costs (n-
cudng theren a reasonabe proporton of management e penses) ncdent to
and necessary for the performance of the contract or subcontract.
( ) ements of cost. No defntons of the eements of cost may e stated
whch are of nvarabe appcaton to a contractors and subcontractors. In
genera, the eements of cost may be defned for purposes of the ct as foows:
(1) Manufacturng cost, whch s the sum of factory cost (see paragraph (c)
of ths secton) and other manufacturng cost (see paragraph ( /) of ths
secton) :
(2) .Msceaneous drect e penses (see paragraph (c) of ths secton)
(3) Genera e penses, whch are the sum of ndrect engneerng e penses,
usuay termed engneerng overhead (see paragraph (/) of ths secton)
and e penses of dstrbuton, servcng and admnstraton (see paragraph (g)
of ths secton) and
(4) Guarantee e penses (see paragraph (7) of ths secton),
(c) actory cost. actory cost s the sum of the foowng:
(1) Drect materas. Materas, such as those purchased for stock and sub-
sequenty ssued for contract operatons and those acqured under subcon-
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tracts, whch become a component part of the fnshed product or whch are
used drecty n fabrcatng, convertng or processng such materas or parts.
(2) Drect productve abor. Productve abor, usuay termed shop abor,
whch s performed on and s propery chargeabe drecty to the artce manu-
factured or constructed pursuant to the contract or subcontract, but whch
ordnary does not ncude drect engneerng abor (see subparagraph (3) of
ths paragraph).
(3) Drect engneerng abor. The compensaton of professona engneers
and other teehncsts (ncudng reasonabe advsory fees), and of draftsmen,
propery chargeabe drecty to the cost of the contract or subcontract.
(4) Msceaneous drect factory charges. Items whch are propery charge-
abe drecty to the factory cost of performng the contract or subcontract but
whch do not come wthn the cassfcatons n subparagraphs (1), (2), and
3) of ths paragraph, as for e ampe, royates whch the contractng party
pays to another party and whch are propery chargeabe to the cost of per-
formng the contract or subcontract (but see paragraph ( /) of ths secton).
(5) Indrect factory e penses. Items, usuay termed factory overhead,
whch are not drecty chargeabe to the factory cost of performng the con-
tract or subcontract but whch are propery ncdent to and necessary for the
performance of the contract or subcontract am consst of the foowng:
( ) Labor. mounts e pended for factory abor, such as supervson and
nspecton, cerca abor, tmekeepng, packng and shppng, stores suppy,
servces of too crb attendants, and servces n the factory empoyment bureau,
whch are not chargeabe drecty to productve abor of the contract or
subcontract.
( ) Materas and suppes. The cost of materas and suppes for genera
use n the factory n current operatons, such as shop fue, ubrcants, heat-
treatng, patng, ceanng and anodzng suppes, nondurabe toos and gauges,
statonery (such as tme tckets and other forms), and bo ng and wrappng
materas.
(C) Servre e penses. actory e penses of a genera nnture, such as those
for power, heat and ght (whether purchased or produced), ventaton and
ar-condtonng and operaton and mantenance of genera pant assets and
factes.
(D) ed charges and obsoescence. Recurrng charges wth respect to
property used for manufacturng purposes of the contract or subcontract, such
as premums for re and eevator nsurance, property ta es, rentas and
aowances for deprecaton of such property, ncudng mantenance and de-
precaton of reasonabe stand-by equpment and deprecaton and obsoes-
cence of speca equpment and factes necessary acqured prmary for
the performance of the contract or subcontract, e cept speca addtona equp-
ment and factes wth respect to whch the Secretary of the department con-
cerned has made a certfcaton bndng upon the Commssoner of Interna
Revenue, pursuant to secton 4 of the ct, n the case of such contract or sub-
contract. See ecutve Order No. 84 5 and ont Rues ssued under such
Order (page 385, ths uetn). In makng aowances for deprecaton, consd-
eraton sha be gven to the number and ength of shfts.
( ) Msceaneous ndrect factory e penses. Msceaneous factory e penses
not drecty chargeabe to the factory cost of performng the contract or sub-
contract, such as purchasng e penses ordnary and necessary e penses of
rearrangng factes wthn a department or pant empoyees wefare e -
penses premums or dues on compensaton nsurance empoyers payments to
unempoyment, od age and soca securty edera and State funds not n-
cudng payments deducted from or chargeabe to empoyees or offcers pensons
and retrement payments to factory empoyees factory accdent compensaton
(as to sef-nsurance, see paragraph (g) of ths secton) but not ncudng any
amounts whch are not ncdent to servces, operatons, pant, equpment or
factes nvoved n the performance of the contract or subcontract.
(d) Other manufacturng cost. Other manufacturng cost as used In para-
graph ( ) of ths secton ncudes tems of manufacturng costs whch are not
propery or satsfactory chargeabe to factory costs (see paragraph (e) of ths
secton) but whch upon a compete showng of a pertnent facts are propery
to be ncuded as a cost of performng the contract or subcontract, as for n-
stance, payments of royates and amortzaton of the cost of desgns purchased
and patent rghts over ther usefu fe and deferred or unqudated
e permenta and deveopment charges. or e ampe, n case e permenta
and deveopment costs have been propery deferred or captazed and are amor-
tzed n accordance wth a reasonaby consstent pan, a proper porton of the
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40
current charge, determned by a ratabe aocaton whch s reasonabe n
consderaton of the pertnent facts, may be treated as a cost of performng
the contract or subcontract. In the case of genera e permenta and deve-
opment e penses whch may be charged off currenty, a reasonabe porton
thereof may be aocated to the cost of performng the contract or subcontract.
If a speca e permenta or deveopment pro|ect s carred on n pursuance
of a contract, or n antcpaton of a contract whch s ater entered nto, and
the e pense s not treated as a part of genera e permenta and deveopment
e penses or s not otherwse aowed as- a cost of performng the contract,
there ceary appearng no reasonabe prospect of an addtona contract for the
type of artce nvoved, the entre cost of such pro|ect may be aowed as a. part
of the cost of performng the contract.
(e) Msceaneous drect e penses. Msceaneous drect e penses as used n
paragraph ( ) of ths secton ncude
(1) Cost of nstaaton and constructon. Cost of nstaaton and construc-
ton ncudes the cost of materas, abor, and e penses necessary for the erec-
ton and nstaaton pror to the competon of the contract and after the
devery of the product or matera manufactured or constructed pursuant to
the contract or subcontract.
(2) Sundry drect e penses. Items of e pense whch are propery chargeabe
drecty to the cost of performng a contract or subcontract and whch do uot
consttute guarantee e penses (see paragraph (h) of ths secton) or drect
costs cassfed as factory cost or other manufacturng cost (see paragraphs (c)
and ( ) of ths secton), such as premums on performance or other bouds
requred under the contract or subcontract State saes ta es mposed on the
contractng party freght on outgong shpments fees pad for wnd tunne
and mode basn tests demonstraton and test e penses crash nsurance pre-
mums traveng e penses. In order for any such tem to be aowed as a
charge drecty to the cost of performng a contract or subcontract, (1) a de-
taed record sha be kept by the contractng party of a tems of a smar
character, and (2) no tem of a smar character whch s propery a drect
charge to other work sha be aowed as a part of any ndrect e penses n
determnng the proper proporton thereof chargeabe to the cost of performng
the contract or subcontract. s to aowabe ndrect e penses, see paragraphs
(c)(5). (/), Ifg), and ( ) of ths secton.
(/) Indrect engneerng e penses. Indrect engneerng e penses, usuay
termed engneerng overhead, whch are treated n ths secton as a part of
genera e penses n determnng the cost of performng a contract or subcon-
tract (see paragraph (ft) of ths secton), comprse the genera engneerng
e penses whch are ncdent to and necessary for the performance of the con-
tract or subcontract, such as the foowng:
(1) Labor. Reasonabe fees of engneers empoyed n a genera consutng
capacty, and compensaton of empoyees for persona servces to the engneer-
ng department, such as supervson, whch s propery chargeabe to the con-
tract or subcontract, but whch s not chargeabe as drect engneerng abor
(see paragraph (c) (3) of ths secton).
(2) Matera. Suppes for the engneerng department, such as paper and
nk for draftng and smar suppes.
(3) Msceaneous e penses. penses of the engneerng department, such
as ( ) mantenance and repar of engneerng equpment, and ( ) servces
purchased outsde of the engneerng department for bue prntng, drawng,
computng, and ke purposes.
(g) penses of dstrbuton, servcng, and admnstraton. penses of
dstrbuton, servcng, and admnstraton, whch are treated n ths secton as
a part of genera e penses n determnng the cost of performng a contract or
subcontract (see paraagraph ( ) of ths secton), comprehend the e penses nc-
dent to and necessary for the performance of the contract or subcontract, whch
are ncurred n connecton wth the dstrbuton and genera servcng of the
contractng party s products and the genera admnstraton of the busness,
such as
(1) Compensaton for persona servces of empoyees. The saares of the
corporate and genera e ecutve offcers and the saares and wages of admns-
tratve cerca empoyees and of the offce servces empoyees such as teephone
operators, |antors, ceaners, watchmen, and offce equpment reparmen.
(2) ddng and genera seng e penses. ddng and genera seng e -
penses whch by reference to a the pertnent facts and crcumstances reason-
aby consttute a part of the cost of performng a contract or subcontract. The
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407
Msc.
treatment of bddng and genera seng e penses as a part of genera e penses
In accordance wth ths paragraph Is n eu of any drect charges whch other-
wse mght be made for such e penses. The term bddng e penses as used
n ths secton ncudes a e penses n connecton wth preparng and submttng
bds.
(3) Genera servcng e penses. penses whch by reference to a the
pertnent facts and crcumstances reasonaby consttute a part of the cost of
performng a contract or subcontract and whch are ncdent, to devered or
nstaed artces and are due to ordnary ad|ustments or mnor defects but
ncudng no tems whch are treated as a part of guarantee e penses (see
paragraph h) of ths secton) or as a part of drect costs, such as drect
materas, drect abor, and other drect e pense.
(4) Other e penses. Msceaneous offce and admnstratve e penses, such
as statonery and offce suppes postage repar and deprecaton of offce equp-
ment contrbutons to oca chartabe or communty organzatons to the e tent
consttutng ordnary and necessary busness e penses empoyees wefare e -
penses premums and dues on compensaton Insurance empoyers payments to
unempoyment, od age, and soca securty edera and State funds, not Incudng
payments deducted from or chargeabe to empoyees or offcers pensons and
retrement payments to admnstratve offce empoyees and accdent compensaton
to offce empoyees (as to sef-nsurance, see the foowng subparagraph).
Sub|ect to the e cepton stated n ths subparagraph. In cases where a contract-
ng party assumes ts own nsurabe rsks (usuay termed sef-Insurance )
osses and payments w be aowed In the cost of performng a contract or sub-
contract ony to the e tent of the actua osses suffered or payments Incurred
durng, and n the course of, the performance of the contract or subcontract and
propery chargeabe to such contract or subcontract. If, however, a contractng
party assumes ts own nsurabe rsks (a) for compensaton pad to empoyees
for In|ures receved In the performance of ther dutes, or ( ) for unempoyment
rsks n States where nsurance s requred, there may be aowed as a part of the
cost of performng a contract or subcontract a reasonabe porton of the charges
set up for purposes of sef-nsurance under a system of accountng reguary
empoyed by the contractng party, as determned by the Commssoner of Interna
Revenue, at rates not e ceedng the awfu or approved rates of nsurance com-
panes for such nsurance, reduced by amounts representng the acquston cost
n such companes, provded the contractng party adopts and consstenty foows
ths method wth respect to sef-nsurance n connecton wth a contracts and
subcontracts subsequenty performed by hm.
owances for nterest on nvested capta are not aowabe as costs of per-
formng a contract or subcontract.
mong the tems whch sha not be ncuded as a part of the cost of performng
a contract or subcontract or consdered n determnng such cost, are the foowng:
ntertanment e penses dues and membershps other than of reguar trade
assocatons donatons e cept as otherwse provded above osses on other
contracts profts or osses from saes or e changes of capta assets e tra-
ordnary e penses due to strkes, or ockouts fnes and penates amortzaton
of unreazed apprecaton of vaues of assets e penses, mantenance and depre-
caton of e cess factes (ncudng de and and budng, de parts of a bud-
ng, and e cess machnery and equpment) vacated or abandoned, or not adaptabe
for future use n performng contracts or subcontracts ncreases In -eserve
accounts for contngences, repars, compensaton nsurance (e cept as above
provded wth respect to sef-nsurance) and guarantee work edera and State
ncome and e cess-profts ta es and surta es cash dscount earned up to 1 per cent
of the amount of the purchase, e cept that a dscounts on subcontracts sub|ect
to the ct w be consdered Interest ncurred or earned bond dscount or fnance
charges premums for fe nsurance on the ves of offcers ega and accountng
fees n connecton wth reorganzatons, securty ssues, capta stock ssues, and
the prosecuton of cams aganst the Unted States (Incudng Income ta mat-
ters) ta es and e penses on ssues and transfers of capta stock osses on
Investments bad debts and e penses of coecton and e change.
In order that the cost of performng a contract or subcontract may be
accounted for ceary, the amount of any e cess profts repayabe to the Unted
States pursuant to the ct shoud not be charged to or Incuded n such cost.
(h) Guarantee e penses. Guarantee e penses ncude the varous Items of
factory cost, other manufacturng cost, cost of nstaaton and constructon,
ndrect engneerng e penses, and other genera e penses (see paragraphs (c)
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408
to (ff), ncusve, of ths secton) whch are ncurred after devery or nstaaton
of te artce manufactured or constructed pursuant to the partcuar contract
or subcontract and whch are ncdent to the correcton of defects or defcenees
whch the contractng party s requred to make under the guarantee provsons
of the partcuar contract or subcontract. If the tota amount of such guarantee
e penses s not ascertanabe at the tme of fng the report requred to be fed
wth the coector of nterna revenue (see secton 2 .1 of these reguatons) and
the contractng party ncudes any estmated amount of such e penses as part
of the camed tota cost of performng the contract or subcontract, such estmated
amount sha be separatey shown on the report and the reasons for camng
euch estmated amount sha accompany the report but ony the amount of guar-
antee e penses actuay ncurred w be aowed. If the amount of guarantee
e cuses actuay ncurred s greater than the amount (f any) camed on the
report and the contractng party has made an overpayment of e cess proft, a
refund of the overpayment sha be made n accordance wth the provsons of
secton 20.1 ) of these reguatons. If the amount of guarantee e penses actuay
ncurred s ess than the amount camed on the report and an addtona amount
of e cess proft s determned to be due, the addtona amount of e cess proft
sha be assessed and pad n accordance wth the provsons of secton 2 .19 of
these reguatons.
(/) Unreasonabe compensaton. The saares and compensaton for servces
whch are treated as a part of the cost of performng a contract or subcontract
ncude reasonabe payments for saares, bonuses, or other compensaton for
servces. s a genera n:1, bonuses pad to empoyees (and not to offcers) n
pursuance of a reguary estabshed ncentve bonus system may be aowed as
a part of the cost of performng a contract or subcontract.
The test of aowabty s whether the aggregate compensaton pad to each
ndvdua s for servces actuay rendered ncdent to, and necessary for, the
performance of the contract or subcontract, and s reasonabe. cessve or
unreasonabe payments whether n cash, stock, or other property ostensby ts
compensaton for servces sha not be ncuded n the cost of performng a contract
or subcontract.
(/) ocuton of ndrect costs. No genera rue appcabe to a cases may
be stated for ascertanng the proper proporton of the ndrect costs to be aocated
to the cost of performng a partcuar contract or subcontract. Such proper
proporton depends upon a the facts and crcumstances reatng to the perform-
ance of the partcuar contract or subcontract. Sub|ect to a requrement that a
tems whch have no reaton to the performance of the contract or subcontract
sha be emnated from the amount to be aocated, the foowng methods of
aocaton are outned as acceptabe n a ma|orty of cases:
(1) actory ndrect e penses. The aowabe ndrect factory e penses (soe
paragraph (c) (5) of ths secton) sha ordnary be aocated or dstrbuted
to the cost of the contract or subcontract on the bass of the proporton whch
the drect productve abor (see paragraph (c) (2) of ths secton) attrbutabe
to the contract or subcontract bears to the tota drect productve abor of the
producton department or partcuar secton thereof durng the perod wthn
whch the contract or subcontract s performed, e cept that f the ndrect factory
e penses are ncurred n dfferent amounts and n dfferent proportons by the
varous producng departments consderaton sha be gven to such crcumstances
to the e tent necessary to make a far and reasonabe determnaton of the true
proft and e cess proft.
(2) ngneerng ndrect e penses. The aowabe ndrect engneerng e -
penses (see paragraph (f) of ths secton) sha ordnary be aocated on ds-
trbuted to the cost of the contract or subcontract on the bass of the proporton
whch the drect engneerng abor attrbutabe to the contract or subcontract
(see paragraph (c) (3) of ths secton) bears to the tota drect engneerng abor
of the engneerng department or partcuar secton ttereof durng the perod
wthn whch the contract or subcontract s performed. If the e penses of the
engneerng department are not suffcent n amount to requre the mantenance
of separate accounts, the engneerng ndrect costs may be ncuded In the
ndrect factory e penses (see paragraph ( :) (5) of ths secton) and aocated
or dstrbuted to the cost of performng the contract or subcontract as a part of
such e peuses, provded the proporton so aocated or dstrbuted s proper under
the facts and crcumstances reatng to the performance of the partcuar contract
or subcontract.
(3) dmnstratve e penses (or overhead ). The aowabe e penses of
admnstraton (see paragraph (g) of ths secton) or other genera e penses
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409
Msc.
e cept ndrect engneerng e penses, bddng and genera seng e penses, and
genera servcng e penses sha ordnary be aocated or dstrbuted to the
cost of performng a contract or subcontract on the bass of the proporton
whch the sum of the manufacturng cost (see paragraph ( ) of ths secton)
and the cost of nstaaton and constructon (see paragraph (e) of ths secton)
attrbutabe to the partcuar contract or subcontract bears to the sum of the
tota manufacturng cost and the tota cost of nstaaton and constructon
durng the perod wthn whch the contract or subcontract s performed.
(4) ddng, genera sang, and genera sen-cng e penses. The aowabe
bddng and genera seng e penses and genera servcng e penses (see para-
graph (g) (2) and (3) of ths secton) sha ordnary be aocated or ds-
trbuted to the cost of performng a contract or subcontract on the bass of -
(1) The proporton whch the contract prce of the partcuar contract
or subcontract bears to the tota saes made (ncudng contracts or sub-
contracts competed) durng the perod wthn whch the partcuar contract
or subcontract s performed, or
() The proporton whch the sum of the manufacturng cost (see para-
graph ( ) of ths secton) and the cost of nstaaton and constructon
(see paragraph (e) of ths secton) attrbutabe to the partcuar contract
or subcontract bears to the sum of the tota manufacturng cost and the
tota cost of nstaaton and constructon durng the perod wthn whch
the contract or subcontract s performed,
e cept that speca consderaton sha be gven to the reaton whch certan
casses of such e penses hear to the varous casses of artces produced by the
contractng party n each case In whch such consderaton s necessary n
order to make a far and reasonabe determnaton of the true proft and
e cess proft. See secton 2 .14 of these reguatons.
Sec. 2 .10. Credt or net oss or for defeenen n proft n computng e cess
proft. The term net oss, as apped to contracts and subcontracts comng
wthn these reguatons, means the amount by whch the cost of performng
any such contract or subcontract competed by a partcuar contractng party
wthn the ncome-ta abe year e ceeds the tota contract prce of such con-
tract or subcontract. s to the meanng of ncome-ta abe year, see secton
2 .1 of these reguatons.
The term defcency n proft, as apped to contracts and subcontracts for
the constructon or manufacture of rmy or Navy arcraft comng wthn these
reguatons, means the amount by whch the aowabe proft upon a such
contracts and subcontracts competed by a partcuar contractng party wthn
an ncome-ta abe year e ceeds the net proft upon a such contracts and sub-
contracts. or the purposes of ths secton, the term aowabe proft means
an amount equa to ( ) 8 per cent of the tota contract prces of n contracts
(ncudng prme contracts made on a cost-pus-a-f ed-fee bass) and subcon-
tracts competed wthn the ncome-ta abe year, or ( ) an amount equa to
8.7 per cent of the tota cost of performng such contracts (e cept prme con-
tracts made on a cost-pus-a-f ed-fee bass) and subcontracts pus 8 per cent
of the tota contract prces of prme contracts made on a cost-pus-a-f ed-fee
bass, whch ever of such amounts ( ) or ( ) s the esser.
net oss or a defcency n proft sustaned by a contractng party wth
respect to contracts and subcontracts conng wthn these reguatons and com-
peted wthn an ncome-ta abe year s aowabe as a credt n computng the
contractng party s e cess proft on contracts and subcontracts comng wthn
these reguatons and competed wthn the frst succeedng ncome-ta abe year.
The amount of such credt s the sum of the foowng: ( ) The tota net
oss on contracts and subcontracts for the constructon or manufacture of nava
vesses competed wthn an ncome-ta abe year reduced by the e cess of the
net proft over the aowabe proft on contracts and subcontracts for the
constructon or manufacture of rmy or Navy arcraft competed wthn such
year, and ( ) the tota defcency n proft and the tota net oss on contracts
and subcontracts for the constructon or manufacture of rmy or Navy arcraft
competed wthn such year reduced by the e cess of the net proft over the
aowabe proft on a contracts and subcontracts for the constructon or manu-
facture of nava vesses competed wthn such year. ny porton of such
credt whch s attrbutabe to contracts or subcontracts for the constructon or
manufacture of nava vesses sha be apped aganst the e cess proft before the
porton, f any, attrbutabe to contracts or subcontracts for the constructon or
manufacture of rmy or Navy arcraft s so apped. If, after the appcaton
290217 41 27
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410
of such credt, there s a remander, the porton of the amount of such remander
whch s attrbutabe to contracts or subcontracts for the constructon or manu-
facture of rmy or Navy arcraft s aowabe as a credt n computng the
contractng party s e cess proft on contracts or subcontracts comng wthn
these reguatons and competed durng the ne t three succeedng ncome-
ta abe years.
Credt for such a net oss or defcency n proft may be camed n the
contractng party s annua report of proft fed wth the coector of nterna
revenue (see secton 2 .1 of these reguatons), but t sha te supported by
separate schedues for each contract or subcontract nvoved showng tota
contract prces, costs of performance and pertnent facts reatve thereto, together
wth a summarzed computaton of the net oss or defcency n proft. The net
oss or defcency n proft camed s sub|ect to verfcaton and ad|ustment s to
preservaton of books and records, see secton 2 .14 of these reguatons.
Net oss or defcency n proft sustaned on contracts and subcontracts com-
peted wthn one ncome-ta abe year may not be consdered n computng net
oss or defcency n proft sustaned on contracts and subcontracts competed
wthn another ncome-ta abe year.
The provsons of ths secton may be ustrated by the foowng e ampes:
ampe (): On uy 1, 1940, the Corporaton, whch keeps ts books and
makes ts edera ncome ta returns on a caendar year bass, entered nto
the foowng contracts (none of whch was on a cost-pus-a-f ed-fee bass) com-
ng wthn these reguatons:
(1) contract for the constructon of a nava vesse at a contract prce of
100,000, whch was competed n 1940 at a cost of 170,000.
(2) contract for the constructon of nava arcraft at a contract prce of
(3) contract for the constructon of rmy arcraft at a contract prce
of 300,000, whch was competed n 1940 at a cost of 250,000.
(4) contract for the constructon of nava arcraft at a contract prce of
On contract No. 1 the net oss was 70,000 ( 170,000 mnus 100,000) and.
accordngy, there was no e cess of the net proft over the aowabe proft
On contracts Nos. 2 and 3 the tota of the contract prces was 500,000 and
the tota cost was 440,000, resutng n a net proft of 0,000. The aowabe
proft on such contracts was 38,280 ( 8.7 per cent of 440,000), whch amount s
ess than 40,000 (8 per cent of 500,000). On such contracts the e cess of the net
proft ( 0,000) over the aowabe proft ( 38,280) was 21,720, and there was
no defcency n proft because the aowabe proft dd not e ceed the net proft.
The amount of aowabe credt s 48,280, computed as foows:
Net oss on nava vesse contract (No. 1) 70,000
Less: cess of net proft over aowabe proft on arcraft contracts
(Nos. 2 and 3) 21,720
48.280
Defcency In proft and net oss on arcraft contracts (Nos. 2 and 3) None
Less: cess of net proft over aowabe proft on nava vesse con-
tract (No. 1) None
mount of aowabe credt from year 1910 48,280
On the contract for nava arcraft competed n 1941 (No. 4), there was a
net proft of 50,000 ( 500,000 mnus 450,000). The aowabe proft on such
contract was 39,150 ( 8.7 per cent of 450,000), whch amount s ess than
40,000 ( 8 per cent of 500,000). ccordngy, the e cess of the net proft
over the aowabe proft was 10,850. ganst ths amount the credt of
48,280 from 1940 may be taken, wth the resut that there s no e cess proft
for the year 1941. The remander of the credt of 48,280 may not be used
n subsequent years because none of the credt was attrbutabe to contracts
or subcontracts for the constructon or manufacture of rmy or Navy arcraft.
ampe (2) : On uy 1, 1940, the Corporaton, whch keeps ts books
and makes ts edera ncome ta returns on a caendar year bass, entered nto
the foowng contracts (none of whch was on a cost-pus-a-f ed-fee bass) comng
wthn these reguatons:
(1) contract for the constructon of a nava vesse at a contract prce
of 100,000, whch was competed In 1940 at a cost of 120,000.
(2) contract for the constructon of Navy arcraft at a contract prce
of 200,000, whch was competed n 1940 at a cost of 188,000.
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(3) contract for the constructon of rmy arcraft at a contract prce of
(4) contract for the constructon of a nava vesse at a contract prce of
400,000, whch was competed n 1942 at a cost of 300,(101).
On contract No. 1 the net oss was 20,000 ( 120,000 mnus 100,000) and,
accordngy, there was no e cess of the net proft over the aowabe proft.
On contract No. 2 the net proft was 12000 ( 200,000 mnus 188,000) and
the aowabe proft was 1 ,000 (8 per cent of 200,000), whch amount s ess
than 1 ,35 (8.7 per cent of 188,000). ccordngy, on such contract there
was a defcency n proft of 4,000 ( 1 ,000 mnus 12,000). There was no
e cess of the net proft over the aowabe proft, the atter beng arger n
amount
The amount of aowabe credt s 24,000, computed as foows:
Net oss on nava vesse contract (No. 1) 20,000
Less: cess of net proft over aowabe proft on arcraft contract
(No. 2) None
20,000
Defcency n proft on arcraft contract (No. 2) 4, 000
Net oss on arcraft contract (No. 2) None
4,000
Less: cess of net proft over aowabe proft on nava vesse
contract (No. 1) None
4,000
mount of aowabe credt from year 1940 24,000
On the contract for rmy arcraft competed n 1941 (No. 3), there was a net
proft of 25,000 ( 300,000 mnus 275,000). The aowabe proft on such contract
was 23,925 ( 8.7 per cent of 275,000), whch amount s ess than 24,000 ( 8 per
cent of 300,000). ccordngy, the e cess of the net proft over the aowabe
proft was 1,075. ganst ths amount the credt of 24,000 from 1940 may be
taken, wth the resut that there s no e cess proft for the year 1941. fter
appyng such credt there s an unused remander of the credt amountng to
22,925 ( 24,000 mnus 1,075).
On the Navy vesse contract competed n 1942 (No. 4) there was a net proft of
40,000 ( 400,000 mnus 3 0,000). The aowabe proft on such contract was
31,320 ( 8.7 per cent of 3 0,000), whch amount Is ess than 32,000 (8 per cent
of 400,000). ccordngy, the e cess of the net proft over the aowabe proft Is
8, 80. ganst ths amount there may be taken as a credt such part of the
unused remander of the aowabe credt from 1940 ( 22,925) as s attrbutabe
to the contract for Navy arcraft (No. 2). Of the orgna credt of 24,000 from
1940, ony 4,000 was attrbutabe to contract No. 2, and hence 4,000 s the ony
part of the unused remander ( 22,925) whch may be taken as a credt aganst the
e cess proft on contract No. 4.
Sec. 2 .11. Credt for edera ncome ta es. or the purpose of computng the
amount of e cess proft to be pad to the Unted States, a credt Is aowabe aganst
the e cess proft for the amount of edera ncome ta es pad or remanng to be
pad on the amount of such e cess proft The edera ncome ta es, n re-
spect of whch ths credt s aowabe ncude the ncome ta es mposed by
Chapter 1 and Subchapter of Chapter 2 of the Interna Revenue Code, as
amended, and the e cess-profts ta es mposed by Subchapter of Chapter 2
of the Interna Revenue Code, as amended. Ths credt s aowabe for these
ta es ony to the e tent that t s affrmatvey shown that they have been fnay
determned and pad or reman to be pad and that they were mposed upon the
e cess proft aganst whch the credt s to be made. In case such a credt has
been aowed and the amount of edera ncome ta es mposed upon the e cess
proft s redetermned, the credt prevousy aowed sha be ad|usted accordngy.
Sec. 2 .12. aure of contractor to requre agreement by subcontractor.
very contract or subcontract comng wthn the scope of the ct and these
reguatons s requred by the ct and the ct of March 27, 1934, as amended,
to contan, among other thngs, an agreement by the contractng party to make
no subcontract uness the subcontractor agrees
(a) To make a report, as descrbed n the ct of March 27, 1934, as
amended, under oath to the Secretary of the department concerned upon
the competon of the subcontract
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412
( ) To pay Into the Treasury e cess proft, as determned by the Treasury
Department, n the manner and amounts specfed n the ct
(c) To make no subdvson of the subcontract for the same artce or
artces for the purpose of evadng the provsons of the ct and the ct
of March 27, 1934, as amended
((/) That the manufacturng spaces and books of ts own pant, affates,
and subdvsons sha at a tmes be sub|ect to nspecton and audt as
provded n the ct of March 27,1934, as amended.
If a contractng party enters nto a subcontract wth a subcontractor who
fas to make such agreement, such contractng party sha, n addton to ts
abty for e cess proft determned on contracts or subcontracts performed
by t, be abe for any e cess proft determned to be due the Unted States
on the subcontract entered nto wth such subcontractor. In such event, how-
ever, the e cess proft to be pad to the Unted States n respect of the sub-
contract entered nto wth such subcontractor sha be determned separatey
from any contracts or subcontracts performed by the contractng party enterng
Into the subcontract wth such subcontractor.
Sec 2 .13. vason of e cess proft. The ct of March 27, 1934, as amended,
provdes that the contractng party sha agree to make no subdvsons of
any contract or subcontract for the same artce or artces for the purpose
of evadng ts provsons. If any such subdvson or subcontract s made for
the purpose of evadng the provsons of the ct or the ct of March 27, 1934,
as amended, t sha consttute a voaton of the agreement, and the cost of
competng a contract or subcontract by a contractng party whch voates
such agreement sha be determned n a manner necessary ceary to refect
the true e cess proft of such contractng party.
Sec. 20.14. ooks of account and records. It s recognzed that no unform
method of accountng can be prescrbed for a contractng partes sub|ect to
the provsons of the ct and the ct of March 27, 1934. as amended. ach
contractng party s requred by aw to make a report of Its true profts and
e cess proft. Such party must, therefore, mantan such accountng reenrds
as w enabe t to do so. See secton 2 .9 of these reguatons. mong the
essentas are the foowng:
(1) The proft or oss upon a partcuar contract or subcontract sha be
accounted for and fuy e paned n the books of account separatey on
each contract or subcontract.
(2) ny cost accountng methods, however standard they may be and
regnrde s of ong contnued practce, sha be controed by, and be n
accord wth, the ob|ectves and purposes of the ct and the ct of
March 27, 1934, as amended, and of any reguatons prescrbed thereunder.
(3) The accounts sha ceary dscose the nature and amount of the
dfferent tems of cost of performng a contract or subcontract.
In cases where t has been the custom n the past to use so-caed norma
rates of overhead e pense or admnstratve e penses, or standard or
norma prces of matera or abor charges, no ob|ecton w be made to the
use temporary durng the perod of performng the contract or subcontract,
f the method of accountng empoyed s such as ceary to refect, In the fna
determnaton upon the books of account, the actua proft derved from the
performance of the contract or subcontract and f the necessary ad|ustng
entres are entered upon the books and they e pan In fu deta the revsons
necessary to accord wth the facts. s to the eements of cost, see secton 2 .9
of these reguatons.
books, records, and orgna evdences of costs (ncudng, among other
thngs, producton orders, bs or schedues of materas, purchase requstons,
purchase orders, vouchers, requstons for materas, standng e pense orders,
nventores, abor tme cards, pay ros, cost dstrbuton sheets) pertnent to
the determnaton of the true proft, e cess proft, defcency n proft or net
oss from the performance of a contract or subcontract sha be kept at a
tmes avaabe for nspecton by nterna-revenue offcers, and sha be carefuy
preserved and retaned so ong as the contents thereof may become matera
n the admnstraton of the ct and the ct of March 27, 1934, as amended.
Ths provson Is not confned to books, records, and orgna evdences per-
tanng to Items whch may be consdered to be a part of the cost of performng
a contract or subcontract. It Is appcabe to a books, records, and orgna
evdences of costs of each pant, branch, or department nvoved n the per-
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413
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formance of a contract or subcontract or In the aocaton or dstrbuton of
costs to the contract or subcontract.
Sec. 2 15. Report to Secretary of department concerned. Upon the compe-
ton of a contract or subcontract comng wthn the scope of the ct and these
reguatons, the contractng party s requred to make a report, under oath,
to the Secretary of the department concerned. s to the date of competon
of a contract or subcontract, see secton 2 .5 of these reguatons. Such report
sha be In the form prescrbed by the Secretary of the department concerned
and sha state the tota contract prce, the cost of performng the contract, the
net ncome from such contract, and the per centum such ncome bears to the
contract prce and the cost of performng the contract. The contractng party
sha aso ncude as a part of such report a statement showng
(1) the manner n whch the ndrect costs were determned and ao-
cated to the cost of performng the contract or subcontract (see secton
2 .9 of these reguatons)
(2) the name and address of every subcontractor wth whom a subcon-
tract was made, the ob|ect of such subcontract, the date when competed
and the amount thereof and
(3) the name and address of each affate or other organzaton, trade,
or busness owned or controed drecty or Indrecty by the same nterests
as those who so own or contro the contractng party, together wth a
statement showng n deta a transactons whch were made wth such
affate or other organzaton, trade, or busness and are pertnent to the
determnaton of the e cess proft.
copy of the report requred to be made to the Secretary of the depart-
ment concerned s requred to be transmtted by the contractng party to the
Secretary of the Treasury. Such copy sha not be transmtted drecty to the
Secretary of the Treasury but sha be fed as a part of the annua report.
See secton 2 .1 of these reguatons.
Sec. 2 .1 . nnua reports for ncome-ta abe years. (a) Genera requre-
ments. very contractng party competng a contract or subcontract wthn
the scope of these reguatons sha fe wth the coector of nterna revenue
for the coecton dstrct n whch the contractng party s edera ncome ta
returns are requred to be fed an annua report on the prescrbed form of the
proft and e cess proft on a such contracts and subcontracts competed
wthn the partcuar ncome-ta abe year. There sha be ncuded as a part
of such report a statement, preferaby n coumnar form, showng separatey
for each such contract or subcontract competed by the contractng party
wthn the ncome-ta abe year the tota contract prce, the cost of perform-
ng the contract or subcontract, and the resutng proft or oss on each con-
tract or subcontract, together wth a summary statement showng n deta the
computaton of the net proft or net oss upon a contracts and subcontracts com-
peted wthn the ncome-ta abe year and the amount of the e cess proft, f any,
for the ncome-ta abe year covered by the report. copy of the report made
to the Secretary of the department concerned (see secton 2 .15 of these regu-
atons) wth respect to each contract or subcontract covered n the annua
report, sha be fed as a part of such annua report. Iu case the ncome-
ta abe year of the contractng party s a perod of ess than 12 months (see
secton 2 .1 of these reguatons), the report requred by ths secton sha be
made for such perod and not for a fu year.
(b) Tme for fng annua reports. nnua reports of contracts and subcon-
tracts comng wthn the scope of the ct and these reguatons competed by
a contractng party wthn an ncome-ta abe year must be fed on or before
the oth day of the nnth month foowng the cose of the contractng party s
ncome-ta abe year. It s mportant that the contractng pary render on or
before the due date an annua report as neary compete and fna as t s
possbe for the contractng party to prepare. n e tenson of tme granted
the contractng party for fng ts edera Income ta return does not serve
to e tend the tme for fng the annua report requred by ths secton. u-
thorty consstent wth authorzatons for grantng e tensons of tme for fng
edera ncome ta returns s hereby deegated to the varous coectors of
nterna revenue for grantng e tensons of tme for fng the reports requred
by ths secton. ppcaton for e tensons of tme for fng such reports
shoud be addressed to the coector of nterna revenue for the dstrct n
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414
whch the contractng party fes ts edera ncome ta returns and must
contan a fu recta of the causes for the deay.
Sec. 2 .17. Payment of e cess proft abty. The amount of the e cess
proft abty to be pad to the Unted States sha be pad on or before the
due date for fng the report wth the coector of nterna revenue. See sec-
ton 2 .1 of these reguatons. t the opton of the contractng party, the
amount of the e cess proft abty may be pad n four equa nstaments n-
stead of n a snge payment, n whch case the frst nstament s to be pad on
or before the date prescrbed for the payment of the e cess proft as a snge
payment, the second nstament ou or before the oth day of the thrd month,
the thrd Instament on or before the 15th day of the s th month, and the
fourh nstament on or before the 15th day of the nnth month, after sncb
date.
Sec. 2 .18. Labty of surety. The surety under contracts entered nto wth
the Secretary of the department concerned for the constructon or manufacture
of any compete nava vesse or rmy or Navy arcraft, or any porton thereof,
sha not be abe for payment of e cess proft due the Unted States In respect
of such contracts.
Sec. 2 .19 Determnaton of abty for e cess proft, nterest and penates
assessment, coecton, payment, refunds. The duty of determnng the correct
amount of e cess proft abty on contracts and subcontracts comng wthn the
scope of the ct and these reguatons s upon the Commssoner of Interna
Revenue. Under secton 3(b) of the ct of March 27, 1934, as ast amended,
a provsons of aw (ncudng the provsons of aw reatng to nterest, pena-
tes, and refunds) appcabe wth respect to the ta es mposed by Tte I of
the Revenue ct of 1934, and not nconsstent wth secton 3 of the ct of March
27, 1934, as ast amended, are appcabe wth respect to the assessment, coec-
ton, or payment of e cess profts on contracts and subcontracts comng wthn
the scope of the ct and these reguatons and to refunds of overpayments of
profts nto the Treasury under the ct. Cams by a contractng party for the
refund of an amount of e cess proft, nterest, penates, and addtons to such
e cess proft sha conform to the genera requrements prescrbed wth respect
to cams for refund of overpayments of ta es Imposed by Tte I of the Reve-
nue ct of 1934 and, f fed on account of any addtona costs ncurred pursuant
to guarantee provsons n a contract, sha be suppemented by a statement
under oath showng the amount and nature of such costs and a facts pert-
nent thereto.
dmnstratve procedure for the determnaton, assessment, and coecton
of e cess proft abty under the ct and these reguatons and the e amna-
ton of reports and cams n connecton therewth w be prescrbed from tme
to tme by the Commssoner of Interna Revenue.
Sec. 2 .20. ppcabty of pror reguatons. The reguatons prescrbed n
Treasury Decson 490 C. . 1939-2, 404 (sectons 17.0 to 17.19, ncusve,
Tte 2 , Code of edera Reguatons, 1939 Sup.) and Treasury Decson 4909
C. . 1939-2, 422 (sectons 1 .0 to 1 .18, ncusve, Tte 2 , Code of edera
Reguatons, 1939 Sup.) sha not appy to contracts entered nto after une 28,
1940, and before uy 1, 1942, nor to subcontracts made wth respect to such
contracts. To ths e tent such reguatons are hereby superseded.
Tmothy C. Mooney,
ohn L. Suvan,
enry L. Stmson,
Secretary of War. T
pproved ugust , 1940.
rank no ,
Secretary of the Navy.
( ed wth the Dvson of the edera Regster ugust 7,1940, 3.3 p. m.)
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Msc.
1940-33-10391
I. T. 3400
Treatment of nterest pad on ndebtedness, the proceeds of whch
are used soey to acqure speca addtona equpment and factes
or workng capta for the operaton thereof, the cost, or porton of
the cost, of whch s borne by the Government and s chargeabe
aganst a contract or subcontract, for the purpose of determnng
the cost of performng a contract or subcontract comng wthn the
scope of the provsons of secton 3(b) of the ct of March 27,
1934, as amended, secton 14 of the ct of pr 3, 1939, or secton
2(b) of the ct of une 28, 1940.
The reguatons contaned n secton 17.9(ff) of Treasury Dec-
son 490 (C. . 1939-2, 404) and secton 1 .8(0)4 of Treasury Dec-
son 4909 (C. . 1939-2, 422) provde that nterest ncurred or earned
sha not be consdered n determnng the cost of performng a con-
tract or subcontract comng wthn the scope of secton 3(b) of the
ct of March 27,1934, as amended, and secton 14 of the ct of pr
3, 1939, reatng to e cess profts on contracts and subcontracts for
nava vesses or rmy or Navy arcraft or any porton thereof. Ths
provson of the reguatons, prescrbng a genera rue as to nterest,
s not to be construed as preventng an annua aowance for reason-
abe nterest (not n e cess of 4 per cent per annum) pad on ndebted-
ness, the proceeds of whch are used soey to acqure speca add-
tona equpment and factes, the cost, or porton of the cost, of
whch s borne by the Government and, pursuant to a certfcaton
made n accordance wth the provsons of ecutve Order 84 5 and
the ont Rues ssued thereunder (page 385, ths uetn) and n ac-
cordance wth the provsons of secton 4 of the ct of une 28,1940
(Pubc, No. 71, Seventy-s th Congress, thrd sesson page 490, ths
uetn), s chargeabe aganst a contract or subcontract comng
wthn the scope of such secton 3(b) or secton 14.
Such provson of the reguatons s aso not to be construed as pre-
ventng an annua aowance for reasonabe nterest (not n e cess of
4 per cent per annum) pad on ndebtedness n case such ndebtedness
s necessary ncurred to provde, and the proceeds of such ndebted-
ness are used soey to provde, workng capta for the operaton of
such speca addtona equpment and factes, the cost, or porton of
the cost, of whch s borne by the Government and s so chargeabe
aganst such a contract or subcontract. No such aowance sha be
made uness the contractng party keeps speca accounts on hs books
and speca bank accounts ceary showng such use of the funds n the
performance of such contracts and subcontracts.
n annua aowance under the precedng paragraphs for nterest
pad on any ndebtedness sha be reduced by a nterest earned
wthn the year on the proceeds of such ndebtedness.
Interest aowabe under the provsons of the precedng paragraphs
sha be treated as an ndrect factory e pense and be aocated to the
cost of performng a partcuar contract or subcontract n accordance
wth the provsons of the reguatons reatng to the aocaton of
ndrect factory e pense.
The provsons of the precedng paragraphs are equay appcabe
n determnng the cost of performng contracts and subcontracts
comng wthn the scope of secton 2(b) of the ct of une 28, 1940
(Pubc, No. 71, Seventy-s th Congress, thrd sesson page 490,
ths uetn), reatng to payment nto the Treasury of proft n
e cess of the specfed 8 per cent and 8.7 per cent.
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41
LCO OL T .
Reguatons 5 (1940), Sectons 184.58, 184.121, 1940-42-10457
184.142,184.148,184.149,184.150,184.24 , 184.255, T. D. 5012
184.25 , 184.29 , 184.310, and 184.412.
TITL 2 INT RN L R NU CI1 PT R I. SU C PT R C, P RT 184.
PRODUCTION O R NDY.1
mendng Reguatons 5.
Washngton, D. C.
To Dstrct Supervsors, Coectors of Interna Revenue, and others
Concerned:
(n) Secton 2800 of the Interna Revenue Code s amended by nsertng at the
(g) Defense Ta fob ve Years. In eu of the rates of ta specfed n
such of the sectons of ths tte as are set forth n the foowng tabe, the rates
appcabe wth respect to the perod after une 30, 1940, and before uy 1,
1045, sha be the rates set forth under the headng Defense-Ta Rate :
Secton.
Descrpton of ta .
Od rate.
Defense-ta
rate.
2800(a)(1)
2.25
2.00
3.00
2800(a)(1) -
2.75

Pursuant to the foregong provson of aw, sectons 2802(a). 2812,
3037, 317 , and 3254(g) of the Interna Revenue Code, and sectons
3 and of the edera coho dmnstraton ct, as amended (27
T . S. C. Sup., 203, 20 ), secton 184.80 of Reguatons 5 s hereby
revoked, and the tte of rtce and sectons 184.58. 184.121(a),
( ), 184.142, 184.148, 184.149, 181.150, 184.24 , 184.255, 184.25 .
184.29 , 184.310, and 184.412 of the sad reguatons are hereby
rtce . edera coho dmnstraton ct Permt.
Pec. 184.58. Permt requred. Under the edera coho dmnstraton ct
and the reguatons ssued pursuant thereto (27 C R, Tart 1), any person,
e cept an agency of a State or potca subdvson thereof, or any offcer or
empoyee of any such agency, ntendng to engage n the busness of producng
bandv. s requred to procure a permt therefor. (Sec. 3, 49 Stat., 978 27
T . S. C. Sup., 203.)
Sec. 184.121. Change n ndvdua, frm, or corporate name. Where there
s a change n the ndvdua, frm, or corporate name of the dster, he must
compy wth the foowng requrements:
(a) mended permt. Procure from the dstrct supervsor under the ed-
era coho dmnstraton et an amended basc permt authorzng operaton
of the dstery under the new name.
( ) mended notce. orm 27 . Submt to the dstrct supervsor an
amended notce on orm 27 , n trpcate, coverng the new name, whch
The astersk at end of sectons refeg to secton 317 of the Interna Revenue Code.
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417
IMsc.
notce must be approved before operatons may be commenced under tbe new
name.
Sec. 184.142. amnaton of other quafyng documents. Upon recept of
notce, pat, pans, bond, and other documents requred by these reguatons of
persons ntendng to quafy as frut dsters, the dstrct supervsor w
e amne the same to determne whether they have been propery e ecuted, and
whether they refect compance wth the requrements of the aw and regua-
tons. Where any requred document has not been fed, or where errors or
dscrepances are found n those fed, or where the documents fed do not
refect compance wth these reguatons, acton thereon w be hed n abeyance
unt the omsson, or error, or dscrepancy has been rectfed, and there has
been fu compance wth a requrements.
fnds, upon e amnaton of the nspecton report, that the person seekng to
quafy as a frut dster has comped n a respects wth the requrements
of aw and these reguatons, and the dster s bond ( orm 30 ) may propery
be approved under secton 184.147, and f the appcant s entted to a permt,
he w note hs recommendaton for approva on a copes of the bond and
notce, and hs approva on a copes of the pat and pans, and w forward
a copes of the bond and notce and the orgna copy of the pat, pans, and
other quafyng documents, together wth a copy of a nspecton reports, to
the Commssoner for fna acton. The ssuance of a permt shoud be wthhed
pendng approva by the Commssoner of the notce, bond, and other quafyng
documents requred under the nterna revenue aws.
Sec. 184.149. Dsapprova of quafyng documents. If the dstrct supervsor
of the aw and reguatons, or that the stuaton of the dstery s such as
woud enabe the dster to defraud the Unted States, or f the bond shoud
be dsapproved under secton 184.147, he w note hs recommendaton for
dsapprova on the bond, and w forward to the Commssoner for fna
acton such copes of the quafyng documents as are requred to be so for-
warded by the precedng secton n the case of recommendaton for approva,
together wth a copy of a Inspecton reports. Where a bond s recom-
mended for dsapprova, the dstrct supervsor w furnsh the Commssoner
wth a fu statement of the reasons therefor. If the appcant s not entted
to a permt, the dstrct supervsor w, upon dsapprova of the appcaton
therefor, return a copes of the quafyng documents to the appcant wthout
acton thereon or reference to the Commssoner.
Sec. 184.150. Dsposton of quafyng documents. Where the dster s bond
( orm 30 ), notce ( orm 27 ), and speca appcaton ( orm 1 13), f any,
are approved by the Commssoner, the dstrct supervsor w, upon recept of ap-
proved copes of such documents from the Commssoner, as provded n rtce
III, forward one copy of the bond, speca appcaton, f any, notce, pat,
pans, and other quafyng documents to the dster and w retan one copy
of such quafyng documents for the fe of such dster. The e tra copy
of the speca appcaton ( orm 1 13), f any, receved from the Comms-
soner w be paced by the dstrct supervsor n the fe of the rectfer.
If the bond and speca appcaton, f any, are dsapproved, the dstrct super-
vsor w, upon recept from the Commssoner of the dsapproved copes of
such documents and other quafyng documents submtted therewth, return
a copes of the quafyng documents to the propretor, wth advce as to the
reasons for dsapprova.
Sec. 184.24 . Rate of ta . The aw mposes a ta on dsted sprts pro-
duced n or mported nto the Unted States at the rate of 3 on each proof
gaon or wne gaon when beow proof and a proportonate ta at a ke
rate on a fractona parts of such proof or wne gaon, to be pad when
wthdrawn from bond, e cept brandy dsted at ess than 190 decrees proof,
on whch the ta s mposed at the rate of 2.7 ) on each proof gaon or wne
gaon when beow proof and a proportonate ta at a ke rate on a fractona
parts of such proof or wne gaon. Sprts dsted from frut at a proof of
190 degrees or over (sprts frut) are sub|ect to the ta at the hgher rate.
( Sec. 2S00(a), I. R. C, as amended.)
Sec. 181.255. Unfnshed sprts. The dster may take sampes of brandy
or frut sprts n the course of dstaton for aboratory anayss. ach
sampe may not e ceed one-haf pnt, uness t s shown that such s an nsuf-
fcent quantty for the purpose for whch the sampe s desred, and the Com-
mssoner authorzes the takng of a arger sampe, not to e ceed 1 pnt. The
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418
tota number of sampes must be restrcted to the mnmum necessary to
accompsh the purpose of the aboratory anayss. ( Sec. 3037, I. R. C.)
Sec. 184.25 . nshed sprts.- The dster may take from the recevng
tanks of the dstery sampes of brandy or frut sprts for aboratory anayss:
Such sampes may not e ceed 1 pnt for each dstaton of each knd of brandy
or frut sprts produced day, uness t s shown that such s an nsuffcent
quantty for the purpose for whch the sampe s desred, and the Commssoner
authorzes the takng of a arger sampe, not to e ceed 1 quart ( Sec.
3037, I. R. C.)
Sec. 184.29 . Issuance of ta -pad stamps. The coector w ssue the ta -
pad stamps. ach ta -pad stamp sha bear the sgnature of the coector,
who sha wrte or stamp thereon the date of payment of the ta , by whom
pad, the number of gaons and tenths of gaons of proof sprts, and the sera
number of the cask. acsme sgnatures of coectors may be aff ed by the
use of hand stamps to the ta -pad stamps, care beng taken to use ony such
nk as w nether fade nor bur. The coector w enter the sera numbers
of the stamps In the approprate spaces on a copes of orms 179 and 1520,
sgn the certfcate of ta -payment on each copy of orm 179, retan one copy
each of orm 179 and orm 1520, and return the remanng three copes of
orm 179 and two copes of orm 1520 to the dster wth the stamps. ( Sec.
2802(a), I. R. C.)
Seo. 184.310. M ng of dfferent sprts prohbted. randy or frut sprts
produced by two or more dsters sha not be mnged n a storage tank nor
sha brandy or frut sprts produced from one knd of frut or berry be so
mnged wth brandy or frut snrts produced from another knd of frut or
berry nor sha brandy and fr t sprts dsted from the same knd of frut
or berry, or brandes whch dffer n knd accordng to the standards of dentty
estabshed under the edera coho dmnstraton ct, be mnged n a
storage tank nor sha brandy or frut sprts dsted from the same knd
of frut or berry durng dfferent dstng seasons, or brandy dsted at
proofs dfferng more than 10 degrees, be so mnged. ( Sec. 3254(g), I. R. C.)
Sec. 184.412. uk contaners. Under the reguatons ssued pursuant to the
edera coho dmnstraton ct (27 C R, Part 3), frut dsters may se
or dspose of brandy n buk, that s, contaners havng a capacty n e cess
of 1 wne gaon, (1) to other dsters and propretors of nterna revenue
bonded warehouses, ndustra acoho pants and ndustra acoho bonded
warehouses, ncudng those operatng ta -pad bottng houses (2) to pro-
pretors of cass 8 customs bonded warehouses (3) to rectfers (4) to wne-
makers (brandy or acoho) for fortfcaton of wne (5) to any agency of
the Unted States or of any State or potca subdvson thereof ( ) for
e port (7) on warehouse recepts, conformng to the reguatons Issued under
the edera coho dmnstraton ct, for dsted sprts n nterna revenue
bonded warehouses and (8) for ndustra use, as foows: or e permenta
purposes, and n the manufacture (a) of medcna, pharmaceutca, and ant-
septc products, ncudng prescrptons compounded by reta druggsts (5)
of toet products (c) of avorng e tracts, srups, or food products or (d) of
scentfc, chemca, mechanca, or ndustra products provded such products
are unft for beverage use. rut dsters may not, under the reguatons
ssued pursuant to the edera coho dmnstraton ct (27 C R, Part 3),
se or dspose of brandy (not ncudng sprts frut) n buk for ndustra
use uness such brandy s shpped or devered drecty to the ndustra user
thereof. (Sec. , 49 Stat., 985 27 U. S. C. Sup., 20 .)
Gut T. evertng,
D. W. e,
( ed wth the Dvson of the edera Regster October 8, 1940, 3.0 p. m.)
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Reguatons 15 (1940), Sectons 190. 8, 1940-35-10403
190.108, etc. T. D. 5004
R CTI IC TION O SPIRITS ND WIN S.
Washngton, D. C.
Concerned:
Secton 2803(c) of the Interna Revenue Code, as amended by
secton 1 of the ct of une 24, 1940 (Pubc, No. 54, Seventy-s th
Congress), reads as foows:
(c) Unused Stamps change, Refund, tc. The Commssoner of In-
terna Revenue, under reguatons prescrbed by hm and approved by the Sec-
retary of the Treasury, may redeem or make aowance for any unused stamps
ssued under secton 203 of the Lquor Ta ng ct of 1934 or subsecton (b) of
ths secton by e changng them for other stamps of the same knd or by
refundng moneys receved therefor: Provded, That stamps may be e changed
or the vaue thereof refunded ony n quanttes of the vaue of 5 or more:
nd provded further, That no cam for the e change of strp stamps or refund
therefor sha be aowed uness presented wthn two years after the date on
whch such stamps were awfuy ssued. There are hereby authorzed to be
approprated annuay, out of any money n the Treasury not otherwse appro-
prated, such sums as may be necessary to carry out ths provson.
s th Congress), reads as foows:
2903(e), Interna Revenue Code, as amended and nserted, respectvey, by ths
ssued pror to the date of enactment of ths ct may be aowed f presented
wthn two years from the date of enactment of ths ct
Secton 1 50 of the Interna Revenue Code, added by secton 210
of the Revenue ct of 1940 (Pubc, No. 5 , Seventy-s th Con-
gress), reads as foows:
(a) In eu of the rates of ta specfed In such of the sectons of ths tte
Secton.
Descrpton of ta .
Od rate.
Defense-ta rate.

3250(0(1)
Rectfers _
200
100
220
110
3250(f)(1)
Rectfers
Secton 3190 of the Interna Revenue Code, added by secton 214
of the Revenue ct of 1940 (Pubc, No. 5 , Seventy-s th Con-
gress), reads as foows:
In eu of the rates of ta specfed n such of the sectons of ths tte as
are set forth n the foowng tabe, the rates appcabe wth respect to the
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420
Secton.
Descrpton of ta .
Od rate.
3030(a)(1)( )
3030(a)(1)( )
3030(a)(1)( )
30301
3030
3030
St wnes
St wnes,.
St wnes
Sparkng wnes
Sparkng wnes
Lqueurs, cordas, etc
Cents.
5
15
25
2
m
18
3
3
14
Pursuant to the foregong provsons of aw and to sectons 2801,
2803(d), 2871, 3030(a), and 3170 of the Interna evenue Code, and
secton 5(e) of the edera coho dmnstraton ct, as amended
(27 U. S. C, Sup., 205), secton 190. 8 of Reguatons 15 s hereby
revoked, and sectons 190.108 (a), (b), 190.120, 190.130, 190.131,
190.132, 190.157, 190.158, 190.220, 190.2 7, 190.2 8, 190.270, 190.272,
190.290, 190.341, 190.349, 190.3 0, 190.403, 190.408, and 190.4 9 of the
sad reguatons are hereby amended to read as foows:
Seo. 190.108. Change n ndvdua, frm, or corporate name. Where there s
a change n the ndvdua, frm, or corporate name of the rectfer, he must
compy wth the foowng requrements:
(a) mended permt. Procure from the dstrct supervsor under the ed-
era coho dmnstraton ct an amended basc permt authorzng operaton
of the rectfyng pant under the new name.
( ) mended notce. orm 2T- . Submt to the dstrct supervsor an
amended notce on orm 27- , n trpcate, coverng the new name.
Sec. 190.120. amnaton of other quafyng documents. Upon recept of the
notce, pat, pans, bond, and other documents requred by these reguatons of
persons ntendng to quafy as rectfers, the dstrct supervsor w e amne
the same to determne whether they have been propery e ecuted, and whether
they refect compance wth the requrements of the aw and reguatons.
Where any requred document has not been fed, or where errors or dscrep-
ances are found n those fed, or where the documents fed do not refect com-
pance wth these reguatons, acton thereon w be hed n abeyance unt the
omsson, or error or dscrepancy, has been rectfed, and there has been fu
compance wth a requrements.
fnds, upon e amnaton of the nspecton report, that the person seekng to
quafy as a rectfer has comped n a respects wth the requrements of aw
and these reguatons, and the rectfer s bond, orm 34, may propery be ap-
proved under secton 190.129, and f the appcant s entted to a permt, he w
note hs recommendaton for approva on a copes of the bond and notce, and
hs approva on a copes of the pat and pans, and w forward a copes
of the bond and notce, and the orgna copy of the pat and pans, and other
quafyng documents, together wth a copy of a nspecton reports, to the
Commssoner for fna acton. The ssuance of a permt shoud be wthhed
pendng approva by the Commssoner of the notce, bond, and other quafyng
documents requred under the nterna revenue aws.
Sec. 190.131. Dsapprova of quafyng documents. If the dstrct supervsor
of the aw and reguatons, or that the stuaton of the rectfyng pant s such
as woud enabe the rectfer to defraud the Unted States, or the bond shoud be
dsapproved under secton 190.129, he w note hs recommendaton for dsap-
prova on the bond, and w forward to the Commssoner for fna acton such
copes of the quafyng documents as are requred to be so forwarded by the
precedng secton n the case of recommendaton for approva, together wth a
copy of a nspecton reports. Where a bond s recommended for dsapprova,
the dstrct supervsor w furnsh the Commssoner wth a fu statement of
the reasons therefor. If the appcant s not entted to a permt, the dstrct
supervsor w, upon dsapprova of the appcaton therefor, return a copes
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to the Commssoner.
Seo. 190.132. Dsposton of quafyng documents. Where the rectfer s bond,
orm 34, notce. orm 27- , and speca appcaton, orm 1 13, f any, are
approved by the Commssoner, the dstrct supervsor w, upon recept of
approved copes of such documents from the Commssoner, as provded n rt-
ce III, forward one copy of the bond, notce, speca appcaton, pat, pans,
and other quafyng documents to the rectfer and w retan one copy of
such quafyng documents for the fe. The e tra copy of the speca appca-
ton, orm 1 13, f any, receved from the Commssoner w be paced by the
dstrct supervsor n the fe of the dster. If the rectfer s bond, or speca
appcaton, s dsapproved, the dstrct supervsor w, upon recept from
the Commssoner of the dsapproved copes of such documents and other
quafyng documents submtted therewth, return a copes of the quafyng
documents to the propretor, wth advce as to the reasons for such dsap-
prova.
Sec. 190.157. Rectfer s speca ta . very person engaged In busness as a
rectfer, wthn the meanng of the term as defned n rtce I , must fe
orm 11 wth the coector and pay speca ta as such. Persons rectfyng
ess than 500 barres a year, countng 40 proof gaons to the barre (1. e., ess
than 20,000 proof gaons), must pay speca ta at the rate of 110 per year,
and persons rectfyng 500 barres or more a year (I. e., 20,000 proof gaons or
more) must pay speca ta at the rate of 220 per year. ( Sees. 1 00(a),
3250(f)(1), I. R. C.)
Seo. 190.158. Change to hgher or ower rate. rectfer who has pad the
speca ta as a rectfer of ess than 500 barres and who e ceeds that quantty
must mmedatey pay the speca ta due at the hgher rate ( 220 per year)
to the coector for the fu perod, and obtan a new speca ta stamp. The
rectfer may submt the stamp representng the speca ta pad at the ower
rate to the coector wth a cam on orm 843 for redempton thereof. rect-
fer who has pad speca ta at the hgher rate, but actuay rectfes ess than
500 barres of sprts durng the year, may kewse procure a new speca ta
stamp at the ower rate ( 110) and submt the stamp representng the ta pad
at the hgher rate to the coector wth a cam on orm 843 for redempton
thereof. ( Sees. 1 50(a), 3250(f)(1), 3304, I. R. C.)
Seo. 190.220. ddtona wne ta . Where the ta abe grade of wne s n-
creased by bendng, addtona gaonage wne ta must be pad on the resutant
product representng the dfference between the ta orgnay pad on the wne
and the ta due on the bended product, as provded n rtce I . or
e ampe, f 100 gaons of wne contanng 20 per cent acoho, on whch wne
ta n the amount of 18 has been pad, are bended wth 100 gaons of wne
contanng 12 per cent acoho, on whch wne ta n the sum of has been
pad, makng a tota wne ta pad on the two wnes of 24, and the resutant
product contans 1 per cent acoho, the wne ta on whch woud amount to
3 , addtona wne ta of 12 must be pad on the bended product, regardess
of whether or not the 30-cent rectfvng ta s ncurred by the bendng. (
Sees. 3030(a), 3190, I. R. C.)
Sec. 190.2 7. ermouth. ermouth made at a rectfyng pant, whch s sub-
|ect to the rect fyng ta of 30 cents per proof gaon mposed by secton
2800(a)(5), I. R. C, s n addton thereto sub|ect to the ta mposed upon
vermouth by secton 3030(a) (1), as amended by secton 3190, I. R. C, whch ta
s as foows:
(a) On vermouth contanng not more than 14 per centum of absoute acoho,
cents per wne gaon, the per centum of acoho to be reckoned by voume and
not by weght
(b) On vermouth contanng more than 14 per centum and not e ceedng 21
per centum of absoute acoho, 18 cents per wne gaon
(c) On vermouth contanng more than 21 per centum and not e ceedng 24
per centum of absoute acoho, 30 cents per wne gaon
(tf) vermouth contanng more than 24 per centum of absoute acoho
by voume (e cept vermouth contanng ta -pad sweet wne, ctrus-frut wne,
peach wne, cherry wne, berry wne, aprcot wne, prune wne, pum wne,
pear wne, or appe wne, fortfed, respectvey, wt grape brandy, ctrus-frut
brandy, peach brandy, cherry brandy, berry brandy, aprcot brandy, prune
brandy, pum brandy, pear brandy, or appe brandy) sha be cassed as ds-
ted sprts and sha be ta ed accordngy.
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Sec. 190.2 8. Lqueurs, cordas, etc., ta abe under secton 3030 a)(2),
I. R. C Secton 3030(a)(2), as amended by secton 3190, L R. C, mposes a
ta on certan products of rectfcaton, as foows:
On each botte or other contaner of queurs, cordas, or smar compound ,
by whatever name sod or offered for sae, contanng sweet wne, ctrus-frut
wne, peach wne, cherry wne, berry wne, aprcot wne, prune wne, pum
wne, pear wne, or appe wne, fortfed, respectvey, wth grape brandy, ctrus-
frut brandy, peach brandy, cherry brandy, berry brandy, aprcot brandy, prune
brandy, pum brandy, pear brandy, or appe brandy, 1 cents on each one-haf
pnt or fracton thereof. Lqueurs, cordas, and smar compounds on whch a
ta s mposed and pad under secton 3030(a) (2), as amended by secton 3190,
I. R. C, are e empt from the 30-cent rectfcaton ta . y queurs, cordas, or
smar compound s meant those products that contan not ess than
2 per cent by weght of sweetenng matera and possess the taste, aroma,
and characterstcs generay attrbuted to queurs and cordas.
Sec. 190.270. Carbonated and sparkng wnes. The carbonatng of ta -pad
wnes, ether by secondary fermentaton of the wne wthn the botte or con-
taner or by chargng the wne artfcay wth carbon do de, must be done at
a rectfyng pant. The carbonated wne s sub|ect to the rectfcaton ta of
SO cents per proof gaon, and, In addton thereto, the ta mposed by secton
3030(a)(2), as amended by secton 3190, I. R. C, upon sparkng wne, or art-
fcay carbonated wne, as the case may be, must be pad. Ths ta s as
foows:
(a) On each botte or other contaner of champagne or sparkng wne, 3
(5) On each botte or other contaner of artfcay carbonated wne, 1
(c) ny of the foregong artces contanng more than 24 per centum of
absoute acoho by voume sha be cassed as dsted sprts and sha be
ta ed accordngy.
Sec. 190.272. ended wnes. ny bendng of ta -pad wnes by rectfers,
e cept the bendng of domestc ta -pad wnes for the soe purpose of perfectng
such wnes accordng to recognzed commerca standards, sub|ects the resutant
product to the 30-cent rectfcaton ta . Where the ta abe cass of wne s
ncreased by bendng wnes wth each other, addtona wne ta due on the
bended wnes must be pad, regardess of whether or not the 30-cent rectfca-
ton ta s ncurred by such bendng. Ths addtona wne ta represents the
dfference between the wne ta due on the bended wne under ts new cassf-
caton and the ta prevousy pad on the wnes used for such bendng. Sec-
ton 3030(a) (1), as amended by secton 3190, I. R. C, mposes a ta upon a
st wnes, and a artfca or mtaton wnes or compounds sod as st wne,
at the foowng rates:
(a) On wnes contanng not more than 14 per centum of absoute acoho,
cents per wne gaon, the per centum of acoho to be reckoned by voume and
not by weght
( ) On wnes contanng more than 14 per centum and not e ceedng 21 per
centum of absoute acoho, 18 cents per wne gaon
(c) On wnes contanng more than 21 per centum and not e ceedng 24 per
centum of absoute acoho, 30 cents per wne gaon
(d) such wnes contanng more than 24 per centum of absoute acoho
by voume sha be cassed as dsted sprts and sha be ta ed accordngy.
Sf c. 190.290. pprova by offcer assgned to pant. If the offcer assgned
to the pant s satsfed that orm 237 covers awfu, ta -pad sprts and s
correcty e ecuted, he w, after ascertanng from the approved formua the
rate of ta appcabe, note hs approva on each copy of the form, sub|ect
to payment of ta , fng In the date of approva and the ta or ta es to
whch the sprts are sub|ect, as Ta at 30 cents per proof gaon, Ta at cents per wne gaon, and Ta at cents per haf-pnt or frac-
ton thereof n each botte, as the case may be (see rtce I ). The
offcer w then return a copes of orm 237 to the rectfer.
Sec. 190.341. Gauge. When preparng appcaton for the dumpng of sprts
for bottng wthout rectfcaton, the rectfer w enter n the space provded
therefor on orm 230 the detas of the wthdrawa gauge for ta -payment. n
actua gauge of the sprts dumped w, however, be made n the bottng tank
after they have been reduced to bottng proof, where such reducton s per-
mssbe, and before they are reeased by the Government offcer for bottng,
and the detas of such gauge w be entered n the space provded therefor
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on the form. Where sprts are to be botted from the orgna package, as
provded n secton 190.347, the detas of the wthdrawa gauge for ta -
payment w kewse be entered on orm 230 at the tme the appcaton s
prepared, but an actua gauge w be made before the bottng begns and
the detas of such gauge w aso be entered on the form.
Sec. 190.349. Transfer of products to wne bottng room. Where the rectfer
desres to botte from the orgna package wnes, cordas, or queurs authorzed
by the dstrct supervsor to be so botted, such packages w be paced n the
wne bottng room and orm 230 w be prepured and submtted to the
Government offcer assgned to the rectfyng pant, or to the dstrct super-
vsor or desgnated offcer, for approva but no bottng w be done unt
the packages have been nspected by an authorzed Government offcer and
an actua gauge of the sprts has been made and the detas of such gauge
entered on orm 230. When wnes, cordas, or queurs are to be botted n
the wne bottng room, the rectfer w attach one copy of the approved
orm 230 to the door of such room.
Sec. 190.3 0. Rebottng, reabeng, and restampng of botted sprts. Where
dsted sprts packaged n bottes are to be rebotted for domestc sae, the
bottes. If of a capacty of one-haf pnt or greater and not e ceedng 1 gaon,
must conform to the requrements of Reguatons 13 (2 C R, Part 175). The
new abe must be covered by an approprate certfcate of abe approva or a
certfcate of e empton from abe approva. If the new abe s covered by a
certfcate of e empton from abe approva t must conform to the requre-
ments of Reguatons 13. If the sprts have eft the possesson of the orgna
botter and are to be reabeed wthout rebottng, authorzaton to reabe the
sprts must be obtaned n accordance wth reguatons ssued under the ed-
era coho dmnstraton ct and submtted to the Government offcer as-
sgned to the pant, or to the dstrct supervsor or other desgnated approvng
ofcer. Whenever botted dsted sprts are dumped for rebottng, the red
strp stamps on the bottes must be destroyed at the tme of dumpng, and new
red strp stamps must be aff ed to the bottes n whch the sprts are rebotted.
( Sees. 2803, as amended, 2871, L R. C.)
Skc 190.403. change and redempton of stamps. Unused red strp stamps,
n quanttes of the vaue of 5 or more, ssued under secton 203 of the Lquor
Ta ng ct of 1934 or subsecton (b) of secton 2803, Interna Revenue Code,
may be e changed for other stamps of the same knd and n any prescrbed
denomnaton, or the vaue thereof may be refunded, provded that a cam
for such e change or refund, estabshng the awfu ssuance and ownershp
of the stamps, s fed wth the coector of nterna revenue who ssued the
stamps (1) wthn two years after the date on whch such stamps were awfuy
ssued or (2) f the stamps were awfuy ssued pror to une 24, 1940, wthn
two years from the atter date: Provded, however, That the vaue of unused
stamps whch have been destroyed may be refunded upon the fng of a cam
as provded heren wth proof to the satsfacton of the Commssoner of the
destructon of the stamps. Cams for e change of stamps w be fed on orm
1579 and cams for refund of the vaue of stamps on orm S43, n accordance
wth procedure prescrbed by the Commssoner. ( Sec. 2803, I. R. C, as
amended: See. 3, ct of une 14, 1940 (Pubc, No. 054, Seventy-s th Congress).)
Sec. 190.408. Wthhodng reca e of sprts. Whore rectfers of dsted
sprts are found to be usng abes other than those covered by a certfcate
of approva of abes or a certfcate of e empton from abe approva, or to
be aff ng abes covered by such certfcates to sprts whch do not conform
to such abes, or where rectfers bottng sprts mported n buk do not
have n ther possesson such certfcates of orgn, age, and cass and type
as are requred, the offcer w wthhod reease of the sprts and w make
a report of the facts to the dstrct supervsor, accompaned by copes of the
abes n queston. (Sec. 595, 49 Stat., 19(15 27 U. S. C, Supp., 205.)
Sec. 190.4 9. Dsposton of red strp stamp . unused red strp stamps,
f any, beongng to the propretor at the tme of permanent dscontnuance
of busness w be nventored by denomnaton, sera number, and quantty,
by the storekeeper-gauger or other offcer desgnated by the dstrct supervsor
to perform such duty. The offcer w dever such stamps to the propretor
and take hs recept therefor, n trpcate. When deverng the stamps the
offcer w advse the propretor that the vaue of the stamps, f In quanttes
of the vaue of 5 or more, may be refunded, provded that a cam for such re-
fund on orm 843, estabshng the awfu ssuance and ownershp of the
stamps, Is fed wth the coector of nterna revenue who ssued the stamps
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(1) wthn two years after the date on whch such stamps were awfuy
Issued or (2) f the stamps were awfuy ssued pror to une 24, 1940, wthn
two years from the atter date or that such unused stamps may be destroyed
n the presence of the Government offcer and the propretor thereby reeved
from further accountabty for the stamps. If the stamps are not surrendered
to the coector for refund of ther vaue or are not destroyed, the propretor
must account for the stamps each month by renderng orm 9 , n dupcate,
to the dstrct supervsor. The offcer sha make a notaton on the recept as
to the dsposton made or to be made of the stamps. One copy of the recept
w be devered to the propretor and the orgna and one copy w be de-
vered to the dstrct supervsor, who w forward the orgna to the Com-
mssoner. ( : Sec. 2803, I. R. C, as amended Sec. 3, ct of une 24, 1940
(Pubc, No. 54, Seventy-s th Congress).)
Gut T. everno,
ohn L. Suvan,
( ed wth the Dvson of the edera Regster ugust 24, 1940, 11.01 a. m.)
Reguatons 18 (1940), Secton 192.113: pp- 1940-3G-10413
caton of surety for reef from bond. T. D. 5005
TITL 2 INT RN L R NU . C PT R I. P RT 192. M NT D M LT
LI UORS.
ppcaton of surety for reef from bond.
Offce of the Secretary.
Washngton, D. C.
Secton 192.113 of Reguatons 18 (Part 192, Tte 2 , Code of
edera Reguatons, 1940 Sup.) s amended to read as foows:
Sec. 192.113. ppcaton of surety for reef from ootd. surety on any
bond requred by these reguatons may at any tme n wrtng notfy the
prncpa and the dstrct supervsor n whose offce the bond s on fe that
he desres after a date named, whch sha be at east 0 days after the date
of the notfcaton, to be reeved of abty under sad bond. The notce
sha be e ecuted n trpcate by the surety, who sha dever one copy to
the prncpa and the other two to the dstrct supervsor, who w retan
one copy and transmt the remanng copy to the Commssoner. If such
notce s not thereafter In wrtng wthdrawn, the rghts of the prncpa as
supported by sad bond sha be termnated on the date named n the notce,
and the surety sha be reeved, n the case of a brewer s bond, orm 150 ,
from abty for fermented quor produced whoy subsequent to the date
named n the notce. Ths notce may not be gven by an agent of the suety
uness t Is accompaned by a power of attorney, duy e ecuted by the surety,
authorzng hm to gve such notce, or by a verfed statement that such power
of attorney s on fe wth the Department.
(Ths Treasury decson s prescrbed pursuant to the authorty
conferred by secton 3170 of the Interna Revenue Code.)
Gut T. everno,
ohn L. Suvan,
( ed wth the Dvson of the edera Itegster ugust 29, 1940, 4.01 p. m )
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1940-53-10548
T. D.502
mendng the Gangng Manua.
Offce of Commssoner of Interna, Revenue,
Washngton, D. C.
y vrtue of and pursuant to the provsons of sectons 2878 and
2883, Interna Revenue Code, paragraph 48 of the Gaugng Manua,
approved November 21, 1938, s hereby amended to read as foows:
Par. 48. In eu of the marks and brands requred by paragraphs 55, 5 , and
57, when brandy s to be removed n packages from a dstery or from a
storage tank n an nterna revenue bonded warehouse, mmedatey and drecty
to the fortfyng room of a wnery on contguous premses under the mmedate
supervson of the storekeeper-gauger, there w be egby cut or stenced
upon the head of the package n fgures and etters arge enough to be easy
read, the gross weght, tare, net weght, wne gaons, proof, proof gaons (re-
tanng fractons of gaons n a nstances to hundredths), the sera number
of the package, the name of the dster, the regstered number of the dstery,
the cty or town and State n whch the dstery Is ocated, the knd of coop-
erage, and the date the package s fed. The date of orgna entry for depost
must aso be cut or stenced on the head of packages fed from warehouse
storage tanks. The knd, n accordance wth paragraph 0 ( ) and (f) of ths
Manua, w aso be cut or stenced on the head of the package n etters not
ess than 1 nch n heght.
Guy T. f verng,
pproved December 21, 1940.
erbert . Gaston,
( ed wth the Dvson of the edera Regster December 2 , 1940, 10.10 a. m.)
1940-42-10458
T. D. 5013
mendng the Gaugng Manua.
Washngton, D. C.
y vrtue of and pursuant to the provsons of sectons 2808 and 317 ,
Interna Revenue Code, paragraph 85 of the Gaugng Manua, ap-
proved November 21, 1938, s hereby amended to read as foows:
Par. 85. When brandy Is wthdrawn from a bonded warehouse for fortfcaton
of wne, there w be cut on the stave to the rght of the bung stave of each
package wthdrawn, begnnng n the mdde ad e tendng toward the Govern-
ment head, n the order named, the gross weght, tare (ascertaned as heren
provded), net weght, wne gaons, proof, and proof gaons, determned at the
tme of wthdrawa, e cept when wthdrawn on the orgna gauge as provded n
paragraph 8, or when the packages are to be removed to a bonded wnery for
mmedate fortfcaton of wne, where such bonded wnery s n the mmedate
vcnty of the bonded warehouse and s operated by the propretor of the ware-
house or a subsdary, the supervsor to determne from a the crcumstances n
29021T 41 28
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42
each case whether the warehouse and bonded wnery are n the Immedate vcnty
of each other. In the case of meta packages, such marks w be pany and
duraby stenced n the correspondng space on the sde of the package, e cept
when not requred as provded above.
Gut T. evernq,
D. W. e,
1940-29-10338
T.D. 4982
asc permt procedure under edera coho dmnstraton ct.
Treasubt Department,
Offce of Commssoner of Intern a Revenue.
Washngton, D. C.
Secton 1. y vrtue of and pursuant to the provsons of the
edera coho dmnstraton ct, as amended (U. S. C. Sup.,
Tte 27), secton 3170 of the Interna Revenue Code (53 Stat., Part
1), and secton 1 1 of the Revsed Statutes (U. S. C, Tte 5, secton
22), Part 171 of Tte 2 of the Code of edera Reguatons s hereby
amended by nsertng between Subpart ( ) and Subpart C thereof
a new subpart, desgnated ( ), to read as foows:
Subpart ( ) asc Permt Procedure Under edera coho
dmnstraton ct.
Sec. 171.4c. Deegaton of functons to dstrct supervsor . The power and
duty heretofore vested n the Deputy Commssoner of the ureau of Interna
Revenue n charge of the coho Ta Unt, by Treasury Department Order
No. 30, dated une 12, 1940 T. D. 4974, C. . 1940-1, 2091 (5 . R., 2212 DI),
to ssue, amend, deny, revoke, suspend, and annu basc permts under the
provsons of the edera coho dmnstraton ct, sha contnue to be
e ercsed by hm, and are aso hereby deegated to dstrct supervsors of the
coho Ta Unt, to be e ercsed by them, sub|ect to the supervson and
drecton of the sad Deputy Commssoner.
Sec. 171.4d. Procedure. cept as otherwse provded heren, the procedure
prescrbed by e stng reguatons for the ssuance, amendment, and dena of
permts, ssuance of ctatons, hodng of hearngs, revocaton of permts, and
appeas to the Commssoner under Part II of Subchapter C of Chapter 2 of the
Interna Revenue Code s hereby e tended to the Issuance, amendment, dena,
revocaton, suspenson, and annument of basc permts under the edera coho
dmnstraton ct, n so far as appcabe and n so far as such procedure s
not n confct wth the provsons of such ct. ppeas to the Deputy Com-
mssoner n charge of the coho Ta Unt from orders denyng permts sha
be taken n conformty wth the procedure appcabe to appeas from orders
revokng permts.
(a) n appcaton for basc permt must be fed, and permt ssued, to
cover each ndvdua pant or premses where any of the busnesses specfed
In secton 3 of the edera coho dmnstraton ct s engaged n, such
appcaton to be fed wth and permt ssued by the dstrct supervsor for
the dstrct wheren such pant or premses s ocated, provded, that In the
case of persons engaged In the busness of mportng nto the Unted States
dsted sprts, wne, or mat beverages, and n the case of persons engaged
n the busness of purchasng for resae at whoesae dsted sprts, wne, or
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mat beverages, ony one basc permt sha be requred, whch basc permt
sha be ssued by the dstrct supervsor of the dstrct wheren the appcant
has hs man offce or pace of busness. In the case of mporters or whoesaers
mantanng branch offces or paces of busness, there sha be kept posted and
avaabe for nspecton at a tmes n each such branch offce or pace of
busness a copy of the basc permt, and a copy of the basc permt sha aso be ted
wth the approprate dstrct supervsor.
( ) On or before September 1, 1940, basc permts n fu force and effect
authorzng the warehousng and bottng of dsted sprts at more than one
bottng pant sha be superseded by separate permts coverng each bottng
pant, such permts to be ssued as a matter of rght upon the tng of app-
caton n proper form wth the approprate dstrct supervsor.
(c) In order to nsure unformty of admnstratve acton no proceedngs
sha be Insttuted by a dstrct supervsor to revoke, suspend, or annu any
basc permt ssued under the edera coho dmnstraton ct uness and
unt a fu report of the facts upon whch such proceedngs are contempated
has been forwarded to the Deputy Commssoner of Interna Revenue n charge
of the coho Ta Unt for revew and hs approva to the nsttuton of such
proceedngs Obtaned.
(d) ny provsons of Reguatons No. 1 Reatng to the Issuance, Revocaton,
Suspenson, and nnument of asc Permts, whch are nconsstent herewth,
are repeaed to the e tent of such nconsstency.
Sec. 2. These reguatons sha take effect 15 days after the date
of fng wth the Dvson of the edera Regster.
Stewart erkshre,
Deputy Commssoner of Interna Revenue.
pproved uy 3, 1940.
Gut T. everng,
pproved uy 9, 1940.
ohn L. Suvan,
1940-40-10442
T. D.5009
Reabeng procedure under edera coho dmnstraton ct
Washngton, D. C.
Dstrct Supervsors and Others Concerned:
y vrtue of and pursuant to secton 5(e) of the edera coho
dmnstraton ct, as amended (U. S. C, Sup., Tte 27), secton
3170 of the Interna Revenue Code (53 Stat., Part 1), and secton 1 1
of the Revsed Statutes (U. S. C, Tte 5 secton 22), rtce III,
secton 30( ), of Reguatons 5, reatng to Labeng and dvertsng
of Dsted Sprts (27 C R, 5.30( )), s amended to read as
foows:
( ) teraton of abes.
(1) It sha be unawfu for any person to ater, mutate, destroy, obterate
or remove any mark, brand, or abe upon dsted sprts hed for sae n nter-
state or foregn commerce or after shpment theren, e cept as authorzed by
edera aw, or e cept as provded n paragraph (2) of ths subsecton Pro-
vded, That the dstrct supervsors of the coho Ta Unt may, upon wrtten
appcaton, permt addtona abeng or reabeng of botted dsted sprts
for purposes of compance wth the requrements of ths artce or of State aw.
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(2) No appcaton for permsson to reabe botted dsted sprts need be
made n any case where there s added to the botte, after remova from customs
custody or from the bottng premses, a abe dentfyng the whoesae or reta
dstrbutor thereof, and contanng no references whatever to the characterstcs
of the product.
Dwght . vs,
ctng Deputy Commssoner of Interna Revenue.
Guy T. everng,
ohn L. Suvan,
1940-43-104 4
T. D. 5014
oatons of edera coho dmnstraton ct.
Washngton, D. C.
y vrtue of and pursuant to the provsons of the edera coho
dmnstraton ct, as amended (U. S. C. Sup., Tte 27), secton 3170,
Interna Revenue Code (53 Stat., Part 1), and secton 1 1 of the Re-
vsed Statutes (U. S. C, Tte 5, secton 22) Part 171 of Tte 2 ,
Code of edera Reguatons, s hereby amended by nsertng a new
subpart, desgnated (C), to read as foows:
Subpart (C) . oatons of edera coho dmnstraton ct.
Sec. 171.4e. Investgatons. The functons reatng to nvestgatons under the
edera coho dmnstraton ct heretofore authorzed to be e ercsed by the
Deputy Commssoner of the ureau of Interna Revenue n charge of the coho
Ta Unt, through the asc Permt and Trade Practce Dvson, by Treasury
Department Order No. 30, dated une 12. 1040 T. D. 4974, C. . 1940-1, 2 9 (5
R 2212 DI), w be e ercsed hereafter by hm through the dstrct supervsors
and the Permssve, nforcement, and asc Permt and Trade Practce Dvsons,
coho Ta Unt.
Skc. 171.4f. Offers n compromse. The functons reatng to offers n compro-
mse under the edera coho dmnstraton ct heretofore authorzed to be
e ercsed by the Deputy Commssoner of the ureau of Interna Revenue n
charge of the coho Ta Unt, through the asc Permt and Trade Practce
Dvson, by Treasury Department Order No. 30, dated une 12, 1940 ( 5 R 2212
DI), w be e ercsed hereafter by hm through the dstrct supervsors and the
Permssve and asc Permt and Trade Practce Dvsons, coho Ta Unt.
Stewart erkshre,
Deputy Commssoner, coho Ta Unt.
Guy T. everng,
C ommssoner.
pproved October 1 , 1940.
erbert . Gaston,
( ed wth the Dvson of the edera Regster October 17,1940,10.32 a. m.)
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M RC NT M RIN CT.
1940-50-10520
T. D.5023
Genera Order No. 35 of the Unted States Martme Comms-
son. Premnary reguatons for estabshment of constructon
reserve funds under secton 511 of the Merchant Marne ct, 183 ,
as amended.
Trkasurt Department,
Offce of the Secretary of the Treasury,
Washngton, D. C.
Unted States Martme Commsson,
Washngton, D. C.
To Offcers and mpoyees of the Treasury Department, the Unted
States Martme Commsson, and Others Concerned:
Secton 32.0. Introductory. n ct entted n ct to amend
the Merchant Marne ct, 193 , as amended, approved October 10,
1940 (Pubc, No. 840, Seventy-s th Congress, thrd sesson), adds
to the Merchant Marne ct, 193 (49 Stat., 1985), as amended (4
U. S. C, Sup., sectons 1101-1279), secton 511 provdng for con-
structon reserve funds to be estabshed, mantaned, e pended, and
used n accordance wth the provsons of the secton and rues or
reguatons to be prescrbed |onty by the Unted States Martme
Commsson, herenafter referred to as the Commsson, and the Sec-
retary of the Treasury. Pursuant to the authorty granted by the
sad secton 511 and by the nterna revenue aws, and n order to
permt the mmedate fng of appcatons for the estabshment of
constructon reserve funds pendng the promugaton of comprehen-
sve reguatons under sad secton 511, the foowng premnary
reguatons are hereby prescrbed (Pubc, No. 840, Seventy-s th
Congress, thrd sesson, and secton 3791, 53 Stat., 4 7 2 U. S. C,
Sup., 3791):
Sec. 32.1. ppcaton to estabsh fund. ny person camng
to be entted to estabsh a constructon reserve fund under the
provsons of secton 511 may make appcaton n wrtng to the
ommsson for permsson to estabsh such fund, whch fund sha
be n the form of a cash fund estabshed wth a depostory approved
by the Commsson, and sha be sub|ect to the |ont contro of
the Commsson and the appcant. The appcaton may be n etter
form, sha be furnshed n trpcate, sha state whether the app-
cant s a ctzen wthn the meanng of secton 2 of the Shppng ct,
191 , as amended, and secton 905(c) of the Merchant Marne ct,
193 , as amended, and sha show the foowng:
(a) The name of the appcant and hs prncpa busness address
(b) The status of the appcant, . e., ndvdua, partnershp, cor-
poraton, etc.:
(c) brer statement of the nature of the busness of the app-
cant, ncudng the trade route or servce n whch engaged
(d) The amount of the frst depost whch the appcant proposes
to make n such fund and a bref descrpton of the transacton
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430
from whch the funds consttutng such frst depost were or w
be derved, ncudng dentfcaton of the vesse or vesses nvoved
e) bref descrpton of the program of the appcant for the
acquston of new vesses, ncudng a descrpton of the vesses
to be acqured, and a statement whether such program s for the
purpose of repacng vesses requstoned or purchased by the
Unted States
(/) The name and address of the proposed depostory of the fund,
whch sha be a bank wthn the meanng of secton 104 of the
Interna Revenue Code and
(g) The agreement of the appcant that the fund w be sub|ect
to the provsons of secton 511, to these premnary reguatons,
and to the comprehensve reguatons to be promugated by the Com-
msson and the Secretary of the Treasury wth respect to the estab-
shment, mantenance, e pendture, and use of such constructon
reserve funds, and that upon the promugaton of such comprehen-
sve reguatons the appcant w compy therewth as to matters and
thngs done pursuant to these premnary reguatons wthn such
tme and n such manner as the Commsson and the Secretary of the
Treasury sha requre.
(Pubc, No. 840, Seventy-s th Congress, thrd sesson, and sec-
ton 3791, 53 Stat., 4 7 2 U. S. C, Sup. 3791.)
Sec. 32.2. ont contro of fund. If the appcaton and the depos-
tory are approved by the Commsson, the Commsson sha adopt a
resouton wth respect to the estabshment of the constructon re-
serve fund wth the depostory named n the appcaton, and the
makng of the depost theren set forth, and provdng for the |ont
contro of the Commsson and the appcant over such fund.
certfed copy of such resouton sha be furnshed to the depostory.
(Pubc, No. 840, Seventy-s th Congress, thrd sesson, and secton
3791, 53 Stat., 4 7 2 U. S. C. Sup., 3791.)
Sec. 32.3. stabshment of fund. Upon devery to the depostory
of the copy of the resouton of the Commsson and the devery by
the appcant to such depostory of a smar agreement or resouton
n form and substance as prescrbed by the Commsson, the appcant
may make the depost set forth n ts appcaton and n the Comms-
son s resouton. (Pubc, No. 840, Seventv-s th Congress, thrd
sesson, and secton 3791, 53 Stat., 4 7 2 U. S. C, Sup., 3791.) _
Sec. 32.4. dmnstraton of fund. Subsequent to the makng of
such depost the appcant may contract for the acquston or construc-
ton of a new vesse as defned n the ct. contract for the acqus-
ton or constructon of such new vesses w not be recognzed, however,
for the purposes of secton 511 uness sad secton and these prem-
nary reguatons and the comprehensve reguatons to be promugated
under secton 511 have been comped wth wthn such tme and n
such manner as may be prescrbed by the Secretary of the Treasury
and the Commsson. Pror to the promugaton of comprehensve
reguatons, no wthdrawas from the constructon reserve fund w be
permtted, provded, however, that n e ceptona crcumstances the
Commsson may permt the temporary use of other funds of the app-
cant for the purpose of makng necessary down payments on contracts
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for the constructon and acquston of new vesses, reservng to the
appcant the rght to remburse tsef therefor out of the constructon
reserve fund to the e tent permtted by, and sub|ect to the provsons
of, the comprehensve reguatons. (Pubc, No. 840. Seventy-s th
Congress, thrd sesson, and secton 3791, 53 Stat., 4 7 2 U. S. C,
Sup., 3791.)
Grv T. everno,
erbert . Gaston,
y order of the Unted States Martme Commsson:
W. C. PeeT| r.,
Secretary.
November 29,1940.
( ed wth the Dvson of the edera Regster December 2, 1W0, 11.58 a. m.)
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432
PU LIC S L RY T CT O 1939.
1940-31-10359
Mm.507
Offcers and empoyees of States or potca subdvsons thereof
Compensaton pad Indrecty by the Unted States Reef from
addtons to ta for faure to fe return, neggence and fraud.
Washngton, D. C, uy 8,1940.
approved une 25, 1940 (Pubc, No. 5 , Seventy-s th Congress,
thrd sesson), whch amends secton 205 of the Pubc Saary Ta
ct of 1939 (Pubc, No. 32, Seventv-s th Congress, frst sesson,
C. . 1939-1 Part 1 , 428) to read as foows:
Sec. 205. Compensaton sha not be consdered as compensaton wthn the
meanng of sectons 201, 202, and 203 to the e tent that t s pad drecty or
ndrecty by the Unted States or any agency or nstrumentaty thereof. If
the amount of the defcency n ncome ta for any ta abe year begnnng
before anuary 1, 1939, attrbutabe to compensaton pad ndrecty by the
Unted States, or any agency or nstrumentaty thereof, for persona servce
as an offcer or empoyee of a State, or any potca subdvson thereof, or any
agency or nstrumentaty of any of the foregong, s pad on or before March
15, 1941, then wth respect to faure to pay such amount or make return of
such compensaton: (a) No crmna penaty sha appy and ( ) the addtons
to ta provded n sectons 291 and 293 of the Interna Revenue Code sha not
appy.
2. Sectons 291 and 293 of the Interna Revenue Code provde:
Sec. 291. aure to e Return.
In case of any faure to make and fe return requred by ths chapter, wthn
the tme prescrbed by aw or prescrbed by the Commssoner n pursuance
of aw, uness t s shown that such faure s due to reasonabe cause and not
due to wfu negect, there sha be added to the ta : 5 per centum f the
faure s for not more than 30 days wth an addtona 5 per centum for each
addtona 30 days or fracton thereof durng whch such faure contnues, not
e ceedng 25 per centum n the aggregate. The amount so added to any ta
sha be coected at the same tme and n the same manner and as a part
of the ta uness the ta has been pad before the dscovery of the negect,
n whch case the amounts so added sha be coected n the same manner as
the ta . The amount added to the ta under ths secton sha be n eu of the
25 per centum addton to the ta provded n secton 3 12(d)(1).
Sec. 293. ddtons to the Ta n Case of Defcency.
(a) Neggence. If any part of any defcency s due to neggence, or nten.
tona dsregard of rues and reguatons but wthout ntent to defraud, 5 per
centum of the tota amount of the defcency (n addton to such defcency)
sha be assessed, coected, and pad n the same manner as f t were a def-
cency, e cept that the provsons of secton 272(). reatng to the proratng
of a defcency, and of secton 292. reatng to Interest on defcences, sha
not be appcabe.
(b) rad. If any part of any defcency s due to fraud wth ntent to
evade ta , then 50 per centum of the tota amount of the defcency (n add-
ton to such defcency) sha be so assessed, coected, and pad, n eu of the
50 per centum addton to the ta provded n secton 3012(d)(2).
Smar provsons are contaned n sectons 291 and 293 of the
Revenue ct of 1938 and the correspondng sectons of the pror
Revenue cts.
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3. In genera, sectons 201, 202, and 203 of the Pubc Saary Ta
ct of 1939 prevent the ta aton for years begnnng pror to anu-
ary 1, 1939, of the compensaton for persona servces of the offcers
and empoyees of the States and ther potca subdvsons and
ther agences and nstrumentates. Secton 205 of the Pubc Sa-
ary Ta ct of 1939 makes the reef provsons of sectons 201, 202,
and 203 nappcabe to compensaton receved by the offcers and em-
poyees of the States and ther potca subdvsons and ther agen-
ces and nstrumentates to the e tent such compensaton s pad
drecty or ndrecty by the Unted States or any of ts agences or
nstrumentates.
4. Secton 271 of the Revenue ct of 1938 provdes:
Sec. 271. Defnton of Defcency.
s used In ths tte u respect of a ta mposed by ths tte defcency
means
(a) The amount by whch the ta mposed by ths tte e ceeds the amount
shown as the ta by the ta payer upon hs return but the amount so shown
on the return sha frst be ncreased by the amounts prevousy assessed (or
coected wthout assessment) as a defcency, and decreased by the amounts
prevousy abated, credted, refunded, or otherwse repad n respect of such
ta or
(b) If no amount s shown as the ta by the ta payer upon hs return, or
f no return s made by the ta payer, then the amount by whch the ta e ceeds
the amounts prevousy assessed (or coected wthout assessment) as a de-
fcency but such amounts prevousy assessed, or coected wthout assessment,
sha frst be decreased by the amounts prevousy abated, credted, refunded,
or otherwse repad n respect of such ta .
Smar provsons are contaned n the correspondng provsons
of the pror Revenue cts. In dennng the term defcency, sec-
ton 271 recognzes cases where the ta payer makes a return showng
some ta abty where the ta payer makes a return showng no ta
abty and where the. ta payer fas to make a return. ( rtce
271-1, Reguatons 101.) It as been hed that n case a return s
fed and the bank spaces on the return are fed n, ncudng the
spaces provded for the computaton of the ta , but abty for the
ta s not admtted and s dened, the ta so computed consttutes a
defcency. (I. T. 2400, C. . II-1.138 (1928).)
5. Under secton 205 of the Pubc Saary Ta ct of 1939, as
amended by the Revenue ct of 1940, f the amount of any defcency
n ncome ta for any ta abe year begnnng before anuary 1, 1939,
attrbutabe to compensaton pad ndrecty by the Unted States,
or any of ts agences or nstrumentates for persona servces of an
offcer or empoyee of a State, or any potca subdvson thereof,
or any agency or nstrumentaty of any of the foregong, s pad on
or before March 15. 1941, then wth respect to faure to pay such
amount or make a return of such compensaton, no crmna penaty
sha appy and the addtons to the ta provded n sectons 291 and
293 of the Revenue ct of 1938 and the correspondng sectons of
the pror Revenue cts sha not appy.
. Ta payers comng wthn the purvew of secton 205 of the
Pubc Saary Ta ct of 1939, as amended by secton 401 of the
Revenue ct of 1940, may be cassfed as foows:
(a) Those who have fed returns of ncome but have not pad the
ta attrbutabe to the compensaton pad to them ndrecty by the
Unted States or ts agences or nstrumentates and
(b) Those who have faed to make a return.
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434
In order to obtan the reef granted by secton 205 of the Pubc
Saary Ta ct of 1939, as amended, ta payers fang wthn cass
(a) shoud on or before March 15, 1941, notfy the coector of n-
terna revenue for the dstrct n whch they fed ther returns of
ther desre to obtan such reef and shoud accompany ther notf-
caton wth payment of the defcency attrbutabe to the compensa-
ton pad to them ndrecty by the Unted States or ts agences or
nstrumentates. In order for ta payers fang wthn cass (5)
to obtan such reef, they shoud on or before March 15, 1941, fe
returns accompaned by payment of the defcency attrbutabe to the
compensaton referred to, but the payment shoud not ncude any
addtons to the ta provded n sectons 291 and 293 of the Revenue
ct of 1938 or the correspondng sectons of the pror Revenue cts.
There shoud be attached to such denquent returns a statement that
the ta payer desres to obtan the benefts of the reef granted by
secton 205 of the Pubc Saary Ta ct of 1939, as amended by
sect on 401 of the Revenue ct of 1940.
7. Inqures regardng ths mmeograph shoud refer to the number
thereof and the symbos IT:TM.
Tmothy C. Mooney,
ctng Commssoner.
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MISC LL N OUS.
1940-32-10374
Ct. D. 14 2
ST T ST TUT COMPIL D G N R L L WS O 1927 ( LORID ) D CISION
O SUPR M COURT.
Cam ganst Decedent s state Statute op Lmtaton State
Statute Not ppc abe to Cam or Unted States.
State statute whch provdes that any cam aganst the estate
of n decedent sha be vod f not fed wthn eght months after frst
pubcaton of notce to credtors can not deprve the Unted States
of the rght to enforce a cam acqured by t from the edera
ousng dmnstrator, as assgnee of a cam aganst a certan
estate, and ted after the e praton of the statutory perod. If the
statute undertakes to nvadate the cam of the Unted States be-
cause not fed wthn eght months, t n that sense transgressed the
mts of State power. The Unted States s not bound by State
statutes of mtaton or sub|ect to the defense of aches In enforcng
ts rghts, and st has ts rght of acton aganst the admnstrator
of the estate even though the probate court s to be regarded as hav-
ng no |ursdcton to receve a cam after the e praton of the
specfed perod.
Supbeme Coubt of the Unted States.
The Unted States of merca, pettoner, v. rene Sum-mern, as ncary
dmnstratr of the estate of . . ndrew, Deceased.
310 U. S., 414.
On wrt of certorar to the Supreme Court of the State of orda.
May 27, 1940.
OPINION.
Mr. Chef ustce ughes devered the opnon of the Court.
y a seres of transactons, whch t s unnecessary to revew, the edera
ousng dmnstrator, actng on behaf of the Unted States, became the
assgnee of a cam aganst the estate of one . . ndrew, deceased. Respondent
was apponted ancary admnstratr of that estate by the county |udge of
Pok County, a. Respondent, on ugust 13, 1937, gave notce by pubcaton to
the credtors of the estate to fe proof of ther cams wthn eght months as
requred by the State statute.
The Unted States fed ts cam n the offce of the county |udge on uy 1,
1938, wth a petton askng that the cam be aowed wth the prorty accorded
by the edera statutes (31 U. S. C, 191, 192) and aso assertng that the State
statute as to the tme for fng cams dd not appy to cams of the Unted
States. The county |udge dened the petton, hodng that the State statute
was appcabe and further ad|udgng that the cam of the Unted States be
dsaowed as a cam aganst the estate of the decedent.
The Unted States appeaed to the Crcut Court for Pok County, where the
order of the county |udge Was n a respects affrmed. The |udgment e pcty
decared the cam of the Unted States to be vod, because not ted wthn
the ttn|e prescrbed. n appea to the Supreme Court of orda resuted n
affrmance of the |udgment of the crcut court. (191 So., 842.) We granted
certorar because of the mportance of the queston. (March 25, 1940.)
The statute of orda (secton 5541(92), Comped Genera Laws of 1927)
provdes:
No cam or demand, whether due or not, drect or contngent, qudated
or unqudated, or cam for persona property n the possesson of the persona
representatve or for damages, sha be vad or bndng upon an estate, or upon
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43
the persona representatve thereof, or upon any her, egatee, or devsee of the
decedent uness the same sha be n wrtng and contan the pace of resdence
and post offce address of the camant and sha be sworn to by the camant,
hs agent or attorney, and be fed n the offce of the county |udge grantng
etters. ny such cam or demand not so fed wthn eght months from the tme
of the frst pubcaton of the notce to credtors sha be vod even though the
persona representatve has recognzed such cam or demand by payng a porton
thereof or Interest thereon or otherwse: .
The cam assgned to the edera ousng dmnstrator actng on behaf
of the Unted States became the cam of the Unted States, and the Unted
States thereupon became entted to enforce t. ( ct of une 27, 1934, 48 Stat..
124a Compare Graves v. New York e re. O eefe, 30 U. S., 4 , 477 Ptt man
v. ome Owners Loan Corporaton, 308 U. S., 21, 32, 33.)
It s we setted that the Unted States s not bound by State statutes of
mtaton or sub|ect to the defense of aches n enforcng ts rghts. (Unted
States v. Thompson, 98 U. S., 48 Unted States v. Nashve, Chattanooga d St.
Lous Rwy. Co., 118 U. S., 120, 125, 12 Staney v. Svhwaby, 147 U. S., 508, 514,
515 Guaranty Trust Co. v. Unted State , 304 U. S., 12 , 132 oard of Comms-
soners v. Unted States, 308 U. S., 343, 351.) The same rue appes whether
the Unted States brngs ts sut n Its own courts or n a State court. (Davs,
Drector Genera of Raroads, v. Corona Coa Co., 2 5 U. S., 219, 222, 223.)
We are of the opnon that the fact that the cam was acqured by the Unted
States through operatons under the Natona ousng ct does not take the
case out of ths rue. The State court treated the case as n the same category
as one of statutes provdng for conveyancng and marketng negotabe nstru-
ments, and conductng other busness reatons. ut ths s not a case reatng
to the appcaton of the aw merchant as to the transfer of negotabe paper and
the dgence necessary to charge an ndorser or as to the ncurrng by the Unted
States of certan responsbtes by becomng a party to such paper. (Unted
States v. arker, 12 Wheat., 559 Cooke v. Unted States, 91 U. S., 389, 39 .) ven
as a hoder of such paper, as e. g. negotabe bonds, the Unted States sung the
maker s not bound by a State statute of mtatons. (Unted States v. Nashve,
Chattanooga d St. Lous Rwy. Co., supra.) When the Unted States becomes
entted to a cam, actng n ts governmenta capacty and asserts ts cam n
that rght, It can not be deemed to have abdcated ts governmenta authorty
so as to become sub|ect to a State statute puttng a tme mt upon enforcement.
(Chesapeake d Deaware Cana Co. v. Unted States, 250 U. S., 123, 12 , 127.)
The State court, however, has sad that the statute In queston s not a statute
of mtatons, but rather a statute of noncam for the ordery and e pedtous
settement of decedents estates. Presumaby the court refers to the provson
of the statute that f a cam s not fed wthn the specfed perod t sha be
vod even though the persona representatve has recognzed such cam or demand
by payng a porton thereof or nterest thereon or otherwse.
If ths were a statute merey determnng the mts of the |ursdcton of a
probate court and thus provdng that the county |udge shoud have no |ursdc-
ton to receve or pass upon cams not fed wthn the eght months, whe eavng
an opportunty to the Unted States otherwse to enforce ts cam, the authorty
of the State to mpose such a mtaton upon Its probate court mght be conceded.
ut f the statute, as sustaned by the State court, undertakes to nvadate the
cam of the Unted States, so that t can not be enforced at a, because not fed
wthn eght months, we thnk the statute n that sense transgressed the mts of
State power. (Davs, Drector Genera of Raroads, v. Corona Coa Co., supra.)
Mr. ustce Story had occason to consder the appcaton to the Government
of a State statute purportng to bar cams aganst decedent s estates n Unted
States v. oar (2 Mason, 311). There an acton was brought by the Unted States
aganst an admnstrator of an estate and the defendant peaded the genera
statute of mtaton of Massachusetts as to persona actons and aso the par-
tcuar statute mtng suts aganst e ecutors and admnstrators to four years
after the acceptance of the trust. Mr. ustce Story thought t cear that the
defense of these statutes of mtatons coud not ava. The queston whether
a further defense of pene admnstravt was good, that s, whether a dstrbu-
ton of surpus assets after the payment of a known debts among the hers,
ether vountary or under a probate decree, woud protect the admnstrator from
sut by the Unted States, t was thought not necessary to decde. Nor have we
such a queston here.
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437
Msc.
We hod that the State statute In ths Instance requrng cams to be fed wthn
eght months can not deprve the Unted States of ts rght to enforce ts cam
that the Unted States st has Its rght of acton aganst the admnstrator, even
though the probate court s to be regarded as havng no |ursdcton to receve a
cam after the e praton of the specfed perod.
So far as the udgment goes beyond the queston of the |ursdcton of the
probate court and purports to ad|udge that the cam of the Unted States s vod
as a cam aganst the estate of the decedent because of faure to compy wth the
statute, the |udgment s reversed.
The cause s remanded for further proceedngs not nconsstent wth ths
opnon.
It s so ordered.
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Msc.
438
OL OM RG RIN .
1940-27-10312
MS. 227
Schedue of oeomargarne produced and materas used durng the month of
May, 1940, as compared wth May, 1939.
May, 1940.
May, 1939.
Tota producton of uncoored oeomargarne
24 49s 589
a ss
Tota wthdrawn ta -pad
24,094,477
22,80 , n
Ingredent schedue of uncoored oeomargarne:
Rahassu o
9 1,032
1,320.730
22,384
2,937.713
28, 95
, 772. 514
53.417
5,290
4,4 8,0 9
73. 577
987.278
288,927
Coconut o
2,4 , 28
4S, 124
8,450. 271
,409
.828
4, 5 .147
493,522
919,428
309, 575
88.000
Corn o
Cottonseed n _
Dervatve of gycerne
Lecthn .
Mk
Neutra ard
Oeo o - -
89, 14
480
73,087
540
Pam kerne o
132,828
981. 249
10,200
8, 83.591
1.100
1,203
7,543
194. 105
975,501
Sat _ -
9,708
,52 .001
1,109
Tota - -
25,3 .229
23, 741.188
180.538
12a044
Tota wthdrawn ta-pad
28,1 8
20, 798
Ingredent schedue of coored oeomargarne:
ahassu o
1,01
0.124
123
1
2,589
s
Corn o
3
Dervatve of gycerne
17,487
3 0
425
73
34,7 1
3.747
13,590
25
1,449
8,015
780
474
Lecthn
Mk
30.420
8.541
13.108
1.000
20
72
48
7, 2
43
Oeo o - -
Pam kerne o
Peanut o .
24
7, 4
3
43, 33
2
Sat
8oya he n o
42.022
1
tamn concentrate
184, 9 7
13 ,2 3
1 Of the amount produced, 29,744 pounds were reworked,
Of the amount produced, 35.055 pounds were reworked.
1 Of the amount produced, 41 pounds were reworked.
Of the amount produced, 1.824 pounds were reworked.
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439
Msc.
1940-31-103
MS. 228
une, 19 0, as compared wth une, 1939.
une, 1840.
une, 1939.
Pounds
1 19,570.141
Pounds
21,030,442
19,472,721
20,729,401
81,8 5
1,104,573
14,530
2,120,921
21,094
,702, 223
49.408
5,547
4,093.818
81,705
997,320
259,907
114,521
eef fat
1,41 ,518
9,751
7,377,850
54,274
,119
3,757,49
418,5 7
885,355
233,811
8,825
2.91
13 ,755
79 ,293
7, 87
4, 431,37
00
843
Cottonseed o
Dervatve of gycerne
Lecthn
Mk
Oeo o
1 , 581
919,0117
8.784
5,435, 208
Sat
Soya bean stearne . -
1,194
Tota
20,28 ,901
22,0 , 341
1 281,891
80,150
Ingredent schedue of coored oeomargne:
21,808
IS, 840
abassu o
873
1
1,7 8
Coconut o
158, 35
19
7,72
100
1
Coor _
Corn o
Cottonseed o -
14,5
,233
120
303
4
Mk
1,470
378
8
53,851
3,788
14,940
2,220
1,25
39
12,3 2
28
31,978
2
17,921
3,275
11,430
338
4
138
4,440
33
34. 40
1
Oeo o
Sat
tamn concentrate
Tota
29 , 51
88,475
1 Of the amount produced, 28,232 pounds were reworked.
1 Of the amount produced, 2 .028 pounds were reworked.
1 Of the amount produced, 5 8 pounds were reworked.
Of the amount produced, 37 pounds were reworked.
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Msc.
440
1940-3 -10412
MS. 229
uy, 19t,0, as compared wth uy, 1939.
uy, 194a
uy, 1939.
Pounds.
21,812,339
Pound .
19,159. 533
22, 044, 758
20.099.144
594,318
1,332, 131
11.900
1,522.413
18.205
,518.39
48,308
4.880
3, 849, 754
109.305
850,4
244.853
5 ,742
18 .354
eef fat.-
1,158, 45
Cottonseed o
8,515,202
70, 91
.748
4,225.008
312.300
1,109. 738
280,807
95.839
4,994
875, 39
8,820
5, 37 ,339
974
Dervatve of gycerne
Lecthn
Mk
Neutra ard
Oeoo
Oeo stock
Peanut o
Sat
a
Soda (benzoate of)
7.744
,592.0 2
Soya bean o
egetabe gum _ -
tamn concentrate
Tota
22, 9 , 12
2a 192, 9S4
Tota producton of coored oeomargarne
208,417
1 102, 74
Tota wthdrawn ta -pad.
21,170
14.83
abassu o
725
3
40
utter favor
Coconut o
102, 1
149
3 ,9 3
Coor
53
3,11
Cottonseed o __
11,025
30
4
125
39. 251
5,333
13.282
1.288
350
17
9,220
5
25,914
Cottonseed stearne. .
Dervatve of gycerne
255
1
Lecthn __
Mk
2a 108
2,143
9.032
875
43
43
5,5 1
27
Neutra ard
Oeoo
Oeo stearne
Oeo stock
Peanut o
Sat
Soda (benzoate of)
Soya bean o
32,127
Soya fakes
SSO
egetabe stearne...
90
2
tamn concentrate
Tota
211,349
na9s2
Or the amount produced. 59,091 pounds were reworked.
1 Of the amount produced, 41,0 5 pounds were reworked.
Of the amount produced, 5,458 pounds were reworked.
Of the amount produced, 348 pounds were reworked.
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441
Msc.
1940-40-10444
MS. 230
ugust, 1940, as compared wth ugust, 19.19.
ugust, 1940.
ugust, 1939.
Pounds.
1 21,481,135
Pounds.
21, 498, 284
Tota wthdrawn ta -pad.
22, 478, 917
21,192,548
ahassu o.. - -
445, 59
1,344,719
19,700
1,728,178
21.88
,980,8 9
53, 87
8,119
4,292.998
123,051
1,048, 1
273, 08
58,0 3
eef fat
Coconut o
1,100,071
Cottonseed o
8, 259, 79
2,588
7. 35
4,141,35
309,039
1,102, 247
281.803
95. 84
139.278
849,991
8,724
5, 4 7.838
901
Dervatve of gycerne
Lecthn
Mk
Neutra ard
Oeo o
Oeo stock
|fa
Sat _ -
Soda (hcnoateof)
Soya bean o
8,537, 05
1,214
tamn concentrate
Tota. ._ - -
22. 272, 331
22,703, 34
Tota producton of coored oeomargarne _
182, 51
no. M
21,202
13, 84
utter favor - -
140
3
925
Coconut o
80,3 0
153
1 , 482
840
458
77
37,758
4, 11
19,407
9 4
2,099
3
7,942
53
29,117
2
34,497
7
,317
120
247
SI
Coor
Dervatve of gycerne -
Lecthn
Mk _ _
21, 970
1,953
11, 14
1,050
1,1 2
37
,5 4
3
35, 53
1
Neutra ard . -
Oeo o
Oeo stock -
Peanut o ... .
Sat -
Soda fbenzoate of)
Soya bean o
tamn concentrate ........ . -
Tota
199, 491
121.273
1 Of the amount produced, 52 pounds wero reworked.
Of the amount produced. 8 4 pounds were reworked
290217 41 29
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#
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Msc.
442
1940-45-10481
MS. 231
Schedue of oeomargarne produced and materas used durng the month
September, 1940, as compared wth September, )39.
of
September.
mo.
September,
1939.
Tota producton of uncoorcd oeomargarne.
Ingredent schedue of uncoorcd oeomargarne:
abassu o
Coconut o -
Corn o ---
Cottonseed o -
Cottonseed stearne
Dervatve of gycerne
Lecthn
Marco
Mk -
Monostearne..
Neutra ord...
Oeo o
Oeo sparne
Oeo stock -
Peanut o --
at
Soda (benoate of)
Soya bean o. -
tamn concentrate
Tota-
Tota producton of coored oeomargarne -
Tota wthdraw n ta -pad
abassu o --
utter favor
Coconut o
Coor -
Com o
Cottonseed o ---
Cottonseed stearne
Dervatve of gycerne
Lecthn
Mk
Monostearne
Neutra ard -
Oeo o
Oeo stearne
Oeo stock
Peanut o
Sat
Soda (benoate of) -
Soya bean o
tamn concentrate
Tota,
Pound .
2 , 327.721
Pounds.
27.89 . v
25, 93.30
331.204
1,0 7,159
9,940, 57
1,2 8
8,303
593
5,077.784
18.077
1, 225. 590
281.880
92. 44
153,3
1,020,803
9,854
7,548,595
1,091
27, 202,9 2
213,959
25. 432
1
74, 47
140
15,084
0
194
71
39.90
252
2,732
14, 15
433
2,1 9
31
9,24
7
5 ,975
2
21 , 15
9.028. 2TS
3. (M
5.275.35
2. :
1. ISO. 9-29
1Z 192
7.337.913
1.379
29.0rt5.395
107. -
79
1
,044
480
21.391
2.711
13.940
1.5 8
115
5,0 5
S
33.423
2
114.059
1 Of the amount produced, 1 ,307 pounds were reworked.
Of the amount produced, 1, 40 pounds were reworked.
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#
p
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g
o
o
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e
443
Mso.
1940-49-10514
MS. 232
ScTedue of oeomargarne produced and materas used durng the month of
October, 1940, as compared wth October, 1939.
1 -
October, 1940.
October, 1939.
Pounds.
Pounds.
23, 34, 1
29. 944,880
29,459.381
23, 50.040
Mk
137.948
1, 3o, 28
19,145
11,808, 297
9,477
9.974
5, 505, 555
19,277
422,880
1,139, 19
34 ,947
103,390
184, 481
1,122,000
11,225
8, 21,9 8
1,353
988,13
2,122,001
21,711
8, 74, 982
57, 120
8,870
4,502.8 2
Sat
84,348
02,937
23 , 212
9, 517
197,034
1,031,280
9,935
,940, 91
1,421
Tota
30, 902, 708
24, 547, 282
215, 193
4 150,154
30702
2 ,041
50
2
Coor
82,771
201
17
44,92
158
15
21,029
480
323
3
39, 79
454
3,9 8
20,087
250
3, 00
44
7, 35
133
42,037
0
2
13, 523
395
0
34,843
Oeo o
3,400
17, 1 1
Peanut o
1,719
77
8,729
55
41,205
Sat
Soda (benzoate of)
2
Tota
222.7 8
1 ,2 8
Of the amount produced, 3 ,452 pounds were reworked,
Of the amount produced, 14,379 pounds wore reworked.
Of the amount produced, 1, 4 pounds were reworked.
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TO CCO.
1940-27-10311
T. 72
Statement of manufactured tobacco produced, by casses, durng the month of pr,
1940, as compared wth pr, 19S9.
pr, 1940.
pr, 1939.
Pound .
4,277,7 4
458,002
8 1.940
3, 507,122
1 ,949,251
Pound .
4,075, 54
425,507
324,9 3
3,023.411
15,044.877
Tota
25,554,079
22,894, 12
Note. These fgures are sub|ect to revson unt pubshed In the Commssoner s annua report.
1940-31-103 0
T. 73
Statement of manufactured tobacco produced, by casses, durng the month of
May, W. fO, as compared wth May, 1939.
May, 1940.
May. 1939.
Pound:
4.331,018
502. 88
511.5 4
3. 539. 123
18. 004 434
533,54.1
395.198
3,501,23
17.74 , 97
Tota -
2 ,888,827
27, 150. 247
Note. Theso fgures are sub|ect to revson unt pubshed n the Commssoner s annua) report.
1940-35-10402
T.74
une, 19 f, as compared wth une, 1939.
une, 1940.
une. IS1 .
Pound .
Pounds.
4, 114,8(12
41 .1
3 .89
4, 32.401
Twst
3,187,323
1 ,081,503
483,727
4 0.748
3,91 .703
17.979.150
Tota
24,1 ,750
27,492, 729
Note. These fpures are sub|ect to, revson unt pubshed n the Commssoner s annua report.
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1940-40-10443
T. 75
uy, 191)0, as compared wth uy, 1939.
uy, 1940.
uy, 1939.
Pounds.
Pounds.
4, 293,934
405. 001
400. 238
3, 089, 307
15, 201, 007
Png.
4. 521, 480
488. 58
431. 070
Twst .
3,984,975
17,4 0, 495
Tota
2 , 887. 215
23,449. 537
Note. These fgures are sub|ect to revson unt pubshed n the Commssoner s annua report.
1940-44-10471
T. 7
ugust, 1940, as compared wth ugust, 1939.
ugust, 1940.
ugust, 1939.
Pug
Pounds.
4, 224,718
49 , 57
45 , 418
3,80 ,751
1 ,948, 79
Pounds.
5, 152, 871
559, .543
407,821
4.345.7 2
19.35 ,89
Twst
Tota
25,933,219
29,822,893
Note. These fpures are sub|ect to revson unt pubshed n the Commssoner s annua report.
1940-49-10513
T. 77
September, 19. /0, as compared wth September, 1939.
September,
1940.
September,
1939.
Pounds.
4, 115.011
Pounds.
4, 470, 588
481,92
348. 371
3, 521, 475
17, 503, 308
Twst --
4 9, 889
39S. 413
3, 24. 505
17, 7 2, 417
ne-cut chewng
Tota
2 , 300. 325
2 ,325, 8
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44
1940-53-10545
T. 78
October, 1940, as compared wth October, 1939.
October, 1940. October. 1939.
Pug._
Pounds.
4, 194,890
3 ,24
443.1
4,009,057
21,949,933
Pounds.
4,3 9.593
518. S82
373,4 7
3, S27, 380
19, 59.708
Twst
DC-cut chewng
Scrap chewng
Tota
31,133, 292
28,748,530
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L GISL TION.
R NU CT O 1940.
1940-28-10321
PU LIC, NO. 5 , S NTY-SI T CONGR SS. (C PT R 419, T IRD
S SSION . R. 10039 .)
n ct To provde for the e penses of natona preparedness by
rasng revenue and ssung bonds, to provde a method for payng
for such bonds, and for other purposes.
e t enacted by the Senate and ouse of Representatves of the Unted
States of merca n Congress assembed,
TITL I.
Sec. 1. Short Tte.
Ths ct may be cted as the Revenue ct of 1940.
Sec. 2._Subta on Indvduas.
Secton 12(b) of the Interna Revenue Code s amended to read as foows:
(b) Rates of Surta . There sha be eved, coected, and pad for each
ta abe year upon the surta net ncome of every ndvdua a surta as foows:
Upon a surta net ncome of 4,000 there sha be no surta upon surta
net ncomes n e cess of 4,000 and not n e cess of ,000, 4 per centum of
such e cess.
S0 upon surta net ncomes of ,000 and upon surta net ncomes n
e cess of ,000 and not n e cess of 8,000, per centum n addton of such
e cess.
200 upon surta net ncomes of 8,000 and upon surta net ncomes n
e cess of 8,000 and not n e cess of 10,000, 8 per centum n addton of such
e cess.
3 0 upon surta net ncomes of 10,000 and upon surta net ncomes n
e cess of 10,000 and not n e cess of 12,000, 10 per centum n addton of
such e cess.
5 0 upon surta net ncomes of 12,000 and upon surta net ncomes n
such e cess.
800 upon surta net ncomes of 14,000 and upon surta net ncomes n
e cess of 14,000 and not n e cess of 1 ,000, 15 per centum n addton of
such e cess.
1,100 upon surta net ncomes of 1 ,000 and upon surta net Incomes n
e cess of 1 ,000 and not n e cess of 18,000, 18 per centum n addton of
such e cess.
1,400 upon surta net ncomes of 18.000 and upon surta net ncomes n
such e cess.
such e cess.
2,3 0 upon surta net ncomes of 22,000 and upon surta net ncomes n
e cess of 22,000 and not n e cess of 2 ,000, 27 per centum n addton of
such e cess.
3,440 upon surta net ncomes of 2 ,000 and upon surta net ncomes n
e cess of 2 ,000 and not n e cess of 32,000, 30 per centum n addton of
such e cess.
5,240 upon surta net ncomes of 32,000 and upon surta net ncomes n
such e cess.
such e cess.
suc G COSS
e cess of 50,000 and not In e cess of 0,000, 44 per centum n addton of
such e cess.
(447)
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448
1 ,180 upon surta net ncomes of 0,000 and upon surta net Incomes In
such e cess.
such e cess.
such e cess.
31,180 upon surta net ncomes of 90,000 and upon surta net Incomes n
such e cess.
3 ,780 upon surta net ncomes of 100,000 and upon surta net ncomes n
such e cess.
such e cess.
such e cess.
12 ,780 upon surta net ncomes of 250,000 and upon surta net ncomes
n e cess of 250,000 and not n e cess of 300,000, 4 per centum n addton
of such e cess.
158,780 upon surta net Incomes of 300,000 and upon surta net ncomes
n e cess of 300,000 and not n e cess of 400,000, per centum n addton
of such e cess.
224,780 upon surta net ncomes of 400,000 and upon surta net ncomes
n e cess of 400,000 and not n e cess of 500,000, 8 per centum n addton
of such e cess.
292,780 upon surta net ncomes of 500,000 and upon surta net ncomes
n e cess of 500,000 and not n e cess of 750,000, 70 per centum n addton of
ucu e cess.
4 7,780 upon surta net ncomes of 750,000 and upon surta net ncomes
n e cess of 750,000 and not n e cess of 1,000,000, 72 per centum n addton
of such e cess.
47,780 upon surta net ncomes of 1,000,000 and upon surta net ncomes
n e cess of 1,000,000 and not n e cess of 2,000,000, 73 per centum n addton
of such e cess.
1,377,780 upon surta net ncomes of 2,000,000 and upon surta net
ncomes n e cess of 2,000,000 and not n e cess of 5,000,000, 74 per centum n
addton of such e cess.
3,597,780 upon surta net ncomes of 5,000,000 and upon surta net
ncomes n e cess of 5,000,000, 75 per centum n addton of such e cess.
Sec. 3. Corporaton Ta .
(a) Ta on Corporatons n Genera. Secton 13(b) of the Interna Reve-
nue Code s amended to read as foows:
(b) Imposton of Ta . There sha be eved, coected, and pad for each
ta abe year upon the norma-ta net ncome of every corporaton the norma-
ta net ncome of whch s more than 25,000 (e cept a corporaton sub|ect to
the tu mposed by secton 14, secton 231(a), Suppement G, or Suppement )
whchever of the foowng ta es s the esser:
(1) Genera rue. ta of 19 per centum of the norma-ta net
ncome or
sghty more than 25,000). ta of 3,775, pus 33 per centum of the
amount of the norma-ta net ncome In e cess of 25,000.
(b) Ta on Speca Casses of Corporatons. Sectons 14 (b) and (c) (1) of
the Interna Revenue Code are amended to read as foows:
(h) Corporatons Wth Norma-Ta Net Incomes of Not More Than
25,000. If the norma-ta net Income of the corporaton s not more than
25,000, and f the corporaton does not come wthn one of the casses specfed
u subsecton (c), (d), or (e) of ths secton, the ta sha be as foows:
Upon norma-ta net ncomes not n e cess of 5,000, 13 per centum.
75 upon norma-ta net ncomes of 5,000, and upon norma-ta net
ncomes n e cess of 5,000 and not n e cess of 20,000, 15 per centum n
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449
Msc.
2,925 upon norma-ta net ncomes of 20,000, and upon norma-ta net
ncomes n e cess of 20,000, 17 per centum n addton of such e cess,
c) oregn Corporatons.
(1) In the case of a foregn corporaton engaged n trade or busness
wthn the Unted States or havng an offce or pace of busness theren,
the ta sha be an amount equa to 19 per centum of the norma-ta net
ncome, regardess of the amount thereof.
(c) Ta on Nonresdent oregn Corporatons. Secton 231(a)(1) of the
Interna Revenue Code s amended by strkng out e cept that n the case of
dvdends the rate sha be 10 per centum, and and by strkng out of 10 per
centum .
(d) Ta on Mutua Investment Companes. Secton 3 2(b) of the Interna
Revenue Code s amended to read as foows:
tabe year upon the Suppement net ncome of every mutua nvestment
company a ta equa to 19 per centum of the amount thereof.
Sec. 4. Ta on Nonresdent en Indvduas.
(a) Ta n Genera. Secton 211(a)(1)( ) of the Interna Revenue Code
(reatng to ta on nonresdent aen ndvduas not engaged n trade or bus-
ness wthn the Unted States and not havng an offce or pace of busness
theren) s amended by strkng out 10 per centum and nsertng n eu
thereof 15 per centum .
(b) ggregate Recepts More Than 24,000. Secton 211(a) (2) of the Inter-
na Revenue Code s amended to read as foows:
(2) ggregate more than 24,000. The ta mposed by paragraph (1)
sha not appy to any ndvdua f the aggregate amount receved durng
the ta abe year from the sources theren specfed Is more than 24,000.
(c) Ta Where Gross Income of More Than 24,000. Secton 211(c) of the
Interna Revenue Code (reatng to ta on certan nonresdent aen ndvduas)
s amended by strkng out 21, 00 wherever occurrng theren and nsertng
n eu thereof 24,000 and by strkng out 10 per centum and nsertng
n eu thereof 15 per centum .
Sec. 5. Wthhodng of Ta at Source.
(a) Secton 143 of the Interna Revenue Code Is amended by strkng out 10
per centum wherever occurrng theren and nsertng n eu thereof 15 per
centum .
(b) Secton 144 of the Interna Revenue Code Is amended by strkng out
e cept that n the case of dvdends the rate sha be 10 per centum, and
and by strkng out of 10 per centum .
(c) The amendments made by ths secton sha take effect on une 2 , 1940.
Sec. . Persona empton.
(a) Secton 25(b)(1) of the Interna Revenue Code s amended to read as
foows:
(1) Persona e empton. In the case of a snge person or a marred
person not vng wth husband or wfe, a persona e empton of 800 or
n the case of the head of a famy or a marred person vng wth husband
or wfe, a persona e empton of 2,000. husband and wfe vng together
sha receve but one persona e empton. The amount of such persona
e empton sha be 2,000. If such husband and wfe make separate returns,
the persona e empton may be taken by ether or dvded between them.
(b) Secton 214 of the Interna Revenue Code (reatng to persona e emp-
ton of nonresdent aen ndvduas) Is amended by strkng out 1,000 and
nsertng n eu thereof 800 .
(c) Secton 251(f) of the Interna Revenue Code (reatng to persona
e empton of ctzens entted to benefts of secton 251) s amended by strkng
out 1,000 and nsertng n eu thereof 800 .
Sec. 7. Returns of Income Ta .
(a) Indvdua Returns. Secton 51(a) of the Interna Revenue Code s
(a) Requrement. The foowng ndvduas sha each make under oath
a return statng specfcay the tems of hs gross ncome and the deductons
and credts aowed under ths chapter and such other nformaton for the
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Msc.
450
purpose of carryng out the provsons of ths chapter as the Commssoner wth
the approva of the Secretary may by reguatons prescrbe
(1) very ndvdua who s snge or who Is marred but not vng
wth husband or wfe, f havng a gross ncome for the ta abe year of
800 or over.
(2) very ndvdua who s marred and vng wth husband or wfe,
f no ont return s made under subsecton (b) and f
( ) Such ndvdua has for the ta abe year a gross Income of
2,000 or over, and the other spouse has no gross ncome or
( ) Such ndvdua and hs spouse each has for the ta abe year
a gross ncome and the aggregate gross ncome s 2,000 or over.
(b) ducary Returns. Secton 142(a) of the Interna Revenue Code s
(a) Requrement of Return. very fducary (e cept a recever apponted
by authorty of aw n possesson of part ony of the property of an ndvdua)
sha make under oath a return for any of the foowng ndvduas, estates, or
trusts for whch he acts, statng specfcay the tems of gross ncome thereof
and the deductons and credts aowed under ths chapter and such other nfor-
maton for the purpose of carryng out the provsons of ths chapter as the
Commssoner wth the approva of the Secretary may by reguatons prescrbe
(1) very ndvdua havng a gross ncome for the ta abe year of
800 or over, f snge, or If marred and not vng wth husband or wfe
(2) very ndvdua havng a gross ncome for the ta abe year of
2,000 or over, f marred and vng wth husband or wfe
(3) very estate the gross ncome of whch for the ta abe year s
800 or over
(4) very trust the net ncome of whch for the ta abe year s 100
or over, or the gross ncome of whch for the ta abe year s 800 or over,
regardess of the amount of the net ncome and
(5) very estate or trust of whch any benefcary s a nonresdent
Ren.
(c) Informaton Returns. Secton 147(a) of the Interna Revenue Code
(reatng to nformaton at the source) s amended by strkng out 1,000
wherever occurrng theren and nsertng n en thereof 800 .
Seo. 8. Treaty Ob|oatons.
No amendment made by ths tte sha appy n any case where Its appcaton
woud be contrary to any treaty obgaton of the Unted States.
Sec. 9. Ta abe Years to Whch ppcabe.
The amendments made by ths tte, e cept the amendments made by sec-
ton 5, sha be appcabe ony wth respect to ta abe years begnnng after
December 31, 1939.
tte II.
Sec 201. Income Ta .
Chapter 1 of the Interna Revenue Code s amended by nsertng after secton
14 the foowng new secton:
Sec. 15. Defense Ta for ve Tears.
In the case of any ta payer, the amount of ta under ths chapter for any
ta abe year begnnng after December 31, 1939, and before anuary 1, 1945,
sha be 10 per centum greater than the amount of ta computed wthout regard
to ths secton. In no case sha the effect of ths secton be to ncrease the
ta computed wthout regard to ths secton by more than 10 per centum of
the amount by whch the net ncome e ceeds such ta . or the purposes of
ths secton, the ta computed wthout regard to Us secton sha be such ta
before the appcaton of the credt provded n secton 31 ( foregn ta credt ),
and the credt provded n secton 32 (ta es wthhed at the source).
Sec. 202. Rates of Wthhodng.
(h) Rates Unt anuary 1945. or the perod after uue 25, 1940, and
before anuary 1, 1945, the rute provded n ths secton and secton 144, of 15
per centum sha be 10 /| per centum. Ths subsecton or secton 15 sha not
appy n any case where ts operaton woud be contrary to any treaty obga-
ton of the Unted States, nor to a resdent of, or a corporaton organzed under
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t e aws of, a contguous country so ong as there Is n effect wth such country
a. treaty, ratfed pror to ugust 2 , 1937, reatng to rates of ncome ta .
Sec. 203. Persona odng Companes.
(a) Genera Rue. before the frst paragraph and Insertng at the end
(b) Defense Ta fob ve Yeabs. In the case of every persona hodng
company, the amount of surta under ths subchapter for any ta abe year
begnnng after December 81, 1939, and before anuary 1, 1945, sha be 10 per
centum greater than the amount of surta computed wthout regard to ths
subsecton.
Seo. 204. cess-Profts Ta .
Secton 00 of the Interna Revenue Code s amended by nsertng (a)
Genera Rue. before the frst paragraph and by nsertng at the end of
such secton the foowng new subsecton:
(b) Defense Ta for ve Yeabs. In the case of any ta payer, the
amount of ta payabe under ths secton for any Income-ta ta abe year endng
after une 30, 1940, and before uy 1, 1945, sha be 10 per centum greater
than the amount of ta whch woud be payabe f computed wthout regard
to ths subsecton.
Sec. 205. Capta Stock Ta
Secton 1200 of the Interna Revenue Code s amended by Insertng at the
end thereof the foowng new subsecton
(c) Defense Ta fob ve Years. or the year endng une 80, 1940, and
for the four succeedng years endng une 30. the rates provded n subsectons
(a) and (b) sha be 1.10 n eu of L
Sec. 20 . state Ta .
Chapter 3 of the Interna Revenue Code Is amended by nsertng at the end
thereof the foowng new subchapter I
Subchapter 0 Defense Ta fob ve Year .
In the case of a decedent dyng after the date of the enactment of the
Revenue ct of 1940 and before the e praton of fve years after such date,
the tota amount of ta payabe under ths chapter sha be 10 per centum
greater than the amount of ta whch woud be payabe If computed wthout
regard to ths secton. or the purposes of ths secton, the ta computed
wthout regard to ths secton sha be such ta after the appcaton of the
credts provded for In secton 813 and secton 93 .
Seo. 207. Gft Ta .
Secton 1001 of the Interna Revenue Code Is amended by addng at the end
thereof the foowng new subsecton :
(d) Defense Ta fob 1940-1945. Despte the provsons of subsecton (a)
(1) The ta for each of the caendar years 1941 to 1945, both ncusve,
sha be an amount equa to the e cess of
( ) 110 per centum of a ta , computed n accordance wth the
Rate Schedue herenbefore set forth, on the aggregate sum of the net
gfts for such caendar year and for each of the precedng caendar
years, over
( ) 110 per centum of a ta , computed n accordance wth the sad
Rate Schedue, on the aggregate sum of the net gfts for each of the
precedng caendar years.
(2) The ta for the caendar year 1940 sha be the sum of ( ) the
ta computed under subsecton (a), pus ( ) an amount whch bears
the same rato to 10 per centum of the ta so computed as the amount
of gfts made after the date of the enactment of the Revenue ct of 1940
bears to the tota amount of gfts made durng the year. or the pur-
poses of ths paragraph, the term gfts does not ncude gfts whch,
under secton 1003(b)(2), are not to be ncuded n computng the tota
amount of gfts made durng the caendar year 1940, or gfts whch, n
the case of a ctzen or resdent, are aowed as a deducton by secton
1004(a) (2), or gfts whch, n the case of a nonresdent not a ctzen of the
Unted States, are aowed as a deducton by secton 1004(b).
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452
Sec. 208. Ta on Transfers to vod Income Ta .
Secton 1250 of the Interna Revenue Code s amended by Insertng (a)
Genera Rue. before the frst paragraph and nsertng at the end thereof the
foowng new subsecton:
(b) Defense Ta for ve Years. In the case of any transfer durng the
perod after the date of the enactment of the Revenue ct of 1940 and before
uy 1, 1945, the rate provded n subsecton (a) sha be 27 per centum n eu
of 25 per centum.
Sec. 209. Contnuaton of cse Ta es.
Sectons 1801, 1802, 3403(f) (1), 3452, 34 0(a), 34 5, 3481(b), and 3482 of the
Interna Revenue Code are amended by strkng out 1941 wherever appearng
theren and nsertng n eu thereof 1945 .
The Interna Revenue Code s amended by nsertng at the end of chapter
9 the foowng new chapter:
C PT R 9 D NS T OR I Y RS.
Sec. 1 50. Defense Ta for ve Years.
to the perod after une 30, 1940, and before uy 1, 1945, sha be the rates set
forth under the headng Defense-Ta Rate :
Descrpton of ta .
Od rate.
3250(c)._
3250(d)
3250(e)-
3250(c)(3)
3250(0(1)
3250(f)(1)
3250 (|). .
32.500)...
3400(1)..
3400(2)._
3401..
3403(a)
3403(h)
3403(c)...
3(04
3405
3407
3409
3411
3412...
3413
3400(a) (1), (2), and
(3).
3481(a) -
3482
o soats -
Saes outsde bo ofce
Cabaret
Dues -
Intaton fees
Corporate securtes
Capto stock ssues
Capta stock ssues
Capta stock transfers
Capta stock transfers
Insurance poces
Passago tckets..-
Passage tckets
Passage tckets.
afc-denost bo es
Pstos and revovers
Whoesaers n quor
Retaers n quor
rewers
rewers..
Whoesaers n mat quors..
Retaers
Speca cases -
Rectfers.
Rectfers
Sts. -
Sts
Tres
Tubes --
Toet preparatons
utomobe truck chasss, eto
utomobes, etc
Parts
Rados
rearms- -
Matches.
ectrca energy.
Gasone
Lubrcatng os
Transportaton of o
Transfer of bonds
Conveyances
10 percent.
10 percent.
I cents...
10 percent.
10 percent.
10 cents...
10 cents...
2 cents
4 cents
cents
3 cents
1
3...
S-
10 percent.
10 percent.
100..
25
100
50...
50
20
2
200
100
50
20
2 cents
4 cents
10 percent.
2 percent..
3 percent..
2 percent..
5 percent..
percent..
10 percent.
cents
8 percent..
1 cent
4 cents
4 percent..
4 cents
50 cents...
11 percent.
11 percent.
2 cents.
11 percent.
11 percent.
11 cents.
11 cents.
Scents.
5 cents.
Scents.
4 cents.
1.10.
3.30.
5.50.
11 percent.
11 percent.
110.
27.50.
110.
55.
M.
22.
2.20.
220.
110.
5 .
22.
2 cents.
y cents.
11 percent.
2 percent.
3)4 percent.
2 percent.
5 percent.
by, percent.
11 percent.
5 cents.
3 percent.
1W cents.
4 3 cents.
4M percent.
Scents.
S5 cents.
(b) In the appcaton of secton 3441(c) to the artces wth respect to whch
the rate of ta s ncreased by ths secton, where the ease, contract of sae, or
condtona sae, and devery thereunder, was made before uy 1, 1940, the tota
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ta referred to In such secton sha be the ta at the rate In force on une 30,
1O40, and not at the Increased rate.
Sec 211. dmssons Ta .
Secton 1700(a) (1) of the Interna Revenue Code Is amended by strkng out
unt uy 1, 1941, s ess than 41 cents and nsertng n eu thereof unt
uy 1, 1940, s ess than 41 cents, and after une 30, 1940, and before uy 1,
3.945, Is ess than 21 cents and by strkng out s ess than 41 cents, unt
uy 1, 1941 and nsertng n eu thereof Is ess than 41 cents unt uy 1,
1040, and s ess than 21 cents after une 30, 1940, and before uy 1, 1945 .
S O. 212. CIG R TT S.
Subchapter of chapter 15 of the Interna Revenue Code s amended by nsert-
ng at the end thereof the foowng new sectons:
In eu of the rates of ta specfed n secton 2000(c) (2), the rates of ta for
the perod after une 30, 1940, and before uy 1, 1945, sha be 3.25 and 7.80,
respectvey.
Sec. 2005. oor Stocks Ta .
(a) oor Stocks Ta . Upon cgarettes sub|ect to ta under secton
200(c)(2) whch on uy 1, 1940, are hed by any person for sae, there sha
be eved, assessed, coected, and pad a foor stocks ta at a rate equa to the
Increase n rates of ta made appcabe to such artces by secton 2004.
(b) Returns. very person requred by ths secton to pay any foor stocks
ta sha, on or before ugust 1, 1940, under such reguatons as the Comms-
soner wth the approva of the Secretary sha prescrbe, make a return and
pay such ta , e cept that n the case of artces hed by manufacturers and
mporters the Commssoner may coect the ta wth respect to a or part of
such artces by means of stamp rather than return, and n such case may make
an assessment aganst such manufacturer or Importer havng tobacco ta stamps
on hand uy 1, 1940, for the dfference between the amount pad for such stamps
and the ncreased rates specfed n secton 2004.
(c) Laws ppcabe. provsons of aw, ncudng penates, appcabe
n respect of the ta es mposed by secton 2000 sha, nsofar as appcabe and
not nconsstent wth ths secton, be appcabe wth respect to the foor stocks
ta mposed by subsecton (a).
Seo. 213. Dsted Sprts.
(a) Secton 2800 of the Interna Revenue Code Is amended by nsertng at the
(g) Defense Ta fob ve Years. In eu of the rates of ta specfed n such
of the sectons of ths tte as are set forth n the foowng tabe, the rates
appcabe wth respect to the perod after une 30, 1940, and before uy 1, 1945,
Secton.
Descrpton of ta .
Od rate.
Defense-ta rate.
2800(a) (1)
Dsted sprts generay
2.25
3.
2800(a)(1) ,
2..
2.75.
2800(a)(3)
2.28
3.
(h) oor Stocks Ta .
(1) Upon a dsted sprts produced n or mported nto the Unted
States upon whch the nterna-revenue ta Imposed by aw has been pad,
and whch on uy 1, 1940, are hed and Intended for sae or for use n the
manufacture or producton of any artce Intended for sae, there sha be ev-
ed, assessed, coected, and pad a foor stocks ta of 75 cents on each proof-
gaon, and a proportonate ta at a ke rate on a fractona parts of such
proof-gaon. The ta mposed by ths subsecton sha not appy to one
hundred wne gaons of the reta stocks of dsted sprts hed by a per-
son on premses as to whch such person has ncurred occupatona ta as a
reta deaer n quors for the perod begnnng on uy 1, 1940, and as to
whch no other occupatona ta wth respect to deang n dsted sprts
has been Incurred by such person for a perod begnnng on such date.
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454
(2) very person requred by ths subsecton to pay any foor stocks
ta sha, on or before ugust 1, 1940. under such reguatons as the Com-
mssoner, wth the approva of the Secretary, sha prescrbe, make a re-
turn and pay such ta . Payment of the ta shown to be due may be
e tended to a date not ater than ebruary 1, 1941, upon the fng of a
bond for payment thereof n such form and amount and wth such surety
or suretes as the Commssoner, wth the approva of the Secretary, may
prescrbe. very reta deaer n quors (even though not abe to pay
such ta ) sha make the return requred by ths paragraph.
(3) provsons of aw, ncudng penates, appcabe n respect of
nterna-revenue ta es on dsted sprts sha, nsofar as appcabe and
not nconsstent wth ths subsecton, be appcabe n respect of the foor
stocks ta mposed hereunder.
(b) The thrd paragraph of secton 2887 of the Interna Revenue Code (re-
atng to drawback on dsted sprts) Is amended by strkng out but sha
rot e ceed a rate of 2.25 (or, n the case of brandy, 2) and nsertng
n eu thereof but sha not e ceed a rate of 3 (or, In the case of brandv,
2.75) .
Sec. 214. Wnes and ermented Mat Lquors.
Chapter 2 of the Interna Revenue Code s amended by Insertng at the end
thereof the foowng new subchapter:
Subchapter Defense Ta for ve Years.
Sec. 3190. Defense Ta for ve Tears.
In eu of the rates of ta specfed n such of the sectons of ths tte as
are set forth In the foowng tabe, the rates appcabe wth respect to the
under the headng Defense-ta rate :
Secton.
Descrpton of ta .
Od rate.
Dcfense-ta r
3030(a)(1)( )-.
3030(a) (1) ( ) _.
3030(a)(1)( )-.
3030(a)(2)
3030(a)(2)
3030(a)(2)
3150(a)
St wnes. _
St wnes
St wnes.
Sparkng wnes
Sparkng wnes
Lqueurs, cordas, otc...
ermented mat quors.
5 cents
15 conts
25 cents
2 conts
cents
1 cents
5.
cents.
18 cents.
30 cents.
3 cents.
4 cents.
1 cents.
Sec. 3191. oor Stocks Ta on ermented Mat Lquors.
(a) oor Stocks Ta . Upon a fermented mat quors upon whch the
Interna-revenue ta Imposed by aw has been pad, and whch on uy 1, 1940,
are hed by any person and ntended for sae there sha be eved, assessed,
coected, and pad a foor stocks ta at a rate equa to the ncrease n rate of
ta made appcabe to such artces by secton 3190. The ta mposed by ths
subsecton sha not appy to the reta stocks of fermented mat quors hed
by a person on premses as to whch such person has ncurred occupatona
ta as a reta deaer n quors or a reta deaer n mat quors for the perod
begnnng on uy 1, 1940, and as to whch no other occupatona ta wth
respect to deang n dsted sprts, wnes, or mat quors, has been Incurred
by such person for a perod begnnng on such date.
(b) Returns. very person requred by subsecton (a) to pay any foor
stocks ta sha, on or before ugust 1, 1940, under such reguatons as the
Commssoner wth the approva of the Secretary sha prescrbe, make a
return and pay such ta . Payment of the ta shown to be due may be e tended
to a date not ater than ebruary 1, 1941, upon the fng of a bond for pay-
ment thereof n such form and amount and wth such surety or suretes as the
Commssoner, wth the approva of the Secretary, may prescrbe.
(c) Laws ppcabe. provsons of aw, ncudng penates, appcabe
n respect of the ta es mposed by secton 3150(a) sha, nsofar as appcabe
and not nconsstent wth ths subsecton, be appcabe wth respect to the
foor stocks ta mposed by subsecton (a).
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Sec. 215. Patng Caeds.
Secton 1807 of the Interna Revenue Code s amended by nsertng (a)
Genera Rue. before the frst paragraph and nsertng at the end thereof
the foowng new subsecton:
(b) Defense Ta foe ve Years. In eu of the rate of ta specfed n
subsecton (a), the rate of ta for the perod after une 30, 1940, and before
uy 1, 1945, sha be 11 cents.
Se 21 . Credts on Ta on utomobes, tc.
Secton 3403(e) of the Interna Revenue Code Is amended by addng at the
end thereof the foowng new sentence: Wth respect to the perod after
une 30, 1940, and before uy 1, 1945, the rates of the credts above provded
sha, n eu of 2 per centum and 3 per centum, be 2 4 per centum and
per centum, respectvey.
TITL III.
Sec. 301. The Secretary of the Treasury sha, as soon as practcabe after
the end of each quarter, determne the addtona amount of ta es coected at-
trbutabe to the ncreases n ta es made, and to the foor stocks ta es mposed,
by the amendments to the Interna Revenue Code In Tte II of ths ct (not
ncudng the amount of ta es attrbutabe soey to secton 209 and not
ncudng any amount coected under secton 1700(a)(1) of the Interna
Revenue Code attrbutabe to a basc admsson charge of more than 40 cents),
pnd the amounts so determned sha be set asde as a speca fund whch sha
be avaabe ony for the retrement of any of the obgatons ssued pursuant to
the authorty contaned n secton 21(b) of the Second Lberty ond ct, as
amended. If at any tme the amounts n the fund are not suffcent for such
purpose, the Secretary of the Treasury s authorzed and drected to transfer to
the fund moneys out of the genera fund of the Treasury. ny amounts In
the speca fund not necessary for the retrement of such obgatons sha be
deposted n the genera fund of the Treasury.
Sec. 302. Secton 21 of the Second Lberty ond ct, as amended, Is hereby
further amended by nsertng (a) after 21. and by addng at the end
of such secton a new paragraph as foows:
(b) In addton to the amount authorzed by the precedng paragraph of ths
secton, any obgatons authorzed by sectons 5 and 18 of ths ct, as amended,
not to e ceed n the aggregate 4,000,000,000 outstandng at any one tme, ess
any retrements made from the speca fund made avaabe under secton 301
of the Revenue ct of 1940, may be ssued under sad sectons to provde the
Treasury wth funds to meet any e pendtures made, after une 30, 1940, for
the natona defense, or to remburse the genera fund of the Treasury therefor.
ny such obgatons so ssued sha be desgnated Natona Defense Seres .
TITL I .
Sec. 401. Secton 205 of the Pubc Saary Ta ct of 1939 s amended by
addng at the end thereof a new sentence to read as foows: If the amount
of the defcency n Income ta for any ta abe year begnnng before anuary 1,
1939, attrbutabe to compensaton pad ndrecty by the Unted States, or any
agency or nstrumentaty thereof, for persona servce as an offcer or empoyee
of a State, or any potca subdvson thereof, or any agency or nstrumen-
taty of any of the foregong, Is pad on or before March 15, 1941, then wth
respect to faure to pay such amount or make return of such compensaton:
(a) No crmna penaty sha appy and (b) the addtons to ta provded n
sectons 291 and 293 of the Interna Revenue Code sha not appy.
pproved, une 25, 1940, 11.45 a. m., . S. T.
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45
S COND R NU CT O 1940.
1940-44-10470
PU LIC, NO. 801, S NTY-SI T CONGR SS. (C PT R 75, T IRD
S SSION . R. 10413 .)
n ct To provde revenue, and for other purposes.
e t enacted by the Senate and ouse of Representatves of the Unted State
of merca n Congress assembed, That ths ct may be cted as the Second
Revenue ct of 1940 .
TITL I CORPOR TION INCOM T .
Sec. 101. Corporaton Income Ta .
(a) Ta on Corporatons n Genera. Secton 13(b) of the Interna Revenue
Code, as amended by secton 3 of the Revenue ct of 1940, s amended to read
as foows:
ta abe year upon the norma-ta net ncome of every corporaton the norma-
ta net Income of whch s more than 25,000 (e cept a corporaton sub|ect to the
ta mposed by secton 14, secton 231(a), Suppement G, or Suppement )
whchever of the foowng ta es s the esser:
(1) Genera rue. ta of 22-fa per centum of the norma-ta net
ncome or
sghty more than 25,000). ta of 3,775, pus 35 per centum of the
amount of the norma-ta net ncome n e cess of 25,000.
(b) Ta on oregn Corporatons. Secton 14(c) (1) of the Interna Revenue
Code, as amended by secton 3 of the Revenue ct of 1940, s amended to read
as foows:
(c) oregn Corporatons.
(1) In the case of a foregn corporaton engaged In trade or busness
wthn the Unted States or havng an offce or pace of busness theren, the
ta sha be an amount equa to 22 per centum of the norma-ta net
ncome, regardess of the amount thereof.
(c) Ta on Mutua Investment Companes. Secton 3 2(b) of the Interna
Revenue Code, as amended by secton 3 of the Revenue ct of 1940, s amended
to read as foows:
ta abe year upon the Suppement net ncome of every mutua nvestment
company a ta equa to 22 per centum of the amount thereof.
(d) Defense Ta for ve Years. The frst sentence of secton 15 of the
Interna Revenue Code, added to such Code by secton 201 of the Revenue ct
of 1040, s amended to read as foows: In the case of any ta payer, the amount
of ta under ths chapter for any ta abe year begnnng after December 31,
59.39, and before anuary 1, 1945, sha be the ta computed wthout regard to
ths secton, ncreased by 10 per centum e cept that n the case of a corpora-
ton the ncrease sha be mted to 10 per centum of the ta computed wthout
regard to the amendments made by secton 101 (a), (b), and (c) of the Second
Revenue ct of 1940.
(e) Ta abe Years to Whch ppcabe. mendments made by ths sec-
ton sha be appcabe ony wth respect to ta abe years begnnng after
December 31, 1939.
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tte e cess profts ta .
Sec. 201. cess Profts Ta of 1940.
The Interna Revenue Code Is amended by nsertng after secton 70 the
foowng new subchapter whch may be cted as the cess Profts Ta ct
of 1940 :
Subchapter cess Profts Ta .
P RT L
Sec. 710. Imposton of Ta .
(a) Imposton. There sha be eved, coected, and pad, for each ta abe
year begnnng after December 31, 1939, on the ad|usted e cess profts net n-
come, as defned n subsecton (b), of every corporaton (e cept a corporaton
e empt under secton 727) a ta as foows:
(1) Upon ad|usted e cess profts net Incomes of ess than 20,000, 25 per
centum of the ad|usted e cess profts net ncome.
5,000 upon ad|usted e cess profts net Incomes of 20,000 and upon
ad|usted e cess profts net ncomes n e cess of 20,000, and not n e cess
of 50,000, 30 per centum n addton of such e cess.
14,000 upon ad|usted e cess profts net ncomes of 50,000 and upon
ad|usted e cess profts net ncomes In e cess of 50,000, and not n e cess
of 100,000, 35 per centum n addton of such e cess.
ad|usted e cess profts net ncomes n e cess of 100,000, and not n e cess of
250,000, 40 per centum n addton of such e cess.
91,500 upon ad|usted e cess profts net Incomes of 250,000 and upon
of 51 0.000, 45 per centum n addton of such e cess.
ad|usted e cess profts net ncomes n e cess of 500,000, 50 per centum n
(2) ppcaton of bates n case of certan e changes. If the ta -
payer s hghest bracket amount for the ta abe year computed under secton
752 (reatng to certan e changes) s ess than 500,000, then n the appca-
ton of paragraph (1) of ths subsecton to such ta payer, n eu of each
amount, other than the percentages, specfed n such paragraph, there sha
be substtuted an amount whch bears the same rato to the amount so
specfed as the hghest bracket amount so computed bears to 500,000.
(b) Defnton of d|usted cess Profts Net Income. s used n ths
secton, the term ad|usted e cess profts net ncome In the case of any ta abe
year means the e cess profts net ncome (as defned n secton 711) mnus the
sum of:
(1) Specfc e empton. specfc e empton of 5,000
(2) cess profts credt. The amount of the e cess profts credt
aowed under secton 712 and
(3) Unused e cess profts credt. In the case of a ta payer the norma-
ta net ncome of whch for the ta abe year s not more than 25,000, the
amount by whch the e cess profts credt for the precedng ta abe year
(f begnnng after December 31, 1939) e ceeds the e cess profts net ncome
for such precedng ta abe year.
Sec. 711. cess Profts Net Income.
(a) Ta abe Tears egnnng fter December 31, 1939. The e cess profts
net ncome for any ta abe year begnnng after December 31, 1939, sha be the
norma-ta net ncome, as defned n secton 13(a) (2), for such year e cept that
the foowng ad|ustments sha be made:
(1) cess profts credt computed under ncome credt. If the e cess
profts credt s computed under secton 713, the ad|ustments sha be as
foows:
( ) Income Ta es. The deducton for ta es sha be Increased by
an amount equa to the ta (not ncudng the ta under secton 102)
under Chapter 1 for such ta abe year
( ) Long-term Gans and Losses. There sha he e cuded ong-
term capta gans and osses. There sha be e cuded the e cess of
gans from the sae or e change of property hed for more than eghteen
290217 11 30
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458
months whch s of a cbnracter whch s sub|ect to the aowance for
deprecaton provded n secton 23(1) over the osses from the sae or
e change of such property
(C) Income rom Retrement or Dscharge of onds, and So orth.
There sha be e cuded, n the case of any ta payer, Income derved
from the retrement or dscharge by the ta payer of any bond, deben-
ture, note, or certfcate or other evdence of ndebtedness, f the obga-
ton of the ta payer has been outstandng for more than eghteen months,
ncudng, In case the Issuance was at a premum, the amount ncudbe
n ncome for such year soey because of such retrement or dscharge
(D) Refunds and Interest on grcutura d|ustment ct Ta es.
There sha be e cuded ncome attrbutabe to refund of ta pad under
the grcutura d|ustment ct of 1933, as amended, and nterest upon
any such refund
( ) Recoveres of ad Debts. There sha be e cuded ncome
attrbutabe to the recovery of a bad debt f a deducton wth reference
to such debt w s aowabe from gross ncome for any ta abe year
begnnng pror to anuary 1, 1940
( ) Dvdends Receved. The credt for dvdends receved sha
appy, wthout mtaton, to dvdends on stock of domestc corporatons.
(2) cess profts credt computed under nvested capta credt. If
the e cess profts credt s computed under secton 714, the ad|ustments sha
be as foows:
( ) Dvdends. Receved. The credt for dvdends receved sha
appy, wthout mtaton, to a dvdends on stock of a corporatons,
e cept dvdends (actua or constructve), on stock of foregn persona-
hodng companes
( ) Interest. The deducton for nterest sha be reduced by an
amount equa to 50 per centum of so much of such nterest as represents
nterest on the ndebtedness ncuded n the day amounts of borrowed
capta (determned under secton 719(a))
(C) Income Ta es. The deducton for ta es sha be ncreased by
an amount equa to the ta (not ncudng the ta under secton 102)
under Chapter 1 for such ta abe year
(D) Long-term Gans and Losses. There sha be e cuded ong-
term capta gans and osses. There sha be e cuded the e cess of
gans from the sae or e change of property hed for more than eghteen
months whch s of a character whch s sub|ect to the aowance for
deprecaton provded In secton 23(1) over the osses from the sae or
e change of such property
( ) Income rom Retrement or Dscharge of onds, and So orth.
There sha be e cuded, n the case of any ta payer, Income derved
from the retrement or dscharge by the ta payer of any bond, debenture,
note, or certfcate or other evdence of ndebtedness, f the obgaton
of the ta payer has been outstandng for more than eghteen months,
ncudng, n case the ssuance was at a premum, the amount Incudbe
In ncome for such year soey because of such retrement or dscharge
( ) Refunds and Interest on grcutura d|ustment ct Ta es.
There sha be e cuded ncome attrbutabe to refund of ta pad under
the grcutura d|ustment ct of 1933, as amended, and nterest upon
any such refund
(G) Interest on Certan Government Obgatons. The norma-ta
net Income sha be ncreased by an amount equa to the amount of the
Interest on obgatons hed durng the ta abe year whch are descrbed
n secton 22(b)(4) any part of the nterest from whch s e cudbe
from gross ncome or aowabe as a credt aganst net ncome, If the
ta payer has so eected under secton 720(d) and
( ) Recoveres of ad Debts. There sha be e cuded Income at-
trbutabe to the recovery of a bad debt f a deducton wth reference
to such debt was aowabe from gross ncome for any ta abe year
begnnng pror to anuary 1, 1940.
(3) Ta abe tear ess than tweve months. If the ta abe year Is a
perod of ess than tweve months the e cess profts net ncome sha be
paced on an annua bass by mutpyng the amount thereof by the num-
ber of days n the tweve months endng wth the cose of the ta abe year
and dvdng by the number of days n the ta abe year. The ta sha be
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Msc.
uch part of the ta computed on such annua bass as the number of days
n the ta abe year s of the number of days In the tweve months endng
wth the cose of the ta abe year.
(b) Ta abe Yeaks n ask Perod.
(1) Genera rue and ad|ustments. The e cess profts net ncome
for any ta abe year sub|ect to the Revenue ct of 193 sha be the
norma-ta net Income, as defned n secton 13(a) of such ct and for
any other ta abe year begnnng after December 31, 1937, and before
anuary 1, 1940, sha be the speca-cass net ncome, as defned In sec-
ton 14(a) of the appcabe revenue aw. In ether case the foowng
ad|ustments sha be made (for addtona ad|ustments n case of certan
reorganzatons, see secton 742(e)) :
( ) Income Ta es. The deducton for ta es sha be ncreased by
an amount equa to the ta (not Incudng the ta under secton 102)
for such ta abe year under Tte I or Chapter 1, as the case may be,
of the revenue aw appcabe to such year
( ) Long-Term Gans and Losses. There sha be e cuded ong-
term capta gans and osses. There sha be e cuded the e cess
of gans from the sae or e change of property hed for more than
eghteen months whch Is of a character whch s sub|ect to the aow-
ance for deprecaton provded n secton 23(1) over the osses from
the sae or e change of such property
(C) Income rom Retrement or Dscharge of onds, and So
orth. There sha be e cuded, n the case of any ta payer, ncome
derved from the retrement or dscharge by the ta payer of any bond,
debenture, note, or certfcate or other evdence of ndebtedness, f the
obgaton of the ta payer has been outstandng for more than eghteen
months, ncudng, n case the ssuance was at a premum, the amount
ncudbe n ncome for such year soey because of such retrement or
dscharge
(D) Deductons on ccount of Retrement or Dscharge of onds,
and So orth. If durng the ta abe year the ta payer retres or ds-
charges any bond, debenture, note, or certfcate or other evdence of
ndebtedness, f the obgaton of the ta payer has been outstandng
for more than eghteen months, the foowng deductons for such ta a-
be year sha not be aowed:
() The deducton aowabe under secton 23(a) for e penses
pad or ncurred n connecton wth such retrement or dscharge
() The deducton for osses aowabe by reason of such re-
trement or dscharge and
() In case the ssuance was at a dscount, the amount de-
ductbe for such year soey because of such retrement or ds-
charge
( ) Casuaty, Demoton, and Smar Losses. Deductons under
secton 23(f) for osses arsng from fres, storms, shpwreck, or other
casuaty, or from theft, or arsng from the demoton, abandonment,
or oss of usefu vaue of property, not compensated for by nsurance
or otherwse, sha not be aowed
( ) Repayment of Processng Ta to endees. The deducton un-
der secton 23(a), for any ta abe year, for e penses sha be decreased
by an amount whch bears the same rato to the amount deductbe on
account of any repayment or credt by the corporaton to ts vendee of
any amount attrbutabe to any ta under the grcutura d|ustment
ct of 1933, as amended, as the e cess of the aggregate of the amounts
so deductbe n the base perod over the aggregate of the amounts
attrbutabe to ta es under such ct coected from Its vendees whch
were Incudbe n the corporaton s gross ncome n the base perod
and whch were not pad, bears to the aggregate of the amounts so
deductbe In the base perod
(G) Payment of udgments, and So orth. Deductons attrbutabe
to any cam, award, |udgment, or decree aganst the ta payer, or
nterest on any of the foregong, sha not be aowed f n the ght of
the ta payer s busness t was abnorma for the ta payer to ncur a
abty of such character or, f the ta payer normay ncurred such
abty, the amount of such abty n the ta abe year was grossy
dsproportonate to the amount of such abty n the four prevous
ta abe years
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4 0
( ) e pendtures for Intangbe drng and deveopment costs
pad or ncurred n or for the drng of wes or the preparaton of
wes for the producton of o or gas, or e pendtures for deveopment
costs In the case of mnes, whch the ta payer has deducted from
gross ncome as an e pense, sha not be aowed to the e tent that n
the ght of the ta payer s busness t was abnorma for the ta payer
to ncur a abty of such a character or, f the ta payer normay
ncurred such abty, to the e tent that the amount of such abty
n the ta abe year was grossy dsproportonate to the amount of such
abty n the four prevous ta abe years and
(I) Dvdends Receved. The credt for dvdends receved sha
appy, wthout mtaton, to dvdends on stock of domestc corpora-
tons.
(2) Capta gans and osses. or the purposes of ths subsecton the
norma-ta net ncome and the speca-cass net ncome referred to n para-
graph (1) sha be computed as f secton 23(g)(2), secton 23(k)(2), and
secton 117 were part of the revenue aw appcabe to the ta abe year the
e cess profts net ncome of whch s beng computed, wth the e cepton
that the net short-term capta oss carry-over provded n subsecton (e) of
secton 117 sha be appcabe to net short-term capta osses for ta abe
years begnnng after December 31, 1934. Such e cepton sha not appy
for the purposes of computng the ta under ths subchapter for any ta abe
year begnnng before anuary 1, 1941.
Sec. 712. cess Profts Credt owance.
(a) Domestc Corporatons. In the case of a domestc corporaton whch was
n e stence before anuary 1, 1940, the e cess profts credt for any ta abe year
sha, at the eecton of the ta payer made n ts return for such ta abe year, be
an amount computed under secton 713 or secton 714. ( or eecton n case of
certan reorganzatons of corporatons not quafed under the precedng sentence,
see secton 741.) In the case of a other domestc corporatons the e cess profts
credt for any ta abe year sha be an amount computed under secton 714. In
the case of a domestc corporaton whch for any ta abe year does not fe a
return before the e praton of the tme prescrbed by aw for fng such return,
the e cess profts credt for such ta abe year sha be an amount computed under
secton 714.
(b) oregn Corporatons. In the case of a foregn corporaton engaged n
trade or busness wthn the Unted States or havng an offce or pace of busness
theren, the frst ta abe year of whch under ths subchapter begns on any date
n 1940, whch was n e stence on the day forty-eght months pror to such date
and whch at any tme durng each of the ta abe years n such forty-eght months
was engaged n trade or busness wthn the Unted States or had an offce or
pace of busness theren, the e cess profts credt for any ta abe year sha, at
the eecton of the ta payer n ts return for such ta abe year, be an amount
computed under secton 713 or secton 714. In the case of a other such foregn
corporatons the e cess profts credt for any ta abe year sha be an amount
computed under secton 714. In the case of a foregn corporaton whch for any
ta abe year does not fe a return before the e praton of the tme prescrbed by
aw for fng such return, the e cess profts credt for such ta abe year sha be
an amount computed under secton 714.
Sec. 713. cess Profts Credt ased on Income.
(a) mount of cess Profts Credt. The e cess profts credt for any
ta abe year, computed under ths secton, sha be
(1) Domestc corporatons. In the case of a domestc corporaton
( ) 95 per centum of the average base perod net Income, as defned
n subsecton (b),
( ) Pus 8 per centum of the net capta addton as defned n
subsecton (c), or
(C) Mnus per centum of the net capta reducton as defned In
subsecton (c).
(2) oregn corporatons. In the case of a foregn corporaton, 95 per
centum of the average base perod net ncome.
(b) verage ase Perod Net Income. or the purposes of ths secton the
average base perod net Income of the ta payer sha be determned as foows:
(1) y computng the aggregate of the e cess profts net ncome for each
of the ta abe years of the ta payer begnnng after December 31, 1935, and
before anuary 1, 1940, reduced, n the case of each such ta abe year n
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whch the deductons pns the credt for dvdends receved e ceeded the
gross ncome, by the amount attrbutabe to such e cess under paragraph (4)
(2) y dvdng the amount ascertaned under paragraph (1) by the
tota number of months n a such ta abe years and
(3) y mutpyng the amount ascertaned under paragraph (2) by
tweve.
(4) or the purposes of paragraph (1)
( ) In determnng whether, for any ta abe year, the deductons
pus the credt for dvdends receved e ceeded the gross ncome, and n
determnng the amount of such e cess, the ad|ustments provded n
secton 711(b)(1) sha be made and
( ) The amount attrbutabe to any ta abe year n whch there s
such an e cess sha be the amount of such e cess, e cept that such
amount sha be zero f there s ony one such year, or, f more than one,
sha be zero for the year n whch such e cess s the greatest.
(5) or the purposes of paragraph (1), f the ta payer was n e stence
durng ony part of the 48 months precedng the begnnng of ts frst ta abe
year under ths subchapter (herenafter n ths paragraph caed base
perod ), Its e cess profts net ncome
( ) for each ta abe year of tweve months (begnnng wth the
begnnng of such base perod) durng whch t was not n e stence,
sha be an amount equa to 8 per centum of the e cess of
(1) the day Invested capta for the frst day of the ta payer s
frst ta abe year begnnng after December 81, 1939, over
(11) an amount equa to the same percentage of such day
Invested capta as s appcabe under secton 720 In reducton of
the average Invested capta of the precedng ta abe year
( ) for the ta abe year of ess than tweve months consstng of that
part of the remander of the base perod durng whch t was not n
e stence, sha be the amount ascertaned for a fu year under sub-
paragraph ( ), mutped by the number of days n such ta abe year
of ess than tweve months and dvded by the number of days n the
tweve months endng wth the cose of such ta abe year.
( ) In no case sha the average base perod net Income be ess than zero.
(7) or computaton of average base perod net ncome n case of certan
reorganzatons, see secton 742.
(c) d|ustments n cess Pboftts Ckedt on ccount of Capta
Changes. or the purposes of ths secton
(1) The net capta addton for the ta abe year sha be the e cess,
dvded by the number of days n the ta abe year, of the aggregate of the
day capta addton for each day of the ta abe year over the aggregate of
the day capta reducton for each.day of the ta abe year.
(2) The net capta reducton for the ta abe year sha be the e cess,
dvded by the number of days n the ta abe year, of the aggregate of
the day capta reducton for each day of the ta abe year over the aggre-
gate of the day capta addton for each day of the ta abe year.
(3) The day capta addton for any day of the ta abe year sha be
the aggregate of the amounts of money and property pad n for stock, or as
pad-n surpus, or as a contrbuton to capta, after the begnnng of the
ta payer s frst ta abe year under ths- subchapter and pror to such day.
In determnng the amount of any property pad n, such property sha e
ncuded n an amount determned n the manner provded n secton
718(a)(2). dstrbuton by the ta payer to ts sharehoders n ts stock
or rghts to acqure ts stock sha not be regarded as money or property
pad In for stock, or as pad-n surpus, or as a contrbuton to capta. The
amount ascertaned under ths paragraph sha be reduced by the e cess,
If any, of the e cuded capta for such day over the e cuded capta for
the frst day of the ta payer s frst ta abe year under ths subchapter.
or the purposes of ths paragraph the e cuded capta for any day sha
be an amount equa to the sum of the foowng:
( ) The aggregate of the ad|usted bass (for determnng oss
upon sae or e change) as of the begnnng of such day, of obgatons
hed by the ta payer at the begnnng of such day, whch are de-
scrbed n secton 22(b)(4) ( ), ( ), or (C) any part of the nterest
from whch s e cudbe from gross ncome or aowabe as a credt
aganst net Income and
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( ) The aggregate of the ad|usted hass (for determnng oss upon
sae or e change) as of the hegnnug of such day, of stock of domestc
corporatons hed by the ta payer at the begnnng of such day.
The day capta addton sha n no case be ess than zero. ( or day
capta addtons and reductons n case of certan reorganzatons, see
secton 743.)
(4) The day capta reducton for any day of the ta abe year sha
be the aggregate of the amounts of dstrbutons to sharehoders, not out of
earnngs and profts, after the begnnng of the ta payer s frst ta abe
year under ths subchapter and pror to such day.
Sec. 714. cess Profts Credt ased on Invested Capta.
The e cess profts credt, for any ta abe year, computed under ths sec-
ton, sha be an amount equa to 8 per centum of the ta payer s nvested
capta for the ta abe year, determned under secton 715.
Sec. 715. Defnton of Invested Capta .
or the purpose of ths subchapter the Invested capta for any ta abe
year sha be the average nvested capta for such year, determned under
secton 71 , reduced by an amount computed under secton 720 (reatng to
nadmssbe assets). If the-Commssoner fnds that In any case the deter-
mnaton of nvested capta, on a bass other than a day bass, w produce
an nvested capta dfferng by not more than 1,000 from an nvested capta
determned on a day bass, he may, under reguatons prescrbed by hm wth
(e approva of the Secretary, provde for such determnaton on such other
bass. ( or computaton of nvested capta n case of foregn corporatons and
corporatons entted to the benefts of secton 251, see secton 724.)
Sec. 71 . verage Invested Cap:ta.
The average nvested capta for any ta abe year sha be the aggregate
of the day nvested capta for each day of such ta abe year, dvded by the
number of days n such ta abe year.
Sec. 717. Day Invested Capta.
The day nvested capta for any day of the ta abe year sha be the sum
of the equty Invested capta for such cay pus the borrowed nvested capta
for such day determned under secton 719.
Sec. 71S. quty Invested Capta.
(a) Defnton. The equty nvested capta for any day of any ta abe
year sha be determned as of the begnnng of such day and sha be the sum
of the foowng amounts, reduced as provded n subsecton (b)
(1) Money pad n. Money prevousy pad n for stock, or as pad-n
surpus, or as a contrbuton to capta
(2) Pkoperty pad n. Property (other than money) prevousy pad n
(regardess of the tme pad n) for stock, or as pad-n surpus, or as a
contrbuton to capta. Such property sha be ncuded n an amount
equa to ts bass (unad|usted) for determnng oss upon sae or e change.
If the property was dsposed of before such ta abe year, such bass sha
be determned n the same manner as f the property were st hed at
the begnnng of such ta abe .year. If such unad|usted bass s a sub-
sttuted bass t sha be ad|usted, wth respect to the perod before the
property was pad n, n the manner provded n secton 113(b)(2)
(3) Dstrbuton n stock. Dstrbutons n stock
( ) Made pror to such ta abe year to the e tent to whch they
are consdered dstrbutons of earnngs and profts and
( ) Prevousy made durng such ta abe year to the e tent to
whch they are consdered dstrbutons of earnngs and profts other
than earnngs and profts of such ta abe year
(4) arnngs and profts at begnnng of year. The accumuated
earnngs and profts as of the begnnng of such ta abe year and
(5) Increase on account of gan on ta -frke qudaton. In the case
of the prevous recept of property (other than property descrbed n the
ast sentence of secton 113(a) (15)) by the ta payer In compete qudaton
of another corporaton under secton 112(b)( ), or the correspondng pro-
vson of a pror revenue aw, an amount, wth respect to each such quda-
ton, equa to the amount by whch the aggregate of the amount of the
money so receved and of the ad|usted bass, at the tme of recept, of a
property (other than money) so receved, e ceeds the sum of:
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( ) The aggregate of the ad|usted bass of each share of stock
wth res Ct to whch such property was receved such ad|usted bass
of each share to be determned mmedatey pror to the recept of any
property n such qudaton wth respect to such share, and
( ) The aggregate of the abtes of such other corporaton as-
sumed by the ta payer n connecton wth the recept of such property,
of the abtes (not assumed by the ta payer) to whch such property
so receved was sub|ect, and of any other consderaton (other than
the stock wth respect to whch such property was receved) gven by
the ta payer for such property so receved.
(b) Reducton n quty Invested Capta. The amount by whch the
equty nvested capta for any day sha be reduced as provded n subsecton
(a) sha be the sum of the foowng amounts
(1) Dstrbutons n prevous years. Dstrbutons made pror to such
ta abe year whch were not out of accumuated earnngs and profts
(2) Dstrbutons durng the year. Dstrbutons prevousy made dur-
ng such ta abe year whch are not out of the earnngs and profts of such
ta abe year
(3) arnngs and profts of another corporaton. The earnngs and
profts of another corporaton whch prevousy at any tme were ncuded
In accumuated earnngs and profts by reason of a transacton descrbed n
secton 112(b) to (e), both ncusve, or n the correspondng provson of a
pror revenue aw, or by reason of the transfer by such other corporaton to
the ta payer of property the bass of whch n the hands of the ta payer s
or was determned wth reference to ts bass In the hands of such other
corporaton, or woud have been so determned f the property had been
other than money and
(4) Reducton on account of oss on ta -free qudaton. In the case
of the prevous recept of property (other than property descrbed n the ast
sentence of secton 113(a) (15)) by the ta payer n compete qudaton of
another corporaton under secton 112(b)( ), or the correspondng prov-
son of a pror revenue aw, an amount, wth respect to each such quda-
ton, equa to the amount by whch the sum of
( ) The aggregate of the ad|usted bass of each share of stock wth
respect to whch such property was receved such ad|usted bass of
each share to be determned mmedatey pror to the recept of any
property n such qudaton wth respect to such share, and
( ) The aggregate of the abtes of such other corporaton
assumed by the ta payer n connecton wth the recept of such prop-
erty, of the abtes (not assumed by the ta payer) to whch such
property so receved was sub|ect, and of any other consderaton (other
than the stock wth respect to whch such property was receved) gven
by the ta payer for such property so receved,
e ceeds the aggregate of the amount of the money so receved and of the
ad|usted bass, at the tme of recept, of a property (other than money)
so receved. The amount of the reducton under ths paragraph sha not
e ceed the accumuated earnngs and profts as of the begnnng of such
ta abe year.
(c) Rues fob ppcaton of Subsectons ( ) and ( ). or the purposes
of subsectons (a) and (b)
(1) Dstrbutons to sharehoders. The term dstrbuton means a
dstrbuton by a corporaton to ts sharehoders, and the term dstrbuton
n stock means a dstrbuton by a corporaton n Its stock or rghts to
acqure ts stock. To the e tent that a dstrbuton n stock s not con-
sdered a dstrbuton of earnngs and profts t sha not be consdered a
dstrbuton. dstrbuton n stock sha not be regarded as money or
property pad In for stock, or as pad-n surpus, or as a contrbuton to
capta.
(2) Dstrbutons n frst s ty days of ta abe year. In the appca-
ton of such subsectons to any ta abe year begnnng after December 31,
1W0, so much of the dstrbutons (taken n the order of tme) made durng
the frst s ty days thereof as does not e ceed the accumuated earnngs
and profts as of the begnnng thereof (computed wthout regard to ths
paragraph) sha be consdered to have been made on the ast day of the
precedng ta abe year.
(3) Computaton of earnngs and profts of ta are year. or the
purposes of subsectons (a) (3) ( ) and (b) (2) n determnng whether a
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dstrbuton Is out of the earnngs and profts of any ta abe year, such
earnngs and profts sha be computed as of the cose of such ta abe year
wthout dmnuton by reason of any dstrbuton made durng such ta abe
year or by reason of the ta under ths subchapter for such year and the
determnaton sha be made wthout regard to the amount of earnngs and
profts at the tme the dstrbuton was made.
(4) Stock n case op merges ob consodaton. If a corporaton owns
stock In another corporaton, and
( ) such corporatons are merged or consodated In a statutory
merger or consodaton, or
( ) such corporatons are partes to a transacton whch resuts n
the emnaton of such stock In a manner smar to that resutng
from a statutory merger or consodaton,
then such stock sha not be consdered as property pad In for stock of, or
as pad-n surpus of, or as a contrbuton to capta of, the corporaton
resutng from the transacton referred to In subparagraph ( ) or ( ).
(d) or speca rues affectng computaton of property pad n for stock n
connecton wth certan e changes and qudatons, see secton 751(a).
(e) or determnaton of equty nvested capta n speca cases, see secton
723.
Sec. 719. orrowed Invested Capta.
(a) orrowed Capta. The borrowed capta for any day of any ta abe
year sha be determned as of the begnnng of such day and sha be the sum
of the foowng:
(1) The amount of the outstandng ndebtedness (not ncudng nterest,
and not ncudng ndebtedness descrbed In secton 751(b) reatng to
certan e changes) of the ta payer whch s evdenced by a bond, note, b
of e change, debenture, certfcate of Indebtedness, mortgage, or deed of
trust, pus,
(2) In the case of a ta payer havng a contract (made before the
e praton of 30 days after the date of the enactment of the Second Reve-
nue ct of 1940) wth a foregn government to furnsh artces, materas,
or suppes to such foregn government, f such contract provdes for
advance payment and for repayment by the vendor of any part of such
advance payment upon canceaton of the contract by such foregn govern-
ment, the amount whch woud be requred to be so repad f canceaton
occurred at the begnnng of such day, but no amount sha be consdered
as borrowed capta under ths paragraph whch has been Incudbe In
gross ncome.
(b) orrowed Invested Capta. The borrowed nvested capta for any
day of any ta abe year sha be determned ns of the begnnng of such day and
sha be an amount equa to 50 per centum of the borrowed capta for such day.
Seo. 720. dmssbe and Inadmssbe ssets.
(a) Defntons. or the purposes of ths subchapter
(1) The term nadmssbe assets means
( ) Stock n corporatons e cept stock n a foregn persona-hodng
company and
( ) cept as provded n subsecton (d), obgatons descrbed n
secton 22(b) (4) any part of the nterest from whch s e cudbe from
gross ncome or aowabe as a credt aganst net ncome.
(2) The term admssbe assets means a assets other than nadms-
sbe assets.
(b) Rato of Ikadmssb.es to Tota ssets The amount by whch the
average nvested capta for any ta abe year sha be reduced as provded n
secton 715 sha be an amount whch s the same percentage of such average
nvested capta as the percentage whch the tota of the nadmssbe assets
s of the tota of admssbe and Inadmssbe assets. or such purposes, the
amount attrbutabe to each asset hed at any tme durng such ta abe year
sha be determned by ascertanng the ad|usted bass thereof (or, n the case
of money, the amount thereof) for each day of such ta abe year so hed and
addng such day amounts. The determnaton of such day amounts sha be
made under reguatons prescrbed by the Commssoner wth the approva of
the Secretary. The ad|usted bass sha be the ad|usted bass for determnng
oss upon sae or e change as determned under secton 113.
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(c) Computaton f Short-Term Capta Gan. Tf durng the ta abe year
there has been a short-term capta gan wth respect to an nadmssbe asset,
then so much of the amount attrbutabe to such nadmssbe asset under sub-
secton (b) as bears the same rato thereto as such gan bears to the sum of
such gan pus the dvdends and nterest on such asset for such year, sha,
for the purpose of determnng the rato of nadmssbe assets to the tota
of admssbe and nadmssbe assets, be added to the tota of admssbe assets
and subtracted from the tota of nadmssbe assets.
(d) Treatment of Government Obgatons as dmssbe ssets. If the
e cess profts credt for any ta abe year s computed under secton 714, the ta -
payer may n ts return for such year eect to ncrease ts norma-ta net
ncome for such ta abe year by an amount equa to the amount of the nterest
on a obgatons hed durng the ta abe year whch are descrbed n secton
22(b) (4) any part of the nterest from whch s e cudbe from gross ncome
or aowabe as a credt aganst net ncome. In such case, for the purposes of
ths secton, the term admssbe assets ncudes such obgatons, and the
term nadmssbe assets does not ncude such obgatons.
Sec. 721. bnormates n Income n Ta abe Perod.
If there s ncudbe n the gross ncome of the ta payer for any ta abe
year an tem of ncome of any one or more of the foowng casses:
(a) rsng out of a cam, award, |udgment, or decree, or nterest on
any of the foregong or
(b) Consttutng an amount payabe under a contract the performance
of whch requred more than 12 months or
(c) Resutng from e poraton, dscovery, prospectng, research, or
deveopment of tangbe property, patents, formuae, or processes, or any
combnaton of the foregong, e tendng over a perod of more than 12
months or
(d) Incudbe n gross ncome for the ta abe year rather than for a
dfferent ta abe year by reason of a change n the ta payer s accountng
perod or method of accountng or
(e) In the case of a essor of rea property, amounts ncuded In gross
ncome for the ta abe year by reason of the termnaton of the ease or
(f) Dvdends on stock of foregn corporatons, e cept foregn persona
hodng companes
and, n the ght of the ta payer s busness, t s abnorma for the ta payer to
derve ncome of such cass, or, f the ta payer normay derves ncome of such
cass, the tem ncudbe n the gross ncome of the ta abe year s grossy
dsproportonate to the gross ncome of the same cass n the four prevous
ta abe years, then: (1) the amount of such tem attrbutabe to any prevous
ta abe year or years sha be determned under rues and reguatons pre-
scrbed by the Commssoner wth the approva of the Secretary (2) the
amount of such tem attrbutabe to any future ta abe year or years sha be
determned under rues and reguatons prescrbed by the Commssoner wth
the approva of the Secretary and sha, for the purposes of ths subchapter,
be ncuded n the gross ncome for the future year or years to whch attrb-
utabe and (3) the ta under ths subchapter for the ta abe year (n whch
the whoe of such tem woud, wthout regard to ths secton, be ncudbe)
sha not e ceed the sum of:
( ) The ta under ths subchapter for such ta abe year computed wth-
out the ncuson n gross ncome of the porton of such tem whch s
attrbutabe to any other ta abe year, and
( ) The aggregate of the ncrease n the ta under ths subchapter
whch woud have resuted for each prevous ta abe year to whch any
porton of such tem s attrbutabe, computed as f an amount equa to
such porton had been ncuded n gross ncome for such prevous ta abe
year.
Sec. 722. d|ustment of bnormates n Income and Capta by the
Commssoner.
or the purposes of ths subchapter, the Commssoner sha aso have author-
ty to make such ad|ustments as may be necessary to ad|ust abnormates affect-
ng ncome or capta, and hs decson sha be sub|ect to revew by the Unted
States oard of Ta ppeas.
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4
Seo. 723. quty Invested Capta n Speca Cases.
Where the Commssoner determnes that the equty nvested capta as of
the begnnng of the ta payer s frst ta abe year under ths subchapter cannot
be determned n accordance wth secton 718, the equty nvested capta as of
the begnnng of such year sha be an amount equa to the sum of (a) the money
pus (b) the aggregate of the ad|usted bass of the assets of the ta payer hed
by the ta payer at such tme, such sum beng reduced by the ndebtedness out-
standng at such tme. The amount of the money, assets, and ndebtedness at
such tme sha be determned n accordance wth rues and reguatons prescrbed
by the Commssoner wth the approva of the Secretary. In such case, the
equty nvested capta for each day after the begnnng of the ta payer s frst
ta abe year under ths subchapter sha be determned, n accordance wth rues
and reguatons prescrbed by the Commssoner wth the approva of the Secre-
tary, usng as the basc fgure the equty nvested capta as so determned.
Seo. 724. oregn Corporatons and Corporatons ntted to enefts of
Secton 251 Invested Capta.
Notwthstandng secton 715, n the case of a foregn corporaton engaged
n trade or busness wthn the Unted States or havng an offce or pace of
busness theren, and n the case of a corporaton entted to the benefts of secton
251, the nvested capta for any ta abe year sha be determned n accordance
wth rues and reguatons prescrbed by the Commssoner wth the approva of
the Secretary, under whch
(a) Genera Rue. The day nvested capta for any day of the ta abe
year sha be the aggregate of the ad|usted bass of each Unted States asset
hed by the ta payer on the begnnng of such day. In the appcaton of secton
720 n reducton of the average nvested capta (determned on the bass of such
day nvested capta), the terms admssbe assets and nadmssbe assets
sha ncude ony Unted States assets or
(b) cepton. If the Commssoner determnes that the Unted States assets
of the ta payer cannot satsfactory be segregated from ts other assets, the
nvested capta for the ta abe year sha be an amount whch s the same
percentage of the aggregate of the ad|usted bass of a assets hed by the ta -
payer as of the end of the ast day of the ta abe year whch the net ncome for
the ta abe year from sources wthn the Unted States s of the tota net ncome
of the ta payer for such year.
(c) Defnton of Unted States sset. s used n ths subsecton, the term
Unted States asset means an asset hed by the ta payer n the Unted States,
determned n accordance wth rues and reguatons prescrbed by the Comms-
soner wth the approva of the Secretary.
Sec. 725. Persona Servce Corporatons.
(a) Defnton. s used n ths subchapter, the term persona servce cor-
poraton means a corporaton whose ncome s to be ascrbed prmary to the
actvtes of sharehoders who are reguary engaged n the actve conduct of the
affars of the corporaton and are the owners at a tmes durng the ta abe year
of at east 70 per centum n vaue of each cass of stock of the corporaton, and
n whch capta s not a matera ncome-producng factor but does not ncude
any foregn corporaton, nor any corporaton 50 per centum or more of whose
gross ncome conssts of gans, profts, or ncome derved from tradng as a
prncpa. or the purposes of ths subsecton, an ndvdua sha be consd-
ered as ownng, at any tme, the stock owned at such tme by hs spouse or
mnor chd or by any guardan or trustee representng them.
(b) ecton as to Ta abty. If a persona servce corporaton sgnfes. In
ts return under Chapter 1 for any ta abe year, ts desre not to be sub|ect to
the ta mposed under ths subchapter for such ta abe year, t sha be e empt
from such ta for such year, and the provsons of Suppement S of Chapter 1
sha appy to the sharehoders In such corporaton who were such sharehoders
on the ast day of such ta abe year of the corporaton.
Sec. 72 . Corporatons Competnq Contracts Under Merchant Marne ct,
1 )3 .
(a) If the Unted States Martme Commsson certfes to the Commssoner
that the ta payer has competed wthn the ta abe year any contracts or sub-
contracts whch are sub|ect to the provsons of secton 505(b) of the Merchant
Marne ct-of )3(|. as amended, then the ta mposed by ths subchapter for
such ta abe year sha be, n eu of a ta computed under secton 710, a ta
computed under subsecton (b) of ths secton, f, and ony f, the ta computed
under subsecton (b) s ess than the ta computed under secton 710.
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(b) The ta computed under ths subsecton sha be the e cess of
(1) tentatve ta computed under secton 710 wth the norma-ta net
Income ncreased by the amount of any payments made, or to be made, to
the Unted States Martme Commsson wth respect to such contracts or
subcontracts over
(2) The amount of such payments.
Sec. 727. empt Corporatons.
The foowng corporatons sha be e empt from the ta mposed by ths
subchapter:
(a) Corporatons e empt under secton 101 from the ta mposed by Chap-
ter 1.
(b) oregn persona-hodng companes, as defned n secton 331.
(c) Mutua Investment companes, as defned In secton 3 1.
(d) Investment companes whch under the Investment Company ct of
1940 are regstered as dversfed companes at a tmes durng the ta abe
year. or the purposes of ths subsecton, If a company Is so regstered before
uy 1, 1941, t sha be consdered as so regstered at a tmes pror to the
date of such regstraton.
(e) Persona-hodng companes, as defned n secton 501.
(f) oregn corporatons not engaged n trade or busness wthn the Unted
States and not havng an offce or pace of busness theren.
(g) Domestc corporatons satsfyng the foowng condtons:
(1) If 95 per centum or more of the gross ncome of such domestc
corporaton for the three-year perod mmedatey precedng the cose of
the ta abe year (or for such part of such perod durng whch the cor-
poraton was n e stence) was derved from sources other than sources
wthn the Unted States and
(2) If 50 per centum or more of ts gross ncome for such perod or
such part thereof was derved from the actve conduct of a trade or
busness.
(h) ny corporaton sub|ect to the provsons of Tte I of the Cv
eronautcs ct of 1938, n the gross ncome of whch for any ta abe year
begnnng after December 31, 1939, there s ncudbe compensaton receved
from the Unted States for the transportaton of ma by arcraft f, after
e cudng from ts gross ncome such compensaton, ts ad|usted e cess profts
net ncome for such year Is zero or ess.
Sec. 728. Meanng of Terms Used.
The terms used n ths subchapter sha have the same meanng as when
used n Chapter 1.
Sec. 729. Laws ppcabe.
(a) Genera Rue. provsons of aw (ncudng penates) appcabe
n respect of the ta es mposed by Chapter 1, sha, nsofar as not nconsstent
wth ths subchapter, be appcabe n respect of the ta Imposed by ths
subchapter.
(b) Returns. Notwthstandng subsecton (a), no return under secton
52(a) sha be requred to be fed by any ta payer under ths subchapter for
any ta abe year for whch ts e cess profts net ncome, computed wth the
ad|ustments provded n secton 711(a) (2) and paced on an annua bass as
provded n secton 711(a) (3), Is not greater than 5,000.
(c) oregn Ta es Pad. In the appcaton of secton 131 for the purposes
of ths subchapter the ta pad or accrued to any country sha be deemed to
be the amount of such ta reduced by the amount of the credt aowed wth
respect to such ta aganst the ta mposed by Chapter 1.
(d) Lmtatons on mount op oregn Ta Credt. The amount of the
credt taken under ths secton sha be sub|ect to each of the foowng
mtatons:
(1) The amount of the credt n respect of the ta pad or accrued to
any country sha not e ceed the same proporton of the ta aganst whch
such credt s taken, whch the ta payer s e cess profts net ncome from
sources wthn such country bears to ts entre e cess profts net ncome
for the same ta abe year and
(2) The tota amount of the credt sha not e ceed the same propor-
ton of the ta aganst whch such credt s taken, whch the ta payer s
e cess profts net ncome from sources wthout the Unted States bears to
ts entre e cess profts net ncome for the same ta abe year.
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4 8
Sec. 730. Consodated Returns.
(a) Prvege to e Consodated Returns. n affated group of cor-
poratons sha, sub|ect to the provsons of ths secton, have the prvege of
makng a consodated return for the ta abe year n eu of separate returna.
The makng of a consodated return sha be upon the condton that a the
corporatons whch have been members of the affated group at any tme dur-
ng the ta abe year for whch the return s made consent to a the reguatons
under subsecton (b) prescrbed pror to the ast day prescrbed by aw for the
fng of such return and the makng of a consodated return sha be con-
sdered as such consent. In the case of a corporaton whch s a member of
the affated group for a fractona part of the year the consodated return
sha ncude the ncome of such corporaton for such part of the year as It s a
member of the affated group.
(b) Reguatons. The Commssoner, wth the approva of the Secretary,
sha prescrbe such reguatons as he may deem necessary n order that the
ta abty of any affated group of corporatons makng a consodated return
and of each corporaton In the group, both durng and after the perod of
affaton, may be returned, determned, computed, assessed, coected, and
ad|usted, n such manner as ceary to refect the e cess profts ta abty and
the varous factors necessary for the determnaton of such abty, and In
order to prevent avodance of such ta abty.
(c) Computaton and Payment of Ta . In any case n whch a consodated
return s made the ta sha be determned, computed, assessed, coected, and
ad|usted n accordance wth the reguatons under subsecton (b) prescrbed pror
to the ast day prescrbed by aw for the fng of such return. Ony one specfc
e empton of 5,000 provded n secton 710(b) (1) sha be aowed for the entre
affated group of corporatons.
(d) Defnton of ffated Group . s used In ths secton, an affated
group means one or more chans of ncudbe corporatons connected through
stock ownershp wth a common parent corporaton whch Is an ncudbe
corporaton f
(1) t east 95 per centum of each cass of the stock of each of the
Incudbe corporatons (e cept the common parent corporaton) s owned
drecty by one or more of the other ncudbe corporatons and
(2) The common parent corporaton owns drecty at east 95 per centum
of each cass of the stock of at east one of the other Incudbe corporatons.
s used In ths subsecton, the term stock does not ncude nonvotng stock
whch s mted and preferred as to dvdends.
(e) Defnton of Incudbe Corporaton . s used In ths secton, the
term Incudbe corporaton means any corporaton e cept
(1) Corporatons e empt from the ta Imposed by ths subchapter.
(2) oregn corporatons.
(3) Corporatons organzed under the Chna Trade ct, 1922.
(4) Corporatons entted to the benefts of secton 251, by reason of
recevng a arge percentage of ther ncome from possessons of the Unted
States.
(5) Persona servce corporatons.
( )Insurance companes sub|ect to ta aton under secton 201, 204, or 207.
(f) Incudbe Insurance Companes. Despte the provsons of paragraph
( ) of subsecton (e), two or more domestc nsurance companes each of whch
s sub|ect to ta aton under the same secton of Chapter 1 sha be consdered as
ncudbe corporatons for the purpose of the appcaton of subsecton (d) to
such nsurance companes aone.
(g) Subsdary ormed to Compy Wth oregn Law. In the case of a
domestc corporaton ownng or controng, drecty or ndrecty, 100 per centum
of the capta stock (e cusve of drectors quafyng shares) of a corporaton
organzed under the aws of a contguous foregn country and mantaned soey
for the purpose of compyng wth the aws of such country as to tte and opera-
ton of property, such foregn corporaton may, at the opton of the domestc
corporaton, be treated for the purpose of ths subchapter as a domestc corpora-
ton.
(h) Suspenson of Runnng of Statute of Lmtatons. If a notce under
secton 272(a) In respect of a defcency for any ta abe year s maed to a
corporaton, the suspenson of the runnng of the statute of mtatons, provded
n secton 277, sha appy n the case of corporatons wth whch such corporaton
made a consodated return for such ta abe year.
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Sec. 731. Corporatons ngaged n Mnng of Strategc Metas.
In the case of any domestc corporaton engaged n the mnng of tungsten,
qucksver, manganese, patnum, antmony, cromte, or tn, the porton of the
ad|usted e cess profts net ncome attrbutabe to such mnng n the Unted States
sha be e empt from the ta mposed by ths subchapter. The ta on the reman-
ng porton of such ad|usted e cess profts net ncome sha be an amount whch
bears the same rato to the ta computed wthout regard to ths secton as such
remanng porton bears to the entre ad|usted e cess profts net ncome.
P RT II RUL S IN CONN CTION WIT C RT IN C NG S.
Suppement cess Profts Credts ased on Income.
Sec. 740. Defntons.
or the purposes of ths Suppement
(a) cqurng Corporaton. The term acqurng corporaton means
(1) corporaton whch has acqured
( ) substantay a the propertes of another corporaton and the
whoe or a part of the consderaton for the transfer of such propertes
s the transfer to such other corporaton of a the stock of a casses
(e cept quafyng shares) of the corporaton whch has acqured such
propertes, or
( ) substantay a the propertes of another corporaton and the
soe consderaton for the transfer of such propertes s the transfer to
such other corporaton of votng stock of the corporaton whch has
acqured such propertes, or
(C) before October 1, 1940, propertes of another corporaton soey
as pad-n surpus or a contrbuton to capta n respect of votng stock
owned by such other corporaton.
or the purposes of subparagraphs ( ) and (C) In determnng whether
such votng stock or such pad-n surpus or contrbuton to capta s the
soe consderaton, the assumpton by the acqurng corporaton of a abty
of the other, or the fact that property acqured s sub|ect to a abty, sha
be dsregarded. Subparagraph ( ) or (C) sha appy ony f the corporaton
transferrng such propertes s forthwth competey qudated n pursuance
of the pan under whch the acquston Is made, and the transacton of whch
the acquston s a part has the effect of a statutory merger or consodaton.
(2) corporaton whch has acqured property from another corporaton
n a transacton wth respect to whch gan or oss was not recognzed under
secton 112(b)( ) of Chapter 1 or a correspondng provson of a pror
revenue aw
(3.) corporaton the resut of a statutory merger of two or more corpo-
ratons or
(4) corporaton the resut of a statutory consodaton of two or more
corporatons.
(b) Component Corporaton. The term component corporaton means
(1) In the case of a transacton descrbed In subsecton (a)(1), the
corporaton whch transferred the assets
(2) In the case of a transacton descrbed n subsecton (a)(2), the
corporaton the property of whch was acqured
(3) In the case of a statutory merger, a corporatons merged, e cept
the corporaton resutng from the merger or
(4) In the case of a statutory consodaton, a corporatons conso-
dated, e cept the corporaton resutng from the consodaton.
(c) uafed Component Corporaton. The term quafed component
corporaton means a component corporaton whch was In e stence on the date
of the begnnng of the ta payer s base perod.
(b) ase Perod. In the case of a ta payer whch s an acqurng corpo-
raton the base perod sha be:
(1) If the ta s beng computed for any ta abe year begnnng n
1940, the forty-eght months precedng the begnnng of such ta abe
year or
(2) If the ta s beng computed for any ta abe year begnnng after
December 31, 1940, the forty-eght months precedng what woud have been
ts frst ta abe year begnnng n 1940 f t had had a ta abe year begn-
nng n 1940 on the date on whch the ta abe year for whch the ta s
beng computed began.
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470
(e) ase Perod Years. n rue case of a ta payer whch Is an acqurng
corporaton ts base perod years sha be the four successve tweve-month
perods begnnng on the same date as the begnnng of ts base perod.
(f) stence of cqurng Corporaton. or the purposes of subsecton
(c) and secton 741, f any component corporaton was n e stence on the
date of the begnnng of the ta payer s base perod (ether actuay or by
reason of ths subsecton), ts acqurng corporaton sha be consdered to have
been n e stence on such date.
(g) Component Corporatons op Component Corporatons. If a corpora-
ton s a component corporaton of an acqurng corporaton, under subsecton
(b) or under ths subsecton, t sha (e cept for the purposes of secton
742(d) (1) and (2) and secton 743(a)) aso be a component corporaton of
the corporaton of whch such acqurng corporaton s a component corporaton.
Sec. 741. ecton of Income Credt.
In addton to the corporatons whch under secton 712(a) may eect the
e cess profts credt computed under secton 713 or the e cess profts credt
computed under secton 714, a ta payer whch Is an acqurng corporaton whch
was n e stence on the date of the begnnng of Its base perod sha have
such eecton.
Sec. 742. veraoe ase Perod Net Income.
In the case of a ta payer whch s an acqurng corporaton whch was
actuay n e stence on the date of the begnnng of Its base perod, or whch
s entted under secton 741 to eect the e cess profts credt computed under
secton 713, Its average base perod net ncome (for the purpose of the credt
computed under secton 713) sha be computed as foows, n eu of the method
provded n secton 713:
(a) y ascertanng wth respect to each of ts base perod years
(1) The amount of ts e cess profts net Income for each of Its ta abe
years begnnng after December 31, 1935, and endng wth or wthn such
base perod year or, n the case of each such ta abe year In whch the deduc-
tons pus the credt for dvdends receved e ceeded the gross Income, the
amount of such e cess
(2) Wth respect to each of Its quafed component corporatons, the
amount of ts e cess profts net Income for each of Its ta abe years
begnnng after December 81, 1935, and endng wth or wthn such base
perod year of the ta payer or, In the case of each such ta abe year
In whch the deductons pus the credt for dvdends receved e ceeded the
gross ncome, the amount of such e cess
(3) ( ) The aggregate of the amounts of e cess profts net ncome
ascertaned under paragraphs (1) and (2) ( ) the aggregate of the
e cesses ascertaned under paragraphs (1) and (2) and (0) the dfference
between the aggregates found under cause ( ) and cause ( ). If the
aggregate ascertaned under cause ( ) s greater than the aggregate found
under cause ( ), the dfference sha for the purposes of subsecton (b)
be desgnated a pus amount , and f the aggregate ascertaned under
cause ( ) s greater than the aggregate found under cause ( ), the
dfference sha for the purposes of subsecton (b) be desgnated a mnus
amount .
(b) y addng the pus amounts ascertaned under subsecton (a)(3) for
each year of the base perod and by subtractng from such sum, f for two
or more years of the base perod there was a mnus amount, the sum of such
mnus amounts, e cudng the greatest.
(c) y dvdng the amount ascertaned under subsecton (b) by four.
(d) In no case sha the average base perod net ncome be ess than zero.
In the case of a ta payer whch becomes an acqurng corporaton In any
ta abe year begnnng after December 31, 1939, f, on September 11, 1940, and
at a tmes unt the ta payer became an acqurng corporaton
(1) the ta payer owned not ess than 75 per centum of each cass of
stock of each of the quafed component corporatons Invoved n the trans-
acton n whch the ta payers became an acqurng corporaton or
(2) one of the quafed component corporatons nvoved In the trans-
acton In whch the ta payer became an acqurng corporaton or
ta payer, and of each of the other quafed component corporatons n-
voved In the transacton,
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the average base perod net ncome of the ta payer sha not be ess than ( )
the average base perod net ncome of that one of ts quafed component
corporatons Invoved n the transacton the average base perod net ncome of
whch s greatest, or ( ) the average base perod net ncome of the ta payer
computed wthout regard to the base perod net ncome of any of ts quafed
component corporatons nvoved n the transacton.
(e) or the purposes of subsecton (a) (1) and (2) of ths secton
(1) There sha be e cuded, n the varous computatons, any dvdends
pad by the ta payer or any of ts quafed component corporatons durng
any of the ta abe years of the payor whch are ncuded n the computaton
of the ta payer s average base perod net ncome. If the payor corporaton
s a corporaton descrbed n subsecton (f) (1) or (2) of ths secton, the
dvdends to be e cuded under ths paragraph sha be ony such as are
pad after such payor corporaton frst became an acqurng corporaton and
(2) In determnng whether, for any ta abe year, the deductons pus
the credt for dvdends receved e ceeded the gross ncome, and n determn-
ng the amount of such e cess, the ad|ustments provded n secton 711(b) (1)
sha be made.
(f) (1) In the case of a ta payer whch s an acqurng corporaton and whch
was not actuay n e stence on the date of the begnnng of ts base perod, there
sha be e cuded from the varous computatons under subsecton (a) (1) of ths
secton the porton of ts e cess profts net ncome, or of the e cess over gross
ncome theren referred to, whch s attrbutabe to any perod before t frst
became an acqurng corporaton.
(2) In the case of a component corporaton whch became a quafed com-
ponent corporaton ony by reason of secton 740(f), there sha be e cuded from
the varous computatons under sub|ecton (a)(2) of ths secton the porton of
ts e cess profts net ncome, or of the e cess over gross ncome theren referred
to, whch s attrbutabe to any perod before t frst became an acqurng
corporaton.
(3) In the case of a quafed component corporaton whch was actuay n
e stence on the date of the begnnng of the ta payer s base perod, there sha
be e cuded from the varous computatons under subsecton (a) (2) of ths
secton the porton of ts e cess profts net ncome, or of the e cess over gross
Income theren referred to, whch s attrbutabe to the perod before such date.
(4) If durng the ta abe year for whch ta s computed under ths sub-
chapter the ta payer acqures assets n a transacton whch consttutes It an
acqurng corporaton, the amount ncudbe under subsecton (a) (2), attrbuta-
be to such transacton, sha be mted to an amount whch bears the same
rato to the amount computed wthout regard to ths paragraph as the number
of days n the ta abe year after such transacton bears to the tota number
of days n such ta abe year.
Sec. 743. Net Capta Changes.
(a) or the purposes of secton 713(c), upon the date of the transacton whch
consttutes a corporaton an acqurng corporaton, there sha be added to ts
day capta addton or reducton for such day, the net capta addton or
reducton, as the case may be, of each of the component corporatons nvoved n
such transacton, but no other capta addton or reducton sha be consdered as
havng been made by reason of such transacton.
(b) or the purposes of ths secton
(1) In computng the net capta addton of each such component corpo-
raton there sha be dsregarded property pad n to such corporaton by
the ta payer or by any of ts component corporatons.
(2) In computng the net capta reducton of each such component
corporaton there sha be dsregarded dstrbutons made to the ta payer
or to any of such component corporatons.
Seo. 744. oregn Corporatons.
The term corporaton as used n ths Suppement does not Incude a foregn
corporaton.
Suppement ghest racket mount and Invested Capta.
Sec. 750. Defntons.
s used In ths Suppement
(a) change. The term e change means an e change, to whch secton
112(b) (4) or (5) or so much of secton 112 (c), (d), or (e) as refers to secton
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472
112(b) (4) or (5), or to whch a correspondng provsons of a pror revenue aw,
s or was appcabe, by one corporaton of ts property whoy or n part for stock
or securtes of another corporaton, or a transfer of property by one corporaton
to another corporaton after December 31, 1917, the bass of whch n the hands
of such other corporaton s or was determned under secton 113(a) (8) ( ), or
woud have been so determned had such secton been n effect.
(b) Trankffror Upon an change. The term transferor upon an e -
Change means a corporaton whch upon an e change transfers property to
another corporaton n e change, whoy or n part, for stock or securtes of
such other corporaton, or transfers property to another corporaton after
December 31, 1917, the bass of whch n the hands of such other corporaton s
or was determned under secton 113(a)(8)( ), or woud have been so deter-
mned had such secton been n effect.
(c) Transferee Upon an change. The term transferee upon an e -
change means a corporaton whch upon an e change acqures property from
another corporaton n e change, whoy or n part, for Its stock or securtes,
or whch acqures property from another corporaton after December 31, 1917,
the bass of whch n ts hands s or was determned under secton 113(a) (8) ( ),
or woud have been so determned had such secton been n effect.
(d) Contro. The term contro means the ownershp of stock possessng
at east 90 per centum of the tota combned votng power of a casses of stock
entted to vote and at east 90 per centum of the tota vaue of shares of a
casses of stock of the corporaton.
(e) ghest racket mount. The term hghest bracket amount means
500,000 or the hghest bracket amount computed under secton 752, whchever
s the smaer.
Sec. 751. Determnaton of Property Pad n for Stock and of orrowed
Capta n Connecton Wth Certan changes.
(a) Property Pad n for Stock. In the appcaton of secton 718(a) to
a transferee upon an e change n determnng the amount pad n for stock
of the transferee, or as pad-n surpus or aa a contrbuton to capta of the
transferee, n connecton wth such e change, ony an amount sha be deemed
to have been so pad In equa to the e cess of the bass In the hands of the
transferee of the property of the transferor receved by the transferee upon
the e change over the sum of
(1) ny abty of the transferor assumed upon such e change and
any abty sub|ect to whch the property was receved upon such e -
change, pus
(2) The aggregate of the amount of money and the far market vaue
of any other property transferred to the transferor not permtted to be
receved by such transferor wthout the recognton of gan.
(b) orrowed Capta. In the appcaton of secton 719(a) to a trans-
feree upon an e change, the term borrowed capta sha not ncude Indebt-
edness orgnay evdenced by securtes ssued by the transferee upon such
e change as consderaton for the property of the transferor receved by the
transferee upon such e change f (1) such securtes were property permtted
to be receved by the person to whom such securtes were Issued wthout the
recognton of gan and (2) the Indebtedness orgnay evdenced by such
securtes dd not arse out of Indebtedness of the transferor (other than In-
debtedness whch n the transferor s hands was sub|ect to the mtatons of
ths subsecton) assumed by the transferee n connecton wth such e change.
Sec. 752. Computaton of ghest racket mount n Connecton Wth
changes.
(a) Speca ppcaton of Day Inverted Capta of Transferor Upon
change. or the purposes of ths secton, the day nvested capta of a
transferor upon an e change for the day after the e change sha be the day
nvested capta determned under secton 717 reduced by an amount equa to
the amount by whch the equty nvested capta of the transferee upon such
e change was ncreased by reason of the recept of property from such transferor
upon such e change.
(b) ghest racket mount of Transferor.
(1) Ta abe year of e change. In the case of a transferor upon an
e change after the begnnng of Its frst ta abe year under ths subchapter,
ts hghest bracket amount for the ta abe year n whch the e change takes
pace sha be the sum of
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( ) Its hghest bracket amount Immedatey precedng the e -
change mutped by the number of days n the ta abe year up to and
ncudng the day of the e change, pus
( ) Its hghest bracket amount for the ta abe year after the
e change, mutped by the number of days n the ta abe year re-
manng after the day of the e change,
dvded by the number of days n the ta abe year.
(2) Ta abe years after e change nvovng contro. In the case of
a transferor upon an e change after the begnnng of ts frst ta abe year
under ths subchapter, f mmedatey after the e change the transferor
or ts sharehoders, or both, are n contro of the transferee, the trans-
feror s hghest bracket amount for any ta abe year after the ta abe year
n whch the e change takes pace sha be an amount whch s a percent-
age of ts hghest bracket amount mmedatey precedng the e change
equa to the percentage whch ts day nvested capta for the dny after
the e change s of ts day nvested capta for the day of the e change.
(3) Ta abe years after e change not nvovng contro. In the case
of a transferor upon an e change (other than a transferor descrbed n
paragraph (4) of ths subsecton) after the begnnng of ts frst ta abe
year under ths subchapter, f mmedatey after the e change no trans-
feror or ts sharehoders, or both, upon the e change are n contro of the
transferee, and f the sharehoders of the transferee mmedatey preced-
ng the e change are not n contro of the transferee mmedatey after the
e change, the transferor s hghest bracket amount for any ta abe year
after the e change sha be the e cess, f any, of the sum of the transferor s
hghest bracket amount mmedatey precedng the e change and the trans-
feree s hghest bracket amount mmedatey precedng the e change, over
500,000.
(4) Ta abe years ater certan e changes under secton 112(b) (5).
In the case of an e change after the begnnng of the frst ta abe year
under ths subchapter of any transferor or transferee upon such e change,
Invovng two or more transferors, or one or more transferors and one or
more other persons, If mmedatey after the e change no one of such
transferors, or ts sharehoders, or both, and no one or more of such other
persons are n contro of the transferee and f such e change s an e change
descrbed n secton 112(b)(5) or so much of secton 112(c) or 112(e) as
refers to secton 112(b)(5), the hghest bracket amount of any such trans-
feror for any ta abe year after the e change sha be an amount equa to
ts hghest bracket amount mmedatey precedng the e change
( ) Mnus an amount whch bears the same rato to ts hghest
bracket amount Immedatey precedng the e change as the e cess of
ts day nvested capta for the day of the e change over ts day
nvested capta for the day after rhe e change bears to ts day In-
vested capta for the day of the e change, and
( ) Pus an amount whch bears the same rato to the e cess over
fOO,000 of the sum of the amounts computed under subparagraph ( )
wth respect to each transferor, as the amount computed under sub-
paragraph ( ) wth respect to such transferor bears to the sum of
the amounts computed under such subparagraph wth respect to each
transferor.
(c) ghest racket mount of Transferee.
(1) Ta abe year of e change nvovng contro. In the case of a
transferee upon an e change after the begnnng of the frst ta abe year
under ths subchapter of a transferor upon such e change the transferee s
hghest bracket amount for the ta abe year n whch the e change takes
pace sha be the sum of
( ) Its hghest bracket amount mmedatey precedng the e change
mutped by the number of days n the ta abe year up to and ncudng
the day of the e change, pus
( ) Its hghest bracket amount for the ta abe year after the e -
change mutped by the number of days n the ta abe year remanng
after the day of the e change,
dvded by the number of days n the ta abe year. or the purposes of ths
paragraph and subsecton (d) of ths secton e change ncudes a qu-
daton descrbed n paragraph (5) of ths subsecton, and such e change
sha be deemed to have taken pace on the day such qudaton was
competed.
290217 41 81
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474
(2) Ta abe years after e change nvovng contro. In the case of
a transferee upon an e change after the begnnng of the frst ta abe year
under ths subchapter of a transferor upon such e change, If Immedatey
after the e change any transferor upon such e change or ts sharehoders,
or both, are n contro of the transferee, the transferee s hghest bracket
amount for any ta abe year after the e change sha be an amount whch s
a percentage of such transferor s hghest bracket amount Immedatey pre-
cedng the e change equa to the percentage whch the e cess of the trans-
feree s day nvested capta for the day after the e change over ts day
nvested capta for the day of the e change s of such transferor s day n-
vested capta for the day of the e change.
(3) Ta abe years after e change not nvovng contro. In the case
of a transferee upon an e change (other than a transferee descrbed n
paragraph (4) of ths subsecton) after the begnnng of the frst ta abe year
under ths subchapter of a transferor upon such e change, f mmedatey
after the e change no transferor or ts sharehoders, or both, are In contro
of the transferee, and If the sharehoders of the transferee Immedatey pre-
cedng the e change are not n contro of the transferee mmedatey after
the e change, the transferee s hghest bracket amount for any ta abe year
after the e change sha be an amount equa to ( ) the sum of the trans-
feror s hghest bracket amount mmedatey precedng the e change and the
transferee s hghest bracket amount mmedatey precedng the e change, or
( ) 500,000, whchever s the smaer.
(4) Ta abe years after certan e changes under secton 112(b)(5).
In the case of an e change descrbed n subsecton (b) (4) of ths secton,
the hghest bracket amount of the transferee upon such e change for any
ta abe year after the e change sha be an amount equa ( ) to the sum
of the amounts computed under subparagraph ( ) of such subsecton wth
respect to each transferor or ( ) 500,000, whchever s the smaer.
(5) Ta abe years after qudaton n case of corporaton recev-
ng property under secton 112(b)( ).- Upon the recept by a corporaton
durng any ta abe year under ths subchapter of property n compete qu-
daton of another corporaton, gan or oss upon whch s not recognzed by
reason of secton 112(b) ( ), the hghest bracket amount of the corporaton
recevng such property for any ta abe year after the qudaton s com-
peted sha be an amount equa to ts hghest bracket amount mmedatey
precedng the competon of the qudaton ncreased, but n no case to an
amount above 500,000, by an amount equa to the hghest bracket amount
of such other corporaton mmedatey precedng the competon of such
qudaton, f prevousy and after the begnnng of the frst ta abe year
under ths subchapter of the corporaton recevng such property such cor-
poraton was a transferor upon an e change wth respect to whch such
other corporaton was a transferee.
(d) ghest racket mount n Case of Two or More changes n Sam
Ta abe Year.
(1) If a transferor upon an e change s n the same ta abe year In-
voved n more than one e change (ether as transferor or transferee), ts
hghest bracket amount for such ta abe year sha be the amount deter-
mned under subsecton (b)(1) wth respect to the ast e change n such
ta abe year. Its hghest bracket amount mmedatey precedng any e -
change n such ta abe year subsequent to the frst e change theren sha
be the amount computed under subsecton (b) (1) wth respect to the mme-
datey precedng e change as f the ta abe year cosed on the day of such
subsequent e change.
(2) If a transferee upon an e change s n the same ta abe year n-
voved n more than one e change (ether as transferee or transferor), ts
hghest bracket amount for such ta abe year sha be the amount deter-
mned under subsecton (c)(1) wth respect to the ast e change In such
ta abe year. Its hghest bracket amount mmedatey precedng any e -
change n such ta abe year subsequent to the frst e change theren sha be
the amount computed under subsecton (c) (1) wth respect to the mme-
datey precedng e change as f the ta abe year cosed on the day of such
subsequent e change.
(3) If a transferor or transferee upon an e change s In the same ta -
abe year nvoved n more than one e change (ether as transferor or trans-
feree), ts hghest bracket amount for any ta abe year after the ta abe
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475
Msc.
year n whch such e changes took pace sha be the amount computed
nnder subsecton (b) (2), (3), or (4), or (c) (2), (3), (4), or (5), as the
case may be, wth respect to the ast such e change.
TITL III MORTIZ TION D DUCTION.
Sec. 301. owance of mortzaton Deducton.
(t) mortzaton Deducton. The deducton for amortzaton provded n
secton 124.
Sec. 302. Computaton of mobtzaton Deducton.
The Interna Revenue Code s amended by nsertng after secton 123 the
foowng new secton:
Sec. 124. mortzaton Deducton.
(a) Genera Rue. very corporaton, at ts eecton, sha be entted to a
deducton wth respect to the amortzaton of the ad|usted bass of any emergency
facty (as defned n subsecton (e)), based on a perod of s ty months. Such
amortzaton deducton sha be an amount, wth respect to each month of such
perod wthn the ta abe year, equa to the ad|usted bass of the facty at the
end of such month dvded by the number of months (ncudng the month for
whch the deducton s computed) remanng n the perod. Such ad|usted bass
at the end of the month sha be computed wthout regard to the amortzaton
deducton for such month. The amortzaton deducton above provded wth re-
spect to any month sha, e cept to the e tent provded n subsecton (g) of ths
secton, be n eu of the deducton wth respect to such facty for such month pro-
vded by secton 211(1), reatng to e hauston, wear and tear, and obsoescence.
The s ty-month perod sha begn as to any emergency facty, at the eecton of
the ta payer, wth the month foowng the month n whc the facty was com-
peted or acqured, or wth the succeedng ta abe year.
(b) ecton of mortzaton. The eecton of the ta payer to take the amor-
tzaton deducton and to begn the s ty-month perod wth the month foowng
the month n whch the facty was competed or acqured sha (e cept as pro-
vded n subsecton (d)(3)) be made ony by a statement to that effect n ts
return for the ta abe year n whch the facty was competed or acqured. Its
eecton to take the amortzaton deducton and to begn such perod wth the ta -
abe year succeedng such year sha be made ony by a statement to that effect n
ts return for such succeedng ta abe year.
(c) Termnaton of mortzaton Deducton. ta payer whch has eected
under subsecton (b) to take the amortzaton deducton provded n subsecton
(a) may, at any tme after makng such eecton, dscontnue the amortzaton
deductons wth respect to the remander of the amortzaton perod, such dscon-
tnuance to begn as of the begnnng of any month specfed by the ta payer n a
notce n wrtng fed wth the Commssoner before the begnnng of such month.
The deducton provded under secton 23(1) sha be aowed, begnnng wth the
frst month as to whch the amortzaton deducton s uot appcabe, and the ta -
payer sha not (e cept as provded n subsecton (d)) be entted to any further
amortzaton deductons wth respect to such emergency facty.
(d) Termnaton of mortzaton P:rou.
(1) If the Presdent has procamed the endng of the emergency perod (as
defned n subsecton (e)), or f the Secretary of War or the Secretary of the
Navy has, n accordance wth reguatons prescrbed by the Presdent, certfed
to the Commssoner that an emergency facty ceased, on the date specfed
n the certfcate, to be necessary n the nterest of natona defense durng the
emergency perod, and f the date of such procamaton or the date specfed
n such certfcate occurs wthn s ty months from the begnnng of the amor-
tzaton perod wth respect to such emergency facty, then the ta payer may
eect (n accordance wth paragraph (4) of ths subsecton) to termnate the
amortzaton perod wth respect to such emergency facty as of the end of
the month n whch such procamaton was ssued or n whch occurred the
date specfed n such certfcate, whchever Is the earer. In such case the
amortzaton perod wth respect to such facty sha end wth the end of
such month n eu of the end of the s ty-month perod.
(2) If the date of the procamaton or the date specfed n the certfcate
referred to n paragraph (1) of ths subsecton occurs wthn s ty months
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from the begnnng of the amortzaton perod wth respect to such emergency
facty and after the begnnng of the month whch the ta payer has pre-
vousy f ed under subsecton (c) for the takng, n eu of the amortzaton
deducton provded n ths secton, of the deducton aowed by secton 23 1),
the ta payer may eect (n accordance wth paragraph (4) of ths subsecton)
to termnate the amortzaton perod wth respect to such emergency facty
as of the end of the month n whch such procamaton was ssued or n whch
occurred the date specfed n such certfcate, whchever s the earer. In
such case the amortzaton perod wth respect to such facty sha end wth
the end of such month n eu of the end of the s ty-month perod, and the ter-
mnaton of the amortzaton deducton under subsecton (c) sha be
dsregarded.
(3) In the case of a ta payer whch has not n ether of ts returns specfed
n subsecton (b) eected to take an amortzaton deducton wth respect to an
emergency facty, f the date of the procamaton or the date specfed n the
certfcate, referred to n paragraph (1) of ths subsecton, whchever Is
earer, s before the e praton of s ty months from the ast day of the month
n whch such emergency facty was competed or acqured, then the ta -
payer may eect (n accordance wth paragraph (4) of ths subsecton) the
amortzaton deducton provded n subsecton (a), usng an amortzaton
perod begnnng wth the month foowng the month n whch the emergency
facty was competed or acqured and endng as of the end of the month
wthn whch such procamaton was ssued or wthn whch occurred the date
specfed n such certfcate, whchever s the earer.
(4) The eecton provded n paragraph (1), (2), or (3) sha be made by
fng wth the Commssoner, n such manner, n such form, and wthn such
tme, as the Commssoner wth the approva of the Secretary may by regua-
tons prescrbe, a statement of such eecton. When such eecton has been so
made, then, under reguatons prescrbed by the Commssoner wth the
approva of the Secretary, the ta es for a ta abe years, begnnng wth the
ta abe year n whch the amortzaton perod began, sha be computed n
accordance wth an amortzaton deducton computed n accordance wth the
method provded n subsecton (a), but usng (n eu of the s ty-month
perod provded n such subsecton) the amortzaton perod specfed n para-
graph (1), (2), or (3), as the case may be.
(5) ReCOMPUT TION O T IN C S O L CTION UND R T IS SURS .CTION.
If the ad|ustment of the ncome or e cess-profts ta abty for any ta abe
year necessary to gve effect to paragraph (4) of ths subsecton s prevented
( ) on the date of the certfcate of the Secretary of War or the Secretary
of the Navy or on the date of the Presdent s procamaton, whchever
s the bass of the ta payer s eecton under ths subsecton, or ( ) wthn
one year from such date, by any provson of aw (other than ths paragraph
and other than secton 37 1, reatng to compromses), an ad|ustment of the
ta abty sha nevertheess be made f n respect of such ta abe year a
notce of defcency s maed or a cam for refund s fed, as the case may be,
wthn one year after the date of such certfcate or such procamaton,
whchever s the bass of the ta payer s eecton under ths subsecton. If at
the tme of the mang of such notce of defcency or the fng of such cam
for refund, the ad|ustment s so prevented, then the amount of the ad|ustment
authorzed n ths paragraph sha be mted to the ncrease or decrease n
the ta prevousy determned for such ta abe year whch resuts soey
from the effect of paragraph (4) of ths subsecton, and such amount sha
be assessed and coected, or credted or refunded, n the same manner as f t
were a defcency or an overpayment, as the case may be, for such ta abe year
and as f on the date of such certfcate or such procamaton, whchever s
the bass of the ta payer s eecton under ths subsecton, one year remaned
before the e praton of the perods of mtaton upon assessment or fng
cam for refund for the ta abe year. The ta prevousy determned sha
be ascertaned n accordance wth secton 3801(d). The amount to be
assessed and coected under ths paragraph n the same manner as f t
were a defcency, or to be refunded or credted n the same manner as f t
were an overpayment, sha not be dmnshed by any credt or set-off based
upon any Item, ncuson, deducton, credt, e empton, gan, or oss, other
than one resutng from the effect of paragraph (4) of ths subsecton. Such
amount, f pad, sha not be recovered by a cam or sut for refund or sut
for erroneous refund based upon any tem, ncuson, deducton, credt,
e empton, gan, or oss, other than one resutng from the effect of para-
graph (4) of ths subsecton.
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(e) Defntons.
(1) mebuen-y facty. s used n ths secton, the term emergency
facty means any facty, and, budng, machnery, or equpment, or part
thereof, the constructon, reconstructon, erecton, or nstaaton of whch
was competed after une 10, 1940, or whch was acqured after such date,
and wth respect to whch a certfcate under subsecton (f) has been made.
(2) mergency perod. s used n ths secton, the term emergency
perod means the perod begnnng une 10, 1940, and endng on the date on
whch the Presdent procams that the utzaton of a substanta porton of
the emergency factes wth respect to whch certfcatons under subsecton
(f) have been made, s no onger requred n the nterest of natona defense.
(f) Determnaton of d|usted ass of mergency ac|ty. In deter-
mnng, for the purposes of subsecton (a) or subsecton (h), the ad|usted bass
of an emergency facty
(1) There sha be ncuded ony so much of the amount otherwse con-
sttutng such ad|usted bass as s propery attrbutabe to such constructon,
reconstructon, erecton, nstaaton, or acquston after une 10,1940, as the
dvsory Commsson to the Counc of Natona Defense and ether the
Secretary of War or the Secretary of the Navy have certfed, wthn the
tme specfed n paragraph (3) of ths subsecton, and under such reguatons
as the Presdent may prescrbe, as necessary n the nterest of natona defense
dur. ng the emergency perod
(2) fter the competon or acquston of any emergency facty wth
respect to whch a certfcate under paragraph (1) has been made, any
e pendture (attrbutabe to such facty and to the perod after such com-
peton or acquston) whch does not represent constructon, reconstructon,
erecton, nstaaton, or acquston ncuded n such certfcate, but wth
respect to whch a separate certfcate s made under paragraph (1), sha
not be apped n ad|ustment of the bass of such facty and sha be
consdered as an e pendture wth respect to a new emergency facty and
(3) The certfcate provded for n paragraph (1) sha have no effect
uness made before whchever of the foowng dates s the ater: ( ) The
the date of such acquston, or ( ) the one hundred and twenteth day after
the date of the enactment of the Second Revenue ct of 1940.
(g) Deprecaton Deducton. If the ad|usted bass of the emergency facty
computed wthout regard to subsecton (f) of ths secton s n e cess of the
ad|usted bass computed under such subsecton, the deducton provded by sec-
ton 23(1) sha, despte the provsons of subsecton (a) of ths secton, be
aowed wth respect to such emergency facty as f ts ad|usted bass were an
amount equa to the amount of such e cess.
(h) Payment by Unted Status of Unamortzed Cost of acty. If an
amount s propery ncudbe n the gross ncome of the ta payer on account of a
payment wth respect to an emergency facty and such payment s certfed as
provded n ths paragraph, then, at the eecton of the ta payer n ts return for
the ta abe year n whch such amount s so ncudbe
(1) The amortzaton deducton for the month n whch such amount s so
ncudbe sha (n en of the amount of the deducton for such month
computed under subsecton (a)) be the amount so ncudbe, but such
deducton sha not be n e cess of the ad|usted bass of the emergency
facty as of the end of such month (computed wthout regard to any
amortzaton deducton for such month). Payments referred to n ths para-
graph sha be payments the amounts of whch arc certfed, under such
reguatons as the Presdent may prescrbe, by ether the Secretary of War
or the Secretary of the Navy as compensaton to the ta payer for the un-
amortzed cost of the emergency facty made because
( ) a contract wth the Unted States nvovng the use of the facty
has been termnated by ts terms or by canceaton, or
( ) the ta payer had reasonabe grounds (ether from provsons of
a contract wth the Unted States nvovng the use of the facty, or
from wrtten or ora representatons made under authorty of the Unted
States) for antcpatng future contracts nvovng the use of the facty,
whch future contracts have not been made.
(2) In case the ta payer s not entted to any amortzaton deducton
wth respect to the emergency facty the deducton aowabe under secton
23(1) on account of the month n whch such amount s so ncudbe sha
be ncreased by such amount, but such deducton on account of such month
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478
sha not be In e cess of the ad|usted bass of the emergency facty as of the
end of such month (computed wthout regard to any amount aowabe, on
account of such month, under secton 23(1) or ths paragraph).
(1) Protecton of the Unted States. If the ta payer has been or w be
rembursed by the Unted States for a or a part of the cost of any emergency
facty pursuant to any contract wth the Unted States, ether
(1) drecty, by a provson theren deang e pressy wth such remburse-
ment, or
(2) ndrecty, because the prce pad by the Unted States (nsofar as
return of cost of the facty Is used as a factor In the f ng of such prce)
s recognzed by the contract as ncudng a return of cost greater than the
norma e hauston, wear and tear,
no amortzaton deducton wth respect to such emergency facty sha be
aowed for any month after the end of the month n whch such contract s
made, uness, before the e praton of nnety days after the makng of such
contract or one hundred and twenty days after the date of the enactment of the
Second Revenue ct of 1940, whchever of such perods e pres the ater, the d-
vsory Commsson to the Counc of Natona Defense, and ether the Secretary
of War or the Secretary of the Navy certfy to the Commssoner that such con-
tract adequatey protects the Unted States wth reference to the future use
and dsposton of such emergency facty. certfcate by the dvsory Com-
msson to the Counc of Natona Defense and ether the Secretary of War or
the Secretary of the Navy, mate to the Commssoner before the e praton of
nnety days after the makng of a contract or one hundred and twenty days after
the date of the enactment of the Second Revenue ct of 1940, whchever of such
perods e pres the ater, to the effect that, under such contract, rembursement
for a or a part of the cost of any emergency facty s not provded for wthn
the meanng of cause (1) or cause (2), sha be concusve for the purposes of
ths subsecton.
The terms and condtons of contracts wth reference to rembursement of the
cost of emergency factes and the protectng of the Unted States wth reference
to the future use and dsposton of such emergency factes sha be made
avaabe to the pubc.
tte v suspenson op proft-mtng provsons op the vnson
act and certan provsons op the merchant marne act, 193 .
Sec. 401. Suspenson of Proft-Lmtng Provsons of the nson ct.
The provsons of secton 3 of the ct of March 27, 1934 ( 48 Stat. 505 34
U. S. C, secton 49 ), as amended, begnnng wth the frst provso thereof, and
secton 2(b) of the ct of une 28, 1940 (Pubc, Numbered 71, Seventy-s th
Congress, thrd sesson), sha not appy to contracts or subcontracts for the
constructon or manufacture of any compete nava vesse or any rmy or Navy
arcraft, or any porton thereof, whch are entered nto n any ta abe year to
whch the e cess profts ta provded n Subchapter of Chapter 2 of the Interna
Revenue Code s appcabe or woud be appcabe f the contractor or subcon-
tractor, as the case may be, were a corporaton, and any agreement to pay Into
the Treasury proft n e cess of 10 per centum, 12 per centum, or 8 per centum,
as the case may be, of the contract prces of any such contracts or subcontracts
sha be wthout effect. Ths secton sha aso appy to such contracts or sub-
contracts whch were entered nto before the date of the begnnng of the con-
tractor s or subcontractor s frst ta abe year whch begns n 1940 and whch are
not competed before such date.
Seo. 402. Suspenson of Proft-Lmtng Provsons of the Merchant Marne
ct, 193 , as to Certan Subcontracts.
(a) The provsons of secton 505(b) of the Merchant Marne ct of 193 , as
amended, sha not appy to any subcontract whch woud otherwse be wthn
such provsons f such subcontract s entered nto n any ta abe year of the
subcontractor to whch Subchapter of Chapter 2 of the Interna Revenue Code
s appcabe and f the prncpa contractor and the subcontractor between whch
such subcontract Is entered Into are not affated wthn the meanng of subsecton
(b) of ths secton at the tme such subcontract s entered nto or at any tme
thereafer up to and ncudng the date of ts competon and any agreement pur-
suant to whch the subcontractor s requred to pay to the Unted States Martme
Commsson proft n e cess of 10 per centum of the contract prce of any such
subcontract or pursuant to whch such an agreement Is requred to be obtaned
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from such subcontractor reatve to sucb subcontract, sha be wthout effect. Ths
subsecton sha appy ony f both the prncpa contractor and the subcontractor
are corporatons.
(b) or the purposes of ths secton, two or more corporatons sha be deemed
to be affated (1) f one corporaton owns at east 95 per centum of the stock
of the other or others, or (2) f at east 85 per centum of the stock of two or
more corporatons s owned by the same nterests. s used n ths subsecton, the
term stock does not ncude nonvotng stock whch s mted and preferred as
to dvdends.
tte v amendments to nterna revenue code.
Sec. 501. arnncs and Profts of Corporatons.
(a) Under Interna Revenue Code. Secton 115 of the Interna Revenue Code
Is amended by nsertng at the end thereof the foowng new subsectons:
(1) ffect on arnngs and Profts of Gan or Loss and of Recept of Ta -
ree Dstrbutons. The gan or oss reazed from the sae or other dsposton
(after ebruary 28, 1913) of property by a corporaton
(1) for the purpose of the computaton of earnngs and profts of the
corporaton, sha be determned, e cept as provded n paragraph (2), by
usng as the ad|usted bass the ad|usted bass (under the aw appcabe to
the year n whch the sae or other dsposton was made) for determnng
gan, e cept that no regard sha be had to the vaue of the property as of
March 1,1913 but
(2) for the purpose of the computaton of earnngs and profts of the
corporaton for any perod begnnng after ebruary 28, 1913, sha be de-
termned by usng as the ad|usted bass the ad|usted bass (under the aw
appcabe to the year n whch the sae or other dsposton was made) for
determnng gan.
Gan or oss so reazed sha ncrease or decrease the earnngs and profts to, hut
not beyond, the e tent to whch such a reazed gan or oss was recognzed n
computng net ncome under the aw appcabe to the year n whch such sae or
dsposton was made. Where n determnng the ad|usted bass used n comput-
ng such reazed gan or oss the ad|ustment to the bass dffers from the ad|ust-
ment proper for the purpose of determnng earnngs or profts, then the atter
ad|ustment sha be used n determnng the ncrease or decrease above pro-
vded. Where a corporaton receves (after ebruary 28, 1913) a dstrbuton
from a second corporaton whch (under the aw appcabe to the year n whch
the dstrbuton was made) was not a ta abe dvdend to the sharehoders of
the second corporaton, the amount of such dstrbuton sha not ncrease the
earnngs and profts of the frst corporaton n the foowng cases:
(1) No such ncrease sha be made n respect of the part of such dstrbu-
ton whch (under such aw) s drecty apped n reducton of the bass of
the stock n respect of whch the dstrbuton was made.
(2) No such ncrease sha be made f (under such aw) the dstrbuton
causes the bass of the stock n respect of whch the dstrbuton was made
to be aocated between such stock and the property receved,
(m) arnngs and Profts Increase n aue ccrued efore March 1,
191S.
(1) If any ncrease or decrease n the earnngs or profts for any perod
begnnng after ebruary 28, 1913, wth respect to any matter woud be
dfferent had the ad|usted bass of the property nvoved been determned
wthout regard to ts March 1, 1913, vaue, then, e cept as provded n
paragraph (2), an ncrease (propery refectng such dfference) sha be
made n that part of the earnngs and profts consstng of ncrease n vaue
of property accrued before March 1, 1913.
(2) If the appcaton of subsecton (1) to a sae or other dsposton after
ebruary 28, 1913, resuts n a oss whch s to be apped n decrease of
earnngs and profts for any perod begnnng after ebruary 28, 1913, then,
notwthstandng subsecton (1) and n eu of the rue provded n paragraph
(1) of ths subsecton, the amount of such oss so to be apped sha be
reduced by the amount, f any, by whch the ad|usted bass of the property
used n determnng the oss, e ceeds the ad|usted bass computed wthout
regard to the vaue of the property on March 1, 1913, and f such amount so
apped n reducton of the decrease e ceeds such oss, the e cess over such
oss sha ncrease that part of the earnngs and profts consstng of Increase
n vaue of property accrued before March 1, 1913.
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480
(b) ffectve Date of mendment. The amendment made by subsecton (a)
sha be appcabe to ta abe years begnnng after December 31, 1938.
(c) Under Pror cts. or the purposes of the Revenue ct of 1938 or any
pror Revenue ct the amendments made to the Interna Revenue Code by sub-
secton (a) of ths secton sha be effectve as f they were a part of each such
Revenue ct on the date of ts enactment Nothng n ths subsecton sha affect
the ta abty of any ta payer for any year whch, on September 20, 1940, wag
pendng before, or was theretofore determned by, the oard of Ta ppeas,
Sec. r 02. Ta of Sharehoders of Persona Servce Corporatons.
The Interna Revenue Code s amended by nsertng after secton 373 the foow-
ng new Suppement:
suppement ta of sharehoders of persona servce corporatons.
Sec. 391. ppcabty of Suppement.
If a persona servce corporaton (as defned n secton 725) Is e empt under
such secton for any ta abe year from the e cess profts ta mposed by such
subchapter, the provsons of ths Suppement sha be appcabe wth respect to
each sharehoder of such corporaton who was a sharehoder n such corporaton
on the ast day of such ta abe year of the corporaton.
Sec. 392. Undstrbuted Suppement S Net Income.
or the purposes of ths chapter, the term undstrbuted Suppement S net
ncome means the Suppement S net ncome (as defned n secton 393) mnus
the amount of the dvdends pad durng the ta abe year. or the purposes of
ths secton the amount of dvdends pad sha be computed n the same manner
as provded n subsectons (d), (e), (f), (g), (h), and (1) of secton 27 for the
purpose of the basc surta credt provded n secton 27.
Sec 393. Suppement S Net Income.
or the purposes of ths chapter Suppement S net ncome means the net
ncome, e cept that there sha be aowed as addtona deductons
(a) The edera ncome ta payabe under ths chapter for the ta abe
year and
(b) In eu of the deducton aowed by secton 23(q), contrbutons or gfts,
payment of whch Is made wthn the ta abe year, to or for the use of donees
descrbed n secton 23(q) for the purposes theren specfed, to an amount
whch does not e ceed 15 per centum of the corporaton s net Income, com-
puted wthout the beneft of ths subsecton and secton 23(q).
Sec. 394. Corporaton Income Ta ed to Sharehoders.
(a) Genera Rue. The undstrbuted Suppement S net Income of a per-
sona servce corporaton sha be ncuded In the gross Income of the share-
hoders n the manner and to the e tent set forth n ths Suppement
(b) mount Incuded n Gross Income. ach sharehoder who, on the
ast day of the ta abe year of the corporaton, was a sharehoder In such
corporaton sha ncude n hs gross ncome, as a dvdend, for the ta abe
year n whch or wth whch the ta abe year of the corporaton ends, the
amount he woud have receved as a dvdend If on such ast day there had
been dstrbuted by the corporaton, and receved by the sharehoders, an
amount equa to the undstrbuted Suppement S net Income of the corporaton
for ts ta abe year.
(c) Credt for Obgatons of the Unted States and Its Instrumen-
tates. ach such sharehoder sha be aowed a credt aganst net ncome,
for the purposes of the ta mposed by secton 11, 13, 14, 201, 204, 207, or 8 2,
of hs proportonate share of the nterest specfed n secton 25(a) (1) or (2)
whch Is ncuded n the gross Income of the corporaton.
(d) ffect on Capta ccount of Persona Servce Corporaton. n
amount equa to the undstrbuted Suppement S net ncome of the persona
servce corporaton for ts ta abe year sha be consdered as pad n as of
the cose of such ta abe year as pad-n surpus or as a contrbuton to capta,
and the accumuated earnngs and profts as of the cose of such ta abe year
sha be correspondngy reduced, If such amount or any porton thereof s
requred to be Incuded as a dvdend n the gross Income of the sharehoders.
(e) ass of Stock n ands of Sharehoders. The amount requred to
be Incuded n the gross ncome of the sharehoder under subsecton (b) sha,
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for the purpose of ad|ustng the bass of hs stock wth respect to whch the
dstrbuton woud have been made (f t had been made), be treated as havng
been renvested by the sharehoder as a contrbuton to the capta of the
corporaton but ony to the e tent to whch such amount s Incuded n hs
gross ncome n hs return, ncreased or decreased by any ad|ustment of such
amount n the ast determnaton of the sharehoder s ta abty, made before
the e praton of seven years after the date prescrbed by aw for fng the
return.
(f) Perod of Lmtaton on ssessment and Coecton. or perod of
mtaton on assessment and coecton wthout assessment, n the case of
fture to ncude n gross ncome the amount propery ncudbe theren under
subsecton (b), see secton 275(d).
Sec. 395. Nonresdent en Indvduas and orf|bn Corporatons.
In the case of a sharehoder ta abe under secton 211(a) or 231(a), hs
dstrbutve share of the undstrbuted Suppement S net ncome of the cor-
poraton requred to be ncuded In the gross ncome sha be consdered as a
dvdend receved by hm from sources wthn the Unted States.
Seo. 39 . Sharehoder s Ta Pad by Corporaton.
If a persona servce corporaton s e empt for any ta abe year under
secton 725 from e cess profts ta , t sha, at the tme of fng ts return, pay
to the coector an amount equa to the amount that woud be requred by sec-
ton 143(b) or secton 144 to be deducted and wthhed by the corporaton f
any amount requred by ths Suppement to be ncuded n the gross ncome of
the sharehoder had been, on the ast day of the ta abe year of the corpora-
ton, pad to the sharehoder n cash as a dvdend. Such amount sha be
coected and pad n the same manner as the amount of ta due n e cess of
that shown by the ta payer upon a return n the case of a mathematca error
appearng on the face of the return.
Seo. 503. Statute of Lmtatons n Case of Constructve Dvdends.
Secton 275(d) of the Interna Revenue Code (reatng to statute of mta-
tons) s amended to read as foows:
(d) Constructve Dvdends. If the ta payer omts from gross ncome an
amount propery ncudbe theren
(1) oregn persona-hodno companes. Under secton 337(b) (re-
atng to the Incuson n the gross ncome of Unted States sharehoders
of ther dstrbutve shares of the undstrbuted Suppement P net ncome
of a foregn persona-hodng company) or
(2) Persona servce corporatons. Under secton 394(b) (reatng
to the Incuson n the gross ncome of sharehoders of ther dstrbutve
shares of undstrbuted Suppement S net ncome of a persona servce
corporaton)
the ta may be assessed, or a proceedng n court for the coecton of such
ta may be begun wthout assessment, at any tme wthn seven years after
the return was fed.
Sec. 504. Credt of Nonresdent en of Ta as Sharehoder n Persona
Servce Corporaton.
Secton 21 of the Interna Revenue Code (reatng to credt aganst ta of a
nonresdent aen ndvdua) s amended by addng at the end thereof a new
sentence to read as foows: nonresdent aen ndvdua sha be aowed
as a credt aganst hs ta the amount requred by secton 39 to be pad by the
persona servce corporaton of whch he s a sharehoder wth respect to hs
ta abty under Suppement S.
Sec. 505. Credt of oregn Corporaton of Ta as Sharehoder n Persona
Servce Corporaton.
Secton 234 of the Interna Revenue Code (reatng to credts aganst ta of
foregn corporatons) s amended by addng at the end thereof a new sentence
to read as foows: foregn corporaton sha be aowed as a credt aganst
ts ta the amount requred by secton 39 to be pad by the persona servce
corporaton of whch It s a sharehoder wth respect to Its ta abty under
Suppement S.
Seo. 50 . Change of Name of stng cess-Profts Ta .
(a) Subchapter of Chapter 2 of the Interna Revenue Code Is amended,
effectve ebruary 10, 1939, by strkng out, n the headng of such subchapter,
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482
C SS PRO ITS T and nsertng n eu thereof D CL R D LU
C SS-PRO ITS T , and by strkng out, n the frst paragraph of
secton 00 of such subchapter, e cess-profts ta and nsertng In eu thereof
decared vaue e cess-profts ta .
(b) Secton 23(c)(1) of the Interna Revenue Code (reatng to ta es not
deductbe In computng net ncome) s amended, effectve ebruary 10, 1939,
to read as foows:
(1) edera ncome, war-profts, and e cess-profts ta es (other than the
e cess-profts ta mposed by secton 10 of the Revenue ct of 19:55 (49 Stat
1019), or by secton 02 of the Revenue ct of 1938 ( 52 Stat. 5 7), and other
than the decared vaue e cess-profts ta Imposed by secton 00) .
Seo. 507. Pubcty op Rktukns of Subchapter cess Profts Ta .
Secton 55(a)(2) of the Interna Revenue Code s amended by strkng out
Subchapters . . and D of Chapter 2 and nsertng n eu thereof Sub-
chapters , P., D, and of Chapter 2 .
Sec. 508. Technca mendments.
(a) Lmtaton on ssessment and Coecton. Secton 3312 of the Interna
Revenue Code (reatng to perod of mtaton on assessment and coecton
of ta es) s amended by strkng out cept n the case of ncome, estate, and
gft ta es and nsertng n eu thereof cept n the case of ncome, war-
profts, e cess-profts, estate, and gft ta es .
(b) batement, Crfdt, and Refund op Ta es. Secton 3770(a)(1) of the
Interna Revenue Code (reatng to authorty to abate, credt, or refund ta ) Is
amended by strkng out cept as otherwse provded by aw n the case of
ncome, estate, and gft tu es and nsertng n eu thereof cept as other-
wse provded by aw n the case of ncome, war-profts, e cess-profts, estate,
and gft ta es .
TITL I N TION L S R IC LI INSUR NC ND PRO ISIONS CTING
T R ILRO D R TIR M NT O RD.
P RT I N TION L S R IC LI INSUR NC .
Sec. 01. When used n ths part
(a) The term person means (1) a commssoned offcer: (2) a warrant
offcer (3) ensted personne (ncudng persons seected for tranng and
servce under the Seectve Tranng and Servce ct of 1940) (4) a member
of the rmy Nurse Corps (femae) and (5) a member of the Navy Nurse
Corps (femae)
(b) The term dmnstrator means the dmnstrator of eterans ffars
(c) The term actve servce means actve servce In the and or nava
forces (ncudng the Coast Gurd) of the Unted States and servce n the and
or nava forces of the Unted States under the Seectve Tranng and Servce
ct of 1940, but the servce of any person ordered to actve duty In any such
force for a perod of thrty days or ess, sha not be deemed to be actve servce
n such force durng such perod
(d) The term nsurance means Natona Servce Lfe Insurance
(e) The term chd ncudes an adopted chd.
Sec. 02. (a) very person who Is commssoned and hereafter ordered Into,
or who s hereafter e amned, accepted, and enroed n, the actve servce and
whe n such actve servce sha, upon appcaton n wrtng (made wthn
one hundred and twenty days after entrance nto such actve servce) and pay-
ment of premums as herenafter provded and wthout further medca e amna-
ton, be granted nsurance on the fve-year eve premum term pan by the
Unted States aganst the death of such person occurrng whe such nsurance
s In force.
(b) ny person who s reeased from actve servce wthn one hundred and
twenty days after such enroment sha be granted such Insurance upon appca-
ton therefor n wrtng (made wthn one hundred and twenty days after a
subsequent enroment or entrance nto actve servce and before dscharge or
resgnaton therefrom), and upon payment of premums and evdence satsfactory
to the dmnstrator showng such person to be n good heath at the tme of
such appcaton.
(c) ny person upon reenstment or reentrance Into or reempoyment n actve
servce and before dscharge or resgnaton therefrom and any person n the
actve servce upon dscharge to accept a commsson and before resgnaton
therefrom, sha be granted such Insurance upon appcaton therefor In wrtng
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483
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(made wthn one hundred and twenty days foowng such reenstment, reen-
trance, reempoyment, or dscharge to accept a commsson), and upon payment
of premums and evdence satsfactory to the dmnstrator showng such person
to be In good heath at the tme of such appcaton.
(d) ny person who has been commssoned, or e amned, accepted, and
enroed, n the actve servce and Is n such actve servce on the date of
enactment of ths ct sha be granted such nsurance upon appcaton there-
for In wrtng (made wthn one hundred and twenty days after the date of
enactment of ths ct and before dscharge or resgnaton from such actve
ervce), and upon payment of premums and evdence satsfactory to the
dmnstrator showng such person to be n good heath at the tme of such
appcaton.
(e) The premum rates for such nsurance sha be the net rates based upon
the mercan perence Tabe of Mortaty and nterest at the rate of 3 per
centum per annum. cash, oan, pad up, and e tended vaues, and a other
cacuatons n connecton wth such nsurance, sha be based upon sad mer-
can perence Tabe of Mortaty and nterest at the rate of 3 per centum per
annum.
(f) Such nsurance sha be Issued upon the fve year eve premum terra
pan, wth the prvege of converson as of the date when any premum be-
comes or has become due, or e change as of the date of the orgna pocy, upon
payment of the dfference In reserve, at any tme after such pocy has been
tn effect for one year and wthn the fve year terra perod, to poces of nsur-
ance upon the foowng pans: Ordnary fe, twenty payment fe, thrty pay-
ment fe. fve year eve premum term poces sha cease and termnate
at the e praton of the fve year terra perod. Provsons for cash, oan, pad
op, and e tended vaues, dvdends from gans and savngs, refund of unearned
premums, and such other provsons as may be found to be reasonabe and
practcabe, may be provded for n the pocy of nsurance or from tme to
tme by reguatons promugated by the dmnstrator.
(g) The nsurance sha be payabe ony to a wdow, wdower, chd (ncud-
ng a stepchd or an egtmate chd If desgnated as benefcary by the
Insured), parent (Incudng person n oco parents f desgnated as benefcary
by the nsured), brother or sster of the nsured. The nsured sha have the
rght to desgnate the benefcary or benefcares of the nsurance, but ony
wthn the casses heren provded, and sha, sub|ect to reguatons, at a
tmes have the rght to change the benefcary or benefcares of such nsurance
wthout the consent of such benefcary or benefcares but ony wthn the
casses heren provded.
(h) Such nsurance sha be payabe n the foowng manner:
(1) If the benefcary to whom payment s frst made s under thrty
years of age at the tme of maturty, n two hundred and forty equa
monthy nstaments.
(2) If the benefcary to whom payment s frst made s thrty or more
years of age at the tme of maturty, n equa monthy nstaments for one
hundred and twenty months certan, wth such payments contnung durng
the remanng fetme of such benefcary.
(3) ny nstaments certan of Insurance remanng unpad at the death
of any benefcary sha be pad n equa monthy nstaments n an
amount equa to the monthy Instaments pad to the frst benefcary, to
the person or persons then n beng wthn the casses herenafter spec-
fed and n the order named, uness desgnated by the Insured n a dfferent
order
( ) to the wdow or wdower of the nsured, If vng
( ) f no wdow or wdower, to the chd or chdren of the Insured,
f vng, In equa shares
(C) f no wdow, wdower, or chd, to the parent or parents of the
nsured, f vng, n equa shares
(D) f no wdow, wdower, chd, or parent, to the brothers and ss-
ters of the Insured, If vng, n equa shares.
(1) If no benefcary s desgnated by the nsured or f the desgnated bene-
fcary does not survve the Insured, the benefcary sha be determned In
accordance wth the order specfed n subsecton (h)(3) of ths secton and
the nsurance sha be payabe n equa monthy nstaments n accordance wth
subsecton (h) (1) or (2), as the case may be. The rght, of any benefcary to
payment of any nstaments sha be condtoned upon hs or her beng ave
to receve such payments. No person sha have a vested rght to any nsta-
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484
ment or Instaments of any such Insurance and any Instaments not pad to
a benefcary durng such benefcary s fetme sha be pad to the benefcary
or benefcares wthn the permtted cass ne t entted to prorty, as provded
n subsecton (h).
( ) No nstaments of such Insurance sha be pad to the hers or ega
representatves as such of the nsured or of any benefcary, and In the event
that no person wthn the permtted cass survves to receve the nsurance or
any part thereof no payment of the unpad nstaments sha be made.
(k) When the amount of an ndvdua monthy payment Is ess than 5,
such amount may, In the dscreton of the dmnstrator, be aowed to accumu-
ate wthout nterest and be dsbursed annuay.
(1) ny payments of Insurance made to a person represented by the nsured
to be wthn the permtted cass of benefcares sha be deemed to have been
propery made and to satsfy fuy the obgaton of the Unted States under
such nsurance pocy to the e tent of such payments.
(m) The dmnstrator sha, by reguatons, prescrbe the tme and method
of payment of the premums on such nsurance, but payments of premums n
advance sha not be requred for perods of more than one month each, and
may at the eecton of the nsured be deducted from hs actve servce pay or
be otherwse made.
(n) Upon appcaton by the nsured and under such reguatons as the
dmnstrator may promugate, payment of premums on such nsurance may be
waved durng contnuous tota dsabty of the nsured whch commenced sub-
sequent to the effectve date of such nsurance and whch has e sted for s
consecutve months or more pror to the attanment by the nsured of the
age of s ty years, effectve as of the due date of the monthy premum becom-
ng payabe on or after the frst day of the seventh consecutve month of such
dsabty: Provded, That appcaton for waver s made whe the nsurance
s currenty kept n force by the payment of premums, and the nsured fur-
nshes proof satsfactory to the dmnstrator showng that he s and has been
contnuousy totay dsabed for s or more months pror to attanng s ty
years of age. ny waver granted by the dmnstrator under ths subsecton
sha not become effectve pror to the date of appcaton therefor e cept that,
n the dscreton of the dmnstrator, t may he made effectve at any tme
wthn a perod of not more than s months pror to such date but In no
event pror to the frst day of the seventh month of such contnuous dsabty.
ny premums tendered to cover a perod durng whch such waver s effectve
sha be refunded. The dmnstrator sha provde by reguatons for ree -
amnatons of benefcares under ths subsecton and, In the event that t Is
found that an nsured Is no onger totay dsabed, the waver of premums
sha cease as of the date of such fndng and the pocy of Insurance may be
contnued by payment of premums as provded n sad pocy. Premum rates
sha be cacuated wthout charge for the cost of the waver of premums heren
provded and no deducton from benefts otherwse payabe sha be made on
account thereof.
(o) The dmnstrator sha prompty determne and pubsh the terms and
condtons of such nsurance. Pendng the promugaton of the terms and cond-
tons of the fve year eve premum term pocy and the prntng of such pocy,
the dmnstrator may ssue a certfcate n eu thereof as evdence that nsur-
ance has been granted and the rghts and abtes of the appcant and of the
Unted States sha be those specfed by the terms and condtons of the pocy
when pubshed.
(p) Such nsurance may be made effectve, as specfed In the appcaton, not
ater than the frst day of the caendar month foowng the date of appcaton
therefor, but the Unted States sha not be abe thereunder for death occurrng
pror to such effectve date.
(q) Such nsurance sha be Issued n any mutpe of 500 and the amount of
such nsurance wth respect to any one person sha be not ess than 1,000 or
more than 10,000.
Sec. 03. No person may carry a combned amount of Natona Servce Lfe
Insurance and Unted States Government fe Insurance n e cess of 10,000 at
any one tme.
Sec. 04. There s hereby authorzed to be approprated, out of any money n
the Treasury not otherwse approprated, such sums as may be necessary to
carry out the provsons of ths part, to be known as the Natona Servce Lfe
Insurance appropraton, for the payment of abtes under Natona Servce
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Lfe Insurance. Payments from ths appropraton sha be made upon and n
accordance wth awards by the dmnstrator.
Sec. 05. (a) There s hereby created n the Treasury a permanent trust fund
to be known as the Natona Servce Lfe Insurance und. premums pad on
account of Natona Servce Lfe Insurance sha be deposted and covered nto
the Treasury to the credt of such fund, whch, together wth nterest earned
thereon, sha be avaabe for the payment of abtes under such nsurance,
ncudng payment of dvdends and refunds of unearned premums. Payments
from ths fund sha be made upon and n accordance wth awards by the d-
mnstrator.
(b) The dmnstrator Is authorzed to set asde out of such fund such re-
serve amounts as may be requred under accepted actuara prncpes, to meet a
abtes under such nsurance and the Secretary of the Treasury s hereby
authorzed to nvest and renvest such fund, or any part thereof, n nterest-
bearng obgatons of the Unted States or n obgatons guaranteed as to prnc-
pa and nterest by the Unted States, and to se such obgatons for the purposes
of such fund.
Sec. 0 . The Unted States sha bear the cost of admnstraton n connecton
wth ths part, ncudng e penses for medca e amnatons, prntng and bnd-
ng, and for such other e pendtures as are necessary n the dscreton of the
dmnstrator. The appropratons made for the eterans dmnstraton for
the fsca year 1941 for admnstratve e penses sha be avaabe for the pay-
ment of such costs of admnstraton under ths part.
Sec. 07. (a) The Unted States sha bear the e cess mortaty cost and the
cost of waver of premums on account of tota dsabty traceabe to the e tra
hazard of mtary or nava servce, as such hazard may be determned by the
dmnstrator.
(b) Whenever benefts under such nsurance become payabe because of the
death of the nsured as the resut of dsease or n|ury traceabe to the e tra
hazard of mtary or nava servce, as such hazard may be determned by the
dmnstrator, the abty for payment of such benefts sha be borne by the
Unted States n an amount whch, when added to the reserve of the pocy at the
tme of death of the nsured, w equa the then vaue of such benefts under
such pocy. The dmnstrator Is authorzed and drected to transfer from tme
to tme from the Natona Servce Lfe Insurance appropraton to the Natona
Servce Lfe Insurance und such sums as may be necessary to carry out the
provsons of ths secton.
(c) Whenever the premums under such nsurance are waved as provded n
secton 02(n) because of the tota dsabty of the nsured as the resut of ds-
ease or n|ury traceabe to the e tra hazard of mtary or nava servce, as such
hazard may be determned by the dmnstrator, the premums so waved sha
be pad by the Unted States and the dmnstrator s authorzed and drected to
transfer from tme to tme an amount equa to the amount of such premums
from the Natona Servce Lfe Insurance appropraton to the Natona Servce
Lfe Insurance und.
Sec. 08. The dmnstrator, sub|ect to the genera drecton of the Presdent,
sha admnster, e ecute and enforce the provsons of ths part, sha have
power to make such rues and reguatons, not nconsstent wth the provsons
of ths part, as are necessary or approprate to carry out ts purposes, and sha
decde a questons arsng hereunder. offcers and empoyees of the eterans
dmnstraton sha perform such dutes n connecton wth the admnstraton
of ths part as may be assgned to them by the dmnstrator. offca acts
performed by such offcers or empoyees desgnated therefor by the dmnstrator
ha have the same force and effect as though performed by the dmnstrator
In person. cept n the event of sut as provded n secton 17 hereof, a de-
csons rendered by the dmnstrator under the provsons of ths part, or regu-
atons ssued pursuant thereto, sha be fna and concusve on a questons of
aw and fact, and no other offca or court of the Unted States sha have |urs-
dcton to revew by moton or otherwse any such decson.
Seo. 09. (a) There sha be no recovery of payments made under ths part
from any person who, n the |udgment of the dmnstrator, s wthout faut on
hs part and where, n the |udgment of the sad dmnstrator, such recovery
woud defeat the purpose of benefts otherwse authorzed heren or woud be
aganst equty and good conscence. No dsbursng offcer or certfyng offcer sha
be hed abe for any amount pad to any person where the recovery of such
amount s waved under ths secton.
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48
(b) Where, under the provsons of ths secton, the recovery of a payment
made from the Natona Servce Lfe Insurance und s waved, the Natona
Servce Lfe Insurance und sha be rembursed for the amount of such payment
from the current appropraton for Natona Servce Lfe Insurance.
Sec. 10. No State aw provdng for presumpton of death sha be appcabe
to cams for Natona Servce Lfe Insurance. If evdence satsfactory to the
dmnstrator s produced estabshng the fact of the contnued and une paned
absence of any Indvdua from hs home and famy for a perod of seven years,
durng whch perod no evdence of hs e stence has been receved, the death
of such ndvdua as of the date of the e praton of such perod may, for the
purposes of ths part, be consdered as suffcenty proved.
Sec. 11. No Unted States Government fe Insurance sha be granted here-
after to any person under the provsons of secton 300 of the Word War et-
erans ct, 1924, as amended: Provded, That ths secton sha not be construed
to prohbt the Issue of Unted States Government fe nsurance poces n cases
n whch acceptabe appcatons accompaned by proper and vad remttances
or authorzatons for the payment of premums have, pror to the date of enact-
ment of ths ct, been receved by the eterans dmnstraton or whch have,
pror to sad date, been paced n the mas propery drected to sad eterans
dmnstraton, or been devered to an authorzed representatve of the War
Department, the Navy Department, or the Coast Guard, and whch are forwarded
to the eterans dmnstraton not ater than one hundred and twenty days
subsequent to sad date.
Sec. 12. ny person guty of mutny, treason, spyng, or deserton, or who,
because of conscentous ob|ectons, refuses to perform servce n the and or
nava forces of the Unted States or refuses to wear the unform of such force,
sha forfet a rghts to nsurance under ths part. No nsurance sha be pay-
abe for death nfcted as a awfu punshment for crme or for mtary or nava
offense, e cept when nfcted by an enemy of the Unted States but the cash
surrender vaue, f any, of such nsurance on the date of such death sha be
pad to the desgnated benefcary, f vng, or otherwse to the benefcary or
benefcares wthn the permtted cass n accordance wth the order specfed
n secton 02(h) (3).
Sec 13. Whoever n any cam for nsurance ssued under the provsons of
ths part makes any sworn statement of a matera fact knowng t to be fase,
sha be guty of per|ury and sha, upon convcton thereof, be punshed by a
fne of not more than 5,000, or by mprsonment for not more than two years, or
by both such fne and mprsonment.
Seo. 14. Whoever, wth ntent to defraud the Unted States or any benef-
cary of such nsurance, sha obtan or receve any money or check for Natona
Servce Lfe Insurance wthout beng entted to the same, sha, upon convc-
ton thereof, be punshed by a fne of not more than 2,000, or by mprsonment
for not more than one year, or by both such fne and mprsonment
Sec. 15. ny person who sha knowngy make or cause to be made, or con-
spre, combne, ad, or assst n, agree to, arrange for, or n any wse procure
the makng or presentaton of a fase or frauduent affdavt, decaraton, cer-
tfcate, statement, voucher, or paper, or wrtng purportng to be such, concern-
ng any appcaton for nsurance or renstatement thereof, waver of premums
or cam for benefts under Natota Servce Lfe Insurance for hmsef or any
other person, sha, upon convcton thereof, be punshed by a fne of not more
than 1,000, or mprsonment for not more than one year, or by both such fne
and mprsonment.
Sec 1 . The provsons of Pubc Law Numbered 2 2, Seventy-fourth Con-
gress, approved ugust 12, 1935 (49 Stat. 07), and ttes II and III of Pubc
Law Numbered 844, Seventy-fourth Congress, approved une 29, 193 (49 Stat
2031), nsofar as they are appcabe, sha appy to the provsons of ths part
Sec 17. In the event of a dsagreement as to cam arsng under ths part
sut may be brought n the same manner and sub|ect to the same condtons and
mtatons as are appcabe to Unted States Government (converted) fe Insur-
ance under the provsons of sectons 19 and 500 of the Word War eterans
ct, 1924, as amended: Provded, That n any such sut the decson of the
dmnstrator as to waver or nonwaver of premums under secton 02(n)
sha be concusve and bndng on the court
Sec 18. Ths part may be cted as the Natona Servce Lfe Insurance ct
of 1940 .
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RT II CR DITING MILIT RY S R IC OR NNUITY PURPOS S UND R T R ILRO D
R TIR M NT CTS.
Sec. 25. The ct entted n ct to amend an ct entted n ct to estab-
sh a retrement system for empoyees of carrers sub|ect to the Interstate Com-
merce ct, and for other purposes, approved ugust 2 , 1935, approved une
24, 1937 ( 50 Stat. 807), s hereby amended by nsertng after secton 3 the
foowng new secton:
MILIT RY S R IC .
Sec. 8 . (a) or the purposes of determnng egbty for an annuty and
computng an annuty, ncudng a mnmum annuty, there sha aso be n-
cuded n an ndvdua s years of servce, wthn the mtatons herenafter
provded n ths secton, vountary or nvountary mtary servce of an nd-
vdua pror to anuary 1, 1937. wthn or wthout the Unted States durng any
war servce perod: Provded, however, That such mtary servce sha be n-
cuded ony sub|ect to and n accordance wth the provsons of subsecton (b)
of secton 3, n the same manner as though mtary servce were servce ren-
dered as an empoyee: Provded further, That an ndvdua who entered m-
tary servce pror to a war servce perod sha not be regarded as havng been
In mtary servce n a war servce perod wth respect to any part of the
perod for whch he entered such mtary servce.
(b) or the purpose of ths secton and secton 202, as amended, an Ind-
vdua sha be deemed to have been In mtary servce when commssoned
op enroed n the actve servce of the and or nava forces of the Unted States
and unt resgnaton or dscharge therefrom and the servce of any nd-
vdua n any reserve component of the and or nava forces of the Unted
States who was ordered to actve duty n any such force for a perod of thrty
days or ess sha be deemed to have been actve servce In such force durng
such perod.
(c) or the purpose of ths secton and secton 202, as amended, a war
servce perod sha mean (1) any war perod, or (2) wth respect to any
partcuar ndvdua, any perod durng whch such ndvdua () havng
been In mtary servce at the end of a war perod, was requred to contnue
n mtary servce, or () was requred by any ct of Congress, any reguaton
promugated, order ssued, or procamaton made, n pursuance of such ct, to
enter and contnue n mtary servce.
(d) or the purpose of ths secton and secton 202, as amended, a war
perod sha be deemed to have begun on whchever of the foowng dates s
the earest: (1) the date on whch the Congress of the Unted States decared
war or (2) the date as of whch the Congress of the Unted States decared
that a state of war has e sted or (3) the date on whch war was decared
by one or more foregn states aganst the Unted States or (4) the date on
whch any part of the Unted States or any terrtory under ts |ursdcton
was Invaded or attacked by any armed force of one or more foregn states
or ( ) the date on whch the Unted States engaged n armed hosttes for
the purpose of preservng the Unon or of mantanng n any State of the
Unon a repubcan form of government.
(e) or the purpose of ths secton and secton 202, as amended, a war
perod sha be deemed to have ended on the date on whch hosttes ceased.
(f) Mtary servce sha not be ncuded n the years of servce of an
Indvdua uness, In the caendar year n whch hs mtary servce In a war
eervce perod began, or In the caendar year ne t precedng such caendar
year, he rendered servce for compensaton to an empoyer, or to a person
servce to whch Is otherwse credtabe under ths ct, or ost tme as an
empoyee for whch he receved remuneraton, or was servng as an empoyee
representatve.
(g) caendar month n whch an ndvdua was n mtary servce whch
may be ncuded In the ndvdua s years of servce or servce perod, as the
case may be, sha be counted as a month of servce: Provded, however, That
no caendar month sha be counted as more than one month of servce.
(h) In determnng the monthy compensaton for computng an annuty,
mtary servce and any remuneraton therefor sha be dsregarded.
(1) In the event mtary servce s or has been used as the bass or as a
parta bass for a penson, dsabty compensaton, or any other gratutous
benefts payabe on a perodc bass under any other ct of Congress, any
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488
annuty under ths ct or the Raroad Retrement ct of 1935, whch s based
u part on such mtary servce and s wth respect to a caendar month for
a or part of whch such penson or other beneft s aso payabe, sha be
reduced wth respect to that mouth by the proporton whch the number of
years of servce by whch such mtary servce ncreases the years of servce,
or the servce perod, as the case may be, bears to the tota years of servce, or
by the aggregate amount of such penson or other beneft wth respect to that
mouth, whchever woud resut u the smaer reducton.
(|) ny department or agency of the Unted States mantanng records of
mtary servce, at the request of the oard, sha certfy to the oard, wth
respect to any ndvdua, the number of months of mtary servce whch such
department or ugency fnds the ndvdua to have had durng any perod or
perods wth respect to whch the oard s request s made, the date and man-
ner of eutry nto such mtary servce, and the condtons under whch such
servce was contnued. ny department or agency of the Unted States whch
s authorzed to make awards of pensons, dsabty compensaton, or any
other gratutous benefts or aowances payabe, on a perodc bass or other-
wse, under any other ct of Congress on the bass of mtary servce, at the
request of the oard, sha certfy to the oard, wth respect to any ndvdua,
the caendar months for a or part of whch any such penson, compensaton,
beneft, or aowance s payabe to, or wth respect to, the ndvdua, the
amounts of any such penson, compensaton, beneft, or aowance, and the
mtary servce on whch such penson, compensaton, beneft, or aowance Is
based. ny certfcaton made pursuant to the provsons of ths subsecton
sha be concusve on the oard: Provded, That f evdence nconsstent wth
any such certfcaton s submtted, and the cam s n the course of ad|udcaton
or s otherwse open for such evdence, the oard sha refer such evdence to
the department or agency whch made the orgna certfcaton and such de-
partment or agency sha muce such recertfcaton as n ts |udgment the ev-
dence warrants. Such recertfcaton, and any subsequent recertfcaton, sha
be concusve, made n the same manner, and sub|ect to the same condtons
as an orgna certfcaton.
(k) In the event that an ndvdua was, on or before the date of enact-
ment of the Second Revenue ct of 1940, dened an annuty but coud have
been granted an annuty under the provsons of ths ct or the Raroad
Retrement ct of 1935 had mtary servce been ncuded n hs years of
servce or servce perod, as the case may be, no annuty sha be payabe wth
respect to such ndvdua, or wth respect to hs death, by reason of the
provsons of ths secton, uness such ndvdua fes a new appcaton wth
the oard. In determnng the earest date upon whch an annuty can begn
to accrue for such an ndvdua n accordance wth the provsons of secton
2, te fng date of the appcaton sha be the date on whch such new
appcaton s fed.
(1) n ndvdua who, on or before the date of enactment of the Second Reve-
nue ct of 1940, was awarded an annuty under the provsons of ths ct or the
Raroad Retrement ct of 1935, but whose annuty woud have been Increased f
hs mtary servce had been ncuded n hs years of servce or servce perod, as
the case may be, may, notwthstandng the prevous award of an annuty, make
appcaton (n such manner and form as may be prescrbed by the oard) for an
ncrease n such annuty based on hs mtary servce. Upon the fng of such
appcaton, f the oard fnds that the mtary servce thus camed s credtabe
and woud resut n an ncrease n the annuty, the oard, notwthstandng the
prevous award, sha recertfy the annuty on an ncreased bass n the same man-
ner as though ths secton had been In effect at the tme of the orgna certfca-
ton : Provded, however, That f the annuty prevousy awarded s a |ont and
survvor annuty, the ncreased annuty sha be a |ont and survvor annuty of
the same type e cept that f on the date the ncrease begns to accrue the nd-
vdua has no spouse for whom the eecton of the |ont and survvor annuty was
made, the ncrease on a snge fe bass sha be added to the ndvdua s annuty:
nd provded further, That such ncrease n the annuty sha not begn to accrue
more than s ty days before the fng date of the appcaton for an ncrease n the
annuty based on mtary servce, and n the event the annuty s a |ont and sur-
vvor annuty, the actuara vaue of the ncrease n annuty sha be computed
as of the effectve date of the ncrease.
(m) In addton to the amount authorzed to be approprated n subsecton (a)
of secton 15 of ths ct, there s hereby authorzed to be approprated to the Ra-
road Retrement ccount for eneh fsca year, begnnng wth the fsca year endng
une 30, 1941, an amount suffcent to meet the addtona e pendtures necessary
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489
Msc.
to be made durng each such fsca year by reason of credtng under the Raroad
Retrement cts mtary servce pror to anuary 1, 1937. The Raroad Retre-
ment oard, us prompty as practcabe after the date of enactment of the Second
Revenue ct of 1940, and thereafter annuay, sha submt to the ureau of the
udget estmates of such mtary servce appropratons to be made to the account
In addton to the annua estmates by the oard, n accordance wth subsecton
(a) of secton 15 of ths ct, of the appropratons to be made to the account to
provde for the payment of annutes, pensons and death benefts not based on
mtary servce. ach such estmate sha take nto account the e cess or the def-
cency, f any, In such mtary servce appropraton for the precedng fsca year.
Se . 12 . Secton 202 of such ct of une 24, 1937, s hereby amended by nsert-
ng mmedatey after the second provso of such secton the foowng new pro-
vso: nd provded further, That for the purposes of determnng egbty for
an annuty and computng an annuty there sha aso be ncuded n an ndvd-
ua s servce perod, sub|ect to and n accordance wth subsectons (a) to (1),
Incusve, of secton 3 of ths ct, vountary or nvountary mtary servce of
an ndvdua pror to anuary 1, 1037, wthn or wthout the Unted States durng
any war servce perod, If, n the caendar year n whch hs mtary servce n a
war servce perod began, or n the caendar year ne t precedng such caendar
year, he was n the compensated servce of a carrer, or of a person servce to whch
s otherwse credtabe, or was servng as a representatve but such mtary serv-
ce sha be ncuded ony sub|ect to and n accordance wth the provsons of the
Raroad Retrement ct of 1935, n the same manner as though mtary servce
were servce rendered as an empoyee: .
TITL II CR DIT G INST D R L UN MPLOYM NT T S.
Sec. 701. Cbedt ganst edfba Unempoyment Ta es.
(a) owance of C Rfa T. ganst the ta mposed by secton 901 of the
Soca Securty ct for the caendar year 193 , 1937, or 1938, or aganst the ta
mposed by the edera Unempoyment Ta ct for the caendar year 1939, any
ta payer sha be aowed credt for the amount of contrbutons pad by hm
Into an unempoyment fund under a State aw
(2) On or after such s teth day (e cept n the case of the ta for the ca-
endar year 1939) wth respect to wages pad after the forteth day after such
date of enactment
(3) Wthout regard to the date of payment, f the assets of the ta payer
are, at any tme durng the fty-nne-day perod foowng such date of enact-
ment, n the custody or contro of a recever, trustee, or other fducary ap-
ponted by, or under the contro of, a court of competent |ursdcton.
The amount of such credt, n the case of contrbutons wth respect to the caen-
dar year 1939 pad after the ast day upon whch the ta payer was requred under
secton 1 04 of the edera Unempoyment Ta ct to fe a return for such year
sha not e ceed 90 per centum of the amount whch woud have been aowabe as
credt on account of such contrbutons had they been pad on or before such ast
day. The provsons of the Soca Securty ct n force pror to ebruary 11.1939
(e cept the provson mtng the credt to amounts pad before the date of fng
returns) sha, wth respect to the ta for the caendar year 193 , 1937, or 1938, ap-
py to aowance of credt under ths secton, and the provsons of the edera Un-
empoyment Ta ct (e cept secton 1 01(a) (3)) sha, wth respect to the ta for
the caendar year 1939, appy to aowance of credt under ths secton. The terms
used n ths subsecton sha, wth respect to the ta for the caendar year 193 ,
1937, or 1938, have the same meanng as when used n tte I of the Soca Securty
ct pror to ebruary 11, 1939, and sha, wth respect to the ta for the caendar
year 1939, have the same meanng as when used n the edera Unempoyment Tu
ct. The tota credt aowabe aganst the ta mposed by secton )1 of the
Soca Securty ct for the caendar year 193 , 1937, or 1938, or aganst the ta
mposed by secton 1 00 of the edera Unempoyment Ta ct for the caendur
yenr 1939, sha not e ceed 90 per centum of such ta .
(b) Refund. Refund of the ta (Incudng penaty and nterest coected wth
respect thereto, f any), based on any credt aowabe under ths secton, may be
made n accordance wth the provsons of aw appcabe n the case of erroneous
or ega coecton of the ta : No nterest sha be aowed or pad on the amount
of any such refund.
pproved, October 8,1940, 11 p. m., . S. T.
290217 41 32
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490
1940-30-10348
PU LIC, NO. 71, S NTY-SI T CONGR SS (C PT R 440, T IRD
S SSION . R. 9822 ).
n ct To e pedte natona defense, and for other purposes.
e t enacted by the Senate and ouse of Representatves of the Unted States
of merca n Congress assembed,

Sec. 2.

(b) fter the date of approva of ths ct no contract sha be made for the
constructon or manufacture of any compete nava vesse or any rmy or Navy
arcraft, or any porton thereof, under the provsons of ths secton or otherwse,
uness the contractor agrees, for the purposes of secton 8 of the ct of March 27,
1934 (48 Stat. 505 84 U. S. C. 49 ), as amended
(1) to pay nto the Treasury proft n e cess of 8 per centum (n eu of the
10 per centum and 12 per centum specfed n such secton 3) of the tota
contract prces of such contracts wthn the scope of ths subsecton as are
competed by the partcuar contractng party wthn the Income ta abe
year
(2) that any proft In e cess of 8.7 per centum of the cost o performng
such contracts e cept prme contracts made on a cost-pus-a-f ed-fee bass as
are competed by the contractng party wthn the ncome ta abe year sha
be consdered to be proft n e cess of 8 per centum of the tota contract
prces of such contracts and
(3) that he w make no subcontract whch Is wthn the scone of such
Sec 3. The provsons of secton 3 of the ct of March 27, 1934 ( 48 Stat. 505),
as amended by the cts of une 25, 193 (49 Stat 192 ), and pr 3, 1939 (53
Stat. 5 0 U. S. C, Supp. , tte 34, secton 49 ), and as made appcabe to
contracts for arcraft or any porton thereof for the rmy by such ct of pr
3, 1939, sha, n the case of contracts or subcontracts entered nto after the date
of approva of ths ct and durng the perod of the natona emergency decared
by the Presdent on September 8, 1939, to e st, be mted to contracts or sub-
contracts where the award e ceeds 25,000.
Sec. 4. In the case of every contract or subcontract for the constructon or
manufacture of any compete nava vesse or rmy or Navy arcraft or any porton
thereof whch Is entered Into (whether before or after the date of approva of
ths ct), the Secretary of War or the Secretary of the Navy, as the case may
be, after agreement wth the contractor or subcontractor, sha certfy to the
Commssoner of Interna Revenue as to (a) the necessty and cost of speca
addtona equpment and factes acqured to factate, durng the natona
emergency decared by the Presdent on September 8, 1939, to e st, the compe-
ton of such nava vesse or rmy or Navy arcraft or porton thereof n prvate
pants and (b) the percentage of cost of such speca addtona equpment and
factes to be charged aganst such contract or subcontract. or a purposes
of secton 3 of the ct of March 27,1934 (48 Stat. 505 34 U. S. C. 49 , as amended,
such certfcaton sha be sub|ect to such reguatons as the Presdent may pre-
scrbe, but sha be bndng upon the Commssoner of Interna Revenue, uness,
wthn fve days after recept of such certfcaton, he make forma ob|ecton
thereto to the Secretary of the Navy or the Secretary of War as the case may be.
The part of such cost chargeabe aganst the contract or subcontract n pursuance
of such certfcaton, sha, for the purposes of such secton 3, be consdered to be a
reducton of the contract prce of the contract or subcontract. The amount
charged aganst the contract or subcontract n pursuance of such certfcaton
sha, for the purposes of such secton 3, be apped aganst and reduce the cost or
other bass of such speca addtona equpment and factes as of the date of
nstaaton thereof: Provded, That the Secretary of War or the Secretary of the
Navy, as the case may be, sha report to the Congress, every three months, the
cost of such speca addtona equpment and factes to be borne by the Govern-
ment under each contract.

Sec. 12. The provsons of a precedng sectons of ths ct sha termnate
une 30, 1942, uness the Congress sha otherwse provde.

pproved, une 28, 1940.
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491
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1940-30-10349
S SSION . R. 98 4 ).
n ct amendng the ankruptcy ct wth respect to the bass of
property.
e t enacted by the Senate and ome of Representatves of the Unted States
of merca n Congress assembed. That effectve as of une 22, 193S, secton 270
of the ct entted n ct to estabsh a unform system of bankruptcy throughout
the Unted States , approved uy 1, 1S9S, as amended, s amended to read as
foows:
as s transferred to any person requred to use the debtor s bass n whoe or n
part sha be decreased by an amount equa to the amount by whch the ndebted-
ness of the debtor, not ncudng accrued nterest unpad nnd not resutng n a
ta beneft on any ncome ta return, has been canceed or reduced n a proceedng
under ths chapter, but the bass of any partcuar property sha not be decreased
to an amount ess than the far market vaue of such property as of the date of
entry of the order confrmng the pan. ny determnaton of vaue n a proceedng
under ths chapter sha not be deemed a determnaton of far market vaue for
the purposes of ths secton. The Commssoner of Interna Revenue, wth the
approva of the Secretary of the Treasury, sha prescrbe such reguatons as he
may deem necessary n order to refect such decrease n bass for edera ncome-
ta purposes and otherwse carry nto effect the purposes of ths secton.
Seo. 2. ffectve as of une 22, 1938, secton 39 of such ct, as amended, s
Sec. 39 . In determnng the bass of property for any purposes of any aw of
debtors property (other than money) or of such property (other than money) as
s transferred to any person requred to use the debtor s bass n whoe or n part
entry of the order confrmng the arrangement. ny determnaton of vaue n a
proceedng under ths chapter sha not be deemed a determnaton of far market
vaue for the purposes of ths secton. The Commssoner of Interna Revenue,
wth the approva of the Secretary of the Treasury, sha prescrbe such reguatons
as he may deem necessary n order to refect such decrease n bass for edera
Income-ta purposes and otherwse carry nto effect the purposes of ths secton.
Sec. 3. ffectve as of une 22, 1938, secton 522 of such ct, as amended, as
debtor s property (other than money) or of such property (other than money) as
s transferred to any person requred to use the debtor s bass n whoe or In part
entry of the order confrmng the arrangement. ny determnaton of vaue n a
proceedng under ths chnpter sha not be deemed a determnaton of far market
vaue for the purposes of ths secton. The Commssoner of Interna Revenue,
wth the approva of the Secretary of the Treasury, sha prescrbe such reguatons
as he may deem necessary n order to refect such decrense n bass for edera
ncome-ta purposes and otherwse carry nto effect the purposes of ths secton.
pproved, uy 1, 1940.
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492
1940-32-10379
PU LIC, NO. 704, S NTY SI T CONGR SS (C PT R 509, T IRD
S SSION . R. 4185 ).
n rt To repatrate natve-born women resdents of the Unted
States who have heretofore ost ther ctzenshp by marrage to an
aen.
e t enacted by the Senate and ouse of Representatves of the
Unted States of merca n Congress assembed, That the ct en-
tted n ct to repatrate natve-born women who have heretofore
ost ther ctzenshp by marrage to an aen, and for other purposes,
approved une 25,193 (U. S. C, 1934 edton, Supp. I , Tte 8, sec-
ton 9a), s amended by nsertng after termnated the foowng:
or who has resded contnuousy n the Unted States snce the date
of such marrage, .
pproved, uy 2, 1940.
1940-44-10472
PU LIC, NO. 811, S NTY-SI T CONGR SS, T IRD S SSION
(C PT R 799 . R. 104 4 ).
n ct To assst In the natona-defense program by amendng
sectons 3477 and 3737 of the Revsed Statutes to permt the assgn-
ment of cams under pubc contracts.
of merca n Congress assembed. That sectons 3477 and 3737 of the Revsed
Statutes be amended by addng at the end of each such secton the foowng new
paragraph:
The provsons of the precedng paragraph sha not appy n any case In
whch the moneys due or to become due from the Unted States or from any
agency or department thereof, under a contract provdng for payments aggre-
gatng 1,000 or more, are assgned to a bank, trust company, or other fnancng
Insttuton, ncudng any edera endng agency: Provded,
1. That n the case of any contract entered nto pror to the date of approva
of the ssgnment of Cams ct of 1940, no cam sha be assgned wthout the
consent of the head of the department or agency concerned:
2. That n the case of any contract entered nto after the date of approva
of the ssgnment of Cams ct of 1940, no cam sha be assgned f It arses
under a contract whch forbds such assgnment
3. That uness otherwse e pressy permtted by such contract any such
assgnment sha cover a amounts payabe under such contract and not aready
pad, sha not be made to more than one party, and sha not be sub|ect to
further assgnment, e cept that any such assgnment may be made to one party as
agent or trustee for two or more partes partcpatng In such fnancng
4. That n the event of any such assgnment, the assgnee thereof sha fe
wrtten notce of the assgnment together wth a true copy of the nstrument of
assgnment wth
(a) the Genera ccountng Offce,
(b) the contractng offcer or the head of hs department or agency,
(c) the surety or suretes upon the bond or bonds, f any, In connecton
wth such contract, and
(d) the dsbursng offcer, If any, desgnated In such contract to make
payment.
Notwthstandng any aw to the contrary governng the vadty of assgnments,
any assgnment pursuant to the ssgnment of Cams ct of 1940 sha consttute
a vad assgnment for a purposes.
ny contract entered nto by the War Department or the Navy Department
may provde that payments to an assgnee of any cam arsng under such contract
sha not e sub|ect to reducton or set-off, and If t Is so provded In such contract,
such payments sha not be sub|ect to reducton or set-off for any Indebtedness
of the assgnor to the Unted States arsng ndependenty of such contract
Sec, 2. Ths ct may be cted as the ssgnment of Cams ct of 1940.
pproved, October 9, 1940.
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1940-45-10480
PU LIC, NO. 881, S NTY-SI T CONGR SS, T IRD S SSION
(C PT R 888 S. 4270 ).
n ct To promote and strengthen the natona defense by sus-
pendng enforcement of certan cv abtes of certan persons
servng n the Mtary and Nava stabshments, Incudng the
Coast Guard.
of merca n Congress assembed, That ths ct may be cted as the Soders
and Saors Cv Reef ct of 1940.

Sue. 513. The coecton from any person n the mtary servce of any ta
on the ncome of such person, whether fang due pror to or durng hs perod
of mtary servce, sha be deferred for a perod e tendng not more than s
months after the termnaton of hs perod of mtary servce f such person s
abty to pay such ta s materay mpared by reason of such servce. No
nterest on any amount of ta , coecton of whch s deferred for any perod
under ths secton, and no penaty for nonpayment of such amount durng such
perod, sha accrue for such perod of deferment by reason of such nonpayment.
The runnng of any statute of mtatons aganst the coecton of such ta
by dstrant or otherwse sha be suspended for the perod of mtary servce
of any ndvdua the coecton of whose ta s deferred under ths secton,
and for an addtona perod of nne months begnnng wth the day foowng
the perod of mtary servce. The provsons of ths secton sha not appy to
the ncome ta on empoyees mposed by secton 1400 of the edera Insurance
Contrbutons ct.

Sec. 03. If any provson of ths ct, or the appcaton thereof to any person
or crcumstances, s hed nvad, the remander of the ct, and the appcaton
of such provson to other persons or crcumstances, sha not be affected thereby.
Sec. 04. Ths rt sha reman n force unt May 15, 1945: Provded, That
shoud the Unted States be then engaged n a war, ths ct sha reman n
force unt such war Is termnated by a treaty of peace procamed by the
Presdent and for s months thereafter: Provded further, That wherever under
any secton or provson of ths ct a proceedng, remedy, prvege, stay, m-
taton, accountng, or other transacton has been authorzed as provded wth
respect to mtary servce performed pror to the date heren f ed for the
termnaton of ths ct, such secton or provson sha be deemed to contnue
n fu force and effect so ong as may be necessary to the e ercse or en|oyment
of such proceedng, remedy, prvege, stay, mtaton, accountng, or other
transacton.
Sec. 05. The provsons of secton 4 of the |ont resouton approved ugust
27, 1940 (Pubc Resouton Numbered 9 , Seventy-s th Congress), and the
provsons of secton 13 of the Seectve Tranng and Servce ct of 1940, sha
not be appcabe wth respect to any mtary servce performed after the date
of enactment of ths ct.
1940-51-10528
S SSION . R. 9581 ).
n ct To amend the Merchant Marne ct, 193 , as amended.
of merca n Congress assembed, That tte of the Merchant Marne ct,
193 , as amended, Is hereby amended by addng at the end thereof a new secton
to read as foows:
M Sec. 511. (a) When used In ths secton the term new vesse means any
vesse (1) documented or agreed wth the Commsson to be documented under
the aws of the Unted States (2) constructed n the Unted States after Decern-
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494
ber 31, 1P39, or the constructon of whch has been fnanced under ttes or II
of ths ct, as amended, or the constructon of whch has been aded by a mort-
gage nsured under tte I of ths ct as amended and (3) ether ( ) of such
type, sze, and speed as the Commsson sha determne to be sutabe for use
on the hgh seas or Great Lakes n carryng out the purposes of ths ct, but not
of ess than two thousand gross tons or of ess speed than tweve knots, uness
the Commsson sha determne and certfy In each case that a vesse of a spec-
fed esser tonnage or speed s desrabe for use by the Unted States n case of
war or natona emergency, or ( ) constructed to repace a vesse or vesses req-
ustoned or purchased by the Unted States.
(b) or the purposes of promotng the constructon of vesses necessary to
carryng out the pocy set forth n tte I of ths ct, any ctzen of the Unted
States who s operatng a vesse or vesses In the foregn or domestc commerce
of the Unted States or In the fsheres or owns a vesse or vesses beng so
operated, or who, at the tme of purchase or requston of the vesse by the
Government, was operatng a vesse or vesses so engaged or owned a vesse or
vesses beng so operated, may estabsh a constructon reserve fund, for the
constructon or acquston of new vesses, to be composed of deposts of proceeds
from saes of vesses, ndemntes on account of osses of vesses, earnngs from
the operaton of vesses, and recepts n the form of Interest or otherwse, wth
respect to amounts prevousy deposted. Such constructon reserve fund sha
be estabshed, mantaned, e pended, and used n accordance wth the provsons
of ths secton and rues or reguatons to be prescrbed onty by the Comms-
son and the Secretary of the Treasury.
(c) In the case of the sae or actua or constructve tota oss of a vesse,
f the ta payer deposts an amount equa to the net proceeds of the sae or to
the net Indemnty wth respect to the oss n a constructon reserve fund estab-
shed under subsecton (b), then, f the ta payer so eects n hs ncome-tar
return for the ta abe year n whch the gan was reazed, no gan sha be
recognzed to the ta payer In respect of such sae or Indemnfcaton n the
computaton of net Income for the purposes of edera ncome or e cess-profts
ta es. or the purposes of ths subsecton no amount sha be consdered as
deposted n a constructon reserve fund uness t s deposted wthn s ty
days after t s receved by the ta payer e cept that n the case of amounts
receved on or before the date of enactment of ths secton or wthn s ty days
after such date, the depost may be made wthn one hundred and twenty days
after the date of enactment of ths secton. s used n ths subsecton the
term net proceeds and the term net Indemnty mean the sum of (1) the
ad|usted bass of the vesse and (2) the amount of gan whch woud be recog-
nzed to the ta payer wthout regard to ths subsecton.
(d) The bass for determnng gan or oss and for deprecaton, for the
purpose of edera ncome or e cess-profts ta es, of any new vesse constructed
or acqured by the ta payer n whoe or n part out of the constructon reserve
fund sha be reduced by that porton of the deposts n the fund e pended n
the constructon or acquston of the new vesse whch represents gan not recog-
nzed under subsecton (c).
(e) or the purposes of ths secton, (1) If the net proceeds of a sae or
the net Indemnty n respect of a oss are deposted n more than one depost,
the amount consstng of the gan sha be consdered as frst deposted:
(2) amounts e pended, obgated, or otherwse wthdrawn sha be apped
aganst the amounts deposted In the fund n the order of depost and
(3) f any depost conssts n part of gan not recognzed under subsecton (c),
any e pendture, obgaton, or wthdrawa apped aganst such depost sha
be consdered to consst of gan n the proporton that the part of te depost
consstng of gan bears to the tota amount of the depost-
(f) Wth respect to any ta abe year, amounts on depost on the ast day
of such year In a constructon reserve fund n accordance wth ths secton and
wth respect to whch a the requrements of subsecton (g) have been satsfed,
to the e tent that such requrements are appcabe as of the ast day of sad
ta abe year, sha not consttute an accumuaton of earnngs or profts wthn
the meanng of secton 102 of the Interna Revenue Code.
(g) The provsons of subsectons (c) and (f) sha appy to any depost In
the constructon reserve fund ony to the e tent that such depost s e pended
or obgated for e pendture, n accordance wth rues and reguatons to be
prescrbed onty by the Commsson and the Secretary of the Treasury, under
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495
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a contract for the constructon or acquston of a new vesse or vesses entered
Into wthn two years from the date of such depost, and ony f under such
rues and reguatons
(1) wthn such perod of two years not ess than 1214 per centum of
te constructon or contract prce of the vesse or vesses s pad or rrev-
ocaby commtted on account thereof and the pans and specfcatons
therefor are approved by the Commsson to the e tent by t deemed neces-
sary and
(2) n case of a vesse or vesses not constructed under the provsons
of ths tte or not purchased from the Commsson, ( ) sad constructon s
competed, wthn s months from the date of the constructon contract,
to the e tent of not ess than 5 per centum thereof (or n case the contract
covers more than one vesse, the constructon of the frst vesse so contracted
for s so competed to the e tent of not ess than 5 per centum) as estmated
by the Commsson and certfed by t to the Secretary of the Treasury,
and ( ) a constructon under such contract s competed wth reasonabe
dspatch thereafter.
(h) The Commssoner of Interna Revenue s authorzed under rues and
reguatons to be prescrbed |onty by the Secretary of the Treasury and the
Commsson to grant e tensons of the perod wthn whch the deposts sha
be e pended or obgated or wthn whch constructon sha have progressed
to the e tent of 5 per centum of competon as provded heren, but such e ten-
son sha not be for an aggregate addtona perod n e cess of two years wth
respect to the e pendture or obgaton of such deposts or more than one year
wth respect to the progress of such constructon.
() ny such deposted gan or porton thereof whch s not so e pended
or obgated wthn the perod provded, or whch s otherwse wthdrawn
before the e praton of such perod, or wth respect to whch the constructon
has not progressed to the e tent of 5 per centum of competon wthn the
perod provded, or wt respect to whch the Commsson fnds and certfes
to the Secretary of the Treasury that, for causes wthn the contro of the
ta payer, the entre constructon s not competed wth reasonabe dspatch,
If otherwse ta abe ncome under the aw appcabe to the ta abe year n
whch such gan was reazed, sha be ncuded n the gross Income for such
ta abe year, e cept for the purpose of the decared vaue e cess-profts ta
and the capta stock ta . If any such deposted gan or porton thereof s
so ncuded n gross ncome for such ta abe year, there sha (n addton
to any other defcency) be assessed, coected, and pad n the same manner
as f t were a defcency, an amount equa to 1.1 per centum of the amount
of gan so ncuded, such amount beng n eu of any ad|ustment wth respect
to the decared vaue e cess-profts ta for such ta abe year.
( ) Notwthstandng any other provson of aw, any defcency In ta for
any ta abe year resutng from the ncuson of any amount n gross ncome
as provded by subsecton (1), and the amount to be treated as a defcency
under such subsecton n eu of any ad|ustment wth respect to the decared
vaue e cess-profts ta , may be assessed or a proceedng n court for the co-
ecton thereof may be begun wthout assessment, at any tme: Provded, ftotc-
ever, That nterest on any such defcency or amount to be treated as a defcency
sha not begn unt the date the deposted gan or porton thereof n queston
s requred under subsecton (1) to bo ncuded In gross ncome.
(k) Ths secton sha be appcabe to a ta payer ony n respect of saes
or Indemnfcatons for osses occurrng wthn a ta abe year begnnng after
December 31, 1939, and ony In respect of earnngs derved durng a ta abe
year begnnng after December 31, 1939.
(1) or the purposes of ths secton a vesse sha be consdered as con-
structed or acqured by the ta payer f constructed or acqured by a corpora-
ton at a tme when the ta payer owns at east 95 per centum of the tota
number of shares of each cass of stock of the corporaton.
(m) The terms used In ths secton sha have the same meanng as n
chapter 1 of the Interna Revenue Code.
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COMMITT R PORTS.
1940 2-10455
T S COND R NU ILL O 1940.
ouse of Representatves Report No. 2894, Seventy-s th Congress, Thrd Sesson.
ugust 28, 1940.
Mr. Doughton, from the Commttee on Ways and Means, submtted the
foowng report to accompany . R. 10413 :
The Commttee on Ways and Means, .to whom was referred the b ( . R. 10413)
to provde revenue, and for other purposes, havng had the same under consdera-
ton, report t back to the ouse wthout amendment and recommend that the
b do pass.
The b may be dvded nto three genera parts: (a) the e cess-profts ta , ( )
the suspenson of the appcaton of the provsons of the nson-Tramme ct
restrctng profts upon the constructon of nava vesses and arcraft, and
(c) the provson of speca amortzaton n respect of factes necessary for
natona defense.
N D OR T L GISL TION.
On May 1 , 1940, the Presdent, n hs message to the Congress, outned the
Immedate necessty for ncreasng the outays for natona defense. In response
to ths and to subsequent messages the Congress has made avaabe n drect
appropratons and contract authorzatons 14,702,000,000 for natona defense,
of whch the revsed budget of ugust 5, 1940, estmates that 5,000,000,000
w be e pended n the fsca year 1941.
In further response to the message of May 10, n order to fnance the addtona
appropratons there requested, your commttee reported and the Congress
enacted the revenue b of 1940. Ths measure, approved une 25, 1940, provded
for a 4,000,000,000 ncrease n the natona debt and addtona ta revenues
of 1,000,000,000 annuay for a 5-year perod an amount suffcent to retre the
addtona borrowngs at maturty.
In ts report on the revenue b of 1940, your commttee e pressed the desre
that the rearmament program shoud furnsh no opportunty for the creaton
of new war monares or the further substanta enrchment of aready weathy
persons. Your commttee Is st of ths opnon but, at the same tme, deems
t advsabe to stmuate the cooperaton of prvate enterprse n the defense
program by suspendng the proft mtatons of the nson-Tramme ct,
appcabe to the constructon of nava vesses and rmy and Navy arcraft.
In addton, t s consdered desrabe to provde speca amortzaton wth respect
to the factes necessary n the natona defense, In order further to encourage
the partcpaton of prvate enterprse n the rearmament program.
Whe these benefts are beng accorded to busness engaged drecty n the
defense program, you commttee fees that they shoud be accompaned by a
genera e cess-profts ta rather than one mted to contractors for rmy and
Navy arcraft and nava vesses or even to muntons manufacturers generay.
ccordngy, the ta provded n the b w appy to corporate profts from a
sources. Ths s fet desrabe snce the segregaton of profts drecty attrbutabe
to the e pendtures of the Government for the defense program presents
Insuperabe dffcutes.
or these reasons your commttee recommends the ncorporaton n the same
b of these three nterreated features, each of great Importance to the fnanca
aspects of the defense program: the suspenson of the proft mtatons under the
nson-Tramme ct, the provson of speca amortzaton for defense factes,
and an e cess-profts ta .
(49 )
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497
Mso.
In the opnon of your commttee, ths Integrated pan presents the best method
of effectuatng the recommendaton of the Presdent as e pressed n the foowng
message:
To the Congress of the Unted States:
We are engaged n a great natona effort to bud up our natona defenses to
meet any and every potenta attack.
We are askng even our humbest ctzens to contrbute ther mte.
It s our duty to see that the burden s equtaby dstrbuted accordng to
abty to pay so that a few do not gan from the sacrfces of the many.
I. therefore, recommend to the Congress the enactment of a steepy graduated
e cess-profts ta , to be apped to a ndvduas and a corporate organzatons
wthout dscrmnaton.
rankn D. Roosevet.
The Whte ouse,
uy 1, 1940.
Upon thorough e amnaton, t appeared that the e cess-profts ta shoud
appy ony to corporatons, as ndvdua and partnershp ncomes are sub|ect to
heavy surta es upon net ncome, whether or not eft n the busness, whe. In
genera, nether corporatons nor ther stockhoders pay surta es upon earnngs
whch are not dstrbuted. Moreover, snce a of the assets of an ndvdua,
whether he be a soe propretor or a member of a partnershp, are at the rsk of
the busness, It s e tremey dffcut, f not mpossbe, to determne the capta
actuay nvested.
The matters ncuded In the b were referred by your commttee to ts Sub-
commttee on Interna Revenue Ta aton on ugust 1, 1940. On ugust 8 the
subcommttee, n a prnted report, submtted ts recommendatons, whch formed
the bass for fu pubc hearngs, hed |onty by your commttee and the Com-
mttee on nance of the Senata The recommendatons of the subcommttee,
modfed as to rates and further modfed wth a vew to the reef of certan types
of cases dscosed n the hearngs, are emboded n the b.
STIM T S O R NU .
It s estmated that the e cess-profts ta w yed 305,000,000 gross revenue
for the caendar year 1940 and over 700,000,000 for a caendar year In whch
the defense program becomes fuy operatve.
SUMM RY O PRINCIP L TUR S,
I. cess-Profts Ta .
. ta abe years.
The ta mposed by the b s appcabe wth respect to a ta abe years begn-
8. corporatons ta abe.
The b provdes that a corporatons e cept the foowng sha be sub|ect
to the e cess-profts ta :
(a) Corporatons e empt from ncome ta .
( ) Persona hodng companes,
(o) oregn persona hodng companes.
( t) Mutua nvestment companes.
(e) Dversfed nvestment companes regstered wth the Securtes and
change Commsson.
(/) oregn corporatons not engaged In trade or busness wthn the Unted
States and not havng an offce or pace of busness theren.
Corporatons wth e cess-profts net ncomes of not more than the specfc e -
empton are not sub|ected to ta and need not fe e cess-profts ta returns.
Snce the specfc e empton for a ta abe year of 12 months s 5,000, and snce
ony about 70,000 of the amost 500,000 actve corporatons n the Unted States
have net ncomes for genera ncome-ta purposes n e cess of 5,000, t s appar-
ent that a arge number of sma corporatons w be reeved from the e cess-
profts ta .
persona servce corporaton, as defned In the b, may be reeved from the
e cess-profts ta for any year by eectng to have ts ncome for such year ta ed
n the hands of the sharehoders, whether or not actuay dstrbuted to them.
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498
S. S P RIOD.
or the purpose of ascertanng the prevous earnng e perence to be used as a
comparatve measure of earnngs for the ta abe years under the b, the years
193 to 1939, ncusve, are seected to consttute a base perod.
4. M SUR O C SS PRO ITS.
(0) Corporatons n e stence durng entre base perod. In determnng the
porton of the earnngs to be consdered as e cess profts, the ta payer, f n e -
stence actuay or constructvey durng the entre base perod, may choose ether
of two standards of measurement.
The choce s avaabe to the foowng casses of corporatons:
(1) domestc corporaton, the frst ta abe year of whch begns In 1940,
If It was n e stence for at east 48 months pror to the begnnng of such
ta abe year.
(2) domestc corporaton, whch, whe not n e stence for the perod
specfed under (1), s deemed to have been In e stence for a perod of 48
months pror to the begnnng of Its frst ta abe year begnnng n 1940,
because t acqured, or resuted from the coaescng of, other corporatons
through certan ta -free e changes or reorganzatons, where such other corpo-
ratons were n e stence at the begnnng of such 48-month perod or had
predecessors who were In e stence at that tme. In the opnon of your
commttee, the dena of the prvege of eecton to corporatons n ths category
woud be nequtabe.
The two methods of measurng e cess profts are outned beow.
rst method ased on ncome.
If ths method s chosen, the ta payer measures Its e cess profts by a
comparson of ts earnngs for the ta abe year wth Its average earnngs for
the base perod. or the purposes of the comparson, the average earnngs
for the base perod are ncreased by 8 per cent of the net addtons to capta
occurrng after the begnnng of the ta payer s frst ta abe year under the
b, or decreased by per cent of the net reductons In capta durng the
same perod. The amount so arrved at consttutes the ta payer s e cess-profts
credt whch, when deducted from the earnngs for the ta abe year, determnes
the e cess profts, or the porton of the Income whch after the deducton of
the specfc e empton of 5,000 Is sub|ected to e cess-profts ta .
(Second method ased on ncome and nvested capta.
Under ths method, the porton of the earnngs for the ta abe year to be
consdered as e cess profts, to whch the ta w appy, s ascertaned by
deductng from the earnngs of the ta payer for the ta abe year an amount
equa to the percentage of Its nvested capta for such year whch ts earnngs
durng the base perod bear to ts nvested capta for the base perod. Such
percentage may not be more than 10 or ess than 5, e cept that wth respect
to the frst 500,000 of nvested capta for the ta abe year the mnmum per-
centage Is 7 nstead of 5. These mnmum percentages estabsh a foor for
corporatons wth ow earnngs durng the base perod, thus aowng such
corporatons a reasonabe return on ther nvested capta before becomng
sub|ect to e cess-profts ta . In addton, corporatons, under ths method, are
aowed a 10 per cent ta -free return on new capta, to the e tent that t does
not cause the nvested capta to e ceed 500,000, and 8 per cent on new capta
In e cess of that fgure.
( ) Corporatons n e stence durng ony part of the base perod. Corpo-
ratons n e stence for ony a part of the base perod must measure ther
e cess profts by the second method.
or ths purpose they are supped an nvested capta for the perod durng
whch they were not n e stence equa to ther nvested capta at the begnnng
of ther 1940 ta abe year, and upon that hypothetca nvested capta they
are deemed to have earned 10 per cent of the frst 500,000 of such nvested
capta and 8 per cent of the amount n e cess of 500,000.
or e ampe, corporaton came nto e stence on anuary 1, 1938. It had
an nvested capta as of anuary 1, 1940, of 800,000 and keeps ts books and
accounts on a caendar-year bass. It had an average nvested capta and.
e cess-profts net ncome for the porton of the base perod durng whch t was
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499
Mso.
actuay In e stence as Indcated. These factors for the porton of the base
perod durng whch t was not n e stence are supped as foows:
ase
perod
percent-
age.
Year.
Invested
capta.
cess profts
net ncome.
193
800,000
800,000
050,000
700,000
74.000
1837
74,000
45. 500
3,000
1938
1939
Tota
2,950,000
800.000
25 .500
8.7
1940
The amounts marked by an astersk ( ) do not represent the actua e perence of the corporaton but have
been supped by the nvested capta for 1940, upon whch a yed of 10 per cent for the frst 500,000 and
8 per cent on the baance s assumed.
Thus, the porton of the earnngs for the ta abe year n e cess of an amount
equa to 8.7 per cent of the nvested capta for the ta abe year Is consdered
e cess profts and, after beng reduced by the specfc e empton of 5,000, Is
sub|ect to ta .
(c) Corporatons not n e stence n the base perod. Corporatons whch come
nto e stence after the cose of the base perod (other than those companes
whch are aowed the use of a substtuted base-perod e perence because of
certan ta -free e changes and reorganzatons) must measure ther e cess profts
under the second method. or ths purpose, they are aowed a credt equa
to 10 per cent of the frst 50u.000 of ther nvested capta for the ta abe year
and 8 per cent of such capta n e cess of 500,000.
5. COMPUT TION O T C SS-PRO ITS CR DIT.
Under ths method the e cess-profts credt for the ta abe year s the aggregate
of earnngs for a of ts ta abe years n the base perod dvded by the tota
number of those years. In the event of a defct for one year n the base perod,
the aggregate earnngs for the other years are not reduced thereby. If there
are defcts In more than one year n the base perod, the aggregate earnngs for
the other years are reduced by a such defcts e cept the one for the year n
whch the greatest defct occurred. ut n a cases the aggregate so determned
s dvded by the tota number of years n the base perod.
or e ampe, corporaton had earnngs of 300,000 n 1S3 , and 200,000 n
1937. In 38 t had a defct (that s, an e cess of deductons and net ncome
credts over gross ncome) of 150,000 and n 1939 another of 100,000. Its ag-
gregate earnngs for the base perod are 100,000 that s, 300,000 pus 200,000
mnus 100,000 the greatest defct, the 150,000 defct, beng dsregarded. The
average earnngs for the base perod are, therefore, 100,000, or 400,000 dvded
by the number of years n the perod.
Second method ased on ncome and nvested capta.
Ths method nvoves the same procedure as the frst for determnng the
average earnngs of the base perod. In determnng the average nvested capta,
however, the nvested capta for no year s emnated.
ddtons to nvested capta are aowed a ta -free return of 10 per cent to
the e tent that they do not cause t to e ceed 500,000: a ta -free return of 8
per cent Is aowed on new capta above that fgure. or the purpose of ds-
tngushng between od capta and new, a capta In e cess of that for the
begnnng of the ta payer s frst ta abe year under the b s consdered to be
new. ut, f the nvested capta subsequenty reaches a ower fgure, that fgure
woud become the measure of new capta.
or e ampe, a corporaton on a caendar-year bass had on anuary 1, 1940,
the begnnng of ts frst ta abe year under the e cess-profts ta , an nvested
capta of 100,000. In 1941 Its Invested capta had Increased to 150,000. Ths
50,000 ncrease woud be consdered as new capta and aowed a return of 10
per cent In 1942 ts nvested capta was 130,000, or 20,000 ess than 1941, but
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st 30,000 more than n 1940. Ths 30,000 woud st be regarded as new
capta as t s n e cess of the measure estabshed by 1940. owever, f n 1943
the Invested capta were to be reduced to 75,000, ths fgure woud repace the
100,000 fgure for 1940 as the measurement of new capta. That s, for years
subsequent to 1943 any nvested capta n e cess of 75,000 w be consdered
as new capta unt a new ow s estabshed.
The foowng tabes prepared by the Treasury Department ustrate the effect
of the ta under the frst and second methods:
Tabe I. Iustratons of sampe corporatons, shottng e cess-profts ta es
under (1) average base perod earnngs method and (2) percentage return on
nvested capta method.1
Norma ta net Income:
verage for base perod
mount.
Per cent of Invested
capta
Ta abe year
mount
Per cent of Invested
capta...
Net Income for e cess-profts
ta :
verage for base perod..
Ta abe year
Ta abe e cess profts:
ase perod earnng
method
Return on nvested cap-
ta method
cess-profts ta :
(1) ase perod earnngs
method
at rate ta (4.1
per cent) 1
Graduated rate ta
Tota e-ess-profts
ta
(2) Return on nvested
capta method
Cor-
pora-
ton L
50, 000
00,000
7.2
42,000
17,400
40(1
2. t
115
2, 575
Cor-
pora-
ton 2.
50,000
00.000
10
42,000
17, 4 0
400
400
2,400
115
2, 575
92
Cor-
pora-
ton 3.
50,000
30
00,000
3
42,000
47,4 0
4 0
25, 793
2. 4 0
2, 575
5,418
Corpo-
raton 4.
1,000,000
1,200,000
7.2
840,000
949,200
104,200
100,8 7
49,200
33. ISO
82,380
20,803
Corpo-
raton 5.
1,000,000,
1,300,000
10.8
840,000
949. 200
104,200
104,200
49,200
33, 180
82,380
27, 970
1,000,000
30
1,200,000
3
Corpo-
raton .
500,000
10
1,500,000
Mf.00(
949. 200
104, 200
10,8 7
49,200
33, ISO
82,380
228, 890
Corpo-
raton 7.
1,250,000
1,500,000
420,000
1 1. 18 , 500
701,500
7 1,5001
1,500
314, 7,
39 ,250
29 , 75
Corpo-
raton 8.
1,050,000
1,185. 500
131.5
S.
44.100
105,900
2 0,875
Tabe II.
Corpora-
ton 9.
Corpora-
ton 10.
quty capta
orrowed capta
Tota capta. - -
Invested capta.-
Norma ta net ncome:1
verage for base wrod
mount
Per cent of tota capta
Ta abe year-
mount.. --
Per cent of tota capta
Net ncome Mr e cess profts ta :
(1) ase perod earnng method-
Ta abe year
(2) Return on nvested capta method-
Ta abe year -
Ta abe e cess profts:
ase perod earnngs method
Return on nvested capta method
cess profts ta :
(1) ase perod earnngs method-
at rate ta (4.1 percent)1
Graduated rate ta
Tota ta ...
(2) Return on Invested capta method...
,000,000
5,000,000
5,000,000
500,000
10
750,000
15
420,000
5 3, 250
420,000
593,250
1 8, 250
1 8, 250
30, 750
58,800
89, 5.10
50,388
3,500,000
1. 500.000
5,000.000
1 4,000,000
500,000
10
750,000
15
420,000
593,250
445,000
018,250
1 8,250
213,250
30,750
15S.SO0
89, 550
0 ,138
See footnotes at end of Tabe III.
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501
Msc.
Tabe III. Corporaton .7
193
1937
1938
1939
Ta abe
year.
1,000,000
1,500,000
2,000,000
2, 500, 000
2, 500,000
Norma ta net ncome:
mount
100,000
10
150,000
10
200,000
10
250,000
10
500,000
20
Net ncome for e cess profts ta
8 ,1 0
128, 0
1 7,000
205,000
395,500
ase perod
earnngs
method.
Return on
Invested
capta
Net ncome for e cess profts ta
mount...
Per cent of nvested capta...
Ta abe year-
mount
Per cent of Invested capta...
Ta abe e cess profts
cess profts ta :
at rate ta (4.1 per cent)
Graduated rate ta
cess profts .
cess profts ta as per cent of net ncome after Income t
14 . 705
8.4
395, 00
15.8
243, 795
20,500
89.018
109.518
27.7
14 ,705
8.4
395,500
15.8
180,500
.- , f,75
54.
75
13.8
cept where otherwse ndcated t s assumed that (1) Invested capta remans unchanged (2) for the
base perod edera Income ta es amounted to 1 per cent of net ncome: (3) the corporaton derved no
Income from dvdends from domestc corporatons, nterest on ta abe Unted States securtes, or capta
gans and (4) the corporaton had no borrowed capta.
1 Net ncome before deducton of norma ta .
Net ncome after deducton of norma ta . The amount for the ta abe year s the e cess profts net
Income.
1 cess profts net ncome for the ta abe year ess the specfc e empton of 5,000 and the e cess profts
credt.
at rate ta of 4.1 per cent Is computed on norma ta net ncome.
Invested capta conssts of the 3,500,000 equty capta and 33M per cent of the 1,500,000 borrowed
capta.
It s assumed that ths corporaton (1) dstrbuted a ts net ncome n dvdends (2) derved no ncome
from dvdends from domestc corporatons, nterest on ta abe Unted States securtes or capta gnns
and (3) had no borrowed capta. Norma ncome ta es are computed at rates effectve n the severa years.
. C SS-P O ITS N T INCOM .
The net Income for e cess-profts ta purposes s the norma-ta net ncome
for the purposes of the genera corporate ncome ta wth certan ad|ustments.
or both the ta abe years and the years n the base perod, where ether
method of measurng e cess profts s used, the norma-ta net Income s
ad|usted by the e cuson of gan or oss from the sae or e change of capta
assets (deprecabe or nondeprecabe) hed for more than 18 months, the
deducton of the norma corporate Income ta , and the e cuson of ncome
arsng from the retrement or dscharge of the ta payer s own ndebtedness.
Where the second method of measurng e cess-profts s used, the norma-ta
net ncome for both the ta abe years and the years n the base perod s
further ad|usted by ncreasng the credt for dvdends receved to 100 per cent
and makng t appcabe to dvdends on the stock of a corporatons, whether
domestc or foregn, e cept dvdends (actua or constructve) on stock of foregn
persona hodng companes. In addton, the deducton for nterest pad or
accrued Is reduced by an amount whch s the same percentage of so much of
such nterest as represents nterest on borrowed capta (as defned n the b)
as the borrowed nvested capta (as defned n the b) s of the tota borrowed
capta.
or the years In the base perod ony, where ether method of measurng
e cess profts s used, the norma-ta net ncome s ad|usted further by the
addton thereto of the amount of osses, not compensated for by nsurance
or otherwse, arsng from fres, storms, shpwreck, or other casuaty, or from
theft. In addton, there Is added back, for the years n the base perod, the
amounts whch were deductbe on account of any repayment or credt by a
corporaton to ts vendee of any amount attrbutabe to any ta under the gr-
cutura d|ustment ct
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502
The ad|ustment of Income to tnke care of these unusua and nonrecurrng
Items makes for equty and the remova of hardshps whch woud otherwse
occur.
or the purposes of the appcaton of the 4.1 per cent ta (descrbed beow),
whch s a prerequste to the use of the frst method of measurng e cess
profts, the ta base s the same to whch the genera corporate ncome ta
appes. Ths 4.1 per cent ta , however, s a part of the e cess-profts ta
structure and for ths reason s not deductbe from the norma-ta net ncome
In arrvng at the e cess-profts net ncome for the purposes of the graduated
e cess-profts ta .
7. SP CI IC MPTION.
fter the amount of the e cess profts s determned under ether the frst
or second method, the amount so determned Is reduced by a specfc e empton
of 5,000 before the appcaton of the graduated e cess-profts ta . It s
fet that ths bera e empton w be a substanta beneft and encouragement
to sma corporatons.
8. R T S O T .
There are two dstnct sets of e cess-profts ta rates the eecton of whch
depends upon the method used to measure the e cess profts.
rst method aaed on ncome.
If the ta payer has eected to measure ts e cess profts by ths method, t Is
requred to pay a ta of 4.1 per cent, n addton to ts genera corporate ncome
ta at a ma mum rate of 20.9 per cent, upon ts norma ta net ncome. In
addton, t Is requred to pay on ts e cess-profts net ncome, reduced by the
e cess-profts credt and the specfc e empton of 5,000, a ta at the foowng
graduated rates:
Rate of ta ,
mount of e cess profts: er cent.
rst 20.000 25
Ne t 30,000 30
Ne t 50,000 35
Ne t 150,000 : 40
Ne t 2 0,000 45
Over 500,000 50
The foowng w ustrate the computaton of the e cess-profts ta under
ths method, the norma ncome ta , and the tota:
Norma ta net ncome 2,200, 000
cess-profts net ncome 2, 000,0U0
Less credts:
ase perod average e cess-profts net ncome 500, 000
Norma ta (20.9 per cent of 2,200,000) 459,800
9 4,800
cess-profts ta base 1.035,200
cess-profts ta :
Under graduated schedue
25 per cent of 20,000 ,000
30 per cent of 30,000 9, 000
35 per cent of 50,000 17, 500
40 per cent of 150,000 0.000
45 per cent of 250,000 112,500
50 per cent of 535,200 2 7, 00
Tota 471, 00
Under fat rate (4.1 per cent of 2,200,000) 90,200
Tota e cess-profts ta 501,800
Norma ta (20.9 per cent of 2,200,000) 459,800
Tota ncome and e cess-profts ta 1,021, 00
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If ths method Is used to measure the e cess profts, the 4.1 per cent ta
requred under the frst method Is not Imposed. There s mposed, however, upon
the ta payer s e cess-profts net ncome, reduced by the e cess-profts credt and
the specfc e empton of 5,000, a ta at the foowng graduated rates:
ate of tar.
mount of e cess profts: pf cent.
rst 20,000 20
Ne t 30,000 25
Ne t 50,000 30
Ne t 150,000 35
Ne t 250,000 40
Over 500,000 45
The ta computaton under ths method, together wth the norma Income ta
and the tota, may be Iustrated as foows:
Norma ta net Income 3,300,000
Invested capta 20,000,000
ase perod percentage 15
cess profts 3,040,200
Less credts:
10 per cent of 20,000,000 2,000, 000
2,005,000
cess-profts ta base 1,035,200
cess-profts ta :
20,000 at 20 per cent 4, 000
30,000 at 25 per cent 7, 500
50,000 at 30 per cent : 15,000
150,000 at 35 per cent 52, 500
250,000 at 40 per cent 100,000
535,200 at 45 per cent 240,840
cess-profts ta 419,840
Income ta (20.9 per cent of 3,300,000) 89, 700
Tota ta 1,109,540
9. IN ST D C PIT L.
The Invested capta for any day of the ta abe year conssts of equty Invested
capta and borrowed nvested capta.
(a) quty nvested capta. quty nvested capta s the sum of the fo-
owng tems:
(1) Money pad In for stock or as pad-n surpus or as a contrbuton to
capta
(2) Property pad n for stock or as pad-n surpus or as a contrbuton
to capta
(3) Ta abe stock dvdends and
(4) ccumuated earnngs and profts as of the begnnng of the ta abe
year
reduced by the sum of the foowng tems:
(1) Dstrbutons out of capta durng pror ta abe years
(2) Dstrbutons prevousy made durng the ta abe year out of capta
or out of the accumuated earnngs and profts as of the begnnng of the
ta abe year.
uctuatons In the earnngs and profts account for the ta abe year have no
effect upon the nvested capta for the ta abe year. Defcts n the earnngs
and profts account, moreover, do not reduce the nvested capta. Nevertheess,
defcts n the earnngs and profts account must be made good out of earnngs
and profts before any ncrease In nvested capta resuts from the earnngs and
profts account
( ) orrowed nvested capta. orrowed capta Is ncuded n InTested
capta under a graduated mtaton at varyng percentages (100, , 83 ),
these percentages dependng upon the amount of equty Invested capta.
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504
or e ampe. If the equty Invested capta of a corporaton s 0,000, t s
aowed to ncude 40,000 of ts borrowed capta at 100 per cent, 900,000 at
per cent, and a remanng borrowed capta at 33 per cent. Thus f ths
corporaton has an equty Invested capta of 0,000 and borrowed capta of
2,( 00.( 00, ts nvested capta w be ncreased as foows:
orrocrd
capta
ncuded n
nvested
orrowed capta: capta.
40,000 ( 100,000 ess 0,000 (equty nvested capta)), at 100
per cent 40,000
90 .000, at per cent 00,000
1,Or 0,000, nt 33 per cent: 353, 333
Totas ( 2,000,000) 993.333
If the equty nvested capta s 100,000 or more, sny 300,000, and the bor-
rowed capta s the same, that s, 2,000,000, the nvested capta woud be
ncreased as foows:
orrotrcd
capta
ncuded n
nvested
orrowed capta: capta.
700.0(0 ( 1,000,000 ess 300,000 (equty nvested capta)), at
0 per cent 4 ,0 7
1,300,000 ( 2,000,000 ess 700,000), at 33 per cent 433,333
Tota 900,000
10. DMISSI L ND IN DMISSI L S T8.
The average nvested capta as computed above s reduced by a percentage
whch s the rato of the nadmssbe assets of the corporaton for the year to
the tota of admssbe and nadmssbe assets for such year.
Inadmssbe assets are (1) corporate stocks (e cept stock n a foregn
persona hodng company), and (2) State and oca securtes, obgatons of
corporate agences of the Unted States, and obgatons of the Unted States or
ts possessons. other assets are admssbe assets.
The nvested capta s so reduced for the reason that snce the ncome from
nadmssbe assets s not ta abe to the corporaton, the assets from whch such
ncome arose shoud be e cuded from nvested capta.
Inadmssbe assets are not deducted drecty from the nvested capta for
the reason that the tota of admssbe and nadmssbe assets s not ordnary
equa to the nvested capta.
11, P SON L S R IC C0 I OR TI0N8.
Under the b, a persona servce corporaton may sgnfy n ts return for
any ta abe year ts desre not to be sub|ect to the e cess-profts ta , and t
w be e empt from the ta for such year. owever, n order for the corpora-
ton to be e empt, the sharehoders are requred to Incude the undstrbuted
ncome of such a corporaton n ther gross ncome, whch then s sub|ect to
norma and sur ta . persona servce corporaton s defned as a corporaton
whose ncome s to be ascrbed prmary to the actvtes of sharehoders who
are reguary engaged n the actve conduct of the affars of the corporaton and
are the owners nt a tmes durng the ta abe year of at east 80 per cent n
vaue of a the stock of the corporaton and n whch capta s not a matera
ncome-producng factor. or ths purpose an ndvdua s consdered as ownng
at any tme the stock owned at such tme by hs spouse or mnor chd. Thus,
a the sharehoders who are reguary engaged n the actve conduct of the
affars of the corporaton may e counted n determnng whether such a corpo-
raton may be cassfed as a persona servce corporaton, nstead of merey
the prncpa sharehoders. Moreover, to determne whether such sharehoders
own at east O per cent n vaue of the stock of the corporaton, the stock
owned by ther spouses or mnor chdren may be ncuded. persona servce
corporaton does not ncude a foregn corporaton or any corporaton 50 per
cent or more of whose gross ncome conssts of gans, profts, or Income derved
from tradng as a prncpa.
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12. OR IGN CORPOR TIONS.
In the case of a foregn corporaton n e stence durng the entre base perod
and engaged n trade or busness n the Unted States or havng an offce or pace
of busness theren, ts e cess-profts credt conssts of the e cess of ts e cess-
profts net ncome for the ta abe year over Its average e cess-profts net ncome
for the base perod, wth no ad|ustments for addtons to or reductons In capta.
Such corporatons w aso be entted to a specfc e empton of 5,000. In the
case of such foregn corporatons whch were not n e stence durng the entre
base perod, the ta s computed by reference to the nvested capta, whch s
determned as foows:
The day nvested capta for any day of the ta abe year s the aggregate of
the ad|usted bass of each Unted States asset hed by the ta payer n the Unted
States on the begnnng of such day. or the purpose of reducng the average
nvested capta by the rato of nadmssbe assets to tota assets, the terms ad-
mssbe assets and nadmssbe assets ncude ony Unted States assets.
13. CR DIT O OR IGN T S.
The b aows a credt aganst the e cess-profts ta for ncome and proft
ta es pad or accrued durng the ta abe year by any domestc corporaton to
any foregn country or to any possesson of the Unted States. The credt s
sub|ect to the same mtatons whch appy to the credt aowed for the purpose
of the corporate norma ncome ta . Ths prevents the credt from reducng the
ta on any e cess-profts ta net ncome derved from mercan sources. The
mercan ta , by reason of the credt, w appy aganst the ncome from foregn
sources ony where the foregn ta rate s ess than the ta rate mposed by the
Unted States. It was beeved necessary to provde such a credt to pace our
mercan corporatons on an equa compettve bass wth foregn corporatons
ocated abroad.
14. C SS PRO ITS CR DIT IN CONN CTION WIT C RT IN C NG S.
Under the provsons of Suppement of the b a domestc corporaton
whch was not n e stence at the begnnng of ts base perod s aowed to com-
pute ts e cess-profts credt under ths method f t acqured, or resuted from
the coaescng of, another corporaton through certan ta -free e changes, where
the other corporaton was n e stence at the begnnng of the base perod or
had a predecessor whch was n e stence at such tme and, havng so eected,
t s aowed to use as ts e cess-profts net ncome for the ta abe years n
the base perod pror to such acqurng or coaescng the e cess-profts net n-
come of the other corporaton. or the years n the base perod subsequent to
such acqurng or coaescng, t uses ts own e cess-profts net ncome for the
purpose of computng the credt.
domestc corporaton whch was n e stence at the begnnng of the base
perod and whch s thereby entted to eect to compute ts e cess-profts credt
under secton 713 by vrtue of the provsons of secton 712, f t does eect to
compute such credt under secton 713, s permtted to add to ts e cess-profts
net ncome for the years n the base perod the e cess-profts net ncome of
corporatons whch t absorbs by a statutory merger or by qudaton under
secton 112(b)( ), where such merged or qudated corporaton was n e st-
ence at the begnnng of the base perod or had predecessors n e stence on such
date.
Suppement contans provsons reatve to the effect of certan ta -free
e changes upon the computaton of the e cess-profts credt based on ncome
and nvested capta. Such provsons are desgned (1) to permt the base perod
e perence of a corporatons whch coaesced durng the base perod to be used
n computng the base perod e perence of the successor corporaton, (2) to
prevent arge corporatons from obtanng undue advantage from reorganzng,
by means of ta -free transactons, nto groups of sma corporatons, (3) to
prevent nvested capta acqured n certan ta -free e changes from beng
treated as new capta to any greater e tent than t was so treated n the hands
of the corporaton from whch t was acqured, (4) to prevent step-ups of base
perod percentages, and (5) to prevent a corporaton the proporton of whose
290217 41 S3
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50
borrowed capta whch may be ncuded In Invested capta at 100 per cent or
per cent or the proporton of whose Invested capta whch Is gven favor-
abe base perod percentage or new capta treatment has been ad|usted because
of prevous reorganzatons from undong the effects of such ad|ustments through
transferrng ts assets, ta -free, to another corporaton whch s tte more
than a dummy. The nonta abe e changes covered by Suppement fa Into
two genera casses: (a) Whereby one corporaton becomes severa corpora-
tons, and ( ) whereby severa corporatons become one corporaton.
1 5. SP CI I, I PRO ISIONS.
Your commttee has recommended certan speca reef provsons, whch are
as foows:
(1) Speca treatment s aowed for corporatons whch were requred to
refund to ther vendees amounts attrbutabe to any ta whch was not pad
under the grcutura d|ustment ct of 1933, as amended. These amounts
were aowed as deductons for busness e penses n computng Income sub|ect
to the corporaton norma ta for the ta abe years n the base perod. Ths
resuted n a dstorton of the ncome n the base perod. Tour commttee has
provded that any deducton for busness e penses n the base perod may be
decreased by the amount of the e cess of such repayments over the amount
requred to be ncuded n gross ncome by reason of such ta es for the purpose
of the e cess-profts ta .
(2) corporaton whch suffered osses durng the base perod because of
re, storm, shpwreck, or other casuaty or from theft, not compensated for by
Insurance or otherwse, s afforded reef by havng such deductons dsaowed
for the purpose of the e cess-profts ta computaton of the base perod ncome.
Ths has the effect of ncreasng the base perod Income.
(3) The emnaton of gans or osses from the sae or e change of assets
(deprecabe or nondeprecabe) hed over 18 months, for the purpose of the
base perod as we as the ta abe year.
(4) The e cuson of ncome derved from the retrement or dscharge of any
bonds, debentures, notes, or certfcates or other evdences of ndebtedness whch
have been outstandng for more than 18 months.
(5) Many corporatons whch had operatng defcts woud sustan severe
hardshps f ther Invested capta was reduced by such defcts. Tour com-
mttee provded that operatng defcts shoud reduce nvested capta ony to
the e tent of the earned surpus.
Your commttee has granted speca reef n cases where the Commssoner
Is unabe to determne the ta payer s equty nvested capta for the frst day
of the frst ta abe year begnnng after December 31, 1939. In such a case,
such equty nvested capta sha be an amount, determned n accordance wth
rues and reguatons prescrbed by the Commssoner wth the approva of the
Secretary, equa to the cash on hand pus the aggregate of the ad|usted bases
at such tme of the assets of the ta payer then hed mnus the Indebtedness
outstandng at such tme. The equty nvested capta for each day In the ta -
payer s base perod and for each day after the begnnng of the ta payer s ta abe
year sha be determned, usng as the basc fgure the equty nvested capta as
of the begnnng of such frst ta abe year.
The foowng e ampe w Iustrate how ths provson w appy. The
equty nvested capta as of anuary 1, 1940, s computed as foows:
d|mte
ssets: bat .
Cash 100,000
Other assets 400,000
Tota , OO, 000
Less: Labtes 200,000
quty Invested capta 300, 000
When the equty nvested capta has been determned as of any partcuar
date, for e ampe, anuary 1, 1940, It may be computed for any other date by
makng ad|ustments for profts and osses, dvdends pad, and addtons or
wthdrawas of capta occurrng durng the ntervenng perod. Thus, If be-
tween anuary 1, 1937, and anuary 1, 1940, the above corporaton had profts
(after ta es) of 200,000 and pad dvdends of 150,000, the equty nvested
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capta as of anuary 1, 193 , woud have been 250,000. Smary, If between
anuary 1, 1940, and anuary 1, 1942, the corporaton had profts of 100,000
and pad dvdends of 0,000, ts equty nvested capta as of anuary 1, 1942,
woud be 340,000.
18. CONSOLID T D R TURNS.
Your commttee gave consderaton to requrng consodated returns n con-
necton wth the e cess-profts ta . owever, t was not possbe to prepare a
consodated return provson wthout deayng the b for a consderabe ength
of tme.
II. Suspenson of the nson-Tramme ct.
The provsons of the nson-Tramme ct, as amended, reatng to mtaton
of proft on contracts for the constructon or manufacture of nava vesses and
rmy and Navy arcraft, are suspended as to contracts or subcontracts for such
constructon or manufacture whch are entered nto or competed durng the
ta abe years to whch the e cess-profts ta w be appcabe.
Snce the proposed e cess-profts ta w appy to a corporatons, Incudng
corporatons now sub|ect to the speca proft-mtng provsons of the nson-
Tramme ct, t s fet that such speca provsons shoud not appy whe the
e cess-profts ta s n force. Unformty w thereby be acheved n the treat-
ment for ta purposes of a abnorma profts resutng from the natona defense
program. It s not beeved that the mted types of busnesses affected by the
nson-Tramme ct shoud be treated, durng the perod n whch the e cess-
profts ta appes, dfferenty from the way n whch other busnesses engaged
In producton for the natona defense are treated.
III. Proft Lmtatons Under the Merchant Marne ct.
The Merchant Marne ct of 193 , as amended, contans provsons reatng to
the recapture by the Martme Commsson of profts n e cess of 10 per cent of
the tota contract prce of contracts and subcontracts for shp constructon under
that ct. It s not beeved desrabe to suspend these provsons of the Merchant
Marne ct snce there are commerca consderatons Invoved whch do not appy
n the case of the nson-Tramme ct. Prvate shp operators for whom vesses
are constructed under the constructon dfferenta subsdy and charter provsons
of the Merchant Marne ct are vtay nterested n the cost of such vesses to
the Commsson. urthermore, money recaptured by the Commsson under shp
constructon contracts and subcontracts pad nto the Commsson s revovng con-
structon fund where t s avaabe for further shp constructon and has the effect
of reducng the amounts whch otherwse woud be requred to be approprated
from tme to tme by the Congress for Martme Commsson shpbudng.
In order to protect shpbuders, machnery manufacturers, and others engaged
on Martme Commsson contracts from beng sub|ect to two proft mtaton
provsons at the same tme, that Is, the mtaton provsons of the Merchant
Marne ct and the e cess-profts ta provsons of the b, your commttee has
suggested speca treatment for e cess-profts ta purposes. Under the b, the
shpbuder or other person engaged on Martme Commsson contracts w be
requred to compute ts e cess-profts ta under two dfferent methods and pay
the esser ta computed under ether method.
Under the frst method, the ta payer w be requred to ncude ony the 10
per cent proft t s permtted to retan under the Merchant Marne ct n ts gross
ncome and compute the e cess-profts ta on that bass. Under the other method,
the ta payer Is requred to ncude n gross ncome the entre amount of the gross
proceeds from ts contract and credt aganst the e cess-profts ta the amount of
any payments recaptured wthn the ta abe year by the Unted States Martme
Commsson wth respect to such contracts or subcontracts. Under ths second
f.ethod, the ta payer s thus aowed credt for any amounts recaptured by the
Commsson. In cases where such credt s ess than the tota ta so computed,
the effect to the ta payer s e acty the same as though the provsons of the Mer-
chant Marne ct were suspended n the same manner as s proposed n the case
of the nson-Tramme ct
I . mortzaton of mergency actes.
The e tenson of e stng factes Is a necessary and vta part of the natona
defense program. To obtan the needed factes w requre the nvestment of
hundreds of mons of doars. Tour commttee has been nformed by the d-
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508
vsory Commsson to the Counc of Natona Defense that substanta amounts
of prvate capta w not be Invested n the constructon of such factes uness
corporatons are assured, n vew of the fact that such factes w be of use
chefy ony durng the perod of natona emergency, that they w be permtted
to amortze the cost thereof over a shorter perod than woud be permtted under
the deprecaton provsons of the Interna Revenue Code.
Under the b, accordngy, a corporaton Is aowed a deducton for ncome
and e cess profts ta purposes for the amortzaton of certan factes whch
are certfed by the dvsory Commsson to the Counc of Natona Defense and
ether the Secretary of War or the Secretary of the Navy as necessary In the
nterest of natona defense durng the present emergency. Such factes are
and, budngs, machnery, and equpment, or parts thereof, constructed, recon-
structed, erected, nstaed, or acqured after uy 10, 1M0, and the constructon,
reconstructon, erecton, nstaaton, or acquston of whch was contracted for
pror to the termnaton of the present emergency. The wrte-off of the cost
(ad|usted bass for ncome-ta purposes) of such factes s permtted to be
spread over a perod of 0 months, ths deducton to be n eu of the present
deducton for e hauston, wear and tear, and obsoescence provded for n secton
23(1) of the Interna Revenue Code. The ta payer has the opton of begnnng
the 0-month perod ether wth the month foowng the month n whch the
facty s competed, or wth the ta abe year foowng the year In whch the
facty s competed, by sgnfyng on the approprate ncome-ta return ts desre
to have the benefts of the amortzaton deducton.
It s further provded that f, after havng eected the amortzaton deducton,
the ta payer desres to termnate such deducton and use the deducton provded
by secton 23(1) of the Interna Revenue Code wth respect to the remander of the
ad|usted bass of the facty, he be permtted to do so upon notce to the Comms-
soner at any tme pror to the termnaton of the 0-month perod and that
(e cept as set forth beow) he be not permtted thereafter agan to eect amor-
tzaton wth respect to the same facty.
The b aso provdes that f the Presdent has procamed the endng of
the emergency, or the Secretary of War or the Secretary of the Navy has certfed
to the Commssoner of Interna Revenue that the facty ceased to be necessary
In the Interest of natona defense durng the emergency, and such procamaton
or certfcate Is made before the end of the 0-month perod, the ta payer may
eect to recompute the amortzaton deducton on the bass of the perod as
termnated by the procamaton or certfcate In eu of the 0-month perod.
The benefts of ths eecton are accorded regardess of whether the ta payer has
In the past eected the amortzaton deducton wth respect to the factes
Invoved.
It s further provded that a deducton be aowed, n eu of the amortzaton
deducton above-descrbed, equa to the amount of certan payments receved from
the Unted States wth respect to a facty f such payments are requred to be
ncuded n the ta payer s gross Income. It s fet that the payments referred
to shoud consst ony of amounts certfed by ether the Secretary of War or the
Secretary of the Navy as compensaton to the ta payer for the unamortzed
cost of the facty, made because further contracts wth the Unted States
nvovng the use of the facty are not forthcomng.
D T IL D DISCUSSION O C RT IN T C NIC L O ISIO S O T ILL.
Secton 710. Imposton of Ta .
Secton 710 mposes an e cess-profts ta at the rates herenbefore set forth. If
the ta payer s e cess-profts credt s based upon Income and nvested capta, the
ta s measured by the ad|usted e cess profts net Income. d|usted e cess profts
net Income s defned as the e cess-profts net ncome ess the sum of a specfc
e empton of 5,000 and the amount of the e cess-profts credt. If the ta payer s
e cess-profts credt s based upon ncome, the e cess-profts ta conssts of the
sum of a ta measured by ad|usted e cess-profts net Income pus a ta measured
by the norma-ta net ncome as defned n secton 13(a)(2) of the Interna
Revenue Code.
In order that corporatons sha not secure undue advantage under the gradu-
ated rate schedues by spttng up n ta -free e changes, a speca appcaton of
the rates s provded n secton 710(a) (3). Thus, If a corporaton were to spt
nto haves, the top bracket of 500,000 n the rate schedues must kewse be
reduced by one-haf to 250,000 n the case of each corporaton and the ower
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brackets reduced proportonatey n order to prevent avodance of the graduated
rate schedue. The reducton accompshed n the b s based upon the reaton
of the nvested capta of the corporaton pror to the spt-up to the reduced
nvested capta after the spt-up. Snce the b, n secton 759, makes a smar
reducton n the 500,000 fgure whch provdes the dvdng ne between the
8 per cent and 10 per cent new capta rate, and snce such 500,(100 fgure s the
same fgure as the top bracket under the rate schedues, the reducton n secton
710(a)(3) In the rate schedues s for convenence based upon the reducton
accompshed under secton 759. The reduced amount computed under that
secton s caed the preferenta rate amount. Therefore, where the preferenta
rate amount of a corporaton s ess than 500,000 as a resut of a spt-up, the
doar amounts desgnatng the amounts of ta and the upper and ower mta-
tons of the varous brackets n the rate schedues are to be reduced to amounts
bearng the same rato to the amounts whch woud otherwse be appcabe as
such preferenta rate amount bears to 500,000.
No such reducton s to be made n the amounts of e cess profts credt, norma-
ta net ncome, or ad|usted e cess profts net Income, whch are determnabe
ony by reference to other sectons of the b. Secton 710(a) (3) Is appcabe
both to a ta payer whose credt s based upon ncome and to a ta payer whose
credt s based upon ncome and nvested capta. In the case of a ta payer of
the former cass havng a preferenta rate amount of 300,000, the graduated
rate schedue measured by ad|usted e cess profts net ncome w, therefore, read
as foows:
Upon ad|usted e cess profts net ncomes of ess than 12,000, 25 per cent
of the ad|usted e cess profts net ncome.
of 30,000, 30 per cent n addton of such e cess.
ad|usted e cess profts net Incomes n e cess of 150,000, and not n e cess
ad|usted e cess profts net ncomes n e cess of 300,000, 50 per cent n
Thus, f the ta payer s ad|usted e cess profts net ncome were 180,000, hs
e cess-profts ta woud be 8,400, computed under the rate schedue above
pus 4 o per centum of the norma ta net ncome.
In the case of a ta payer usng the credt based upon ncome and nvested
capta, the rate schedue set forth n secton 710(a)(2), appcabe to such
ta payers, s smary ad|usted under subsecton (a) (3).
Secton 711. cess-Profts Net Income.
The e cess-profts net ncome for purposes of the ct s defned n secton
711. or ta abe years begnnng after December 31. 1939, the e cess-profts
net ncome s the norma ta net ncome for such year, as defned n secton
13(a)(2), wth certan prescrbed ad|ustments dependng upon whch of the
aternatve methods provded for computng the e cess-profts credt s used.
The ad|ustments to the norma ta net ncome for the purpose of determnng
the e cess-profts net ncome are as foows:
( ) If the e cess-profts credt for the ta abe year s computed under secton
713 on the bass of the average earnngs for the base perod, the ad|ustments
to be made are as foows:
(1) The deducton for ta es pad or accrued under the aw appcabe to the
ta abe year s to be ncreased by an amount equa to the amount of the ta
under Chapter 1 payabe for such ta abe year.
(2) The amount of any gan or oss reazed upon the sae or e change of a
capta asset hed for more than 18 months sha be e cuded. or the purpose
of ths ad|ustment, capta asset means a capta asset as defned n secton
11T of the Interna Revenue Code but wthout any e cepton wth respect
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510
to an asset of a character whch Is sub|ect to the aowance for deprecaton
f such asset otherwse consttutes a capta asset wthn the meanng of the
defnton.
(3) There sha be e cuded the amount of any ncome derved from the
retrement or dscharge by the corporaton of any of ts bonds, debentures,
notes, or certfcates of ndebtedness, or any ndebtedness evdenced by a wrtng
whch (ncudng renewed obgatons) were outstandng for more than 18
months pror to the date of such retrement or dscharge.
) If the e cess-profts credt s computed under secton 714 by the nvested-
capta method, the foowng addtona ad|ustments sha be made:
(4) The deducton aowabe for nterest pad or accrued durng the ta abe
year sha be reduced by an amount whch s the same percentage of so much
of such Interest as represents nterest on borrowed capta as the borrowed
nvested capta s of the tota borrowed capta.
(5) Instead of the mted credt for dvdends receved, aowed n com-
putng the norma ta net ncome, a credt s to be aowed n the fu amount
of a dvdends receved wthout regard to the mtaton as to the amount
of the ad|usted net ncome) from another corporaton, whether foregn or
domestc, e cept dvdends (actua or constructve) on stock of foregn persona
hodng companes.
or ta abe years n the base perod, the e cess-profts net ncome s determned
n the same manner as descrbed for ta abe years begnnng after December
31, 1939, but wth the addtona ad|ustments herenafter descrbed. or ta -
abe years sub|ect to the Revenue ct of 193 , the bass for the appcaton of
the varous ad|ustments Is the norma ta net ncome as defned In secton
13(a) of such ct, and for any other ta abe year begnnng after December
31, 1937, and before anuary 1, 1940, the speca cass net Income as defned n
secton 14(a) of the appcabe revenue aw.
The norma ta net ncome or the speca cass net ncome for ta abe years
n the base perod s to be computed as If secton 117 of the Interna Revenue
Code were a part of the revenue aw appcabe to the ta abe year for whch
such ncome s beng determned, wth the e ceptons herenafter noted. In
the appcaton of secton 117, the defnton of capta assets s to be apped
n the case of property hed for more than 18 months as f deprecabe assets
were not e cuded that Is, deprecabe assets woud be treated as capta assets
If they are otherwse quafed as capta assets under the defnton. If the
computaton of the e cess-profts net ncome for a ta abe year In the base
perod s beng made In connecton wth the determnaton of the e cess-profts
ta abty for a ta abe year begnnng after December 31, 1940, then the
net short-term capta oss carry-over provded n secton 117(e) sha be ap-
pcabe to net short-term capta osses for ta abe years begnnng after
December 31, 1934. Secton 117(e) s not appcabe f the base perod com-
putaton s beng made for the purpose of determnng the e cess-profts ta
abty for a ta abe year begnnng before anuary 1, 1941.
ddtona ad|ustments wth respect to the base perod are that deductons
for osses arsng from fres, storms, shpwreck, or other casuaty, or from theft,
not compensated for by nsurance or otherwse are not Incuded, and the deducton
for e penses s dmnshed by payments or credts to vendees of rembursements
to them of processng and other ta es under the grcutura d|ustment ct
of 1933. The effect of these ad|ustments s to ncrease the e cess-profts ta
net ncome n the base perod.
Secton 712. cess-Profts Credts.
Secton 712 provdes that a domestc corporaton, the frst e cess-profts ta
ta abe year of whch begns on any date n 1940, and whch was n e stence dur-
ng the entre 48 months pror to such date, sha be permtted to eect for each
ta abe year the credt under secton 713 or secton 714. The eecton must be made
In Its return for the ta abe year and once havng been made s rrevocabe for snch
year. In the case of a other domestc corporatons, the e cess-profts credt for
any ta abe year must be computed n accordance wth the nvested capta method
provded In secton 714.
In the case of a foregn corporaton engaged n trade or busness wthn the
Unted States or havng an offce or pace of busness theren, If ts frst e cess-
profts ta ta abe year begns on any date n 1940 and t was n e stence durng
the entre 48 months pror to such date and was engaged In trade or busness
wthn the Unted States or had an ofce or pace of busness theren at any tme
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511
Msc-
durng each of the ta abe years In the 48 months pror to such date, t must com-
pute Its e cess-profts credt by the method provded n secton 713. other
foregn corporatons engaged n trade or busness wthn the Unted States or
barng an offce or pace of busness theren are requred to compute ther e cess-
profts credt n accordance wth the method provded n secton 714. If the
e cess-profts credt of a foregn corporaton s requred to be computed under
secton 713, no ad|ustments are aowed for addtons to or reductons n capta.
Sucton 713. cess-Profts Cbedt ased on vtcbage ase Perod Income.
The credt provded under secton 713 s based upon a comparson of ncome
for the ta abe year wth the average ncome for the base perod. Such credt
conssts of the average base perod net ncome reducton n capta after the
begnnng of such ta abe year. The term base perod means the ta abe years
begnnng after December 31, 1935, and before anuary 1, 1940.
The base perod net ncome conssts of the aggregate of the e cess-profts net
ncome for each of the ta abe years of the ta payer ncuded n the base perod
ess, n the case of ta abe years ncuded n such base perod n whch the deduc-
tons pus the credt for dvdends receved e ceed the gross ncome, the amount of
such e cess, e cept as ponted out n the foowng paragraph of ths report. In
determnng such e cess, the ad|ustments requred by secton 711(b) (n respect
of ong-term capta gans and osses, the deducton for ta es, casuaty osses,
processng ta repayments, and the e cuson of ncome derved from the retre-
ment or dscharge of ndebtedness of the corporaton) for the purpose of com-
putng the e cess-profts net ncome sha be made. The average base perod net
rcome s determned by dvdng the base perod net ncome by the tota number
of months n the ta abe years ncuded n the base perod and mutpyng the
quotent thus obtaned by 12.
Wth respect to ta abe years n whch the deductons pus the credt for
dvdends receved e ceed the gross ncome the foowng rues are appcabe to
the trentment of such e cess: If the deductons pus the credt for dvdends
receved e ceeded the gross ncome n ony one year, the amount of the e cess to
be taken nto account n computng the average base perod net ncome sha be
zero. If the deductons pus the credt for dvdends receved e ceed the gross
ncome n more than one of the ta abe years ncuded n such base perod, the
amount to be taken nto account n computng the average base perod net ncome
sha be zero for the year n whch such e cess s the greatest and for the other
year or years sha be the amount of the e cess determned n respect of such year
or years.
or the purpose of the e cess-profts credt, the average base perod net ncome
sha not n any case be ess than zero.
If a domestc corporaton computes ts e cess-profts credt on the bass of
the average earnngs for the base perod, such credt s ad|usted for any changes
n capta occurrng after the begnnng of ts frst ta abe year under the e cess-
profts ta . The e cess-profts credt w be ncreased by 8 per cent of the net
capta addton for the ta abe year or decreased by per cent of the net capta
reducton for the ta abe year. The net capta addton for the ta abe year s
computed by takng the aggregate of the day capta addton for each day of
the ta abe year and subtractng therefrom the aggregate of the day capta
reducton for each day of the ta abe year. The dfference thus obtaned s
dvded by the number of days n the ta abe year. If the aggregate of the day
capta reductons e ceeds the aggregate of the day capta addtons, the e cess
dvded by the number of days n the ta abe year represents the net capta
reducton for the ta abe year.
The day capta addton for any day of the ta abe year s the aggregate of the
amount of money and property pad n for stock, or as pad-n surpus, or as a con-
trbuton to capta, after the begnnng of the ta payer s frst ta abe year under
the e cess-profts ta and pror to the day for whc the computaton s made. Prop-
erty pad n s ncuded n an amount equa to ts unad|usted bass for determnng
oss upon sae or e change. If such unad|usted bass s a substtuted bass, t s
ad|usted wth respect to the perod before the property was pad n, n the manner
provded n secton 113(b) (2). or the purpose of determnng the amount of the
day capta addton a dstrbuton by the ta payer to ts sharehoders n ts
stock or rght to acqure ts stock sha not be regarded as money or property pad
n for stock, or as pad-n surpus, or as a contrbuton to capta.
The amount of the day capta addton as above computed sha be reduced
by the e cess, If any, of the e cuded capta for such day over the e cuded cap-
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512
ta for the frst day of the ta payer s frst ta abe year under the e cess-profts ra .
c uded capta conssts of (1) obgatons descrbed n secton 22(b)(4) ( ),
( ), or (C), any part of the Interest upon whch s e cudbe from gross ncome
or aowabe as a credt aganst net ncome, and (2) stock hed by the ta payer
the dvdends upon whch are aowed as a credt under secton 2 (b). -The
e cuded capta for any day s an amount equa to the sum of the foowng:
(1) The aggregate of the ad|usted bass (for determnng oss upon sae or
e change) as of the begnnng of such day of the above-descrbed obgatons hed
by the ta payer at the begnnng of such day and
(2) ghty-fve per cent of the aggregate of the ad|usted bass (for determnng
oss upon sae or e change) as of the begnnng of such day of the above-descrbed
stock hed by the ta payer at the begnnng of such day.
The capta so e cuded for the purpose of determnng the addtons to Invested
capta represents capta the Income from whch Is not sub|ected to ta .
The day capta reducton for any day of the ta abe year s the aggregate
of the amounts of dstrbutons to sharehoders after the begnnng of the ta -
payer s frst ta abe year under the e cess-profts ta and pror to such day, whch
dstrbutons are not out of earnngs and profts.
Secton 714. cess-Pbofts Cbedt ased Upon Income and Invested Capta.
Domestc corporatons whch were n e stence durng the whoe of the base
perod may eect, and a other domestc corporatons are requred, to compute
the e cess-profts credt by the method provded n secton 714. Such credt
Is based upon the reatonshp of ncome to Invested capta. In determnng
such credt, there s frst ascertaned the base perod percentage. Ths s
defned n secton 714 as the percentage whch the base perod net ncome s
of the aggregate of the nvested capta for each of the ta abe years n the
base perod but not to e ceed 10 per cent or be ess than 5 per cent. Wth
respect to the frst 500,000 of nvested capta n the ta abe year, not In e cess
of the owest Invested capta, the mnmum s 7 per cent.
ny ncrease n the nvested capta over the nvested capta at the cose
of the base perod or the nvested capta for any ta abe year begnnng after
December 81, 1939, and precedng the ta abe year for whch the credt Is
beng computed, whchever Is the ower, w Increase the credt computed
upon such prevous nvested capta by 10 per cent of so much of the new nvested
capta as does not produce a tota nvested capta In e cess of 500,000,
and by 8 per cent of the remander of the new nvested capta. n e ampe
of the operaton of ths rue s set forth n the precedng porton of ths report
The term base perod means the ta abe years begnnng after December
31, 193), and before anuary 1, 1940, e cept that n the case of a ta payer
the frst ta abe year of whch under the e cess-profts ta begns on any date
n 1940, and whch was n e stence durng ony part of the 48 months pror
to such date, the base perod sha be such 48 months. Wth respect to a corpo-
raton whch was n e stence durng ony part of the base perod, the b
provdes that for each of the ta abe years of 12 months durng the whoe
of whch t was not n e stence, It sha be deemed to have an nvested capta
equa to ts nvested capta as of the frst day of Its ta abe year begnnng
In 1940, reduced by an amount whch s the same percentage of such nvested
capta as the percentage whch the tota of the nadmssbe assets for the
precedng ta abe year s of the tota of nadmssbe and admssbe assets for
such ta abe year, such percentage to be computed In accordance wth the
method provded n secton 720. The nvested capta for the ta abe year
consstng of the remander of that part of ts base perod durng whch t
was not n e stence sha be an amount determned as above, mutped by
the number of days n such remander and dvded by the number of days n
the 12 months precedng the frst day of ts e stence.
The e cess-profts net ncome for any of the ta abe years of 12 months
In the base perod durng whch the corporaton was not n e stence s an
amount equa to 10 per cent of the frst 500,000 of the constructve nvested
capta and 8 per cent of the baance of such constructve nvested capta.
The e cess-profts net ncome for any perod of ess than 12 months durng
whch the corporaton was not In e stence Is a proportonate part of such
amount.
Corporatons whch were not n e stence durng any part of the base perod
are aowed an e cess-profts credt equa to 10 per cent of that part of the
nvested capta whch does not e ceed 500,000 pus 8 per cent of the remander.
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513
Msc.
or the purpose of determnng the e cess-profts credt based upon In-
vested capta under secton 714, the base perod net Income s computed n
the same manner as the base perod net Income for the purpose of the e cess-
profts credt provded under secton 713, e cept that n determnng the e cess-
profts net ncome, or the e cess of the deductons pus the credt for
dvdends receved over the gross ncome, for ta abe years n the base perod,
the foowng addtona ad|ustments are made:
(1) The ad|ustment provded n secton 711(b) wth respect to the credt
for dvdends receved and
(2) The ad|ustment provded n secton 711(b) wth respect to the deduc-
ton aowabe for nterest pad or accrued durng the ta abe year.
These ad|ustments are descrbed n the dscusson of the secton deang
wth the determnaton of e cess-profts net ncome.
so, smar to the treatment provded under secton 713, If the deductons
pus the credt for dvdends receved e ceed the gross ncome for one of the
ta abe years n the base perod, such e cess Is treated as zero n determnng
the base perod net ncome. If there was such an e cess n more than one
of the ta abe years n the base perod, ony the e cess for the ta abe year
In whch such e cess was greatest sha be treated as zero. The rue per-
mttng such an e cess to be treated as zero appes wth respect to ta abe
years n the base perod not ony n the case of corporatons whch were n
e stence durng the whoe of the base perod but aso In the case of corpo-
ratons whch were n e stence durng ony part of the base perod. Ths
rue has the effect of preventng too great a reducton of the e cess-profts
credt for an abnorma year.
Sectons 715-719. Invested Capta.
Invested capta for any ta abe year, Incudng the ta abe years In the base
perod, s defned n secton 715 as the average nvested capta for such year
and s based on the nvested capta for each day of the ta abe year. verage
nvested capta s the aggregate of the day nvested capta for each day of
the ta abe year dvded by the number of days n such ta abe year or, for a
ta abe year n the base perod, the aggregate of the day nvested capta for
each day of such ta abe year dvded by the number of days n the 12 months
endng wth the cose of the ta abe year. The nvested capta for a ta abe
year conssts of two component parts: (a) quty nvested capta and (b)
borrowed nvested capta.
(a) quty nvested capta. The equty nvested capta for any day of the
ta abe year s determned under secton 718, whch provdes that It sha be
determned as of the begnnng of such day and sha be the sum of the fo-
owng amounts
(1) Money pad n. Money prevousy pad In for stock, or as pad-n sur-
pus, or as a contrbuton to capta.
(2) Property pad n. Property other than money prevousy pad n for
stock, or as pad-n surpus, or as a contrbuton to capta, regardess of the
tme pad n. Such property sha be ncuded at an amount equa to ts un-
ad|usted bass for determnng oss upon sae or e change. If the unad|usted
bass of such property s a substtuted bass t sha be ad|usted, wth respect
to the perod before the property was pad n, n the manner provded In sec-
ton 113(b)(2). The use of the unad|usted bass s dctated by the fact that
ad|ustments of bass, notaby for deprecaton, are refected n earnngs and
profts. If the property so pad n was dsposed of before the begnnng of
the ta abe year, such bass s determned n the same manner as If the prop-
erty were st hed by the ta payer at the begnnng of the ta abe year.
The resut s unformty of bass treatment, regardess of the aw n effect
at the tme of the dsposton of the property.
(8) Ta abe stock dvdends. Dstrbutons n stock of the corporaton, or n
rghts to acqure ts stock, to the e tent to whch they consttute a dstrbuton
of earnngs and profts other than earnngs and profts of the ta abe year.
Ta abe stock dvdends are ncuded In Invested capta because they represent,
In effect, a renvestment of earnngs In the busness. Conversey, f a stock
dvdend was not sub|ect to ta n the hands of the dstrbutee because It dd
not consttute ncome to hm wthn the meanng of the s teenth amendment
to the Consttuton or was not ta abe to hm under the appcabe revenue aw,
It s not deemed to reduce the earnngs and profts account and Is therefore
aready refected In the accumuated earnngs and profts. In determnng
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514
whether a ta abe stock dvdend s out of the earnngs and profts of the ta -
abe year, such earnngs and profts are computed as of the cose of such ta abe
year wthout dmnuton by reason of any dstrbuton made durng such ta -
abe year or by reason of the e cess-profts ta for such year, and the determ-
naton s to be made wthout regard to the amount of earnngs and profts at
the tme the dstrbuton was made. Ths rue avods the necessty of ad|ustng
the earnngs and profts of the ta abe year by reason of the e cess-profts ta
mposed wth respect to such earnngs or by reason of any dstrbuton made
durng such ta abe year for the purpose of determnng the amount of earnngs
and profts avaabe as of the date of dstrbuton.
(4) arnngs and profts at begnnng of year. The accumuated earnngs
and profts as of the begnnng of the ta abe year. If there s a defct n the
accumuated earnngs and profts as of the begnnng of the ta abe year, such
defct sha not be taken nto account and n such cases the earnngs and
profts as of the begnnng of the ta abe year sha be consdered as zero, for
the purpose of computng the Invested capta for such year. In computng such
earnngs and profts for ta abe years begnnng after December 31, 1940, ds-
trbutons made durng the frst 0 days of the ta abe year are deemed, to the
e tent they do not e ceed the accumuated earnngs and profts as of the be-
gnnng of the ta abe year, to have been made on the ast day of the precedng
ta abe year.
Under varous provsons of the Interna Revenue Code deang wth e -
changes and qudatons, the transfer of the property by a corporaton to an-
other corporaton resuts n the nonrecognton, n whoe or n part, of the
gan or oss reazed by the transferor upon such transfer. In such cases we
estabshed prncpes of ncome ta aw requre that the earnngs and profts
of the transferor sha go over to the transferee and sha be consdered to be
earnngs and profts of the transferee for ta purposes. Subsecton (c)(4) of
secton 718 provdes that such transferred earnngs and profts sha not be
taken nto account n computng the earnngs and profts as of the begnnng
of the ta abe year for the purpose of determnng the equty nvested capta.
Inasmuch as the property receved by the transferee upon such a transfer s
ncuded n such cases n the equty nvested capta at ts ad|usted bass n the
hands of the transferor, t s necessary to e cude the earnngs and profts
acqured by the transferee by reason of such transfer n order to avod
dupcaton.
The sum of the above-descrbed amounts sha be reduced by the sum of the
foowng:
(1) Dstrbutons n prevous years. Dstrbutons made n pror ta abe
years whch were not out of accumuated earnngs and profts.
(2) Dstrbutons durng the year. Dstrbutons prevousy made durng
the ta abe year whch are not out of the earnngs and profts of such ta abe
year. Dstrbutons made durng the frst 0 days of the ta abe year, to the
e tent they do not e ceed the accumuated earnngs and profts as of the
begnnng of the ta abe year, are deemed to have been made on the ast day
of the precedng ta abe year. Moreover, n determnng whether a dstrbu-
ton s out of the earnngs and profts of any ta abe year, such earnngs and
profts are computed as of the cose of such ta abe year wthout dmnuton
by reason of any dstrbuton made durng such ta abe year or by reason of
the e cess-profts ta for such year, and the determnaton s to be made
wthout regard to the amount of the earnngs and profts at the tme the
dstrbuton was made. The purpose of ths atter rue Is the same as Indcated
n the paragraph deang wth ta abe stock dvdends.
or the purpose of the concusve presumpton respectng dvdends out of
earnngs and profts pad durng the frst 0 days of the ta abe year, such
dstrbutons sha be consdered In the order of tme and the accumuated
earnngs and profts as of the begnnng of the ta abe year sha be computed
wthout regard to the presumpton. The presumpton appes ony wth respect
to ta abe years begnnng after December 31, 1940.
( ) orrowed nvested capta. orrowed nvested capta for any day of
the ta abe year Is to be based on the borrowed capta at the begnnng of
such day. orrowed capta conssts of the outstandng ndebtedness of the
ta payer (e cusve of nterest) whch s evdenced by bond, note, debenture,
b of e change, certfcate of ndebtedness, mortgage, or deed of trust, or any
other wrtten evdence of Indebtedness. The amount to be ncuded. In nvested
capta s mted to varyng percentages of the borrowed capta, dependng
upon the amount of the equty nvested capta. These mtatons are as
foows:
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(1) If the equty Invested capta s ess than 100,000, 100 per cent of that
porton of the borrowed capta whch does not e ceed the dfference between
100,000 and the equty nvested capta, pus per cent of so much of the
remander of the borrowed capta as does not e ceed 900,000, pus 33 per
cent of any remanng borrowed capta.
(2) If the equty nvested capta s 100,000 or more and ess than
1,000,000, per cent of that porton of the borrowed capta whch does
not e ceed the dfference between 1,000,000 and the equty nvested capta,
pus 33 per cent of the remander of the borrowed capta.
(3) If the equty nvested capta s 1,000,000 or more, 33 per cent of the
borrowed capta.
Secton 720. Inadmssbe ssets.
Sectons 715 and 720 of the b provde that the average nvested capta of the
ta abe year sha be reduced by an amount whch s the same percentage of
nvested capta as the nadmssbe assets are of the tota of admssbe and
nadmssbe assets, wth an ad|ustment for short-term capta gan reazed upon
the sae or other dsposton of such nadmssbe assets. The terms admssbe
and nadmssbe assets are defned n secton 720 and the computaton to
determne the percentage of reducton s made n accordance wth the provsons
of such secton.
Inadmssbe assets are:
(1) Stock n a corporaton e cept stock n a foregn persona hodng company,
and
(2) Obgaton descrbed n secton 22(b)(4) ( ), ( ), or (C) any part of
the nterest from whch s e cudbe from gross ncome or aowabe as a credt
aganst net ncome. Such obgatons ncude State and oca securtes, obga-
tons of corporate agences organzed under an ct of Congress, and obgatons
of the Unted States or ts possessons.
dmssbe assets are a assets other than nadmssbe assets, e cept as
provded n secton 753.
The nvested capta s so reduced because the Income from nadmssbe assets
s not ncudbe In the e cess profts net ncome of the corporaton and, therefore,
the assets from whch such ncome arose shoud be e cuded from nvested capta.
The nadmssbe assets are not deducted drecty from the nvested capta for
the reason that the tota of admssbe and nadmssbe assets Is not ordnary
equa to the nvested capta.
or the purpose of determnng the rato of nadmssbes to the tota of ad-
mssbes and Inadmssbes, secton 720(b) of the b provdes that the amount
attrbutabe to each asset sha be determned, under reguatons prescrbed by
the Commssoner wth the approva of the Secretary, by ascertanng the ad|usted
bass thereof for each day of the ta abe year and addng such day amounts. In
the case of a ta abe year for whch the e cess-profts ta s beng determned,
the ad|usted bass sha be the ad|usted bass for determnng oss upon sae or
e change under secton 113, and n the case of a ta abe year n the base perod
the ad|usted bass sha be the ad|usted bass for determnng oss upon sae or
e change as determned under the aw appcabe to such ta abe year.
Secton 720(c) of the b provdes that f durng the ta abe year there has
been a short-term capta gan wth respect to an Inadmssbe asset, an ad|ust-
ment sha be made for the purpose of determnng the nadmssbe rato. Under
ths provson there s added to the tota of admssbe assets and subtracted
from the tota of nadmssbe assets that proporton of the amount attrbutabe
to any nadmssbe asset upon whch a short-term capta gan was reazed
whch such gan bears to the sum of such gan pus the dvdends and nterest on
such asset for such year. or the purpose of ths provson, short-term capta
gan means a short-term capta gan as defned n secton 117 of the Interna
Revenue Code. The effect of ths ad|ustment s to ncude as an admssbe asset
that proporton of the amount attrbutabe to the nadmssbe asset whch the
earnngs on such asset ncuded n ta abe ncome bear to the tota of the earnngs
on such asset durng the ta abe year.
Secton 721. quty Invested Capta n Speca Cases.
The b provdes a speca method of determnng equty nvested capta n
cases where the Commssoner s unabe to determne the ta payer s equty In-
vested capta for the frst day of the frst ta abe year begnnng after December
31,1939, under the rues prevousy dscussed. In such a case, the equty Invested
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51
capta as of such date sha be an amount equa to the cash on hand pus the
aggregate of the ad|usted bases at such tme of the assets of the ta payer then hed
mnus the Indebtedness outstandng at such tme. The amount of the money,
assets, and ndebtedness at such tme sha be determned n accordance wth regu-
atons of the Commssoner wth the approva of the Secretary. The equty n-
vested capta for each day n the ta payer s base perod and for each day after the
begnnng of the ta payer s frst ta abe year sha be determned (under such
reguatons) usng as the basc fgure the equty nvested capta so determned.
Secton 722. oregn Corporatons Invested Capta.
In the case of a foregn corporaton requred to compute ts e cess-profts credt
by the nvested-capta method under secton 714, the nvested capta s based ony
on the assets of the ta payer hed by It n the Unted States. The b provdes that
the day nvested capta for any day of the ta abe year sha be the aggregate
of the ad|usted bass of each Unted States asset hed by the ta payer In the Unted
States on the begnnng of such day, the determnaton to be made n accordance
wth rues and reguatons prescrbed by the Commssoner wth the approva of
the Secretary. or the purpose of reducng the average Invested capta by the
rato of nadmssbe assets to the sum of admssbe and nadmssbe assets, the
terms admssbe assets and nadmssbe assets Incude ony Unted States
assets. The term Unted States asset means an asset hed by the ta payer In
the Unted States, determned n accordance wth rues and reguatons prescrbed
by the Commssoner wth the approva of the Secretary.
If the Commssoner determnes that the Unted States assets of the ta payer
can not satsfactory be segregated from a ts assets, secton 722(b) of the b
provdes that the Invested capta for the ta abe year sha be an amount whch s
the same percentage of the aggregate of the ad|usted bass of a assets hed by the
ta payer as of the end of the ast day of the ta abe year whch the net Income for
the ta abe year from sources wthn the Unted States Is of the tota net ncome
of the ta payer for such year.
oregn corporatons sub|ect to the e cess-profts ta are aowed the specfc
e empton of 5,000.
Secton 723. Persona Servce Corporatons.
Secton 723 provdes speca treatment for persona servce corporatons. Such
corporatons may eect not to be sub|ect to the e cess-profts ta , and n such
event the undstrbuted ncome of the corporaton w be ta ed to ts share-
hoders. Secton 723(a) defnes a persona servce corporaton as a corporaton
whose Income s attrbutabe prmary to the actvtes of sharehoders who
are reguary engaged In the actve conduct of the affars of the corporaton and
are the owners at a tmes durng the ta abe year of at east 80 per cent n
vaue of the stock of the corporaton, and n whch capta (whether nvested or
borrowed) s not a matera Income-producng factor. or the purpose of the
stock-ownershp requrement an ndvdua Is consdered as ownng, at any tme,
the stock owned at such tme by hs spouse or mnor chd. The term persona
servce corporaton does not ncude any foregn corporaton, nor any corpo-
raton 50 per cent or more of whose gross ncome conssts of gans, profts, or
Income derved from tradng as a prncpa.
Subsecton (b) of secton 723 provdes that a persona servce corporaton may
eect n ts ncome-ta return under Chapter 1 for any ta abe year not to be
sub|ect to the e cess-profts ta and n such event t w be e empt from ta for
such ta abe year. new eecton must be made for each ta abe year and may
be made ony n Its ncome-ta return for such year. If the corporaton so eects
for any ta abe year Its undstrbuted net ncome s requred to be ncuded n
the gross Income of the persons who were sharehoders of the corporaton on the
ast day of the corporaton s ta abe year.
The treatment of the undstrbuted Income of the corporaton for ta purposes
both wth respect to the corporaton and ts sharehoders s prescrbed In the
new Suppement S. Ths suppement s e paned ater In ths report.
Secton 724. Corporatons Competng Contracts Under Merchant Marne
ct, 193 .
Under secton 505 of the Merchant Marne ct, 193 , as amended, f any con-
tractng party wthn an ncome ta abe year competes one or more contracts op
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Msc.
subcontracts for the constructon of a vesse under such ct. such party s
requred to pay to the Unted States Martme Commsson proft n e cess of
10 per cent of the tota contract prces of such contracts and subcontracts. The
e cess proft so pad to the Martme Commsson, together wth a other recepts
of the Commsson, are paced n a revovng constructon fund and are avaabe
for further shp constructon.
In vew of the fact that such proft-mtng provsons are retaned, t s be-
eved that a ta payer sub|ect thereto shoud have some reef from the e cess-
profts ta .
Secton 724 s desgned to accompsh ths purpose. It provdes for an aternatve
ta whch s to be pad f t s ess than the ta computed under secton 710.
s a genera rue the amounts receved by the contractng party and recaptured
by the Martme Commsson woud be e cuded from net ncome n computng the
e cess-profts ta under secton 710. In computng the aternatve ta provded
for by secton 724 the ta payer w be requred to ncrease ts e cess-proft net n-
come and ts norma-ta net ncome by the amount of the payments to the Martme
Commsson. The ta computed upon ths bass s then reduced by the amount of
the payments to the Martme Commsson, and the remander consttutes the ta
whch s to be pad f t s ess than the ta computed under secton 710.
Secton 727(a) makes appcabe In respect of the e cess-profts ta a pro-
vsons of aw (ncudng penates) appcabe n respect of the ta es mposed by
Chapter 1 whch are not nconsstent wth the provsons of the b. ampes
of such provsons are provsons reatng to the assessment and coecton of
defcences, cams for refund, perods of mtaton on the assessment and coec-
ton of defcences or the aowance of refunds, the |ursdcton, procedure, and
powers of the oard of Ta ppeas, cosng agreements, etc.
Secton 727(b) provdes that, athough secton 52(a), requrng the fng of
returns, s made appcabe to the e cess-profts ta , no e cess-profts-ta return
need be fed under such secton by any ta payer for any ta abe year for whch ts
e cess-profts net ncome computed wth the ad|ustments provded n secton
711(a) (2), and paced on an annua bass as provded n secton 711(a) (3), s not
greater than 5,000.
Secton 727. Other Laws ppcabe.
Under e stng aw an mercan corporaton whch pays ncome ta to a foregn
country or to a possesson of the Unted States upon ts ncome from such source
s aowed (f t cams such credt on ts return) a credt for such ta aganst ts
Unted States ncome ta but ony to the e tent of the mercan ta upon the
ncome from such country or possesson. Thus, f the Unted States effectve ta
rate s 20 per cent, and the foregn effectve ta rate Is 25 per cent, a part of the
foregn ta s not aowed. Snce the e cess-profts ta proposed n ths b s a
ta mposed upon, and measured by, ncome t s beeved that the e cess-profts
ta shoud be ncuded n the mercan ta burden aganst whch s aowed the
credt for ncome ta es pad to foregn countres or possessons of the Unted
States by our domestc corporatons. ccordngy, secton 727 provdes n effect
that, where a credt for the ta pad to such foregn country or possesson of the
Unted States s aowed under Chapter 1, the porton, f any, of such ta not used
as a credt aganst the ta mposed by Chapter 1 by reason of the mtatons of
secton 131(b), w be avaabe as a credt aganst the e cess-profts ta sub|ect
to substantay the same prncpes of mtaton as are appcabe for norma ta
purposes.
P RT II. C SS PRO ITS CR DIT IN CONN CTION WIT C RT IN
C NG S.
Suppement . Cbeott ased on Income.
In genera, ths suppement has two fundamenta purposes. The frst s to
aow a domestc corporaton whch was not n e stence at the begnnng of ts
base perod to eect to compute ts e cess-profts credt under the average-earnngs
method provded by secton 713, f t acqured, or resuted from the coaescng of,
another corporaton through certan ta -free e changes, where the other corpora-
ton was n e stence at the begnnng of the base perod or had a predecessor
whch was n e stence at such tme and, havng so eected, to use as ts e cess-
profts net ncome for the ta abe years n the base perod pror to such acqurng
or coaescng, the e cess-profts net ncome of the other corporaton. or the
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51S
years In the base perod subsequent to such acqurng or coaescng, t uses Its own
e cess-profts net ncome for the purpose of computng the credt.
The second s to permt a domestc corporaton whch was n e stence at the
begnnng of the base perod and whch s thereby entted to eect to compute ts
e cess-profts credt under secton 713 by vrtue of the provsons of secton 712,
If t does eect to compute such credt under secton 713, to add to ts e cess-profts
net Income for the years n the base perod the e cess-profts net ncomes of
corporatons whch t absorbs by a statutory merger or by qudaton under
secton 112(b) ( ), where such merged or qudated corporaton was n e stence
at the begnnng of the base perod or had predecessors n e stence on such date.
The factors defned n ths secton may be more ceary understood by reference
to the foowng dagram:
Ta abe years:
193 P
1937 T M P
1938 C T S
1939 T S
1940 T
1941 T
1942 T
1943 T
Corporatons , , and P were n e stence on anuary 1, 193 , the begnnng
of the ta payer T s base perod. Corporatons T and M came nto e stence
on anuary 1, 1937.
In the above e ampe:
C acqured a the assets of n return for a the stock of C, and s an acqur-
ng corporaton as defned n secton 740(a)(1) and s a component cor-
poraton as defned n secton 740(b)(1).
C was qudated by T under secton 112(b)( ), and T s an acqurng cor-
poraton under secton 740(a)(2). C s a component corporaton under secton
740(b) (2) as we as an acqurng corporaton as |ust ponted out.
S was the resut of the consodaton of M and P and s an acqurng cor-
poraton under secton 740(a)(4). M and P are component corporatons under
secton 740(b) (4).
S was merged nto T and, therefore, becomes a component corporaton under
secton 740(b)(3). T (athough aready an acqurng corporaton as above
stated) aso s an acqurng corporaton (under secton 740(a)(3)) by reason
of the merger.
was merged nto T and s a component corporaton under secton 740(b) (3),
and T s once more consdered as an acqurng corporaton by reason of the
merger.
Under secton 740(c), a quafed component corporaton must be n e stence,
ether actuay or constructvey, on the date of the begnnng of the ta payer s
base perod as defned n subsecton (d). ssumng, In the e ampe gven, that
T, the ta payer, s on a caendar-year bass, then a quafed component cor-
poratons of T must have been In e stence, ether actuay or constructvey,
on anuary 1, 193 . Thus M s not a quafed component but T tsef, whe
not In e stence on anuary 1, 1930, s gven a hypothetca e stence on that
date by subsecton (f) because t had one or more component corporatons whch
were themseves actuay or constructvey n e stence on such date.
S CTION T41. L CTION O INCOM CR DIT.
Thus under secton 741, T s permtted to eect the ncome credt, provded
by secton 713, athough t was not n e stence actuay on anuary 1, 1940,
and athough ts component was sub|ect to e cess-profts ta for 1941 and
on the part of ts year 1942 pror to Its merger nto T. If nether , , nor P
had been n e stence on anuary 1,193 , T woud have had no rght of eecton.
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S CTION 742. R G S P RIOD N T INCOM .
or the purposes of ascertanng T s average base perod net ncome, T s
frst gven a base perod, whether actua or hypothetca under secton 740(d),
consstng of 4 ta abe years of 12 months each, the ast of whch ends wth
the begnnng of ts frst ta abe year begnnng In 1940.
Into these ta abe years are paced the e cess-profts net Incomes (or n
the case where the deductons and credt for dvdends receved e ceed the
gross ncome, the amount of such e cess) of T s quafed component corpo-
ratons for ther ta abe years n the base perod endng wth or wthn T s
ta abe years n such perod. If T s actua ta abe years do not concde wth
ts constructve ta abe years durng the base perod, ts e cess-profts net
ncome (or, n the case where the deductons and credt for dvdends receved
e ceed the gross ncome, such e cess) goes nto ts hypothetca ta abe year
n, or wth, whch such actua ta abe year ends.
Under subsecton (f) T s dened the rght to ncude n ts aggregate e cess-
profts net ncome for the base perod, ts own ncome for the years before t
became an acqurng corporaton, f t was not actuay n e stence at the
begnnng of ts base perod. Thus, under the e ampe gven, T can not count
Its Income for 1937. smar rue appes to the ncome of a component
corporaton, under whch the ncome of M for 1937 can not be used by T.
The e cess-profts net ncomes of T s component corporatons attrbutabe
to perods pror to the begnnng of T s base perod are e cuded pro rata from
T s aggregate base perod net ncome. The same rue s appcabe to T tsef
where ts actua and constructve ta abe years do not concde at the
begnnng of ts base perod.
ssumng that the merger of nto T took pace n the mdde of Ts ta abe
year 1942, under subsecton (f)(4), ony one-haf of s base perod ncome
can be used by T for the purposes of computng ts ncome credt for 1942.
Thereafter, T s entted to s fu base perod e perence.
Subsecton (e) provdes that n the computaton of the base perod ncome
of both T and ts component corporatons, there sha be e cuded any dv-
dends pad by T or any of ts components whch woud otherwse go nto the
ta payer s base perod net ncome.
or e ampe, f n the dagram gven, C had receved a dvdend from T
In 1937 such dvdend s not affected by ths subsecton as T s ncome for
such year s not taken nto account n the computaton of the ta payer s base
perod ncome. owever, f T n 1938, after t had become an acqurng corpo-
raton, had receved a dvdend from S, such dvdend woud be e cuded snce
both T s and S s ncome for such year go Into the ta apayer s base perod
ncome and f the dvdend were not e cuded t woud be counted twce.
The foowng e ampe ustrates the computaton of T s e cess-profts credt
for 1942. In the e ampe the amount stated as ncome s the net ncome
ad|usted by the ad|ustments specfed n the b and e cudng the dvdends
on e cuded stock. Ths assumes that a transactons take pace at the be-
gnnng of each of the ta abe years specfed, e cept that t s assumed that
merged wth T n the mdde of 1942.
or 193 , s ncome s 4,000 s ncome s ,000 and P has a defct
n ncome of 10,000. T s base perod ncome for 1030 s the sum of 2,000
(one-haf of s 4,000) pus ,000, or 8,000, mnus 10,000, gvng a base
perod ncome for the year of mnus 2,000.
or 1937, s ncome s 4,000 C s ncome s 8,000 T s ncome s 10,000
M s ncome s 4,000 and P s ncome s ,000. s ncome s ncuded at one-
haf, or 2,000. C s ncome s ncuded n fu, or 8,000. T s ncome nnd M s
ncome are not ncuded, for they were not actuay n e stence on anuary 1,
193 , and had no component n e stence on that date. P s ncome of 0,000 s
ncuded n fu, so that for 1937, T s base perod ncome s 2,000 pus 8,000, pus
,000 or 1 ,000.
or 1938, s ncome s 4,000, T has a defct n ncome of 0,000, and S has
a defct n ncome of 10,000. s ncome s ncuded at one-haf, or 2,00).
T s defct s subtracted n fu, or ,000. S s defct s subtracted n fu, or
10,000. or the year, T s base perod net Income s the sum of the pus
amounts, or 2,000, mnus the sum of the mnus amounts, or 1 ,000, whch
equas a mnus 14,000.
or 1939, s ncome s 4,000 T s ncome s 20,000 and S s ncome s 8,01)0.
or the year T s base perod net ncome s 2,000, pus 20,000, pus 8,000, or
30,000.
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Thus T has a base perod net ncome for each year n the base perod as
foows:
193 2,000
1937 1 .000
maa 30,000
Under the rae of countng the year of greatest defct at zero, 1938 s not
Incuded, so the aggregate base perod ncome of T Is 30,000. pus 1 ,000, or
4 ,000, mnus 2,000, or 44,000, whch, dvded by 4, gves a base perod net
ncome of 11,000.
S CTION 743. N T C PIT C NG S.
y the provsons of ths secton, the ta payer s aowed to odd the net
addtons to capta of ts component corporatons accumuated after the be-
gnnng of the frst ta abe year under the b and pror to the acqurng
transacton. Conversey It must take the net capta reductons of such com-
ponent corporatons for the same perod.
or e ampe, f the merger of nto T took pace In the mdde of T s ta -
abe year, assumng that had net capta addtons as of the day at the
merger of 100,000, such net capta addton w be used n computng the
net capta addtons of T for that and subsequent days n the same manner
as T s own net capta addtons. The same Is appcabe wth respect to net
capta reductons.
S CTION 784. OR IGN CORPOR TIONS.
oregn corporatons are not permtted the use of ths suppement and are
not ncuded as acqurng, component, or quafed component corporatons.
ST PPI M NT . C N0 8.
Suppement contans provsons reatve to the effect of certan ta -free
e changes upon the computaton of the e cess-profts credt based on ncome and
nvested capta. Such provsons are desgned (1) to permt the base perod
e perence of a corporatons whch coaesced durng the base perod to be
used n computng the base perod e perence of the successor corporaton,
(2) to prevent arge corporatons from obtanng undue advantage from reor-
ganzng, by means of ta -free transactons, nto groups of sma corporatons,
(3) to prevent nvested capta acqured n certan ta -free e changes from
beng treated as new capta to any greater e tent than t was so treated In
the hands of the corporaton from whch It was acqured, (4) to prevent step-
ups of base perod percentages, and (5) to prevent a corporaton, the propor-
ton of whose borrowed capta whch may be ncuded n nvested capta at
100 per cent or per cent or the proporton of whose nvested capta whch
s gven favorabe base perod percentage or new capta treatment has been
ad|usted because of prevous reorganzatons, from undong the effects of such
ad|ustments through transferrng ts assets, ta -free, to another corporaton
whch s tte more than a dummy.
The nonta abe e changes covered by Suppement fa nto two genera
casses: (a) Whereby one corporaton becomes severa corporatons, and ( )
whereby severa corporatons become one corporaton. The treatment accorded
to such e changes by Suppement s n genera as foows:
rhangr ocevrrng after base perod. In cases of corporate spt-ups the
equty nvested capta, the owest Invested capta, the amounts representng the
pont at whch borrowed capta may be Incuded n nvested capta at 100
per cent, per cent, or 33 per cent, the amount of owest Invested capta to
whch a mnmum base perod percentage of 7 per cent s appcabe f the base
perod percentage s ower, and the amount representng the pont at whch new
capta s sub|ect to the 8 per cent nstead of the 10 per cent rate, of the orgna
corporaton, are dvded between t and the new corporatons and each subsdary
s gven the same base perod percentage as that possessed by the parent corpora-
ton. Stock of the subsdares acqured by the parent s emnated from consd-
eraton by beng treated as nether an admssbe nor an nadmssabe asset. In
addton, securtes other than stock ssued by the subsdares upon the e change
are e cuded from the borrowed capta of the subsdares uness Issued n con-
necton wth an assumpton of the abtes of the parent. The resut s that
the sum of the e cess-profts credts of a such corporatons s e acty the same
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521
Msc.
as the e cess-profts credt of the parent corporaton woud have been f the
spt-up had not taken pace.
Where the Corporaton merey reorganzes tsef nto the Corporaton,
transferrng a ts assets to the Corporaton for a the Corporaton s stock,
the Corporaton acqures the status of the Corporaton.
In cases where severa corporatons become one corporaton the equty nvested
capta, the borrowed capta, and the owest nvested capta of the resutng
corporaton are the sum of the equty nvested captas, the borrowed captas,
and the owest nvested captas, respectvey, of the consttuent companes. The
amounts representng the pont at whch borrowed capta may be ncuded n
nvested capta by the resutng corporaton at 100 per cent, per cent, or
33 per cent, the amount of owest nvested capta of the resutng corporaton
to whch a mnmum base perod percentage of 7 per cent s appcabe f the
base perod percentage s ower, and the amount representng the pont at whch
new capta s sub|ect to the 8 per cent nstead of the 10 per cent rate are the sum
of such amounts n the ease of the consttuent corporatons, e cept that they may
not e ceed the amounts otherwse aowed by Subchapter . The base perod
percentage of the resutng corporaton s the weghted average of the base perod
percentages of the consttuent corporatons. The resut s that the status of
consttuent corporatons s attrbuted to the resutng corporaton e cept for the
consequences whch fow from ncreased sze.
Snce corporate spt-ups may sometmes be dsgused as transactons whereby
one corporaton acqures assets of another, as, for e ampe, where the Corpora-
ton transfers a porton of ts assets to an aready e stng Corporaton whch t
or ts sharehoders, or both, afterward contro, t s necessary that such trans-
actons be treated n the same manner as corporate spt-nps. The status of
the acqurng corporaton before the e change s therefore gnored e cept to the
e tent that ts equty nvested capta, ts borrowed capta, ts owest nvested
capta, and ts base perod percentage are taken nto account n the computaton.
or ths purpose contro s defned as ownershp of stock possessng at east
90 per cent of the tota combned votng power of a casses of stock entted to
vote and at east 90 per cent of the tota vaue of shares of a casses of stock
of a corporaton. Smary and to the same e tent, where the sharehoders of an
acqurng corporaton mmedatey before the acquston by such corporaton of
the assets of another corporaton are aso n contro after such acquston the
status of the corporaton whose assets are acqured s gnored n determnng
the future status of the acqurng corporaton. n e cepton to the atter rue
s where corporatons whch resuted from a prevous spt-up sub|ect to the
ad|ustments provded by Suppement ater reunte.
changes nvovng severa transferors are treated as a seres of separate
e changes e cept where the e change s one descrbed n secton 112(b)(5) or
so much of secton 112(c) and (e) as refers to secton 112(b) (5). In the atter
case the acqurng corporaton s gven a status refectng the status of each of the
transferor corporatons, e cept where one transferor by tsef s n contro of the
acqurng corporaton after the transfer, n whch case the transacton s treated
as a spt-up of such corporaton aone. In secton 112(b)(5) cases where the
acqurng corporaton s controed after the e change by noncorporate trans-
ferors, t s treated as a new corporaton e cept as regards owest nvested
capta and the base perod percentages appcabe thereto.
The rues provded by Suppement reatve to the computaton of equty
Invested capta and admssbe and nadmssbe assets upon ta -free e changes
appy regardess of contro and regardess of whether the e change took pace
before, after, or durng the base perod.
change n base perod. changes occurrng n the base perod are treated
n the same manner as e changes occurrng after the base perod nsofar as the
computaton of equty nvested capta and admssbe and nadmssbe assets
and the e cuson of certan securtes from borrowed capta are concerned. It
has been thought unnecessary to requre ad|ustment wth respect to the amounts
of borrowed capta whch may be ncuded n nvested capta at 109 per cent,
per cent, and 33 per cent Other ad|ustments whch woud be made f the
e change took pace after the base perod have no appcaton to the base perod.
In the case of corporatons whch have acqured substantay a the assets
of one or more other corporatons durng the base perod, the base perod
e perence of such other corporatons, both as respects nvested capta and
as respects base perod ncome, Is Incuded In the base perod e perence of the
acqurng corporaton. Ony actua amounts of nvested capta and ncome
290217 41 34
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522
are ncuded for any part of the acqurng corporaton s base perod durng
whch the acqurng corporaton or any one of such other corporatons was
n e stence. or any porton of such base perod durng whch nether the
acqurng corporaton nor any one of such other corporatons was n e stence.
Invested capta and Income are constructed on the bass of the acqurng
corporaton s nvested capta for the frst day of ts frst ta abe year under
Subchapter .
In computng the base perod net ncome of the acqurng corporaton the
Income for each ta abe year of each corporaton s taken nto account, and
from the sum of such amounts s deducted the sum of the defcts for each
ta abe year of each corporaton. If, however, for one or more of the four
12-month perods precedng the begnnng of the frst ta abe year of the
acqurng corporaton, the combned defct of the acqurng corporaton and
the other corporatons s greater than the combned ncome, the ncomes and
defcts aocated to the 12-month perod n whch fas the argest e cess of
defcts over ncomes are to be omtted from the computaton.
MPL O SPUT-UP.
The Corporaton whch s on a caendar-year bass has for each dav of
1941 equty nvested capta of 1,000,000 and borrowed capta of 1,500,000.
It has a base perod percentage of 5 per cent and owest nvested capta of
300,000. Not havng been through a pror ta -free e change, t has a second
borrowed capta base (. e., the pont at whch any future borrowed capta
may be ncuded n nvested capta at ony 33 per cent nstead of per
cent) of 1,000,000, a frst borrowed capta base (. e., the pont at whch
borrowed capta s ncudbe at per cent nstead of 100 per cent) of
100,000, and preferenta rate amount (the pont at whch the rate appcabe
to new capta becomes 8 per cent nstead of 10 per cent and the pont at whch
the rate appcabe to owest nvested capta s the base perod percentage
even though ower than 7 per cent) of 500,000. On December 31, 1941, the
ad|usted bass of a ts assets s 2,500,000. On such date t organzes the
Corporaton, transferrng to t assets wth an ad|usted bass of 1,250,000
for a the stock of the Corporaton and the assumpton by the Corporaton
of 750,000 of the Corporaton s Indebtedness represented by borrowed capta.
ssumng that the Corporaton aso fes ts returns on the caendar-year
bass and that no further changes occurred durng the year 1942. the e cess-
profts credt of the and the Corporatons for such year w each be
0,500, computed as foows:
Corpo-
raton.
Corpo-
raton.
500,000
750.000
500,000
50.000
750.000
150,000
250,000
5
500,000
75ft 000
500.000
50,000
750,000
150,000
250.000
0,500
0,500
The e cess-profts credt of the Corporaton for 1941 was 121,000, computed
as foows:
quty nvested capta 1,000.000
orrowed capta 1,500,000
Second borrowed capta base 1, 000, 000
rst borrowed capta base 100,000
Invested capta 1. 500,000
Lowest nvested capta .- 300, 000
Preferenta rate amount 500.000
ase perod percentage 5
cess-profts credt 121,000
On the bass of ths e ampe It w be seen that the sum of the credts of the
Corporaton after the spt-up and the Corporaton s e acty equa to the
credt of the Corporaton before the spt-up.
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523
Msc.
MPL O C UISITION.
The Corporaton and the Y Corporaton, both of whch fe ther returns on
a caendar-year bass, for each day of the caendar year 1941 and on December
31, 1941, fnd themseves n the foowng stuaton:
Corpo-
raton.
Y Corpo-
raton.
quty Invested capta
500,000
900,000
750,000
00,000
0,000
1,1 0,000
800,000
400,000
7
taoo.ooo
econd borrowed capta base
800,000
80,000
800,000
200,000
3 0,000
8
Invested capta _
Lowest nvestod capta . _
cess-profts credt .
87,000
84,000
On December 81, 1941, the Corporaton and the Y Corporaton organzed
the Z Corporaton, to whch they transfer a ther assets n e change for a
the Z Corporaton s stock pus the assumpton of a ther abtes. ssumng
that the ad|usted bass of the assets transferred s 2,750,000, that the Z Cor-
poraton aso fes ts return on the caendar-year bass, and that no changes
occurred durng the year 1942, the e cess profts credt of the Z Corporaton w
be 140,000, computed as foows:
Corporaton.
quty nvested capta 1,400,000
orrowed capta 1,350,000
Second borrowed capta base 1, 000,000
rst borrowed capta base 100,000
Invested capta 1,850,000
Lowest nvested capta 1,000,000
Preferenta rate amount 500,000
ase perod percentage (per cent) 7.2
cess-profts credt 140,000
If nstead of consodatng nto the Z Corporaton ether the Corporaton
or the Y Corporaton had acqured a the assets of the other n e change for
stock and an assumpton of abtes, the status of the acqurng corporaton
after the e change woud be the same as that of the Z Corporaton n the above
e ampe.
Tte II. mortzaton Deductons.
Tte II of the b adds to the Interna Revenue Code a new secton to be
desgnated as secton 124 and a new subsecton desgned secton 23(t) to
authorze the aowance of a deducton for the cost of certan factes necessary
n the Interest of natona defense durng the present emergency. Secton 124
provdes that a corporaton sha be aowed a deducton for ncome and e cess-
profts ta purposes for the amortzaton of certan factes whch the dvsory
Commsson to the Counc of Natona Defense and ether the Secretary of
War or the Secretary of the Navy certfy as necessary n the nterest of natona
defense durng the present emergency. Such factes are and, budngs,
machnery and equpment or parts thereof acqured after uy 10, 1940, or
the constructon, reconstructon, erecton, or nstaaton of whch was competed
after uy 10, 1940. In order to be effectve for the purpose of the amortzaton
aowance, such certfcaton must have been made before (1) the begnnng of
such constructon, reconstructon, erecton, or nstaaton, or the date of such
acquston, or (2) the s teth day after the date of the enactment of the b,
whchever of such dates s the ater. though a facty may be an emergency
facty even though ts constructon was begun on or before uy 10, 1940, ony
so much of Its ad|usted bass as s attrbutabe to certfed constructon takng
pace after uy 10, 1940, s sub|ect to amortzaton. The remander of the
ad|usted bass s sub|ect to deprecaton. Capta addtons, whether or not
the cost thereof s covered by a certfcate, may not be added to the ad|usted
bass for amortzaton as determned under a pror certfcate. If certfed,
a new amortzaton perod begns reatve to the cost of such capta addtons.
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524
The amortzaton of the ad|usted bass of such factes Is to be spread over
a perod of 0 months, the deducton to be In eu of the present deducton
for e hauston, wear, and tear, and obsoescence provded for In secton 23(1)
of the Interna Revenue Code. The 0-month perod sha begn as to any
emergency facty, at the eecton of the ta payer, wth the month foowng
the month n whch the facty was competed or acqured, or wth the succeedng
ta abe year.
The b provdes that an eecton to take the amortzaton deducton and to
begn the 0-month perod for such amortzaton wth the month foowng the
month n whch the facty was competed or acqured sha be made ony by a
statement to that effect n the return for the ta abe year In whch the facty
was so competed or acqured. n eecton to take the amortzaton deducton
and to begn such perod wth the ta abe year succeedng such year sha be
made ony by a statement to that effect In ts return for such succeedng ta abe
year.
If, after havng eected the amortzaton deducton, the ta payer desres to
termnate such deducton and use the deducton provded by secton 23(1) of the
Interna Revenue Code wth respect to the remander of the ad|usted bass of the
facty, t may be permtted to do so upon notce to the Commssoner at any
tme pror to the termnaton of the 0-month perod and the ta payer sha not
be entted to any further amortzaton deducton wth respect to such emergency
facty e cept n the case of a new eecton authorzed by reason of the termna-
ton of the emergency perod by a procamaton of the Presdent, or by reason of a
certfcate of the Secretary of War, or the Secretary of the Navy that the emer-
gency facty s no onger necessary n the nterest of natona defense.
If the Presdent has procamed the endng of the emergency, or the Secretary
of War or the Secretary of the Navy has certfed to the Commssoner of Interna
Revenue that, on a date specfed In the certfcate, the facty ceased to be
necessary In the nterest of natona defense durng the emergency and the date
of such procamaton or the date specfed n such certfcate fas before the end
of the 0-month perod, the ta payer may eect to termnate the amortzaton
perod as of the end of the month n whch fas the date of the procamaton or
the date specfed n the certfcate, whchever s the earer, and to recompute
the amortzaton deducton on the bass of such perod n eu of the 0-month
perod. The benefts of ths eecton are accorded regardess of whether the
ta payer has n the past eected the amortzaton deducton wth respect to the
factes Invoved and regardess of the fact that the ta payer had prevousy
eected to termnate the amortzaton deducton and use the deprecaton deduc-
ton provded by secton 23(1), but n the atter case ony f the date of the
procamaton or the date specfed n the certfcaton occurs after the begnnng
of the month whch the ta payer had prevousy f ed for the takng of the deduc-
ton aowed by secton 23(1) n eu of the amortzaton deducton.
Subsecton (h) of secton 124 provdes that, at the eecton of the ta payer, the
amortzaton deducton for any month n whch certan payments receved from
the Unted States wth respect to such facty are requred to be Incuded n
gross ncome sha be the amount of such payments n eu of the amortzaton
deducton otherwse provded for such month. The payments referred to con-
sst ony of amounts certfed by ether the Secretary of War or the Secretary
of the Navy as compensaton to the ta payer for the unamortzed cost of the
facty, made because a contract wth the Unted States nvovng the use of the
facty has been termnated or because the ta payer had reasonabe grounds to
antcpate further contracts wth the Unted States nvovng the use of the
facty and such contracts were not made.
The deducton for amortzaton n the amount of the payment descrbed n
subsecton (h) s aowabe ony for the month n whch such payment s n-
cudbe n ncome and sha be taken n eu of the amortzaton deducton other-
wse aowabe n respect of such month. The deducton may not n any case
e ceed the ad|usted bass of the emergency facty as of the end of such month,
computed wthout regard to any amortzaton deducton for such month.
If the ta payer s takng deprecaton rather than amortzaton n the month
any such payment Is ncudbe n gross ncome, the deprecaton deducton for
such month s ncreased by the amount of such payment, but the tota deducton
for such month sha not e ceed the ad|usted bass of the emergency facty.
Paragraph (4) of secton 124(d) provdes that f, by reason of the Presdent s
procamaton, or the certfcate of the Secretary of War, or the Secretary of the
Navy, the ta payer eects to have hs amortzaton perod termnated and the
amortzaton deductons computed upon the bass of such commuted perod, n
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en of the 0-month perod otherwse provded, a ta es for a ta abe years,
begnnng wth the ta abe year n whch the amortzaton perod began, sha be
recomputed to gve effect to the revsed aowance for amortzaton. In any such
case any defcency or overpayment of ncome or e cess-profts ta es for any
ta abe year resutng drecty or ndrecty from such revson sha be assessed
and coected or refunded or credted, as the case may be, wthn the perod of
mtatons propery appcabe thereto.
Subsecton (d)(5) provdes that f an ad|ustment of the ta abty for any
ta abe year to gve effect to the revsed amortzaton deducton s prevented (1)
on the date of the certfcate of the Secretary of War or the Secretary of the Navy
or the date of the Presdent s procamaton, whchever s the bass of the ta -
payer s eecton under the subsecton, or (2) wthn one year from such date, by
any provson of aw (other than secton 37 1 of the Interna Revenue Code and
other than ths secton) or by any rue of aw ncudng the doctrne of res
udcata, an ad|ustment sha nevertheess be made f a cam for refund or credt
Is fed, or a notce of defcency Is maed, as the case may be, wthn one year
from such date. If, at the tme of fng such cam for refund or credt or the
mang of such notce of defcency, as the case may be, an ad|ustment of the ta
abty woud be so prevented, the amount of the ad|ustment n ths stuaton s
mted to the Increase or decrease n the ta prevousy detennned for such ta -
abe year whch resuts soey from the revson of the amortzaton deducton
and the coatera effects of such revson. or the purpose of such recomputa-
ton, the ta prevousy determned for any ta abe year Is to be ascertaned n
accordance wth the method prescrbed In secton 3801(d) of the Interna Revenue
Code.
The amount of such ad|ustment s to be treated n the same manner as f t
were a defcency or an overpayment, as the case may be, for the ta abe year.
Sub|ect to certan mtatons herenafter descrbed, such amount may thus be
assessed and coected under the aw and reguatons appcabe to the assessment
and coecton of defcences, or may be refunded or credted under the aw and
reguatons appcabe to overpayments as the case may be. Such ad|ustment
w bear nterest and be sub|ect to addtons to the ta to the e tent provded
by the nterna-revenue aws appcabe to defcences and overpayments for
the ta abe year wth respect to whch the ad|ustment was made. The amount
of such ad|ustment may not be dmnshed by any credt or set-off based upon
any Item, ncuson, deducton, credt, e empton, or gan or oss wth respect to
the year as to whch the ad|ustment was made, other than one resutng from
the revson of the amortzaton aowance. If the Commssoner has refunded
the amoufnt of such ad|ustment, the amount so refunded may not subsequenty
be recovered n a sut for erroneous refund based upon any tem, ncuson,
deducton, credt, e empton, gan, or oss wth respect to the year for whch
the ad|ustment s made other than one resutng from the revson of the
amortzaton aowance. If the Commssoner has assessed and coected the
amount of the ad|ustment, no part thereof may be recovered by the ta payer n
any sut for refund based upon any tem, ncuson, deducton, credt, e empton,
or oss wth respect to the year for whch the ad|ustment s made, other
one resutng from the revson of the amortzaton aowance. The
amount of any such ad|ustment whch Is to be treated as an overpayment
may be credted, under the appcabe aw and reguatons thereunder, aganst
any Income, or e cess-profts ta , or nstament thereof, due from the ta payer.
Lkewse, If the amount of the ad|ustment s to be treated as a defcency, any
overpayment by the ta payer of ncome or e cess-profts ta may be credted
aganst the amount of such ad|ustment n accordance wth the appcabe aw and
reguatons thereunder.
Subsecton (1) provdes that an emergency facty may not be destroyed,
demoshed, Impared, or substantay atered wthout the consent n wrtng
of the Secretary of War or the Secretary of the Navy. If such consent s not
gven wthn 90 days after consent has been requested, the Secretary of War or
the Secretary of the Navy Is drected to purchase such facty at a prce not to
e ceed the ad|usted bass but not to be ess than 1. In the event that the
facty Is so purchased and f It conssts of budngs or f tures not removabe
wthout substantay affectng the structure to whch they are aff ed, the ta -
payer Is gven an opton, before the facty s resod, to repurchase the facty
at the prce whch he was pad therefor.
Subsecton ( ) provdes that the speca deducton for amortzaton of emer-
gency factes sha not be aowed n any case uness the ta payer fes wth
the Commssoner a sworn statement acceptng the restrctons Imposed under
subsecton (1).
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52
Subsecton (k) Imposes a penaty for the wfu destructon, demoton, Im-
parment, or substanta ateraton of any emergency facty wthout havng frst
obtaned the wrtten consent of the Secretary of War or the Secretary of the
Navy. Such penaty s mposed n an amount equa to the unad|usted bass of
the facty n the hands of the ta payer and s to be assessed, coected, and pad
n the same manner as the ta mposed by the b.
Tte I .
S CTION 401. RNINGS ND PRO ITS O CORPOR TIONS.
The purpose of ths amendment s to carfy the aw wth respect to what
consttutes earnngs and profts of a corporaton. Ths s mportant not ony
for the purpose of determnng whether dstrbutons are ta abe dvdends but
aso n determnng equty nvested capta for e cess-profts-ta purposes.
Secton 401 of the b nserts subsecton (1) n secton 115 of the Interna
Revenue Code and correspondngy amends pror Revenue cts. The rue,
apped by the Treasury under e stng aw, s that whe gans or osses whch
are not recognzed by reason of the provsons of secton 112 nether ncrease
nor dmnsh the earnngs Or profts, the earnngs or profts are ncreased or
dmnshed by the entre amount of the recognzed gan or oss, computed n
accordance wth the provsons of sectons 111, 112, and 113. Together wth the
provsons of secton 115(h) of the Interna Revenue Code, and the prncpes
estabshed n Commssoner v. Sansome (GO ed. (2d), 931) and foowng
decsons, the rue effectuates the provsons of secton 112. Whe ta payers
generay have concurred n the rue apped by the Treasury, the oard of
Ta ppeas and some of the courts have not agreed but have foowed the
theory that gan or oss, even though not recognzed n computng net ncome,
nevertheess affects earnngs and profts. or e ampe, on anuary 1, 1930,
the Corporaton owned stock n the Y Corporaton whch t had acqured n
1929 n a transacton wheren no gan or oss was recognzed. The ad|usted
bass to the Corporaton of the property e changed by t for the stock n
the Y Corporaton was 100. The far market vaue of the stock n the Y
Corporaton receved by the Corporaton was 1,000. On pr 9, 1930, the
Corporaton decared a cash dvdend of 900 and, e cept for the possbe
effect of the transacton n 1929, had no accumuated earnngs or profts as of
that date. Under the Interpretaton of the oard and some of the courts, the
e cess of the far market vaue of the stock of the Y Corporaton over the
bass, 900, woud represent earnngs or profts, and the cash dstrbuton woud
be a ta abe dvdend (Commssoner v. . . Young Corporaton, 103 ed. (2d).
137). Under the proposed egsaton and Treasury practce, the 900 woud
not represent earnngs or profts, and the cash dstrbuton woud not be a
ta abe dvdend. The need for certanty, not ony wth respect to the determ-
naton of when dvdends are ta abe but aso In the computaton of the e cess
profts ta credt, makes t desrabe to carfy e stng aw.
Provson s made for cases n whch the ad|ustment to the bass prescrbed
by secton 113 s dfferent from the ad|ustment to such bass proper for the
purpose of determnng earnngs or profts. Thus, secton 113(b)(1)( ) re-
qures ad|ustment for depeton, to the e tent aowed (but not ess than the
amount aowabe). Snce the ony depeton deductons to be consdered n
the computaton of earnngs or profts are those based on (1) the cost or
other bass prescrbed by secton 113, f the depetabe asset was acqured sub-
sequent to ebruary 28, 1913, or (2) the bass prescrbed by secton 113. or
March 1, 1913. vaue, whchever s hgher, f the depetabe asset was acqured
pror to March 1, 1913, the ad|ustment to the bass n such a case Is of such
depeton deductons, and not depeton, to the e tent aowed (but not ess
than the amount aowabe).
Certan ta -free dstrbutons when receved have unformy been treated by
the Treasury as not ncreasng the earnngs or profts of the dstrbutee for the
perod after ebruary 28, 1913, of the dstrbutee. Thus, dstrbutons out of
earnngs or profts accumuated pror to March 1, 1913, or out of ncrease n
vaue of property accrued pror to March 1, 1913, or otherwse than out of earn-
ngs or profts accumuated snce 1913 or the earnngs or profts of the ta abe
year, have, to the e tent to whch they do not e ceed the ad|usted bass of the
stock n respect of whch the dstrbuton was made, been apped n reducton of
the bass of such stock, wth the resut that earnngs or profts are ncreased, upon
the sae of such stock, by the entre amount of the recognzed gan computed upon
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the bass so reduced. Ta -free dstrbutons n stock or n rghts, whether not con-
sttutng ncome wthn the meanng of the s teenth amendment or e empt to
the dstrbutee under secton 115(f) of the Revenue ct of 1934 or a correspondng
provson of a pror Revenue ct, and ta -free dstrbutons of stock or securtes
n a corporaton a party to a reorganzaton, have consstenty been treated by the
Treasury as not resutng upon recept n an Increase In earnngs or profts, but as
causng the bass of the stock n respect of whch the dstrbuton was made to be
aocated between such stock and the stock securtes receved, wth the resut that
earnngs or profts are Increased, upon the sae of such stock or property, by the
entre amount of the recognzed gan computed upon the bass so determned by
aocaton. In order that the confuson whch occasoned the enactment of secton
214(a) of the Revenue ct of 1939 may not reappear n the computaton of earnngs
or profts, secton 401 e pcty states the rues heretofore apped by the Treasury.
It shoud be noted that the provsons of secton 401 are appcabe ony n deter-
mnng the earnngs or profts for perods begnnng after ebruary 28, 1913. In
the case of a corporaton organzed before March 1, 1913, Its entre accumuated
earnngs or profts as of any date after ebruary 28,1913, conssts of ts earnngs or
profts accumuated after ebruary 28, 1913, ts earnngs or profts accumuated
pror to March 1,1913, and ts ncrease n vaue of property accrued pror to March
1,1913, whch has been after ebruary 28, 1913, reazed by a sae, or has other-
wse been brought nto account n computng ts earnngs or profts accumuated
after ebruary 28, 1913. Wth respect to earnngs or profts accumuated after
ebruary 28, 1913, secton 401 does not purport to prescrbe rues for anythng
other than certan e ceptona cases, namey, the nonrecognton provsons of
secton 112, use of vaue as of March 1, 1913, as the bass for determnng gan or
oss, and deprecaton and depeton, and ta -free dstrbutons whch ether are
apped n reducton of the bass or cause the bass to be aocated.
Whe prescrbng rues for certan cases (whch appy not ony n determnng
earnngs or profts for perods begnnng after ebruary 28, 1913, but aso, to the
e tent to whch such earnngs are a factor, n determnng the entre accumuated
earnngs or profts of a corporaton), secton 401 contempates that consstenty
wth these rues the computaton sha be made conformaby to the best accountng
practce.
Suppement S.
Ta of sharehoders of persona servce corporatons. Secton 402 of the b
amends the Interna Revenue Code by nsertng after secton 873 a new sup-
pement, desgnated Suppement S and made up of sectons 391 to 39 , ncusve.
Suppement S s appcabe to the sharehoders of a persona servce cor-
poraton whch has eected to be e empt from the e cess-profts ta mposed
under Subchapter and prescrbes rues for the determnaton and ta aton
of the undstrbuted ncome of such corporatons to sharehoders.
The undstrbuted net Income of a persona servce corporaton for a ta abe
year n whch such corporaton s e empt from the e cess-profts ta s ncud-
be n the gross ncome of such as ts sharehoders as were sharehoders on the
ast day of the ta abe year of the corporaton. The amount to be ncuded n the
gross ncome of the sharehoders s termed the undstrbuted Suppement S
net Income whch s defned In secton 392 to mean the Suppement S net
ncome mnus the dvdends pad durng the ta abe year. or the purpose
of determnng the amount of dvdends pad durng the ta abe year, the pro-
vsons of subsectons (d), (e), (f), (g), (h), and () of secton 27 are made
appcabe.
The Suppement S net Income s the net Income of the persona servce
corporaton, as defned n secton 21 of the Interna Revenue Code, wth the
foowng ad|ustments:
(1) n addtona deducton s aowed In the amount of the ncome ta
under Chapter 1 payabe for such year and
(2) The mtaton on the deducton aowed for gfts or contrbutons to
chartabe, etc., organzatons s rased from 5 per cent to 15 per cent of the
net Income computed wthout the beneft of such deducton.
Secton 394 provdes that each sharehoder of the corporaton who was a
sharehoder on the ast day of the ta abe year of the corporaton sha Incude
n hs return, for the ta abe year n whch or wth whch the ta abe year
of the corporaton ends, hs pro rata shnre of the undstrbuted Suppement S
net ncome of the corporaton. The amount to be ncuded s the amount the
sharehoder woud have receved as a dvdend f on such ast day there had
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23
been dstrbuted by the corporaton, and receved by the sharehoders, an amount
equa to the undstrbnted Suppement S net Income of the corporaton for
Its ta abe year.
or the purposes of the ta mposed by sectons 11, 13, 14, 201, 204, 207, or
3 2, each sharehoder requred to ncude n gross Income hs proportonate
share of the ncome of a persona servce corporaton s aowed to credt
aganst net Income hs proportonate share of the nterest specfed In secton
25(a) (1) or (2) whch s Incuded n the gross ncome of the corporaton.
Secton 25(a) (1) and (2) reates to nterest on obgatons of the Unted
States and Instrumentates of the Unted States.
Secton 301(d) provdes that the amount of the undstrbuted Suppement S
net ncome of a persona servce corporaton whch s requred to be ncuded as
a dvdend n the gross ncome of the sharehoders sha for ncome and e cess-
profts ta purposes be consdered as pad-n surpus or as a contrbuton to the
capta of the corporaton. The accumuated earnngs and profts of the cor-
poraton as of the cose of such ta abe year sha be reduced by a correspondng
amount
Under secton 394(e), the amount of the undstrbuted Suppement S net Income
of a persona servce corporaton whch s requred to be ncuded n the gross
Income of the sharehoder sha, for the purpose of ad|ustng the bass of the stock
owned by hm on the ast day of the corporaton s ta abe year, be treated as
havng been renvested by the sharehoder as a contrbuton to the capta of the
corporaton. Ths provson s appcabe ony to the e tent of the amount of
the Suppement S net ncome of the corporaton ncuded n the sharehoder s
gross ncome sub|ect to any ad|ustment to such amount whch may be made In
the determnaton of the sharehoder s ta abty at any tme before the
e praton of seven years after the date prescrbed by aw for fng a return.
Secton 395 Incudes n the ta abe ncome of nonresdent aen ndvduas
and foregn corporatons ther dstrbutve shares of the undstrbuted
Suppement S net ncome of a persona servce corporaton.
Secton 39 requres a persona servce corporaton whch s e empt from
e cess-profts ta to pay to the coector an amount equa to an amount whch
t woud have been requred to wthhod under secton 143(b) or 144 f the
constructve dvdend had been an actua dvdend.
Secton 275(d) of the Interna Revenue Code, as amended by secton 403 of
the b, provdes that n the case of faure to Incude n gross Income the amount
of Suppement S net Income propery Incudbe theren the ta may be assessed
or a proceedng n court for the coectng of such ta may be begun wthout
assessment at any tme wthn seven years after the return was fed.
1940-43-104 2
T S COND R NU ILL O 1940.
Senate Report No. 2114. Seventy-s th Congress, Thrd Sesson.
September 11 (egsatve day, ugust 5), 1940.
Mr. arrson, from the Commttee on nance, submtted the foowng
report to accompany . R. 10413 :
The Commttee on nance, to whom was referred the b ( . R. 10418) to
provde revenue, and for other purposes, havng had the same under consdera-
ton, report favoraby thereon, wth certan amendments, and, as amended,
recommend that the b do pass.
STIM T S O R NU .
The amendments recommended by your commttee Increase substantay the
estmated yed of revenue from the b, as compared wth the Treasury est-
mates under the ouse b of a gross yed of 305,000,000 for the caendar year
1940 and a net yed of 2 0,000,000.
There are two estmates of yed under your commttee b, one by the Treas-
ury showng a net yed of 305,000,000 for the caendar year 1940, and the
other by the staff of the ont Commttee on Interna Revenue Ta aton, show-
ng a net yed for that year of 432,500,000. That the estmates of the staff
of the ont Commttee are conservatve Is evdenced by the fact that the staff
computed the e cess-profts ta on estmated earnngs for the caendar year
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1940 of 27 corporatons representng a cross secton of ndustra and mercan-
te estabshments and that computaton dscosed an e cess-profts ta abty
of 102,000,000.
The estmates furnshed the commttee are as foows:
1 40:
Treasury.
ont Com-
mttee staff.
rom norma ta _
8240,000.000
115,000,000
232,500,000
250,000,000
1941:
355, 000, 000
305,000. 000
482, 500,000
432, 500, 000
ft
282,500,000
00,000,000
o
882,500,000
1 No estmate.
In the opnon of your commttee, the changes n the b to provde ths add-
tona revenue are |ustfed by current fsca requrements and w accompsh
the equtabe dstrbuton of an addtona ta burden we wthn the power
of corporate enterprse to sustan n a perod of vast governmenta e pendture
for natona defense.
M SUR O C SS TRO ITS.
The b as passed by the ouse combned two fundamenta methods of meas-
urng e cess profts: (1) comparson of the average earnngs of a corpora-
ton wth Its earnngs for the ta abe year (2) a comparson of the rato of
earnngs to nvested capta durng the base perod wth such rato for the
ta abe year. These methods of measurement were aternatve but ony cor-
poratons whch were n e stence for the entre base perod (the years 193
to 193 , ncusve) were aowed to eect. Corporatons not n e stence for ths
requred perod, e cept n the case of certan ta -free e changes and reorgan-
zatons, were compeed to use the nvested capta method of measurng ther
e cess profts.
In order to afford reef to sma corporatons, the ouse b contaned three
factors reatng to the computaton of the Invested capta credt, varyng wth
the sze of the corporaton:
(1) ta -free return of 7 per cent was aowed upon the frst 500,000 of the
nvested capta, whe the mnmum ta -free return on capta n e cess of
500,000 was mted to 5 per cent.
(2) mnmum ta -free return upon new capta was aowed at 10 per cent
upon that porton of the new capta whch dd not cause the nvested capta
to e ceed 500,000 and 8 per cent upon new capta n e cess of that fgure.
(3) aryng percentages (100, , and 33 ) of borrowed capta were per-
mtted to be ncuded n nvested capta dependng upon the sze of the equty
nvested capta.
These varabe factors, whe they dd afford substanta reef to sma cor-
poratons, were the cause of consderabe compe ty whch your commttee do
not consder necessary n obtanng the desred resut. It Is fet that substan-
tay the same resut s acheved by repacng the varyng percentages of mn-
mum ta -free return for both od and new capta by the fat rate of 8 per cent,
and the varyng percentages of borrowed capta aowed to be ncuded n n-
vested capta, by a fat 50 per cent, regardess of the sze of the corporaton,
and by rasng the specfc e empton, appcabe to a corporatons, from 5,000
to 10,000.
nother feature of the ouse b, whch requred a number of pages of hghy
technca and compcated anguage, was that provdng for the computaton of
the e cess-profts credt by the nvested-capta method. Under these provsons
t was necessary for the ta payer to determne both Its nvested capta for each
of the years of the base perod and ts e cess-profts net ncome for each of
such years. Ths requrement, wth respect to the years n the base perod, has
been emnated. Ta payers usng the nvested-capta method under the b
reported by your commttee need ony determne ther nvested capta for the
ta abe year and upon that they are aowed a ta -free return of 8 per cent
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530
SUMM RY O PRINCIP L C NG S.
I. Increase n Norma Corporate Income Ta .
The ouse b requred corporatons usng the average-earnngs method of
computng the e cess-profts credt to pay as a part of ther e cess-profts ta
an amount equa to 4r per cent on the norma ta net ncome. Your com-
mttee substtuted for ths provson a genera ncrease of 3r per cent In the
norma ta payabe by a corporatons regardess of ther abty for e cess-
profts ta .
The foowng tabe shows the norma corporate Income-ta rate under e stng
aw, the addtona norma ta rate under the commttee b, and the tota rate:
Rate under e stng aw.
ddtona
rate under
the com-
mttee b.
Tota nor-
ma ta
rate.
Corporate net ncomes.
Temporary
addtona
rate (defense
ta ).
Permanent
rate.
Not over 25,000:
Per cent.
Per cent.
Per cent.
Per cent.
Up to 5,000....
13.50
1.35
3.1
17.95
5,000 to 20,000
15.00
1.50
3.1
19. 0
20,000 to 25,000
17.00
1.70
3.1
21. SO
Over 25,000...-
19.00
1.90
3.1
24.00
II. cess-Pbofts Ta .
In order that the features of the e cess-profts ta as contaned n the com-
mttee b may be ready compared wth smar provsons n the ouse b,
the dscusson n ths report foows the arrangement used n the report of the
Commttee on Ways and Means.
1. T L Y RS.
s under the ouse b, the ta mposed by the commttee b s appcabe
to a ta abe years begnnng after December 31, 1939.
2. CORPOR TIONS T L .
Under the ouse b, corporatons wth e cess-profts net ncomes of not more
than the specfc e empton were not sub|ected to ta and were not requred
to fe e cess-profts ta returns. Your commttee, havng ncreased the specfc
e empton, correspondngy modfed the requrement for the fng of returns.
Increasng the specfc e empton to . 10,000 has the effect of mtng the appca-
ton of the e cess-profts ta to ess than 40,000 corporatons, snce of the amost
500,000 actve corporatons n the Unted States, ony about 4 ,000 have norma-
ta net ncomes e ceedng 10,000.
It w be noted that the Ways and Means Commttee amendments adopted
by the ouse after the b was reported, and therefore not mentoned n the
Ways and Means Commttee report, added to the e empt category two casses
of corporatons, namey:
(1) Domestc corporatons wth ncomes argey derved from sources outsde
of the Unted States, and
(2) Certan ar-ma carrers.
3. base perod.
The base perod under the ouse b, the years 1938 to 1939, Incusve, s
retaned for the purposes of the ncome method of computng the e cess-profts
credt. Under the commttee b, however, the nvested capta method of com-
putng the credt requres no reference to the nvested capta or ncome of the
base perod. Those foregn corporatons, further, whch under the ouse b
were confned to the use of the ncome credt are, under your commttee b,
permtted to use the ncome or the nvested capta credt.
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4. M -SU O C SS PRO ITS.
Corporatons whch may eect. Under the ouse b the prvege of eectng
the average earnngs n the base perod as the standard of measurement of e cess
profts was restrcted to corporatons actuay or constructvey n e stence dur-
ng the entre base perod. Your commttee b aso e tends ths prvege to
corporatons n e stence durng any part of the base perod. Such a corpora-
ton s deemed to have had, n that porton of the base perod when t was not
In e stence, earnngs equa n amount to 8 per cent of ts nvested capta at the
begnnng of ts frst ta abe year n 1940.
The provsons of the ouse b e tendng the prvege of eecton of the
average earnngs method of computng the e cess-profts ta to corporatons not
n e stence durng the base perod but consdered to have been so n e stence
by reason of havng acqured, or havng resuted from the coaescng of, other
corporatons, hare not been materay changed.
The eecton prvege has aso been e tended to foregn corporatons engaged
In trade or busness wthn the Unted States at some tme durng each of the
years n the base perod.
The ouse b provded two methods of computng the e cess-profts credt,
the use of ether of whch was at the eecton of the ta payer as above-outned.
The commttee b contnues ths prncpe wth the changes descrbed under
the foowng beadng:
. COMPUT TION O T C SS-PRO ITS CR DIT.
rst method ased on ncome. Under the b reported by your commttee,
corporatons n e stence durng any part of the base perod may use ths
method and for that purpose are aowed, for the part of the base perod durng
whch they were not n e stence, a hypothetca ncome equa to 8 per cent of
ther nvested capta at the begnnng of ther frst ta abe year In t O.
Second method ased on nvested capta. Under the ouse b the credt
aowed under ths method was that percentage of the nvested capta for the
ta abe year whch the average earnngs durng the base perod were of the
average nvested capta n that perod. The base perod percentage so deter-
mned, however, was confned wthn f ed mts namey, a mnmum of 5 per
cent and a ma mum of 10 per cent, e cept that on the frst 500,000 of nvested
capta the mnmum was 7 per cent In addton, the ouse b provded a 10
per cent ta -free return on new capta to the e tent that t woud not cause the
Invested capta to e ceed 500,000, and 8 per cent on new capta n e cess of
that fgure. In the opnon of your commttee, the aowance of a fat credt of
8 per cent of the nvested capta for the ta abe year, n eu of these varyng
percentages, and the emnaton of computatons of base perod nvested capta
and earnngs remove compe tes of anguage and obvate dffcutes of admn-
straton whch appear ncommensurate wth the revenue nvoved as we as
wth the benefts sought to be obtaned for the ta payer.
. C SS-PRO ITS N T INCOM .
To the ad|ustments provded n the ouse b for the purpose of determnng
e cess profts net ncome, your commttee has added the foowng:
(1) Unnsured osses resutng from the demoton, abandonment, or oss of
usefu vaue of property. Ths ad|ustment appes ony to years n the base
perod and the effect of It Is to Increase net ncome by the amount then aowed
as a deducton from gross Income.
(2) Losses and e penses resutng from the retrement or dscharge by the
ta payer certan ndebtedness outstandng for more than 18 months. Ths
ad|ustment s appcabe wth respect to both the base perod and ta abe years
thereafter, whchever method of computng the e cess-profts credt s used, and
has the effect of restorng these osses and e penses to net Income.
(8) Refunds of processng ta es, ncudng nterest thereon. Ths ad|ustment
appes to the ta abe years after the base perod, whchever method of com-
putng the e cess-profts credt s used, and reduces gross ncome by the amount
of such refunds and nterest.
(4) Interest on ta -e empt securtes. Interest on edera securtes sub|ect
to e cess-profts ta Is ncuded n gross ncome and such securtes are treated
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532
as admssbe assets. If the ta payer eects to treat other ta -e empt securtes
as admssbe assets, he must ncude the nterest therefrom In hs gross ncome.
Ths ad|ustment Is appcabe ony to ta abe years after the base perod and
to cases where the e cess-profts credt s computed under the nvested capta
method.
(5) Unusua and nonrecurrng cams, |udgments, awards, and decrees. Un-
usua or abnorma amounts pad out because of cams, |udgments, awards, and
decrees are not deducted from the gross ncome of years In the base perod.
T. SP CI IC MPTION.
The specfc e empton of 5,000 provded n the ouse b has been ncreased
to 10,000. It s the opnon of your commttee that the aowance of ths
ncreased e empton and the unform 8 per cent credt are adequate compensa-
ton for the dscontnuance of the preferenta treatment apped to the frst
500,000 of nvested capta under the ouse b.
8. T S O T .
Under the ouse b, the e cess-profts ta Incuded as a part an amount
equa to 4 o per cent of the norma-ta net Income n the case of corporatons
eectng to use the average-earnngs method of computng ther e cess-profts
credt. Ths penaty ta has been emnated by your commttee. The 3 0 per
cent Increase n the norma corporate ncome-ta rate, adopted by your com-
mttee, appes to corporatons generay regardess of the method empoyed n
computng the e cess-profts credt.
In addton, your commttee has removed the 5 per cent dfferenta n the
graduated e cess-profts ta rate schedue whch favored corporatons eectng
to compute ther e cess-profts credt on the nvested-capta method.
The b reported by your commttee contans one such schedue, whch s the
hgher of the two provded In the ouse b. Ths schedue s as foows:
Rate of ta .
mount of e cess profts: per cent.
rst 20,000 25
Ne t 30,000 30
Ne t 50,000 35
Ne t 150,000 40
Ne t 250,000 45
Over 500,000 50
9. IN ST D C PIT L.
Your commttee has made no change n the determnaton of equty nvested
capta e cept to carfy the provsons whch were desgned to avod any over-
statement of nvested capta as the resut of dupcatng amounts n the tems
of earnngs and profts and property pad n. Such a dupcaton mght other-
wse arse In the computaton of nvested capta n eases of reorganzaton and
other ta -free e changes.
Wth respect to the porton of borrowed capta whch s ncudbe In Invested
capta your commttee has provded a fat 50 per cent n eu of the graduated
percentages of 100, , and 33 , provded n the ouse b
10. DMISSI L ND IN DMISSI L SS TS.
Under the ouse b a State and oca securtes, obgatons of corporate
agences of the Unted States, and obgatons of the Unted States or ts pos-
sessons were nadmssbe assets. The commttee b provdes that such
assets whch, under ther terms, are not e empt from e cess-profts ta sha
be cassed as admssbe assets. Wth respect to such securtes whch are
e empt from e cess-profts ta , the ta payer may, f he so eects, treat them as
admssbe assets, n whch case the nterest thereon Is ncuded n gross
Income.
11. P RSON L S R IC CORPOR TIONS.
No change Is made by your commttee In the provsons of the ouse b
reatng to persona servce corporatons.
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533
Msc.
12. OR IGN CORPOR TIONS.
Tour commttee has e tended to foregn corporatons engaged In trade ot bus-
ness wthn the Unted States at some tme In a the years n the base perod
the same rght of eecton of the method of computng e cess-profts credt as s
aowed domestc corporatons.
13. C DIT O O IGN T S.
No change has been made n the aowance of the credt for foregn ta es
provded n the ouse b.
14. C SS PRO ITS C DIT IN CONN CTION WIT C RT IN C NG S.
rst method ased on ncome. The prveges aowed under the ouse b
to corporatons resutng from statutory mergers or consodatons are e tended
In your commttee b to smar reorganzatons n States n whch mergers or
consodatons are not defned by statute.
Second method ased on nvested capta. Tour commttee has repaced the
varyng percentages of ta -free return aowed wth respect to the frst 500,000
of nvested capta In the ouse b by a fat 8 per cent In addton, t has
substtuted a fat 50 per cent aowance of borrowed capta to be ncuded In
nvested capta n eu of the graduated percentages of 100, , and 33 ,
provded n the ouse b. Whe these preferenta methods of treatment for
sma corporatons were In the b t was necessary to guard aganst the serous
oophoe open to arge corporatons whch, by spttng up nto smaer enttes,
coud obtan undue advantages and accompsh substanta ta avodance. The
acton of your commttee has removed the necessty for many of the e tremey
technca and compcated provsons of Suppement .
I . SP CI L LI PRO ISIONS.
The ouse b contaned a number of speca reef provsons, generay In
the form of ad|ustments n arrvng at the e cess-profts net ncome. To these,
your commttee has added further ad|ustments to take care of some unusua
cases of hardshp. These further ad|ustments are descrbed n the dscusson
of e cess-profts net Income.
In addton, your commttee has provded a reef provson of much wder
and more genera appcaton. Ths provson aows reef In the ta abe perod
where abnormates n ncome occur because of amounts of Income (a) arsng
out of cams and |udgments ( ) resutng on ong-term contracts (c) resut-
ng from ong-term e poraton, dscovery, prospectng, research, or deveopment
of property, patents, or processes (d) fang Into one ta abe year rather than
another because of a change n accountng perods or methods or (c) arsng
upon the termnaton of a ease from mprovements on the eased property.
To be entted to reef n such cases, the type of ncome must be abnorma n
the case of the partcuar ta payer, n the ght of ts busness, or f of a type
normay receved by t, must be grossy dsproportonate to ts ncome of the
same cass n the four precedng ta abe years.
Where, wth respect to any partcuar tem of ncome the ta payer s entted
to reef under ths provson, such tem of ncome w be aocated to the years
In whch t Is propery attrbutabe and the ta payer s ncome for the ta abe
year n whch such tem woud otherwse fa s correspondngy reduced.
In addton, ta payers, 80 per cent or more of whose gross ncome s derved
from processng, cannng, or otherwse preparng for market any seasona frut
or vegetabe or any fsh or other marne fe, are aowed to carry over for two
years the unused e cess-profts credt for any ta abe year sub|ect to the e cess-
profts ta .
18. CONSOLID T D R TURN.
Tour commttee has provded that an affated group of corporatons may fe
a consodated return n eu of separate returns. Ths prvege s condtoned
upon the consent by each of the corporatons of the group to the reguatons
prescrbed by the Commssoner wth respect to such returns. When a conso-
dated return s fed, ony one specfc e empton of 10,000 s aowed.
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534
III. Suspenson of the nson-Tbamme ct.
Under the ouse b the provsons of the nson-Tramme ct were sus-
pended so far as appcabe to contracts entered Into or competed In any ta abe
year sub|ect to the e cess-profts ta .
Your commttee e tends such suspenson to contracts entered Into but not
competed before the date of the begnnng of the ta payer s frst e cess-profts
ta ta abe year begnnng n 1940.
I . mortzaton of mergency actes.
Your commttee e tended the amortzaton deducton benefts to certfed con-
structon after anuary 1, 1940, n pace of uy 10, 1940, as provded In the
ouse b.
In addton, subsectons (), (|), and (k) of secton 201 of the ouse b
(secton 301 of the commttee b) have been emnated. In en thereof, your
commttee has nserted a new subsecton (1) provdng that If a ta payer has
been or w be substantay rembursed by the Government for a or a part
of the cost of any emergency facty pursuant to a Government contract reatve
to such facty or for the purchase of suppes, or otherwse, the ta payer w
not be aowed amortzaton wth respect to such facty uness the dvsory
Commsson to the Counc for Natona Defense and ether the Secretary of War
or the Secretary of the Navy certfy that the contract contans provsons ade-
quatey protectng the pubc nterest wth reference to the use and dsposton
of the facty.
The methods of procurng new defense factes were descrbed before your
commttee by a mem er of the dvsory Commsson to the Counc of Natona
Defense n the hearngs before your commttee as foows:
Recommended Methods of Procurng New actes.
pan . prvate ownershp wth no government nterest.
Purpose: When manufacturer desres to own the factes at a tmes and does
not ncude n the product prce an abnorma amount for deprecaton or amor-
tzaton.
nancng: Prvate, ncudng Reconstructon nance Corporaton oans.
Tte: ested n manufacturer.
Methods of o eraton: y manufacturer n the norma way.
Rembursement: None other than by way of norma deprecaton.
mortzaton: Certfed for ta purposes as needed for natona defense.
Termnaton: No protecton for contractor.
Provson for subsequent use by manufacturer: Contnued use by the con-
tractor.
PL N n. PRI T OWN RS IP WIT GO RNM NT INT R ST.
Purpose: or pants n whch the manufacturer desres to preserve a future
nterest.
nancng: Prvate, ncudng Reconstructon nance Corporaton oan.
Tte: ested n the manufacturer.
Method of operaton: y manufacturer.
Rembursement: Cost to be repad to manufacturer n fve equa annua In-
staments. Payments to be sub|ect to acceeraton f suppy contracts run out.
mortzaton: Certfed for ta purposes as requred for natona defense.
Termnaton : t end of 5-year perod, or earer termnaton of the emergency,
the manufacturer may contnue to use the factes f he pays to the Government
the then far vaue thereof as determned by arbtrators otherwse contractor
transfers tte to the new factes to the Government.
Provson for subsequent use by manufacturer: No rght to use uness payment
made as set forth under headng Termnaton above.
PL N m. GO RNM NT OWN RS IP.
Purpose: or pant In whch Government desres to have permanent nterest
or n whch the manufacturer has no future nterest
nancng: Government funds, ether Reconstructon nance Corporaton,
Defense Corporaton, rmy or Navy.
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Tte: ested In the Government
Method of operaton: Leased to the manufacturer.
Rembursement: Not appcabe (Government owned).
mortzaton for ta purposes: Not appcabe (Government owned).
Termnaton: Government w take over factes whenever ease termnates.
Provson for subsequent use by manufacturer: None.
D SIGN O CILITI S ND SUP R ISION O T I CONSTRUCTION.
To nsure proper factes for the work and e pedte pacng such factes n
producton, the manufacture shoud supervse ther desgn and constructon,
even n case pan III s foowed. In connecton wth pans II and III, the Gov-
ernment departments concerned shoud revew the budng pans and the cost
estmates to determne whether the factes proposed and the cost of the same
are reasonabe for the purpose pror to any commtments.
COM IN TION O PL NS.
Machnery, for nstance, may be Government furnshed by pan III, whe the
pant may be provded by pans I or II shoud ths be desred.
The varatons n these methods used by the Government n deang wth
producers of artces necessary for the natona defense demonstrate the nad-
vsabty of attemptng to cover a of these cases wth a rgdy unform statu-
tory me.
D T IL D PL N TION OP T C NG S IN T OUS ILL.
Tte I. Corporaton Income Ta .
Tte I of the commttee amendment conssts of one secton ncreasng by 3
per cent the ordnary ta es mposed by Chapter I of the Interna Revenue Code
upon corporatons. Such Increase appes to the entre rate schedue contaned
In sectons 13 and 14. Ths provson s new and was not contaned n the ouse
b. Secton 710 of the e cess-profts ta as passed by the ouse dd, however,
provde as a part of the e cess-profts ta n the case of corporatons whch
eected to compute ther e cess-profts credt on the average-earnngs pan for the
payment of an addtona amount equa to 4 per cent of the norma ta net
ncome. s Indcated beow, your commttee recommends that such provson be
emnated.
Under the proposed amendment the permanent genera corporate ta rate w
be 22r per cent. It Is provded, however, that n computng the 10 per cent
Increase n ta Imposed by secton 15 of the Interna Revenue Code, added to such
Code by secton 201 of the Revenue ct of 1940, the corporate ta pror to the
per cent ncrease proposed by the b s to be used as the bass for such
computaton. Thus, the genera effectve rate appcabe to corporatons so ong
as the defense-ta provsons of secton 15 are n force w be 24 per cent, com-
puted as foows:
Per cent.
Ta under permanent provsons 22
Pus 10 per cent of 19 per cent (the rate appcabe under the permanent
provsons pror to ther amendment by the b) ft
Tota 24
Tte II. cess-Profts Ta .
S CTION 710. IMPOSITION O T .
Under the ouse b the e cess-profts ta Imposed upon corporatons whch
eected to compute ther e cess-profts credt on the average-earnngs method
conssted of 4r r per cent of the corporaton s norma-ta net ncome pus a
graduated ta of from 25 to 50 per cent of the corporaton s ad|usted e cess-
profts net ncome. The e cess-profts ta mposed upon corporatons whch
eected to compute ther e cess-profts credt on the ncome and Invested capta
method conssted soey of a graduated ta of from 20 to 45 per cent of the cor-
poraton s ad|usted e cess-profts net ncome. In the case of any corporatons
whch had been through certan types of ta -free e changes, t was provded that
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53
ad|ustments were to be made In the doar amounts consttutng the dvdng nes
between the varous brackets on the bass of the reatonshp of the ta payer s
preferenta rate amount to 500,000. The ouse b defnes the term ad|usted
e cess-profts net ncome, whch consttuted the measure of the graduated ta ,
as the e cess-profts net ncome ess a specfc e empton of 5,000 and the amount
of the ta payer s e cess-profts credt for the ta abe year.
In the b as reported by your commttee the addtona 4r | per cent of the
norma ta net ncome of corporatons eectng the e cess-profts ta based on
average earnngs has been emnated. The graduated rate schedue appcabe
under the ouse b to such corporatons has been made appcabe to a cor-
poratons whether computng ther e cess-profts credt on the average-earnngs
method or on the nvested-capta method. The e cess-profts ta of any cor-
poraton, therefore, s based on the foowng rate schedue:
Rate of ta .
mount of ad|usted e cess-profts net ncome: percmt.
rst 20,000 25
Ne t 30,000 30
Ne t 50.000 35
Ne t 150.000 40
Ne t 250.000 : 45
Over 500,000 L. 50
The ad|ustments made to the doar amounts n the above rate schedue n
the ouse b, on account of certan ta -free e changes, are retaned, e cept
that the term preferenta rate amount has been changed to hghest bracket
amount. The computaton of the hghest bracket amount s contaned n sec-
ton 752 and s substantay the same as the computaton of the preferenta rate
amount contaned n secton 759 of the ouse b. Such ad|ustment s neces-
sary to prevent corporatons from obtanng undue advantage by breakng up
nto severa smaer corporatons by means of ta -free transactons.
The defnton of ad|usted e cess-profts net ncome contaned n the ouse
b s retaned e cept that the specfc e empton deduct:he n computng such
ad|usted e cess-profts net ncome s ncreased from 5,000 to 10,000.
S CTION 711. C SS-PRO ITS N T INCOM .
Under the ouse b the e cess-profts net ncome was the norma-ta net
ncome wth certan ad|ustments. If the e cess-profts credt was computed on
the average-earnngs pan, the norma-ta net ncome was ad|usted by the e -
cuson of gan or oss from the sae or e change of capta assets (whether
deprecabe or nondeprecabe) hed for more than 18 months, the deducton of
the norma corporate ncome ta , and the e cuson of ncome arsng from the
retrement or dscharge of the ta payer s own ndebtedness.
If the e cess-profts credt was computed on the nvested-capta pan, the
norma-ta net ncome was further ad|usted by ncreasng the credt for dv-
dends receved to 100 per cent and makng t appcabe to dvdends on the
stock of a corporatons, whether domestc or foregn, e cept dvdends (actua
or constructve) on stock of foregn persona hodng companes: and by reducng
the deducton for nterest pad or accrued by an amount whch was the same
percentage of the nterest on borrowed capta as the borrowed nvested capta
was of the tota borrowed capta.
The above ad|ustments apped whether the computaton was made for the
base perod or the ta abe year. Reatve to the base perod the norma-ta net
Income (or ts equvaent) was to be further ad|usted by dsaowng certan
casuaty osses and certan deductons on account of repayments of grcutura
d|ustment ct ta es to vendees.
Under the b, as reported by your commttee, the ad|ustments to norma-ta
net ncome n computng the e cess profts net ncome whch were provded n
the ouse b are retaned, but certan changes have been made theren and
certan addtons made thereto, as foows:
(1) The treatment of gans and osses on deprecabe assets hed for more
than 18 months as ong-term capta gans and osses has been emnated. In
eu thereof a provson has been nserted provdng that ony the e cess of gans
arsng from the sae or e change of such assets over any osses arsng from the
sae or e change of such assets sha be e cuded from the computaton. The
effect of ths provson s to aow osses from the sae or e change of deprecabe
assets hed for more than IS months to be deducted from ordnary Income to the
e tent such osses e ceed the gans from smar transactons.
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(2) The ad|ustment on account of ncome derved from the retrement or ds-
charge of bonds, etc.. has been rewrtten to make certan that amounts whch
woud be otherwse ncudbe upon such retrement or dscharge on account of
any premum receved upon ssuance sha be eft out of the computaton, and
that the ad|ustment sha appy athough the ndebtedness retred or dscharged
Is ndebtedness whch has been assumed by the ta payer a.d, athough t s
evdenced, so far as the ta payer s concerned, ony by a contract wth the
person whose abtes have been assumed.
(3) new ad|ustment has been added, appcabe whether the e cess-profts
credt s computed under the ncome or nvested capta pan and to ta abe
years n the base perod as we as to ta abe years under the e cess-profts ta ,
requrng that any deductons otherwse aowabe on account of the retrement
or dscharge of ndebtedness sha be dsaowed f the ta payer s obgaton has
been outstandng for more than 18 months. The amounts so to be dsaowed
ncude the deducton otherwse aowabe under secton 23(a) for e penses pad
or ncurred n connecton wth such retrement or dscharge (ncudng any
premum pad upon any such retrement or dscharge), the deducton for osses
otherwse aowabe n such connecton, and the deducton otherwse aowabe
on account of the ssuance of the bonds or other evdence of ndebtedness at a
dscount.
(4) new ad|ustment has been added appcabe ony to ta abe years under
the e cess-profts ta requrng the e cuson of ncome attrbutabe to refunds
of grcutura d|ustment ct ta es and nterest upon such refunds.
(5) The ad|ustment appcabe to the nvested capta method on account of
nterest has been smpfed on account of the substtuton of a fat 50 per cent
rue for the ncuson of borrowed capta n nvested capta n eu of the vary-
ng percentages contaned n the ouse b.
( ) It s provded that, f the e cess-profts credt s computed under the n-
vested capta pan, the norma-ta net ncome sha be ncreased by an amount
equa to the nterest on edera obgatons not specfcay e empted from e cess-
profts ta es and n addton thereto, the nterest on a other edera, State, or
oca obgatons, f the ta payer eects, under secton 720(d), to treat a such
other obgatons as admssbe assets for the ta abe year.
(7) The ad|ustment on account of casuaty osses has been e panded so as to
e cude from the computaton of e cess-profts net ncome for ta abe years In
the base perod, osses arsng from the demoton, abandonment, and oss of
usefu vaue of property.
(8) The ad|ustment on account of repayment of grcutura d|ustment ct
ta es to vendees has been rewrtten to remedy certan technca defects contaned
n the ouse b.
(9) n addtona ad|ustment s provded, appcabe ony to ta abe years
n the base perod, to the effect that deductons attrbutabe to any cam, award,
udgment, or decree aganst the ta payer, or nterest thereon, w not be re-
qured to be taken nto account f, n the ght of the ta payer s busness, t s
abnorma for the ta payer to ncur a abty of such character or, f the ta -
payer normay Incurs abtes of such character, the amount of the partcuar
abtes of such character In the ta abe year s grossy dsproportonate to the
average amount of abtes of such character n each of the four prevous
ta abe years.
The ouse provson appyng secton 117 of the Interna Revenue Code (rea-
tve to capta gans and osses) to ta abe years n the base perod has been
retaned. Certan changes have been made theren n vew of the revsed treat-
ment above descrbed n the case of deprecabe assets. In addton, secton 23
(g) and (k) of the Interna Revenue Code have been made appcabe to ta abe
years n the base perod, n order that ong-term osses due to securtes (stocks
and bonds) havng become worthess sha be dsaowed n computng e cess
profts net ncome for ta abe years In whch such osses were not treated as
capta osses under the ncome-ta aw appcabe to such years.
S CTION 712. LLOW NC O C SS-PRO ITS C DIT.
Domestc corporatons. Under the ouse b a domestc corporaton was per-
mtted to choose between the ncome credt and the nvested capta credt ony
If t had been n e stence durng the entre 48 months pror to the begnnng
of Its frst ta abe year whch began n 1940. other domestc corporatons
were requred to compute ther e cess-profts credt on the nvested-capta pan.
200217 41 35
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538
Under the b as reported by your commttee any domestc corporaton whch
was n e stence before anuary 1. 1040, may choose between the ncome credt
and the nvested capta credt. It s further provded that any domestc cor-
poraton whch for any ta abe year does not fe a return must compute ts
e cess-profts credt on the nvested-capta pan.
oregn corpora ons. Under the ouse b a foregn corporaton sub|ect to
e cess-profts ta was requred to compute ts e cess-profts credt on the aver-
age-earnngs pan f t was n e stence durng the entre 48 months pror to the
begnnng of ts frst e cess-profts ta ta abe year begnnng n 1040 and was
engaged n trade or busness wthn the Unted States or had an offce or pace
of busness theren at tny tme durng each of the ta abe years n the 48
months pror to such date. otter foregn corporatons sub|ect to e cess-
profts ta were requred to compute ther e cess-profts credt on the nvested-
capta pan.
Under the b as reported by your commttee the frst cass of foregn cor-
poratons s entted to choose between the ncome credt and the nvested-
capta credt. If the corporaton fas to fc a return ts e cess-profts credt
for the ta abe year s computed under the nvested-capta pan. The treat-
ment of other foregn corporatons sub|ect to ta Is the same under ths secton
as t was under the ouse b.
S CTION 71.1. C SS PO ITS CR DIT S D ON INCOM .
Owng to the fact that secton 712 has been changed so as to aow a domes-
tc corporaton whch was not n e stence durng the entre base perod, to
choose the ncome credt, secton 713 has been changed by the nserton of
addtona provsons gvng corporatons whch were not n e stence durng the
entre base perod an e cess-profts net ncome for that porton of the base
perod durng whch they were not n e stence. or each 12 months of such
perod the e cess-profts net ncome s deemed to be S per cent of the corpora-
ton s day nvested capta for the frst day of ts frst ta abe year sub|ect
to the e cess-profts ta reduced on account of nadmssbes by the same rato
as s appcabe under secton 720 n reducton of the average nvested capta
of the precedng ta abe year. Thus f the rato of nadmssbes to tota assets
n the ast ta abe year of the base perod were as 1 to 3, the day nvested
capta as of the day foowng the cose of such ta abe year woud be reduced
by one-thrd thereof, and 8 per cent of such reduced amount woud consttute
the corporaton s e cess-profts net ncome for each perod of 12 months In the
base perod durng whch t was not n e stence. The e cess-profts net ncome
for a perod of ess than 12 months durng whch t was not so n e stence s
a proportonate part of such amount
S CTION 714. C SS-PRO ITS CR DIT S D ON IN ST D C PIT L.
Under the ouse b the nvested capta credt for any ta abe year refected,
n part, the base perod e perence of the ta payer. In genera, the e cess-
profts credt conssted of an amount representng the same rate of return (but
not ess than 7 per cent or more than 10 per cent on the frst . 500,000 and not
ess than 5 per cent or more than 10 per cent on the remander) on so much
of the corporaton s nvested capta for the ta abe year as dd not e ceed ts
nvested capta at the cose of the base perod, pus 10 per cent of so much of
the remanng nvested capta as dd not brng the tota nvested capta beyond
500,000, and 8 per cent of the remander.
Under the b as reported by your commttee the base perod e perence of a
corporaton eectng the nvested-capta credt has been emnated from con-
sderaton. In eu of the varyng percentages contaned n the ouse b, a
fat rate of 8 per cent of the ta payer s nvested capta for the ta abe year
has been substtuted.
S CTIONS 715-717. IN ST D C PIT L.
These sectons are the same as n the ouse b e cept that the references to
the ta abe years n the base perod have been emnated owng to the fact that
base perod e eren e s not taken nto account n computng the e cess-profts
credt based on nvested capta.
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S CTION 718. UITY IN ST D C PIT L.
Ts secton Is substantay as t was In the ouse b e cept for certan
cerca and technca changes. The most mportant of these arc as foows:
(1) Secton 718(c)(4) of the ouse b provded that, u makng te compu-
tatons requred by subsectons (a) and (b), the earnngs and profts of a
transferee corporaton were not to ncude the earnngs and profts of another
corporaton whch woud otherwse be ncuded by reason of property of such
other corporaton havng been pad n for stock, or as a contrbuton to capta,
or as pad-n surpus, of the transferee corporaton. Ths subsecton has been
nserted as secton 718(b) (3) and made an actua step u the computaton.
(2) Secton 718(d) of the ouse b has been omtted because of the treat-
ment of ths matter under secton 501 (secton 401 of the ouse b).
S CTION 710. ORROW D IN ST D C PIT L.
Under the ouse b borrowed capta (. e., ndebtedness evdenced by a
bond, note, b of e change, debenture, certfcate of Indebtedness, mortgage, or
deed of trust) was ncuded n nvested capta under a graduated mtaton at
varyng percentages (100, , 33 / ), these percentages dependng upon the
amount of equty nvested capta.
Under the b as reported by your commttee a borrowed capta, as defned
In the ouse b, s ncudbe In nvested capta at 50 per cent.
S CTION 720. DMI SI L ND IN DMISSI L 88 TS.
cept for technca changes, secton 720 of the ouse b has been changed
In ony one respect, as foows: If the e cess-profts credt for any ta abe year
Is computed on the Invested-capta pan, the foowng obgatons are to be
consdered as admssbe and not as nadmssbe assets for such ta abe year:
(1) Unted States obgatons and obgatons of edera nstrumentates
the nterest from whch s not e empt from e cess-profts ta aton and
(2) other edera, State, and oca obgatons, f the ta payer so eects
In ts return for such year. ta payer may not make such an eecton reatve
to ony a porton of such obgatons. The eecton must be made reatve to a
uch obgatons, or none of such obgatons may be treated as admssbe assets.
Under secton 711(a) (2) ( ) (1) the nterest descrbed n paragraph (1) above
ncreases the norma-ta net ncome for e cess-profts ta purposes. Under sec-
ton 711(a) (2) ( ) (), f the eecton descrbed n paragraph (2) Is made, then
a the nterest on a such obgatons ncreases the norma-ta net ncome.
S CTION 721. NORM LITI S IN INCOM IN T L P RIOD.
Secton 721 of the commttee amendment s a new secton, no comparabe pro-
vsons hnvng been ncuded n the ouse b. Subsecton (a) of ths secton s
desgned to provde reef n enumerated cases n whch the ta payer s ncome
n any ta abe year s abnormay arge because of certan speca crcumstances.
The speca types of ncome wth respect to whch reef may be accorded by ths
secton are as foows:
(1) Income arsng out of a cam, award, |udgment, or decree, or out of
Interest on any of the foregong
(2) Income receved wth respect to a contract whose performance requred
more than one year
(3) Income resutng from the e poraton, dscovery, prospectng, research, or
deveopment of tangbe property, patents, formuas, or processes, provdng that
such e poraton, etc., e tended over a perod of more than one year
(4) Income whch s requred to be ncuded for the ta abe year as a resut
of a change n the ta payer s accountng perod or method of accountng
(5) Income receved by the essor of rea property on the termnaton of the
ease as a resut of Improvements on the property durng the ease.
If the ta payer receves ncome of any of the above casses, the secton pro-
vdes that reef sha be accorded f ether (1) n the ght of the ta payer s
busness It s abnorma for t to receve such ncome or (2) athough the recept
of such ncome may be norma, the Income so receved for the ta abe year s
grossy dsproportonate to the amounts of such ncome receved by the ta payer
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540
n the four prevous ta abe years. If ether of these condtons s satsfed
wth respect to ncome fang n an enumerated cass, the reef accorded by
the secton s as foows: There s frst determned the amount of such ncome
receved n the ta abe year whch s attrbutabe to any prevous ta abe year
or years and the amounts so attrbutabe to such years. Such determnaton s
to be made under rues and reguatons prescrbed by the Commssoner wth the
approva of the Secretary. It s e pected that such reguatons w provde
genera rues prescrbng the method by whch the ta abe years to whch the
ncome s to be attrbuted and the amounts to be attrbuted may be ascertaned.
There s then computed the aggregate of the e cess-profts ta es whch woud
have been paced on such ncome had t been receved n the ta abe years to
whch t s thus attrbuted, as descrbed above, ncudng the ta abe year n
whch the ncome was n fact receved. or the ta abe year n whch the
ncome was receved, the e cess-profts ta attrbutabe to such Income can not
e ceed the aggregate of the ta es so computed. If t s determned that the
ncome receved n the ta abe year s attrbutabe to years n the base perod,
the amount of such ncome so attrbutabe to such years w have the effect of
Increasng the base perod net ncome and thus the credt under the average-
earnngs method.
Subsecton (b) provdes n mted cases a 2-year carry-over of any e cess of
the e cess-profts credt for any ta abe year begnnng after December 31, 1939,
over the e cess-profts net ncome. Such carry-over consttutes an addtona
subtracton from e cess-profts net Income n arrvng at the ad|usted e cess-
profts net ncome. Such carry-over s avaabe ony to corporatons 80 per cent
or more of the gross ncome of whch for the ta abe year s derved from
processng or otherwse preparng for market any seasonabe frut or vegetabe,
or any fsh or other marne fe.
S CTIONS 722-724 (S CTIONS 721-723 OP T OUS ). UITY IN ST D C PIT L
IN SP CI L C S S OR IGN CORPOR TIONS, IN ST D C PIT L P RSON L S R IC
CORPOR TIONS.
There have been no changes n these sectons as contaned n the ouse b
e cept for the emnaton of a reference to the base perod n secton 722.
S CTION 725. CORPOR TIONS COMPL TING CONTR CTS UND R M RC NT M RIN
CT, 193 .
Ths secton s the same as secton 724 of the ouse b e cept for a carfyng
change.
S CTIONS 72 -728 (S CTIONS 725-727 O T OUS ILL). MPT CORPOR TIONS
M NING O T RMS US D L WS PPLIC L .
No change has been made n these sectons as contaned n the ouse b
e cept the foowng:
(1) Secton 72 (d) reatng to nvestment companes regstered as dversfed
companes under the Investment Company ct of 1940 s amended to aow
such companes unt uy 1, 1941, to so regster and thereby obtan e empton
from the e cess-profts ta , nstead of December 1, 1940, as under the ouse
b.
(2) Secton 727(b) of the ouse b provded that no return need be fed
by a corporaton whose e cess-profts net ncome (paced on an annua bass
n the case of a ta abe perod of ess than one year) was not greater than
5,000. In vew of the fact that the specfc e empton has been rased from
5,000 to 10,000, ths provson has been changed to provde that no return
need be fed uness the corporaton s e cess-profts net ncome s n e cess of
10,000.
S CTION 72 1. CONSOLID T D R TURNS.
Ths secton was not n the ouse b. It permts consodated returns to
be fed by affated groups of corporatons under certan crcumstances, among
whch s the requrement that a the corporatons whch have been members
of the affated group at any tme durng the ta abe year for whch the return
s made must consent to reguatons prescrbed by the Commssoner, wth the
approva of the Secretary, pror to the ast day prescrbed by aw for the fng
of such return. The makng of a consodated return sha be consdered as
such consent.
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The reguatons whch the Commssoner s authorzed to prescrbe are such
reguatons as he may deem necessary n order that the ta abty of any
affated group of corporatons makng a consodated return and of each cor-
poraton n the group, both durng and after the perod of affaton, may be
returned, determned, computed, assessed, coected, and ad|usted, n such
manner as ceary to refect the e cess-profts ta abty and the varous
factors necessary for the determnaton of such abty, and n order to pre-
vent avodance of such ta abty n addton to the matters whch, n the
ght of current and prevous consodated returns reguatons, are e pected to
be covered n deta n the reguatons to be ssued by the Commssoner, are
the e tent to whch and the manner n whch the foowng tems, among others,
w be computed and gven effect n determnng the e cess-profts-ta abty
of an affated group: (a) quty nvested capta, borrowed capta, and
nvested capta, ( ) admssbe and nadmssbe assets, and e cuded capta,
(c) net capta addtons and reductons, (d) consodated net operatng osses,
net operatng osses ncurred by members of the group n ta abe years pror
to that for whch the consodated return s fed, and the net operatng oss
deducton of members of the group n ta abe years foowng that for whch
the consodated return was fed, and (e) e cess-profts net ncome and ad-
usted e cess-profts net ncome.
If a consodated return s fed, ony one specfc e empton of 10,000 s
aowabe for the year for the entre affated group.
The term affated group s defned to mean one or more chans of cor-
poratons connected through stock ownershp wth a common parent corporaton
If
(1) t east 95 per cent of each cass of the stock of each of the corporatons
(e cept the common parent corporaton) s owned drecty by one or more of
the other corporatons and
(2) The common parent corporaton owns drecty at east 90 per cent of
each cass of the stock of at east one of the other corporatons.
oregn corporatons, Chna Trade ct corporatons, and corporatons en-
tted to the benefts of secton 251 by reason of recevng a arge percentage
of ther Income from possessons of the Unted States are not to be deemed
to be affated wth any other corporaton wthn the meanng of secton 729.
or the purpose of ths mtaton, a 100 per cent owned foregn subsdary
of a domestc corporaton, organzed under the aws of a contguous foregn
country and mantaned soey for the purpose of compyng wth the aws of
such country as to tte and operaton of property, may, at the opton of the
domestc parent corporaton, be treated as a domestc corporaton.
It s aso provded that a notce of defcency for any ta abe year maed to
a corporaton sha suspend the runnng of the statute of mtatons as to a
corporatons wth whch such corporaton made a consodated return for such
ta abe year.
Suppement . changes : cess-Phofts Credt ased on Income.
cept for technca changes and the changes Indcated beow, ths suppement
s the same as the ouse b.
S CTION 74 0. D INITIONS.
Ths secton s the same as t was n the ouse b e cept for the defnton
of acqurng corporaton, whch has been e panded to take Into account cer-
tan types of transfers not covered by the ouse b. Subsecton (a)(1) has
been rewrtten.
Subparagraph ( ) s substantay the equvaent of the entre subsecton
(a)(1) as t appeared n the ouse b.
Subparagraph ( ) covers e changes descrbed In secton 112(g)(1)(C),
that s, the acquston by one corporaton, n e change soey for a or a part
of Its votng stock, of substantay a the propertes of another corporaton, the
assumpton by the acqurng corporaton of a abty of the other or the fact
that property acqured s sub|ect to a abty beng dsregarded n the determ-
naton of whether the e change s soey for votng stock. Ths makes t pos-
sbe for certan types of mergers and consodatons to quafy under the b,
though they are not statutory mergers and consodatons, owng to the absence
of any State aws on the sub|ect. Your commttee s nformed that there are
appro matey 12 States whch have no statutory provsons reatve to cor-
porate mergers and consodatons.
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542
Subparagraph (C) covers transfers before October 1, 1940, by one corpora-
ton of property to another corporaton soey as pad-n surpus or a contrbu-
ton to capta n respect of votng stock owned by such other corporaton.
Snce the property transferred must be receved soey as pad-n surpus or a
contrbuton to capta made soey n respect of votng stock, t s necessary that
(1) the transferor corporaton receve nothng upon the e change and (2) that,
at the tme the transfer takes pace, the transferor own no stock of the trans-
feree other than votng stock of the transferee.
Subparagraph ( ) or (C) sha appy ony f the corporaton transferrng
such propertes s forthwth competey qudated n pursuance of the pan
under whch the acquston s made, and the transacton of whch the acqus-
ton s a part has u a respects the effect of a statutory merger or consoda-
ton.
S CTION 742. R G S P RIOD N T INCOM .
Ths secton s the same as n the ouse b e cept for a technca change and
for the addton of a new sentence to subsecton (b) to prevent too great a
reducton of the average base perod net ncome of an acqurng corporaton n
cases where such corporaton became an acqurng corporaton n a ta abe
year begnnng after December 31, 1939, and the component corporatons nvoved
n the transacton were at east 75 per cent owned by the acqurng corporaton.
Such 75 per cent ownershp must have e sted pror to the enactment of the
b and have been present at a tmes thereafter unt the transacton. In
such cases the average base perod net ncome of the acqurng corporaton sha
not be ess than ether (1) ts average base perod net ncome computed wthout
reference to the base perod e perence of the component corporatons nvoved
n the transacton, or (2) the average base perod net ncome of that component
corporaton whch possesses the hghest average base perod net ncome.
Suppement . changes : ghest racket mount and Invested Capta.
Under the ouse b the term e change was defned to mean certan e -
changes descrbed n secton 112(b) (4) or (5) and reated sectons and certan
transfers of property by one corporaton to another corporaton the bass of
whch n the hands of the acqurng corporaton s or was determned under
secton 113(a)(8)( ), or woud have been so determned had such secton been
n effect. The type of e changes or transfers descrbed woud therefore have been
ncuded regardess of whether they were controed by correspondng provsons
of the revenue aws n force at the tme when made. Ths defnton has been
changed so as, n effect, to ncude ony e changes and transfers occurrng after
December 31, 1917. roady speakng, the ta -free e change provsons dd not
appear n the ncome-ta aw unt after such date.
The defntons of transferor upon an e change and transferee upon an e -
change contaned n secton 750(b) (c) of the ouse b have been brought nto
conformty wth the changed defnton of e change.
The defntons of predecessor, successor, frst borrowed capta base,
and second borrowed capta base, contaned n secton 750(e), (f), (h), and
() of the ouse b have been emnated as no onger necessary n vew of
the emnaton of the sectons n whch such terms were used.
The defnton of preferenta rate amount, contaned n secton 750(g) of
the ouse b, has been moved to secton 750(e) and as so transferred has been
retaned e cept that the term preferenta rate amount has been changed to
hghest bracket amount
S CTION 751. D T RMIN TION O PROP RTY P ID IN OR STOC ND O ORROW D
C PIT L IN CONN CTION WIT C RT IN C NG S.
The ony change made n ths secton of the ouse b s the emnaton of the
matter n parentheses n subsecton (a) thereof, whch e cuded from the com-
putaton stock receved whch was nether an admssbe nor nadmssbe asset
n the hands of the transferor. Secton 752 of the ouse b, whch made such
stock nether admssbe noc nadmssbe u the hands of the transferor, has been
emnated.
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S CTIONS 752-7r 8 ND S CTION 750 (O T OUS ILL). C NG S: UITY IN-
ST D C PIT L DMISSI L ND IN DMISSI L SS TS S P RIOD O
SUCC SSOR SUCC SSOR S P RIOD N T INCOM SUCC SSOR R S P RIOD IN ST D
C PIT L LOW ST IN ST D C PIT L S P RIOD P RC NT G ORROW D C PIT L
S S.
These sectons n the ouse b requred computatons n the determnaton of
certan factors empoyed n the computaton of the nvested capta credt under
the ouse b, necessary n order to prevent ta avodance through ta -free e -
changes. ecause of the change recommended by your commttee n the computa-
ton of the nvested capta credt, the necessty for these sectons dsappears and
they have, therefore, been emnated.
S CTION 7 2. IG ST R C T MOUNT.
(Secton 759 of the ouse b. Preferenta rate amount.)
Secton 759 of the ouse b provded rues for the computaton of the preferen-
ta rate amount of a corporaton foowng certan ta -free e changes. The
preferenta rate amount was the pont at whch, n computng the nvested capta
credt, there was a shft from 10 to 8 per cent n the rates appcabe to new
capta, and the pont at whch the corporaton was compeed to use ts base
perod percentage even though such percentage was ess than 7 per cent or
e ampe, n the case of a corporaton whch had not been through a pror ta -free
e change, new capta whch woud not produce a tota nvested capta n e cess
of 500,000 was entted to a rate of 10 per cent and any new capta n e cess
of such amount was entted to a rate of ony 8 per cent. The 00,000 amount
whch consttuted ths dvdng ne was the corporaton s preferenta rate
amount. If such corporaton spt up n a ta -free e change t was necessary to
dvde ths amount between the two resutng corporatons n order tut the two
together mght not have the beneft of the 10 per cent rate on a arger amount
of new capta than the orgna corporaton was entted to n the frst pace.
Secton 750 of the ouse b provded the rues pursuant to whch such ad|ustment
was to be made.
Under the ouse b the reatonshp of the preferenta rate amount to
500,000 was aso used n the ad|ustment of the rate schedues contaned In sec-
ton 710 to prevent a corporaton from obtanng an undue advantage n connecton
wth such rate schedues as a resut of a ta -free reorganzaton.
Under the b as reported by your commttee t s unnecessary to retan the
preferenta rate amount for the purpose of determnng the rates appcabe to
od and new capta, owng to the changes whch have been made n the computa-
ton of the nvested capta credt. It s st necessary, however, to make ad|ust-
ments In the doar amounts of the rate schedues contaned n secton 710 smar
to those made n the ouse b. Secton 759 of the ouse b has, therefore, been
retaned, but t has been made secton 752. Snce the computaton s appcabe
ony for the purpose of ad|ustng the rate schedues, however, the term preferen-
ta rate amount has been gven the more approprate tte of hghest bracket
amount
Owng to the fact that secton 752 of the ouse b has been emnated and the
ad|ustment on account of nadmssbes s not made unt the cose of a ta abe
year, t has been necessary to nsert a new subsecton preservng, for the purposes
of the computaton of the hghest bracket amount, the ad|ustment formery
requred by secton 752(a) n the ouse b.
The ony change made n the actua computaton under new secton 752 s n
subsecton (c)(1)( ) secton 759(b)(1)( ) n the ouse b . In order to
prevent a corporaton from dervng undue advantage, n the ta abe year n
whch an e change took pace, from any ncrease n capta n that porton of
such year foowng the e change, the ouse b provded that the corporaton s
nvested capta, f ower than the hghest bracket amount, for that porton of
the ta abe year whch preceded the e change, shoud be used n the computaton
rather than the hghest bracket amount. The mted use to whch the hghest
bracket amount w be put under the b as reported by your commttee makes
ths restrcton no onger necessary and subsecton (c)(1)( ), therefore, pro-
vdes for the use of the hghest bracket amount n a cases.
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544
Tte III (Tte II of the ouse ). mortzaton Deducton.
The provsons of ths tte as they appear n the ouse b (Tte II) have
been changed n ony the foowng respects:
(1) The dvdng ne for the appcaton of the amortzaton provsons wth
respect to factes has been changed from the date uy 10, 1940, as provded
n the ouse b, to anuary 1, 1940.
(2) Subsecton () of the ouse b provded that emergency factes wth
respect to whch amortzaton deductons had been taken were not to be destroyed,
demoshed, mpared, or substantay atered wthout the wrtten consent of
the Secretary of War or the Secretary of the Navy, that f such consent was not
gven wthn 90 days after request the Secretary concerned was to purchase such
facty for not more than ts ad|usted bass or ess than 1, and that the ta payer
coud repurchase any such emergency facty under certan crcumstances. Sub-
secton (|) provded that no deducton for amortzaton was to be aowed
uness the ta payer consented n wrtng to the provsons of subsecton ().
Subsecton (k) mposed a penaty for voaton whch was to consst of an
amount equa to the ad|usted bass of the facty n the hands of the ta payer,
to be assessed, coected, and pad n the same manner as the corporate ncome ta .
Under the b as reported by your commttee these provsons have been
emnated and n eu thereof a new subsecton () has been nserted. Such
new subsecton provdes that f the ta payer has been or w be pad or sub-
stantay rembursed, drecty or ndrecty, by the Government for a or a
part of the cost of any emergency facty pursuant to a Government contract
reatve to such facty or for the purchase of suppes, or otherwse, the ta -
payer w not be aowed amortzaton wth respect to such facty uness the
dvsory Commsson to the Counc for Natona Defense and ether the Secretary
of War or the Secretary of the Navy certfy to the Commssoner of Interna
Revenue that the contract contans provsons, adequatey protectng the pubc
Interest, wth reference to the future use and dsposton of the facty. Such
certfcate, to be vad, must be made wthn 30 days after the makng of the
contract above referred to or wthn 0 days after the date of enactment of the
b, whchever perod e pres the ater. It s aso provded that, f such rem-
bursement occurs after the begnnng of the amortzaton perod wth respect
to such facty and the prescrbed certfcate s not made, the ta abty for
the precedng ta abe years sha be recomputed dsaowng the amortzaton
deducton prevousy taken. The terms and condtons of a rembursements
and payments of cost, Incudng the terms and condtons wth respect to the
protecton of the Government s nterest, are to be made avaabe to the pubc.
(3) Subsecton (d) (5) of the ouse b provded for reopenng of the statute
of mtatons for the purpose of makng certan ad|ustments on account of a
change n pror amortzaton or deprecaton deductons taken wth respect to
an emergency facty. Ths provson has been retaned but t has been e panded
bo as to cover the recomputaton requred by new subsecton (I) dscussed n (2)
above.
Tte I (Tte III of the ouse ) . Suspenson op nson-Tramme ct
and Certan Provsons of the Merchant Marne ct, 198 .
In the ouse b ths was Tte III and contaned ony one secton (301) sus-
pendng the proft-mtng provsons of the nson ct n the case of contracts
or subcontracts entered nto or competed In any ta abe year sub|ect to the
e cess-profts ta (or whch woud have been sub|ect to the e cess-profts ta f
the contractor or subcontractor had been a corporaton). Ths secton has been
renumbered secton 401 and has been retaned. new sentence has been added
at the end thereof e tendng the same treatment to contracts or subcontracts
entered nto before the begnnng of the ta payer s frst e cess-profts ta year,
f they were not competed at the tme such year began. Such contracts or sub-
contracts, ke contracts or subcontracts entered nto n a ta abe year sub|ect
to the e cess-profts ta , w not be sub|ect to the nson ct even though, at
the tme they are competed, no e cess-profts ta Is n effect.
Your commttee has aso added a new secton 402 suspendng the proft-mtng
provsons of the Merchant Marne ct, 193 , as to subcontracts, whch woud
otherwse be sub|ect to such ct, entered nto by a corporate contractor wth a
corporate subcontractor n any ta abe year of the subcontractor sub|ect to the
e cess-profts ta , uness at the tme such subcontract was entered nto or at
any tme thereafter up to and ncudng the date of ts competon, the prncpa
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Mec.
contractor and the subcontractor were affated. The defnton of affated
appcabe to ths secton s substantay the same as that contaned n secton
2704(b) (1) of the Interna Revenue Code . e., two or more corporatons sha be
deemed to be affated (1) f one corporaton owns at east 95 per cent of the
stock of the other or others, or (2) f at east 95 per cent of the stock of two
or more corporatons s owned by the same nterests. or the purposes of such
rue the term stock s not to ncude nonvotng stock whch s mted and
preferred as to dvdends.
Tte (Tte I of the ouse ). mendments to the Intebka
Revenue Code.
secton 501. earnngs and pbofts of cohpobatonb.
The commttee amendment rearranges secton 401 of the ouse b but other-
wse makes no substanta change. Three new subsectons are added to secton
115 of the Interna Revenue Code reatng to dstrbutons by corporatons.
Subsecton (1) defnes earnngs and profts of a corporaton as the sum of (1)
ts earnngs and profts accumuated after ebruary 28, 1913, (2) ts earnngs and
profts accumuated before March 1, 1913, pus (3) the ncrease (to the e tent
provded n subsecton (n)) n vaue of ts property accrued before March 1, 1913,
but reazed on or after such date.
Subsecton (m) prescrbes rues for the computaton of earnngs and profts
accumuated after ebruary 2S, 1913, and earnngs and profts of the ta abe year
or other perod after ebruary 28, 1913. It deas wth the foowng matters:
1. The bass upon whch gan or oss, for the purposes of determnng such
earnngs and profts, s to be computed.
2. The ad|ustments to be made to such bass n such computaton.
3. The effect upon such earnngs and profts of the appcaton of the nonreeog-
nton provsons of aw to the gan or oss so computed.
4. The effect upon such earnngs and profts of dstrbutons from another cor-
poraton f such dstrbutons actuay reduce the bass of the stock n respect of
whch the dstrbuton s made, or cause such bass to be aocated.
The subsecton provdes that the gan or oss reazed from the sae or other
dsposton (after ebruary 28, 1913) of property sha, for the purpose of com-
putng the earnngs and profts (for any perod begnnng after ebruary 28,
1913), be determned by usng as the ad|usted bass the ad|usted bass (under the
aw appcabe to the year n whch the sae or other dsposton was made) for
determnng gan. or e ampe, stock n the Corporaton was acqured by the
Y Corporaton pror to March 1, 1913, at a cost of 90, ts March 1, 1913, vaue
was 120, and n 1939 t was sod for 100. The bass (under the aw appcabe
to the year 1939) for determnng gan s the cost on March 1, 1913, vaue, whch-
ever s hgher. s the Y Corporaton receved 100 for the stock of the Cor-
poraton, and ts vaue on March 1, 1913, 120, e ceeded ts cost, 90 (assumng
that there are no ad|ustments to be made to the bass), the Y Corporaton reazed
a oss under the provsons of ths subsecton of 20. If such a oss s recognzed
under secton 112, the decrease n the earnngs and profts accumuated by the
Y Corporaton after ebruary 28, 1913, as the resut of ths transacton n 1939
was 20 notwthstandng provsons of the Code to the effect that no deducton
was aowabe n computng net ncome.
The subsecton aso provdes that the reazed gan or oss sha ncrease or
decrease the earnngs and profts (for any perod begnnng after ebruary
28, 1913) to, but not beyond, the e tent to whch such a reazed gan or oss
was recognzed n computng net ncome under the aw appcabe to the year
n whch such sae or dsposton was made. Ths provson reates to gans or
osses whch are recognzed, pursuant to the provsons of aw, for nstance, by
reason of the provsons of secton 112 of the Interna Revenue Code. It does not
reate to osses dsaowed or not taken nto account such as those under secton
24(b), secton 118, and secton 117 of the Code. or e ampe, on anuary 1, 1939,
the Corporaton owned stock n the Y Corporaton whch t had acqured n
1938 n an e change transacton n whch no gan or oss was recognzed. The
ad|usted bass to the Corporaton of the property e changed by t for the
stock n the Y Corporaton was 100. The far market vaue of the stock n the
Y Corporaton when receved by the Corporaton was 1,000. On pr 9, 1939,
the Corporaton decared a cash dvdend of 900 and, e cept for the possbe
effect of the trans-acton n 1938, had no accumuated earnngs or profts. The
e cess of the far market vaue of the stock of the Y Corporaton over the bass,
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54
900, was not recognzed gan under the provsons of secton 112 of the Revenue
ct of 1938. ccordngy, Its earnngs and profts are not ncreased by 900 and
the dstrbuton was not out of earnngs and profts.
The subsecton appes regardess of the form taken by the sae or other dspo-
ston resutng n the accumuaton of earnngs and profts. or e ampe, sup-
pose that o property whch had acqured n 1922 at a cost of 28,000 was
transferred to a corporaton n 1924 n e change for a of ts capta stock
that the far market vaue of the stock and of the property as of the date of
the transfer was 247,000 and that the corporaton, after three years opera-
tons, effected n 1927 a cash dstrbuton to n the amount of 105,000. In
determnng the e tent to whch the earnngs and profts of the corporaton
avaabe for dvdend dstrbutons have ben ncreased as the resut of pro-
ducton and sae of o, t s ntended that depeton shoud be taken nto account
computed upon the bass of 28,000 estabshed n the nonta abe e change n
1924 regardess of the far market vaue of the property or the stock ssued n
e change therefor-.
The subsecton further provdes that where a corporaton receves (after
ebruary 28, 1913) a dstrbuton from a second corporaton whch (under the
aw appcabe to the year n whch the dstrbuton s made) was not a ta abe
dvdend to the sharehoders of the second corporaton, the amount of such
dstrbuton sha not ncrease the earnngs and profts (for any perod begnnng
after ebruary 28, 1913) of the frst corporaton n certan cases of ta -free
dstrbutons. or e ampe, f n the ustraton n the second precedng para-
graph the cash dvdend of 900 was receved by the Z Corporaton, the soe
stockhoder of the Corporaton, t woud be apped (f the ad|usted bass of
the stock s not n e cess of 900) n reducton of the stock n respect of whch
the dstrbuton was made and woud not ncrease the earnngs and profts of the
Z Corporaton.
Provson s aso made for cases n whch the ad|ustment of the bass pre-
scrbed by secton 113 s dfferent from the ad|ustment to such bass proper
for the purpose of determnng earnngs or profts. The effect of such prov-
son may be ustrated by the foowng e ampe: The Corporaton purchased
on anuary 1, 1931, an o ease at a cost of 10,000. The ease was operated
ony for the years 1931 and 1932. The deducton aowed for depeton n each
of the years 1931 and 1932 amounted to 2,750, of whch amount 1,750 repre-
sented percentage depeton n e cess of depeton based on cost. The ease was
sod n 1940 for 15,000. Secton 113(b)(1)( ) of the Interna Revenue Code
provdes that n determnng the gan or oss from the sae of the property the
bass must be ad|usted for cost depeton of 1,000 n 1931 and percentage depe-
ton of . 2,750 n 1932. owever, the ad|ustment of such bass, proper for the
determnaton of earnngs and profts, s 1,000 for each year, or 2,000. ence,
the cost w be ad|usted ony to the e tent of 2,000, eavng an ad|usted bass
of 8,000 and the earnngs and profts woud be ncreased by the reazed gan of
7,000 and not by the ta abe gan of 8,750, the dfference havng prevousy
been taken nto account n computng earnngs and profts.
If n the precedng e ampe the property, nstead of beng sod, was e changed
n a transacton descrbed n secton 112 (b) or (c) for other ke property havng
a vaue of 7,750 and cash of 7,250, then the gan for earnngs and profts
purposes amounts to 7,000, that s, 15,000 ( 7,750 pus 7,250) mnus the base
of 8,000. owever, for net ncome purposes the gan s 8,750, that s, 15,000
mnus 10,000 (ess depeton of 3,750) of whch ony 7,250 s recognzed for
net ncome purposes because such gan can not e ceed the sum of money receved
n the transacton. Secton 112(c)(1), Interna Revenue Code and correspond-
ng provsons of pror revenue aws. If, however, the cash receved was ony
2,2. 0 and the vaue of the property receved was 12,750, then the gan for
earnngs and profts purposes woud be 2,250, that amount beng the gan
recognzed under secton 112.
Of course, mere ncrease or decrease n vaue (after ebruary 28, 1913) of
property whe owned by a corporaton does not ncrease ts earnngs and
profts.
Under varous provsons of the Interna Revenue Code deang wth e changes
and qudatons, the transfer of the property by a corporaton to another cor-
poraton resuts n the nonrecognton, n whoe or n part, of the gan or oss
reazed by the transferor upon such transfer. In such eases we estabshed
prncpes of ncome ta aw requre that the earnngs and profts of the trans-
feror sha go over to the transferee and sha be consdered to be earnngs and
profts of the transferee for ta purposes. These prncpes are to be gven
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ft effect under secton 501. The requrement of secton OI that there sha be
no ncrease or decrease n earnngs and profts by reason of a whoy unrecog-
nzed gan or oss s but another aspect of the prncpe under whch the earnngs
and profts of the transferor become by reason of the transfer the earnngs and
profts of the transferee.
Subsecton (n) prescrbes rues for determnng that part of the earnngs
and profts whch s represented by ncrease n vaue of property accrued but
ot reazed pror to March 1, 1913. It provdes that f any ncrease or decrease
In the earnngs and profts (for any perod begnnng after ebruary 28, 1913),
wth respect to any matter woud be dfferent had the ad|usted bass of the
property nvoved been determned wthout regard to ts March 1, 1913, vaue,
then an ncrease (propery refectng such dfference) sha be made n that
part of the earnngs and profts consstng of ncrease n vaue of property
accrued before March 1, 1913. The foowng e ampes ustrate the appcaton
of ths subsecton:
ampe (1): Nondeprecabe property was acqured pror to March 1, 1913,
at a cost of 8, ts March 1, 1913, vaue was 10, and t was sod thereafter
for 12. The ncrease n earnngs and prcfts based on the March 1, 1913, vaue
Is 2. If the bass was determned wthout regard to the March 1, 1913, vaue
there woud be an ncrease n earnngs and profts of 4. The ncrease to be
made n that part of the earnngs and profts consstng of the ncrease n vaue
of property accrued before March 1, 1913, propery refectng such dfference,
s 2.
ampe (2) : Nondeprecabe property was acqured pror to March 1, 1913,
at a cost of 8, ts March 1, 1913, vaue was 12, and t was sod thereafter for
10. The decrease n earnngs and profts based on the March 1, 1913, vaue s
2. If the bass was determned wthout regard to the March 1, 1913, vaue there
woud be an ncrease n earnngs and profts of 2. The ncrease to be made
In that part of the earnngs and profts consstng of the ncrease n vaue of
property accrued before March 1, 1913, propery refectng such dfference, s 4.
ampe (3) : Nondeprecabe property was acqured pror to March 1, 1913,
at a cost of 10, ts March 1, 1913, vaue was 12, and t was sod thereafter
for 8. The decrease n earnngs and profts based on the March 1, 1913, vaue
Is 4. If the bass was determned wthout regard to the March 1, 1913, vaue
there woud be a decrease n earnngs and profts of 2. The ncrease to be made
In that part of the earnngs and profts consstng of the ncrease n vaue of
property accrued before March 1, 1913, propery refectng such dfference, s 2.
ampe (4) : Deprecabe property was acqured n 1908 for 100,000. s-
sumng no addtons or betterments, the deprecaton sustaned pror to March
1, 1913, was 10,000 so that the ad|usted cost was 90,000. Its March 1, 1913,
vaue was 94,000 and n 1939 t was sod for 0,000. or the purpose of de-
termnng gan from the sae, the bass of the property s the far market vaue
of 94,000 as of March 1, 1913, ad|usted for deprecaton for the perod subse-
quent to ebruary 28, 1913, computed on such far market vaue. If the amount
of the deprecaton deducton aowed (not ess than the amount aowabe)
after ebruary 28, 1913, to the sae n 1939 s the aggregate sum of 43,240 the
ad|usted bass for determnng gan In 1939 ( 94,000 ess 43,240) s 50,7 0 and
the gan woud be 9,240 ( 0,000 ess 50,7 0). The ncrease n earnngs and
profts accumuated snce ebruary 28, 1913, by reason of the sae, based on the
March 1, 1913, vaue ad|usted for deprecaton, s 9,240. If the deprecaton
Snce ebruary 28, 1913, had been based on the cost of 100,000 nstead of the
March 1, 1913, vaue of 94,000, the deprecaton sustaned from that date to the
date of sae woud have been 41,400 nstead of 43,240 and the actua gan on
the sae based on the cost of 100,000 ad|usted by deprecaton on such cost to
48, 00 ( 100,000 ess 10,000 ess 41,400) woud be 11,400 ( 0,000 ess 48,-
00). If the ad|usted bass of the property was determned wthout regard to
the March 1, 1913, vaue there woud be an ncrease In earnngs and profts of
11,400. The Increase to be made n that part of the earnngs and profts con-
sstng of the Increase In vaue of property accrued before March 1, 1913,
propery refectng such dfference, s 2,1 0.
The amendments to the Interna Revenue Code made by secton 501(a) are by
secton 501(c) made appcabe to a pror Revenue cts, effectve as f they
were a part of such ct on the date of ts enactment, thus effectng the appca-
ton of a unform rue for the determnaton of the earnngs and profts of a
corporatons for a pror ta abe years. The ast sentence of the subsecton
provdes that ony the actua ta abty of a sharehoder ta payer for a par-
tcuar year whch Is now pendng before, or heretofore determned by, the
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548
oard of Ta ppeas or any court of the Unted States, sha reman unaffected
by the provsons of secton 501. These cases now actuay n tgaton are eft
to be determned as the oard or the court may see ft. The resut s that the
decson n each of these cases w merey determne the ta abty for the
partcuar year of the partcuar ta payer, but for every other purpose the de-
termnaton of the earnngs and profts, and of a matters dependent upon such
determnaton the provsons of secton 501 govern. Secton 501 w therefore
contro for a purposes as respects the corporaton, and as respects the share-
hoder n tgaton for every purpose e cept that the ta abty for the par-
tcuar year, as fnay determned by the oard or the court, w reman
undsturbed.
S CTIONS 502-508 (S CTIONS 402-408 O T OUS ILL). T ON S R OLD RS O
P RSON L 8 IC CORPOR TIONS ST TUT O LIMIT TIONS IN T C S O CON-
STRUCTI DI ID NDS CR DIT O NONR SID NT LI N O T S S R OLD R IN
P RSON L S R IC CORPOR TION CR DIT O OR IGN CORPOR TION O T S S R -
OLD R IN P RSON L S R IC CORPOR TION C NG IN N M O ISTING C SS-
PRO ITS T PU LICITY O R TURNS O SU C PT R C SS-PRO ITS T
T C NIC L M NDM NTS.
These sectons are the same as sectons 402-408 of the ouse b.
1940-43-104G3
S COND R NU ILL O 1940.
Mouse of Representatves Report No. 3002, Seventy-s th Congress, Thrd Sesson.
September 30, 1040.
Mr. Doughton, from the commttee of conference, submtted the foowng
conference report to accompany II. It. 10413 :
The commttee of conference on the dsagreeng votes of the two ouses on
the amendments of the Senate to the b ( . . 10413) to provde revenue, and
for other purposes, havng met, after fu and free conference, have agreed
to recommend and do recommend to ther respectve ouses as foows:

ST T M NT OP T M N G RS ON T P RT O T OUS .
The managers on the part of the ouse at the conference on the dsagreeng
votes of the two ouses on the amendments of the Senate to the b ( . .
10413) to provde revenue, and for other purposes, submt the foowng state-
ment n e panaton of the effect of the acton agreed upon by the conferees and
recommended n the accompanyng conference report:
mendment No. 1: Ths amendment strkes out Tte I (e cess-profts ta ) of
the ouse b and substtutes Tte I (corporaton ncome ta ) and Tte II
(e cess-profts ta ) and the ouse recedes wth an amendment.
Tte I of ths amendment beng new and Tte II beng n effect Tte I of the
ouse b wth amendments, the ncton on ths amendment w be dscussed
secton by secton.
Tte I Corporaton Income Ta .
Uoune b. There s no comparabe provson In the ouse b. Secton 710
of the e cess-profts ta as passed by the ouse dd, however, provde, as part
of the e cess-profts ta n the case of corporatons whch eected to compute
ther e cess-profts credt on the average earnngs pan, for the payment of an
addtona amount equa to 4 o per cent of the norma ta net Income.
Senate, amendment. The Senate amendment ncreased by 3 o per cent the
corporate ncome ta of a corporatons (e cept nonresdent foregn corpora-
tons ta abe under secton 231(a)). Such ncrease apped to the entre rate
schedue contaned n sectons 13 and 14, that s, whether or not the corporaton s
norma ta net ncome was In e cess of 25,000. The permanent corporate ta
rate appcabe to corporatons not entted to the speca treatment provded for
sma corporatons was therefore 22 o per cent. It was provded, however,
that n computng the 10 per cent ncrease n ta Imposed by secton 15 of the
Interna Revenue Code, added to such code by secton 201 of the rst Revenue
ct of 1940, the corporate ta pror to the 3 o per cent ncrease contaned n
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the Senate amendment was to be used as the bass for such computaton. Thus,
the genera effectve rate appcabe to corporatons wth norma-ta net ncomes
In e cess of 31,9 4.30, so ong as the defense-ta provsons of secton 15 were
In force, woud be 24 per cent.
Conference agreement. Under the conference agreement, there s no ncrease
of the Chapter 1 ta of corporatons whose norma-ta net ncome s not n e cess
of 25,000, f such corporatons are entted to the treatment provded by secton
14 of the Interna Revenue Code. In the case of corporatons whose norma-ta
net ncome s sghty n e cess of 25,000 and whch are ta abe as provded
n secton 13, the fu S o per cent ncrease s not appcabe n fact unt the
norma-ta net ncome reaches 38,5 5.89. Lke the Senate amendment, the b
as agreed to n conference provdes that the addtona 10 per cent mposed by
the rst Revenue ct of 1940 s to be fgured on the bass of the permanent rates
pror to ther ncrease by the b. Therefore, n the case of corporatons whose
norma-ta net ncome s sghty n e cess of 25,000, the 10 per cent ncrease
may be computed on the bass of the ta (at the unncreased rates) under the
genera rue, even though the corporaton may st be sub|ect to the aternatve
ta under the b. The appcabe rates under the conference agreement are
ustrated by the foowng tabe:
Permanent rate.
dd-
tona
Tempo-
rary
add-
tona
rate
Tota
norma
ta rate.
stng
aw.
rate
under
the con-
ference
Tota.
(defense
ta ).
Corporatons wth norma ta net Incomes not n
b.
e cess of 31,9 4.30:
Per cent.
Per cent.
Per cent.
Per cent.
Per cent.
rst 5,000
13.50
0
13.50
1.35
14.85
Ne t 15,000
15.00
0
15.00
1.50
1 .50
Ne t 5,000-
17.00
0
17.00
1.70
18.70
et ,9 4.30
83.00
2
5.00
8.30
38.30
Corporatons wth norma-ta net Incomes In e cess
of 31,9 4.30, but not n eccss of 38,5 5.89:
18.50
0
18.50
1.9
1 .4
Net 15,000
15.00
0
15.00
1.9
1 .9
Ne t 5.000
17.00
0
17.00
L9
18.9
Corporatons wth norma-ta net Incomes n e cess
83.00
2
8 .00
LI
3 .9
of 38,5 5.89
19.00
8.1
22 10
L9
24.00
1 Ths s the notch provson. The specfed rate, couped wth the ow rates appcabe to the frst
2 ,000, does not produce an effectve rate as hgh as that appcabe to arge corporatons unt the norma-
ta net ncome reaches 31,9 4.30, In the case of e stng aw, and 3S,5 5.89, under the b.
In ths group woud aso fa mutua nvestment companes and foregn corporatons not ta abe under
Moton 231 (a), regardess of the amount of ther ncome.
Tte II (Tte I or ouse ) cess-Profts Ta .
S CTION 710. IMPOSITION O T ,
ouse b. Under the ouse b, the e cess-profts ta Imposed upon corpo-
ratons whch eected to compute ther e cess-profts credt on the ncome pan
conssted of 4 o per cent of the corporaton s norma-ta net ncome pus a
graduated ta of from 25 to 50 per cent of the corporaton s ad|usted e cess-
profts net ncome. The e cess-profts ta mposed upon corporatons whch
eected to compute ther e cess-profts credt on the nvested capta method
conssted soey of a graduated ta of from 20 to 45 per cent of the corporaton s
ad|usted e cess-profts net ncome. The term ad|usted e cess-profts net ncome,
whch consttuted the measure of the graduated ta , was defned as the e cess-
profts net ncome ess a specfc e empton of 5,000 and the amount of the
ta payer s e cess-profts credt for the ta abe year.
In the case of any corporatons whch had been through certan types of
ta -free e changes, ad|ustments were to be made n the doar amounts con-
sttutng the dvdng nes between te varous brackets. If, for e ampe,
a corporaton, n a ta -free transacton, spt up nto two corporatons, the rate
schedue was ad|usted so that the sum of the amounts of Income of both corpo-
ratons sub|ect to each bracket woud not e ceed the amount of Income whch
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woud have been ta ed n such bracket had the orgna corporaton remaned
ntact. The amount n each bracket was dvded between the two corporatons
on the bass of the reatonshp of ts nvested capta mmedatey after the
e change to the nvested capta of the orgna corporaton mmedatey pre-
cedng the e change. To accompsh ths resut, snce secton 759 requred a
smar ad|ustment to be made n the case of the preferenta rate amount, whch
n the case of corporatons whch had not been through a pror ta -free e change
was aways 500,000, the rato of the ta payer s preferenta rate amount to
500,000 was, as a matter of convenence, apped n the ad|ustment of the doar
amounts n the rate schedue provded by secton 710.
Senate amendment. The addtona 4 10 per cent of the norma-ta net ncome
of corporatons eectng the e cess-profts ta based on average earnngs was
emnated. The 5 per cent dfferenta n rate between corporatons computng
ther e cess-profts credt on the nvested-capta pan and corporatons com-
putng ther e cess-profts credt on the ncome pan was aso emnated and the
25 to 50 per cent graduated rate schedue appcabe under the ouse b to
corporatons eectng the ncome credt was made appcabe to a corporatons.
owever, such rate schedue w s further modfed so as to make the dvdng
ne between the brackets depend upon specfed doar amounts of ad|usted
e cess-profts net ncome ony f such specfed doar amounts are greater than
aternatve amounts representng specfed percentages of the e cess-profts
credt. The rate schedue contaned n the Senate amendment s as foows:
Twenty-fve per cent of so much of the ad|usted e cess-profts net ncome as
does not e ceed the greater of 20,000 or 20 per cent of the e cess-profts credt
Thrty per cent of so much of the ad|usted e cess-profts net ncome as e ceeds
the greater of 20 000 or 20 per cent of the e cess-profts credt and does not e ceed
the greater of 50,000 or 40 per cent of such credt
Thrty-fve per cent of so much of the ad|usted e cess-profts net ncome as
e ceeds the greater of 50,000 or 40 per cent of the e cess-profts credt and does
not e ceed the greater of 100,000 or 0 per cent of such credt
orty per cent of so much of the ad|usted e cess-profts net Income as e ceeds
the greater of 100,000 or 00 per cent of the e cess-profts credt and does not e -
ceed the greater of 250,000 or SO per cent of such credt
orty per cent of so much of the ad|usted e cess-profts net ncome as e ceeds
the greater of 250,000 or 80 per cent of the e cess-profts credt and does not
e ceed the greater of 500,000 or 100 per cent of such credt and
fty per cent of so much of the ad|usted e cess-profts net ncome as e ceeds
the greater of 500,000 or 100 per cent of the e cess-profts credt.
The ad|ustment n the rate schedue requred n the case of ta payers whch
had been through certan types of ta -free transactons was emnated.
The defnton of ad|usted e cess-profts net ncome contaned n the ouse
b was retaned e cept that the specfc e empton aowabe n computng such
ad|usted e cess-profts net ncome was ncreased from 5,000 to 10,000.
Conference agreement. Under the conference agreement, the e cess-profts
ta of a corporatons, whether computng ther e cess-profts credt on the n-
come or nvested-capta pan, s based soey on the foowng rate schedue:
Rate of to
mount of ad|usted e cess-profts net ncome: percent).
rst 20,000 25
Ne t 30,000 30
Ne t 50,000 , 35
Ne t 150,000 r t
Ne t 250,000 45
Over 500,000 0
Ths was the graduated schedue appcabe to corporatons computng ther
e cess proft on the ncome pan under the ouse b and was the schedue
appcabe to a corporatons under the amendment as reported by the Senate
nance Commttee.
The ad|ustment n the above rate schedue whch was requred, under the
ouse b, n the case of ta payers whch had been through certan types of
ta -free transactons has been restored, wth cerca changes.
The specfc e empton aowabe n computng the ad|usted e cess-profts
net ncome has been restored to 5,000. n addtona credt s aso aowed,
n computng such ad|usted e cess-profts net ncome, to corporatons whose
norma-ta net ncome for the ta abe year s not In e cess of 25,000, such
addtona credt to consst of the amount f any, by whch the e cess-profU
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551
credt for the precedng ta abe year e ceeded the e cess-profts net Income
for such year. It s understood that the Treasury and members of the staff of
te ont Commttee on Interna Revenue Ta aton w study the operaton of
ths mted carry-over, wth a vew to ts possbe e tenson or modfcaton,
and w report to the approprate commttees on the sub|ect as soon as possbe.
S CTION 711. C SS-PRO ITS N T INCOM .
ouse b. Under the ouse b the e cess-profts net ncome was defned to
be the norma-ta net ncome wth certan ad|ustments.
Senate amendment. In addton to certan technca amendments, the Senate
amendment made the foowng changes n and addtons to the ad|ustments
contaned n the ouse b:
(1) The addtona deducton on account of corporate ncome ta es was
modfed so as to e cude the secton 102 ta mposed on corporatons mprop-
ery accumuatng surpus. Under both the ouse and Senate bs, how-
ever, the norma corporate Income ta (after the aowance of the foregn ta
credt) for the ta abe year for whch the e cess-profts net ncome s beng
computed s aowabe as an addtona deducton.
(2) The treatment of gans and osses on deprecabe assets hed for more
than 18 months as ong-term capta gans and osses and ther consequent
e cuson from the computaton was emnated. In eu thereof a provson
was nserted provdng that ony the e cess of gans arsng from the sae or
e change of such assets over any osses arsng therefrom shoud be e cuded
from the computaton. The effect of ths provson s to aow osses from the
ae or e change of deprecabe assets hed for more than 18 months to be
deducted from ordnary ncome to the e tent such osses e ceed the gans from
smar transactons.
(3) The ad|ustment on account of ncome derved from the retrement or
dscharge of bonds, etc., was rewrtten to make certan that amounts whch
woud be otherwse ncudbe upon su h retrement or dscharge on account
of any premum receved upon ssuance shoud be eft out of the computaton,
and that the ad|ustment shoud appy athough the ndebtedness retred or ds-
charged Is ndebtedness whch has been assumed by the ta payer and athough
It s evdenced, so far as the ta payer s concerned, ony by a contract wth the
person whose abtes have been assumed.
(4) correspondng ad|ustment was added requrng that certan deductons
otherwse aowabe on account of the retrement or dscharge of bonds, etc.,
shoud be e cuded from the computaton.
(5) new ad|ustment was added, appcabe ony to ta abe years after
the base perod, requrng the e cuson of ncome attrbutabe to refunds of
grcutura d|ustment ct ta es and nterest upon such refunds.
( ) It was aso provded that, f the e cess-profts credt s computed under
the nvested-capta pan, the norma-ta net ncome shoud be ncreased by
an amount equa to the nterest on Unted States obgatons and the obga-
tons of edera nstrumentates not specfcay e empted from e cess-profts
ta es and. n addton thereto, the nterest on a other edera, State, or oca
obgatons, f the ta payer eects, under secton 720(d) (added by the Senate
amendment), to treat a such other obgatons as admssbe assets for the
ta abe year.
(7) Losses arsng from the demoton, abandonment, and oss of usefu
vaue of property are e cuded from the computaton of e cess-profts net
ncome for ta abe years n the base perod.
(8) n addtona ad|ustment was provded, appcabe ony to ta abe
years n the base perod, to the effect that deductons attrbutabe to any
cam, award, |udgment, or decree aganst the ta payer, or nterest thereon,
woud not be requred to be taken nto account f, n the ght of the ta -
payer s busness, t s abnorma for the ta payer to ncur a abty of such
character or, f the ta payer normay ncurs abtes of such character,
the amount of the partcuar abtes of such character n the ta abe year
s grossy dsproportonate to the average amount of abtes of such char-
acter n each of the four prevous ta abe years.
(9) Income attrbutabe to the recovery of a bad debt, f a deducton from
gross Income was aowed wth reference to such debt was aowed from
gross ncome for a ta abe year begnnng pror to anuary 1, 1940, s e cuded
n the case of ta abe years after the base perod.
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(10) new ad|ustment, appcabe to both the ta abe years In the base
perod and ta abe years after the base perod n the case of corporatons
computng ther e cess-profts credt under the ncome pan, was added re-
qurng the e cuson of any deductons n connecton wth e poraton, ds-
covery, prospectng, research, or deveopment of tangbe property, patents,
formuae, or processes, or any combnaton of the foregong.
(11) Corporatons computng ther e cess-profts credt under the ncome
pan are gven the same dvdends receved credt, both for ta abe years n
the base perod and for ta abe years after the base perod, as s gven to
corporatons computng ther e cess-profts credt on the nvested capta pan,
. e., the fu amount of a dvdends receved, e cept dvdends on stock of
a foregn persona hodng company.
(12) mounts receved pursuant to an award of the M ed Cams Comms-
son, Unted States and Germany, are e cuded from ncome for ta abe years
after the base perod n the case of corporatons computng ther e cess-
profts credt under the ncome pan.
(13) In case of ta abe years n the base perod, the deducton under secton
23(k) for bad debts s decreased by an amount representng unrecovered oans
made by a parent corporaton to Its subsdary, n so far as such deducton
ncudes an amount representng such unrecovered oans.
In addton to appyng secton 117 of the Interna Revenue Code (reatve to
capta gans and osses) to ta abe years n the base perod, whch was done n
the ouse b, the Senate amendment appes secton 23 (g) and (k) to such
ta abe years n order that ong-term osses due to securtes (stocks and bonds)
havng become worthess woud be dsaowed n computng e cess-profts net
ncome for ta abe years n whch such osses were not treated as capta osses
under the ncome-ta aw appcabe to such years.
Conference agreement. Wth the e ceptons and modfcatons descrbed be-
ow, the Senate provson s adopted:
(1) The ad|ustment reatve to ncome reazed upon the retrement or ds-
charge of bonds, etc., has been further redrafted so as to make certan that the
e cuded ncome on account of the ssuance of the bonds at a premum reates
ony to premum unamortzed on the date of retrement or dscharge. There s
not to be e cuded from ncome the accrued amortzaton of bond premum for that
porton of the ta abe year precedng such retrement or dscharge.
(2) The ad|ustment requrng that certan deductons otherwse aowabe
on account of the retrement or dscharge of bonds, etc., shoud be e cuded from
the computaton has been emnated for ta abe years after the base perod.
s retaned reatve to ta abe years n the base perod, t has been redrafted
so as to make certan that the e cuded deducton on account of the ssuance
of bonds, etc., at a dscount reates ony to dscount unamortzed on the date of
the retrement or dscharge. The ordnary deducton for amortzaton of bond
dscount accrued for that porton of the ta abe year precedng the retrement
or dscharge s not to be e cuded from the computaton.
(3) The ad|ustment reatve to nterest on edera, State, and oca obgatons
has been revsed as foows: The dstncton between certan Unted States obga-
tons and obgatons of edera nstrumentates, on the one hand, and a other
edera, State, or oca obgatons, on the other, has been emnated, and the
treatment of a such obgatons has been made optona wth the ta payer.
Instead of requrng the ta payer to eect to treat such obgatons as admssbe
assets and havng the ta aton of the nterest derved therefrom foow as a
consequence, however, the conference agreement provdes that the ta payer s
eecton sha be wth respect to the ncuson of the nterest n ncome and that,
f such an eecton s made, the obgatons from whch such nterest was derved
sha be treated as admssbe assets for the ta abe year. See dscusson under
secton 720. ta payer must eect as to a such nterest and may not eect
as to ony a porton thereof.
(4) The ad|ustment requrng the e cuson of any deducton n connecton wth
e poraton, etc., has been emnated as to ta abe years after the base perod.
s retaned reatve to ta abe years n the base perod, the ad|ustment has been
mted to deductons aowed n respect of e pendtures for ntangbe drng
and deveopment costs pad or ncurred n or for the drng of wes or the
preparaton of wes for the producton of o or gas, or for deveopment costs n
the case of mnes. Such deductons are e cuded ony f and to the e tent that
n the ght of the ta payer s busness t s abnorma for the ta payer to ncur
a abty of such character or, f the ta payer normay ncurs such abty,
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ony to the e tent that the amount of such abty n the ta abe year n queston
was grossy dsproportonate to the amount of such abty n the four prevous
ta abe years.
(5) Corporatons computng ther e cess-profts credt on the ncome pan are
aowed a dvdends receved credt of 100 per cent of the dvdends receved from
a domestc corporaton, nt, unke corporatons on the nvested-capta pan, are
gven no credt for dvdends receved from a foregn corporaton. Such dv-
dends, however, f ther recept consttutes n abnormaty, are entted to the
treatment provded by secton 721.
(t) The specfc ad|ustment e cudng from ncome awards of the M ed Cams
Commsson has been emnated, snce t s aready covered by the genera pro-
vsons of secton 721. Such ncome woud be abnorma n knd, and, to the
e tent t consttuted compensaton or past osses, woud be attrbutabe to the
years such osses occurred. Most of these awards of the M ed Cams Com-
msson were pad many years ago. owever, a number of awards to mercan
natonas were rendered by the Commsson ony recenty and have not yet been
pad. The conferees were unanmous that such awards when pad, to the e tent
they do not ncude current nterest, shoud not and woud not be sub|ect to the
e cess-profts ta . Secton 711(a)(1) (I) of Senate amendment has been
omtted from the b us agreed to n conference by reason of the fact that the
conferees are convnced (and have the assurances of the Treasury) that secton
721 of the b accompshes the same resut, snce the very nature of the award
makes any resutng ncome abnorma, and none of the amounts pad pursuant
to such awards w be attrbutabe to any ta abe year begnnng after December
31, 1939, wthn the meanng of such secton. In so far as such amounts are
propery ncudbe n the norma ta net ncome of the recpents, they w, of
course, be sub|ect to the norma ta n the year n whch they are accrued or (n
the case of recpents upon the cas recepts bass) are actuay receved.
(7) The ad|ustment n the base perod on account of bad debts representng
unrecovered oans made by a parent corporaton to a subsdary has been
emnated.
S CTION 712. OW NC O C SS-PRO ITS CR DIT.
ouse h. Under the ouse b a domestc corporaton was permtted to
choose between the ncome credt and the nvested capta credt ony f t had
been n e stence durng the entre 48 months pror to the begnnng of ts frst
ta abe year whch began n 1940. oregn corporatons sub|ect to e cess-profts
ta were requred to compute ther e cess-profts credt on the ncome pan f
they were n e stence durng the entre 48 months pror to the begnnng of
ther frst e cess-profts ta ta abe year begnnng n 1940 and were engaged n
trade or busness wthn the Unted States or had an offce or pace of busness
theren at any tme durng each of the ta abe years n the 48 months pror to
such date. other domestc and foregn corporatons sub|ect to e cess-profts
ta were requred to compute ther e cess-profts credt on the nvested-capta
pan.
Senate amendment. Under the Senate amendment a domestc corporatons
whch have been n e stence pror to anuary 1, 1040, and a foregn corpora-
tons whch, under the ouse b, were requred to compute ther e cess-profts
credt on the ncome pan, are permtted to choose between the ncome and the
nvested-capta pan. other corporatons, ncudng corporatons whch for
any ta abe year do not fe returns, must compute ther e cess-profts credt
on the nvested-capta pan.
Conference agreement. The Senate provson s adopted.
S CTION 713. C SS-PRO ITS CR DIT S D ON INCOM .
ouse h. Under the ouse b a ta abe years In the base perod, ncud-
ng ta abe years for whch there were defcts, were taken nto account n
computng the average base perod net ncome, e cept that the oss for one
defct year (the argest, f the ta payer had more than one) was not to be
apped n reducton of the aggregate ncome for other years. In ascertanng
the average, however, the perod covered by such ta abe year was taken nto
account, . e., the aggregate for the other years was dvded by the tota number
of years n the base perod, not by such tota number ess one.
290217 11 3
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Senate amendment. In eu of the treatment reatve to defcts contaned In
the ouse b, the Senate amendment provdes that a ta payer may entrey
e cude one base perod ta abe year In computng ts average earnngs. Not
ony may the e cess-profts net Income or the defct for such year be e cuded
from the computaton, but the perod embraced by such ta abe year s e cuded
n ascertanng the average base perod net ncome for the base perod. Thus,
f the base perod ncudes four caendar years and the ta payer chooses to
drop one of such years out of the computaton, the aggregate ncome for the
remanng three years s dvded by 8, and not by 4, n ascertanng the base
perod average.
Snce under the Senate amendment a domestc corporatons whch have been
n e stence pror to anuary 1, 1940, are permtted to choose between the
ncome and the nvested capta pan, even though they may not have been n
e stence durng the entre base perod, the Senate amendment aso provdes
for a constructve e cess-profts net Income n the case of corporatons eectng
the ncome pan for such porton of the base perod as the corporaton was not
n e stence. Such e cess-profts net ncome s to be computed n the same
manner as the ouse b provded n the case of corporatons eectng the
nvested-capta pan, . e., 8 per cent of the nvested capta for the day foowng
the cose of the base perod, reduced by the same rato of nadmssbes as s
appcabe to the ast year of the base perod.
The ad|ustment on account of capta addtons and reductons was amended
0 as to treat 100 per cent of the stock of another corporaton owned by the
ta payer as e cuded capta. Ths conforms wth the change made n the
dvdends receved credt of corporatons computng ther e cess-profts credt
on the ncome pan.
Conference agreement. The Senate provson permttng the compete e cu-
son of one year n the computaton of average base perod net ncome has been
emnated, and the ouse provson reatve to the treatment of defct years
has been restored. In addton, t s provded that, n computng the ncome
credt, the amount thereof, pror to ad|ustment on account of capta addtons
or capta reductons, sha be 95 per cent of the average base perod net ncome
nstead of 100 per cent of such average base perod net ncome. Ths 5 per cent
reducton of the average base perod net ncome s n eu of the ouse provson
whch ncuded an addtona 4 w per cent of the norma-ta net ncome In the
e cess profts ta of corporatons eectng the ncome pan and provded a 5 per
cent dfferenta n the graduated rate schedue appcabe to such corporatons.
In vew of the conference agreement on sectons 711 and 712, the Senate pro-
vson reatve to a constructve e cess profts net Income n the case of corpora-
tons n e stence durng part, but not a. of the base perod has been retaned,
and the treatment of corporate stock as e cuded capta has been mted to the
stock of domestc corporatons.
S CTION 714. C SS-PRO ITS CR DIT S D ON IN ST D C PIT L.
ouse b. Under the ouse b the nvested capta credt for any ta abe
year refected, n part, the base perod e perence of the ta payer. In genera,
the e cess-profts credt conssted of an amount representng the base perod rate
of return (but not ess than 7 per cent or more than 10 per cent on the frst
5 ),000 and not ess than 5 per cent or more than 10 per cent on the remander)
on so much of the corporaton s nvested capta for the ta abe year as dd not
e ceed ts nvested capta at the cose of the base perod, pus 10 per cent of so
much of the remanng Invested capta as dd not brng the tota nvested capta
beyond 500,000, and 8 per cent of the remander.
Senate amendment. Under the Senate amendment the base perod e perence
of a corporaton eectng the Invested capta credt s emnated from consdera-
ton. The e cess-profts credt of any such corporaton s 8 per cent of the
ta payer s nvested capta for the ta abe year, wthout regard to ts earnngs
record In the base perod.
Conference agrcetnent. The conference agreement adopts the Senate provson.
S CTIONS 715-718. IN ST D C PIT L.
The ony change, other than cerca and technca changes, made by the Senate
amendment n these sectons of the ouse b was the nserton of a new sentence
n secton 715 authorzng the Commssoner of Interna Revenue, pursuant to
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reguatons, to permt. In the computaton of nvested capta, the use of averages
or ratos on a monthy, annua, or other approprate hass, where n hs opnon
the crcumstances do not requre day computaton.
Under the conference agreement, the authorzaton to compute nvested capta
on some bass other than a day bass s mted to cases where such other method
w not cause the nvested capta to vary by more than 1,000 from the nvested
capta computed on a day bass. The conference agreement aso makes further
technca changes n order to emnate dupcatons n the computaton of equty
nvested capta. Provsons have been nserted governng the e tent to whch
the equty nvested capta of a parent corporaton s to be ncreased or decreased
foowng a qudaton under secton 112(b) ( ). Ths provson enabes the
provsons of secton 718(b)(3) to be e panded so as to cover a stuatons n
whch, under the doctrne of Commssoner v. Sansome ((30 ed. (2d), 931), the
earnngs and profts of one corporaton become the earnngs and profts of another.
proper appcaton of the provsons of secton 718 prevents, t s beeved, m-
proper dupcatons n the case of the merger or consodaton of two or more
corporatons, one of whch owns stock n the other for the sake of carty, how-
ever, subsecton (c) (4) has been nserted deang wth the merger or consoda-
ton of two or more corporatons, one of whch owns stock n the other. In case
the corporaton whose stock s owned by the other s merged nto the other, no
correspondng provson s necessary, snce the property transferred In the merger
represented by such stock s not wthn any provson of secton 718(a).
S CTION 719. ORROW D IN ST D C PIT L
Souse b. Under the ouse b borrowed capta (. e.. Indebtedness evdenced
by a bond, note, b of e change, debenture, certfcate of ndebtedness, mortgage,
or deed of trust) was ncuded n nvested capta under a graduated mtaton
at varyng percentages (100, , 33 ), these percentages dependng upon the
sze of the corporaton.
Senate amendment. Under the Senate amendment a borrowed capta s n-
cuded n nvested capta at 50 per cent, regardess of the sze of the corporaton.
orrowed capta s defned to mean, n addton to the types of ndebtedness
descrbed n the ouse b, certan amounts receved as advance payment In
connecton wth a contract wth a foregn government to furnsh artces, ma-
teras, or suppes, to the e tent such amounts woud be repayabe, pursuant to
the terms of the contract, f canceaton by such foregn government occurred at
the begnnng of the day for whch the borrowed capta s beng ascertaned.
Such contract must have been made before the e praton of 30 days after the
date of enactment of the b.
Conference agreement. The Senate provson has been adopted, e cept that the
cause reatve to amounts repayabe to a foregn government has been redrafted
so as to make certan that the amounts Incuded as borrowed capta thereunder do
not ncude amounts treated as ncome and therefore refected n equty nvested
capta through the accumuated earnngs and profts account,
S CTION 720. DMISSI L ND IN DMISSI L SS TS.
ouse b. Under the ouse b, n addton to corporate stock, a edera,
State, and oca obgatons were treated as Inadmssbe assets for the ta abe
year, and the nterest derved therefrom was not ncuded n norma-ta net
Income, upon the bass of whch the e cess-profts net ncome was computed.
Senate amendment. Under the Senate amendment a Unted States obga-
tons and obgatons of edera Instrumentates, the nterest from whch s not
e empt from e cess-profts ta aton, are treated as admssbe assets and the
nterest derved therefrom s sub|ect to ta . In addton, the ta payer may eect
to treat a other edera, State, and oca obgatons as admssbe assets for
the ta abe year. If such an eecton s made, the norma ta net ncome s n-
creased by the amount of nterest derved from such obgatons. The ta payer
s requred to make a snge eecton reatve to a such obgatons and may not
eect as to ony a porton thereof.
Conference agreement. Under the conference agreement the dsncton between
certan Unted States obgatons and obgatons of edera nstrumentates,
on the one hand, and of other edera, State, and oca obgatons, on the other,
Is emnated. The ta payer s eecton, nstead of beng an eecton to treat the
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55
ohtrntons n queston as admssbe assets, Is an eecton to ncude the nterest
derved therefrom n norma ta net ncome. It s provded that, f such an
eecton s made, the obgatons from whch such ncuded nterest s derved are
treated as admssbe assets for the ta abe year.
S CTION 721. NORM LITI S IN INCOM IN T L P RIOD.
Uo.tr b. There were no comparabe provsons n the ouse b.
Senate amendment. Secton 721(a) of the Senate amendment was desgned to
provde reef n the case of
(1) Income arsng out of a cam, award, |udgment, or decree, or out of nter-
est on any of the foregong
(2) Income receved wth respect to a contract whose performance requred
more than one year
(3) Income resutng from the e poraton, dscovery, prospectng, research, or
deveopment of tangbe property, patents, formuas, or processes, or any comb-
naton thereof, by the ta payer or any of ts predecessors, provdng that such
e poraton, etc., e tended over a perod of more than one year
(4) Income whch s requred to be ncuded for the ta abe year as a resut of
a change n the ta payer s accountng perod or method of accountng
(5) Income receved by the essor of rea property on the termnaton of the
ease as a resut of mprovements on the property durng the ease.
ny of the above types of ncome whch s abnorma n knd, or whch, n the
ght of the ta payer s e perence n the four prevous ta abe years, s abnorma
In amount, s entted to the foowng treatment:
The amount thereof attrbutabe to any prevous ta abe year or years Is to
be determned under rues and reguatons prescrbed by the Commssoner wth
the approva of the Secretary. In the case of ncome from e poraton, etc., the
Commssoner s requred to aocate n equa amounts so much of such ncome as
s not attrbuted to the ta abe year to each of the precedng years (not e ceedng
fve) durng whch the e poraton, etc., was conducted. The e cess-profts ta
for the ta abe year sha not e ceed the e cess-profts ta for such ta abe year
computed wthout ncudng such ncome n gross Income, pus the aggregate of
the addtona e cess-profts ta es whch woud have been payabe n each of the
precedng ta abe years (ncudng the current ta abe year) to whch a porton
of such ncome s attrbuted f such porton had been ncuded n ncome n such
year.
Secton 721(b) provdes a 2-year carry-over of the unused e cess-profts credt
for any ta abe year begnnng after December 81, 1939, In the case of corpora-
tons 80 per cent or more of whose gross ncome Is derved from mnng or
processng mneras or from processng or otherwse preparng for market any
seasona frut or vegetabe, or any fsh or other marne fe. The unused e cess-
profts credt for any ta abe year Is the amount by whch the e cess-profts credt
for such ta abe year e ceeds the e cess-profts net ncome for such ta abe year.
Conference agreement. The conference agreement retans secton 721 wth
the foowng modfcatons:
(1) The tem reatve to Income resutng from e poratons, etc., has been
rewrtten. The e poraton, etc., from whch the Income Is derved must be the
ta payer s own e poraton. Income resutng from actvtes of such a character
carred on by a predecessor corporaton s not entted to the treatment provded
In secton 721.
(2) The tem reatve to Income arsng from the termnaton of a ease has been
broadened so as to Incude a ncome arsng from such source and not merey
Income occasoned by Improvements on the property durng the term of the ease.
(3) new category of potentay abnorma ncome has been added, consstng
of dvdends on stock of foregn corporatons, e cept foregn persona hodng com-
panes. Ths s part of the conference agreement reatve to the dvdends receved
credt of corporatons computng ther e cess-profts credt on the ncome pan.
ee secton 710.
(4) The f ed rue of aocaton appcabe to Income resutng from e poraton,
etc., has been emnated.
(5) new provson Is nserted makng certan that Income attrbuted to any
future year or years w be Incuded n e cess-profts net Income for such future
year or years and sub|ected to e cess-profts ta .
( ) Subsectons (b) and (c), provdng for a speca 2-year carry-over of the
nnused e cess-profts credt n the case of certan busnesses, are emnated.
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8 CTION T2 (S CTION 121 O T S N T M NDM NT). D USTM NT O
NORM LITI S IN INCOM ND C PIT L.
Secton 721 a of the Senate amendment provdes that the Commssoner sha
have authorty to make any ad|ustments whch abnormay affect ncome or cap-
ta, and that hs decson sha be sub|ect to revew by the oard of Ta ppeas.
Conference agreement. Under the conference agreement secton 721 a s re-
numbered secton 722 and gven the headng d|ustment of bnormates of
Income and Capta. It grants the Commssoner authorty to ad|ust any tems
whch abnormay affect ncome or capta, and provdes that the Commssoner s
decson sha be sub|ect to revew by the oard of Ta ppeas. It s understood
that the Treasury and members of the staff of the ont Commttee on Interna
Revenue Ta aton w gve further study to the entre probem covered by ths
secton and w report to the approprate commttees on the sub|ect as soon as
possbe.
S CTIONS 723 ND 72-1 (S CTIONS 722 ND 723 O T S N T M NDM NT ND S C-
TIONS 721 ND 722 O T OUS ILL). UITY IN ST D C PIT L IN SP CI L
C S S OR IGN CORPOR TIONS, IN ST D C PIT L.
In addton to changes n secton numbers, a cerca change was made by the
Senate amendment because of the changes made In secton 714. The Senate pro-
vson s adopted wth a further change n secton number.
S CTION 724 (S CTION 723 O T OUS ILL). P RSON L S R IC CORPOR TION
ouse b. The ouse b aowed a persona servce corporaton an eecton
to have ts ncome ta ed n the hands of Its sharehoders n eu of payng an
e cess-profts ta . persona servce corporaton was defned to mean a corpo-
raton whose ncome s attrbutabe prmary to the actvtes of sharehoders
who are reguary engaged n the actve conduct of the affars of the corporaton
and are owners at a tmes durng the ta abe year of at east 80 per cent n
vaue of the stock of the corporaton, and n whch capta (whether nvested
or borrowed) s not a matera ncome-producng factor. oregn corporatons
and any corporaton 50 per cent or more of whose gross ncome conssted of
gans, prcfts, or ncome derved from tradng as a prncpa were e cuded.
or the purposes of the stock-ownershp test, an ndvdua was consdered as
ownng stock owned by hs spouse or mnor chd.
Senate amendment. The Senate amendment contans, n effect, three aterna-
tve defntons of a persona servce corporaton. The frst s that contaned
n the ouse b. The second defnes a persona servce corporaton as a cor-
poraton (n whch capta s not an ncome-producng factor) at east 80 per
cent n vaue of whose stock s owned at a tmes durng the ta abe year by
sharehoders who are reguary engaged n the actve conduct of the corpora-
ton s affars. Ths defnton dffers from the ouse defnton n that t does
not requre the corporaton s ncome to be ascrbed prmary to the actvtes
of such sharehoders. The thrd aternatve contaned n the Senate amend-
ment defnes a persona servce corporaton as a corporaton (n whch capta
s not an ncome-producng factor) the ncome of whch s to be ascrbed
prmary to the actvtes of sharehoders who are actvey engaged n the con-
duct of the corporaton s affars and a of the stock of whch Is owned at a
tmes durng the ta abe year by or for not more than 20 ndvduas. The effect
of ths aternatve Is to ncude corporatons whch have so-caed sent partners
who own more than 20 per cent of ts stock. s to both aternatves added
by the Senate amendment, t s provded that an ndvdua sha be consdered as
ownng stock owned not ony by hs spouse or mnor chd, but by any guardan
or trustee representng them.
Conference agreement. Under the conference agreement a persona servce
corporaton s defned to mean a corporaton whose ncome s attrbutabe
prmary to the actvtes of sharehoders who are reguary engaged n the
actve conduct of the affars of the corporaton and are owners at a tmes
durng the ta abe year of at east 70 per cent n vaue of each cass of
stock of the corporaton, and n whch capta (whether nvested or borrowed)
s not a matera ncome-producng fnctor. oregn corporatons and any cor-
poraton 50 per cent or more of whose gross ncome conssted of gans, profts,
or ncome derved from tradng as a prncpa are e cuded. or the purposes
of the stock-ownershp test, an Indvdua s consdered as ownng stock owned
by hs spouse or mnor chd or by any guardan or trustee representng them.
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558
S CTION 720 (S CTION 72T. O T S N T M NDM NT ND S CTION T24 OP T
OUS ILL). CORPOR TIONS COMPL TING CONTR CTS UND R M RC NT M RIN
CT, 1938.
In addton to changng the secton number, ony a carfyng change was
made n ths secton by the Senate amendment The Senate provson s
adopted, wth a further change n secton number.
S CTION 72T (S CTION 72 O T S N T M NDM NT ND S CTION 725 O T
OUS ILL). MPT CORPOR TIONS.
The Senate amendment made no change In ths secton as contaned In the
ouse b e cept to change the secton number and to advance from Decem-
ber 1, 1940, to uy 1, 1941, the date before whch an nvestment company
must regster as a dversfed company under the Investment Company ct o
1940 n order to quafy for e empton for the ta abe years 1940 and 1941.
The Senate provson s adopted wth a further change nr secton number.
CTION 728 (S CTION 727 O T S N T M NDM NT ND S CTION 72 O T
OUS ILL). M NING O T RMS US D.
The Senate amendment and the conference agreement merey change the
secton number.
S CTION 729 (S CTION 728 O T S N T M NDM NT ND S CTION 727 O T
OUS ILL). L WS PPLIC L .
ouse b. Secton 727(b) of the ouse b provded that no return need
be fed by a corporaton whose e cess-profts net Income (paced on an annua
bass n the case of a ta abe perod of ess than one year) was not greater
than 5,000, the amount of the specfc e empton contaned n the ouse b.
Senate amendment. The Senate amendment provdes that no return need
be fed uness the corporaton s e cess-profts net ncome (paced on an annua
bass In the case of a ta abe perod of ess than one year) Is n e cess of
10,000, the amount of the specfc e empton provded by the Senate amend-
ment.
Conference agreement. In vew of the conference acton restorng the spe-
cfc e empton to 5,000, the ouse provson Is adopted wth a further change
In secton number.
S CTION 780 (S CTION 729 O T S N T M NDM NT). CONSOLID T D R TURNS.
Ths secton was not n the ouse b. s added by the Senate amendment
It permts consodated returns to be fed by affated groups of corporatons
under certan crcumstances, among whch s the requrement that a the
corporatons whch have been members of the affated group at any tme
durng the ta abe year for whch the return s made must consent to regua-
tons prescrbed by the Commssoner, wth the approva of the Secretary,
pror to the ast day prescrbed by aw for the fng of such return. The
makng of a consodated return sha be consdered as such consent.
The term affated group s defned to mean one or more chans of cor-
poratons connected through stock ownershp wth a common parent corporaton
If
(1) t east 95 per cent of each cass of the stock of each of the corpora-
tons (e cept the common parent corporaton) Is owned drecty by one or
more of the other corporatons and
(2) The common parent corporaton owns drecty at east 95 per cent of each
cass of the stock of at east one of the other corporatons.
oregn corporatons (e cept certan 100 per cent owned foregn subsdares
of domestc corporatons), Chna Trade ct corporatons, and certan corpora-
tons dervng ncome from Unted States possessons are not to be deemed
to be affated wth any other corporaton wthn the meanng of ths provson.
Under the conference agreement
(1) The cass of corporatons e cuded from membershp n an affated
group s e panded to ncude certan other corporatons In addton to those
specfed n the Senate amendment. s thus e panded, the cass of corporatons
e cuded from the affated group ncudes a those corporatons whch, by
reason of the fact that they are themseves e empt from the e cess-profts ta ,
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Mso.
or are ta abe on a bass dfferent from that used n the case of corporatons
generay (as n the case of foregn corporatons), or are otherwse aowed
speca treatment (as n the case of Chna Trade ct corporatons, persona
servce corporatons, and corporatons dong busness n possessons of the
Unted States), can not appropratey be assocated for ta purposes wth
corporatons not accorded such speca treatment. Whe nsurance companes
n genera are not ncudbe n an affated group, an nsurance company may
be affated wth other nsurance companes of the same ta abe character.
or e ampe, an nsurance company ta abe under secton 201 may fe a con-
sodated return wth another nsurance company ta abe under the same sec-
ton, assumng both companes meet the stock ownershp test n nsurance
company ta abe under secton 201 may not, however, fe a consodated
return wth another nsurance company ta abe under secton 204 or secton
207. The conference agreement preserves the e cepton reatve to certan
100 per cent owned foregn subsdares of domestc corporatons contaned In
the Senate amendment.
(2) The defnton of the term affated group has been revsed so as to
speak n terms of ncudbe corporatons (a corporatons not e cuded from
membershp n an affated group beng termed ncudbe corporatons) and
to provde that the type of stock to whch the 95 per cent ownershp test appes
sha not ncude nonvotng stock whch s mted and preferred as to dvdends.
The term affated group s defned to mean one or more chans of
Incudbe corporatons connected through stock ownershp wth a common
parent corporaton whch s tsef an ncudbe corporaton If
(a) t east 95 per centum of the stock of each of the ncudbe cor-
poratons (e cept the common parent corporaton) s owned drecty by
one or more of the other ncudbe corporatons and
(b) The common parent corporaton owns drecty at east 95 per centum
of the stock of at east one of he other ncudbe corporatons.
In vew of the above defnton, consodated returns may not be fed by
subsdary corporatons as an affated group uness the parent corporaton
through whch such subsdares are connected s a member of the group.
or nstance, there w not be recognzed as an affated group two ndustra
corporatons the common parent of whch Is an nsurance company or a per-
sona hodng company. In addton, no corporaton whch s connected by
stock ownershp wth an affated group of ncudbe corporatons ony through
a non Incudbe corporaton may be ncuded n a consodated return. If a
common parent whch s an ncudbe corporaton owns 95 per cent of the
stock of a nonncudbe corporaton and 95 per cent of the stock of an n-
cudbe corporaton, t, and the other ncudbe corporatons may, of course,
fe a consodated return.
Under secton 141 of the Interna Revenue Code and correspondng sectons
of pror evenue cts, the Commssoner has prescrbed by reguatons the
requrement that a corporatons fang wthn the affated group at any
tme durng the ta abe year sha |on In the consodated return. The secton
provdes that a the members of the group sha consent to such reguatons
as a condton to the prvege of fng such return. It s contempated that
the Commssoner w prescrbe ke requrements for the purposes of the con-
sodated returns authorzed by ths secton and the secton provdes that such
reguatons sha bo consented to by a of the ncudbe corporatons.
S CTION 731. INCOM OM MINING STR T GIC M T LS (S CTION 730 O S N T
M NDM NT).
Ths secton s new n the Senate amendment, no comparabe provson hav-
ng been contaned n the ouse b. It e empts from e cess-profts ta n-
come derved from mnng, reducton or bencfcaton of tungsten, qucksver,
manganese, patnum, antmony, chromte, and tn, or the ores and matera
contanng such metas. These materas have been decared to be strategc
materas by the War Department. The e empton provded In secton 730 s
ntended to encourage ther domestc producton.
Under the conference agreement, ths secton Is changed to secton 731 and
t Is gven a new capton. It e empts from e cess-profts ta that porton of
the ad|usted e cess-profts net ncome of a domestc corporaton whch Is at-
trbutabe to mnng wthn the Unted States of tungsten, qucksver, man-
ganese, patnum, antmony, chromte, or tn. The ta on the remanng porton
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5 0
of the ad|usted e cess-profts net ncome s an amount whch bears the same
rato to the ta computed on a the ad|usted e cess-profts net ncome as such
remanng porton hears to the entre ad|usted e cess-profts net ncome.
Suppement . changes : cess-Profts Credt ased on Income.
cept for technca changes and the changes ndcated beow. Suppement
of the Senate amendment s the same as Suppement of the ouse b.
ouse b. Suppement of the ouse b contaned provsons whereby, n
computng the e cess-profts credt of a ta payer on the average earnngs pan,
the base perod e perence of corporatons, the assets of whch had prevousy
been acqured by the ta payer n certan types of transactons, coud be taken
nto account. Ths provson was ntended not ony to enabe the base perod
e perence of the enterprse to be more truy refected but to enabe the ncome
credt to be avaabe n certan cases even though the ta payer had not been n
e stence durng the entre base perod. The types of transactons n whch the
assets of another corporaton must have been acqured to entte the acqurng
corporaton to these benefts were as foows:
(1) Whereby a the assets of another corporaton were acqured n whoe or
In part for a the stock of the acqurng corporaton.
(2) Compete qudatons of subsdares under secton 112(b) ( ).
(8) Statutory mergers or consodatons.
Senate amendment. sde from certan technca changes the Senate amend-
ment changed ths provson of the ouse b ony n tbe foowng respects:
In addton to the types of transactons covered by the ouse b, the Senate
amendment added the type of e change descrbed n secton 112(g)(1)(C) of
the Interna Revenue Code, that s, the acquston by one corporaton, In e change
soey for a or a part of Its votng stock, of substantay a the propertes of
another corporaton, the assumpton by the acqurng corporaton of a abty of
the other or the fact that property acqured s sub|ect to a abty beng dsre-
garded n the determnaton of whether the e change s soey for votng stock.
There were aso added transfers before October 1, 1940, by one corporaton of
property to another corporaton soey as pao n surpus or a contrbuton to
capta n respect of votng stock of the transferee corporaton owned by the
transferor corporaton, assumptons of abtes beng dsregarded as n the
case of secton 112(g)(1)(C) reorganzatons. Nether of these types of trans-
actons are ncudbe uness the transferor corporaton s forthwth competey
qudated n pursuance of the pan under whch the acquston s made, and the
transacton of whch the acquston s a part has n a respects the effect of a
statutory merger or consodaton.
The Senate amendment aso provdes that n the ease of a ta payer whch
became an acqurng corporaton n a ta abe year after December 31, 1939, f,
on September 11, 1940, and at a tmes thereafter unt the ta payer became an
acqurng corporaton, ether the ta payer or one of the transferor corporatons
nvoved n the transacton n whch the ta payer became an acqurng corporaton
owned not ess than 75 per cent of each cass of stock of each of the other corpora-
tons nvoved n the transacton, then the average base perod net ncome of the
ta payer shoud not be ess than ether (1) ts average base perod net ncome
woud have been f the transacton had not taken pace or (2) the average base
perod net ncome of that transferor corporaton whose average base perod net
Income s the greatest.
change, correspondng to that made n secton 713, was made n secton 742,
authorzng the omsson of one ta abe year n the computaton of average base
perod net ncome.
Conference agreement. The Senate provsons are adopted, e cept to the
e tent they authorze the compete e cuson of one ta abe year n computng
average base perod net ncome. (See secton 713.) The conference agreement
aso makes a carfyng change, whereby secton 743(c) s strcken out and
secton 740(g) nserted n eu thereof. Secton 740(g) provdes that the
term component corporaton ncudes a component corporaton of a com-
ponent corporaton, e cept as used n secton 742(d) (1) and (2) and secton
743(a).
Suppkment . changes : ghest racket mount and Invested
Capta.
ouse h. In the computaton of the n vested-capta credt under the
ouse b, a number of varabe factors were empoyed dependng upon the
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sze of the corporaton. The preferenta treatment accorded sma corporatons
made t necessary to ncude provsons to prevent a arge corporaton from
recevng sma corporaton treatment through breakng tsef up nto a num-
ber of sma corporatons by means of ta -free transactons. Suppement
of the ouse b provded the necessary rues for ad|ustng the varous factors
empoyed n the computaton of the nvested capta credt foowng certan
ta -free transactons.
Senate amendment. The Senate amendment emnates most of Suppement
as no onger necessary n vew of the change made n secton 714, reatve
to the computaton of the uvested-capta credt. Secton 751, reatve to the
determnaton of property pad n for stock and of borrowed capta n con-
necton wth certan e changes, was retaned, however, wth a cerca amend-
ment Secton 759, reatve to the determnaton of the preferenta rate
amount (renumbered secton 752 and entted ghest racket mount ),
was aso retaned, wth technca amendments.
The defntons of e change, transfer or upon e change, transferee
upon e change, and preferenta rate amount (renamed hghest bracket
amount ), contaned n secton 750 of the ouse b, were aso retaned but
the term e change was carfed so as to make t cear that ony trans-
actons occurrng after December 31, 1917, are embraced n the defnton.
roady speakng, the ta -free e change provsons dd not appear n the
ncome-ta aw unt after such date.
Conference agreement. The conference agreement adopts the Senate pro-
vsons.
mendments Nos. 2, 3, and 4: These are changes In tte and secton num-
bers. The ouse recedes.
mendment No. 5: Secton 124(d) as added to the Interna Revenue Code
by the ouse b provded for makng certan ad|ustments on account of
changes n pror amortzaton or deprecaton deductons occasoned by the
provsons of subsecton (d) (1), (2), (3), and (4), whch ad|ustments were
to be made wthout regard to the statute of mtatons, cosng agreements,
or any other fna determnaton of ta abty. Ths amendment e pands
such provson so as to cover the recomputaton requred by subsecton (),
added by amendment No. 11. ecause of the changes made n subsecton ()
n conference, ths amendment s no onger necessary and the Senate recedes.
mendment No. : Ths s a carfyng amendment e pandng the defnton
of the term emergency facty to ncude any facty whch meets the requred
condtons, as we as and, budngs, machnery, or equpment, n terms of
whch the defnton n the ouse b was phrased. Ths s to make certan
that the cost of dry docks, channes, arports, and smar factes may be
amortzed. The ouse recedes.
mendments Nos. 7, 8, and 9: These amendments substtute anuary 1, 1940,
for uy 10, 1940, the date contaned n the ouse b, as the date (1) after
whch the constructon, reconstructon, erecton, or nstaaton of any facty
must have been competed or ts acquston have taken pace n order that
the cost thereof may be sub|ect to amortzaton, (2) wth whch the perod
of natona emergency begns durng whch the facty must have been necessary
n the nterest of natona defense, and (3) n terms of whch the porton of
the ad|usted bass sub|ect to amortzaton s defned. The ouse recedes wth
an amendment f ng une 10,1940, as such date.
mendment No. 10: Under the ouse b, the certfcate enttng the ta -
payer to amortzaton must have been ssued before whchever of the foowng
dates was the ater: (1) The begnnng of the constructon, etc., of the facty,
or the date of ts acquston, or (2) the s teth day after the enactment of
the b. The Senate amendment changed the day specfed In (2) to the one
hundred and twenteth day after the enactment of the b. The ouse recedes.
mendment No. 11: Ths amendment substtutes for secton 124 (), (|), and
(k) of the ouse b a new subsecton (). In genera, subsectons (), (|),
and (k) of the ouse b prohbted the destructon, demoton, etc., of any
emergency facty wthout the consent of the Secretary of War or the Secretary
of the Navy, and provded penates for voatons thereof. The substtute pro-
vson nserted by the Senate amendment provdes that, f the ta payer has been
or w be pad or substantay rembursed by the Government for a or a
part of the cost of any emergency facty pursuant to any Government con-
tract for the constructon or acquston of such factes, or the purchase of
suppes, or otherwse, amortzaton of the cost of such facty (ncudng any
amortzaton prevousy taken) w be dsaowed uness wthn 30 days after
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makng of such contract, or 0 days after the (ate of the enactment of the b,
whchever of such perods e pres the ater, the dvsory Commsson to the
Counc of Natona Defense and ether the Secretary of War or the Secretary
of the Navy have certfed to the Commssoner of Interna Revenue that the
contract contans provsons adequatey protectng the pubc nterest wth
respect to the future use and dsposton of the factes. The terms and con-
dtons of such contracts wth reference to payment or rembursement of the
cost of suc factes and the protectng of the Government s nterest theren
sha be made avaabe to the pubc.
The ouse recedes wth an amendment. Under the conference agreement,
rembursement by the Unted States must have been ether (1) drecty, by
provson of any contract wth the Unted States deang e pressy wth such
rembursement, or (2) ndrecty, because the prce pad by the Unted States
(n so far as return of cost of the facty s used as a factor n the f ng
of such prce) s recognzed by the contract as ncudng a return of cost greater
than the norma e hauston, wear and tear. In the event of such remburse-
ment and n the absence of the requred certfcate, amortzaton wth respect
to the facty n queston Is dsaowed, but ony for the perod foowng the
end of the month In whch the contract s made. The tme wthn whch the
certfcaton that the Government s nterest s adequatey protected s requred
to be mae has been ncreased to 90 days after the makng of the contract or 120
days after the date of enactment of the b. It s further provded that a
certfcate made by the dvsory Commsson and ether the Secretary of War
or the Secretary of the Navy to the Commssoner of Interna Revenue, wthn
90 days after any contract s made or 120 days after the enactment of the b,
to the effect that, under such contract, rembursement s not provded for wthn
the moanng of the above provsons, sha be concusve of such fact for the
purposes of ths provson.
I nder the conference agreement the provson wt respect to pubcty has
been retaned.
mendments Nos. 12, 13, 14, and 15: These are cerca amendments. The
ouse recedes.
mendments Nos. 1 and 17: The effect of these amendments s to add to
the cass of contracts or subcontracts reatve to whch the proft-mtng pro-
vsons of the nson-Tramme ct are suspended, any contracts or subcon-
tracts whch were entered nto before the begnnng of the contractor s or sub-
contractor s frst ta abe year whch began n the year 1940 and whch are not
competed unt after the ast ta abe year to whch the e cess-profts ta Is
appcabe. The ouse recedes.
mendment No. 18: Ths amendment adds a new secton suspendng the proft-
mtng provsons of the Merchant Marne ct of 193 as to any subcontract
whch woud otherwse be sub|ect to such ct, f such subcontract was entered
nto by a corporate contractor wth a corporate subcontractor n any ta abe
year of the subcontractor sub|ect to the e cess-profts ta , and f the prncpa
contractor and the subcontractor were not affated at the tme such subcontract
was entered Into or at any tme thereafter up to and ncudng the date of
ts competon. The defnton of affated s substantay the same as that
contaned n secton 2704(b) (1) of the Interna Revenue Code, . e., two or more
corporatons sha be deemed to be affated (1) f one corporaton owns at east
95 per cent of he stock of the other or others, or (2) If at east 95 per cent
of the stock of two or more corporatons s owned by the same nterests. or the
purposes of such rue the term stock s not to ncude nonvotng stock whch
s mted and preferred as to dvdends. The ouse recedes.
mendments Nos. 19 and 20: These are changes n tte and certan numbers.
The ouse recedes.
mendments Nos. 21, 22, 23, and 24:
The ouse h provded rues appcabe to ta abe years begnnng after
Decemher 81, 1938, for determnng the effect on earnngs and profts of the sae
or other dsposton (after ebruary 28, 1913) of property by a corporaton or
the recept by t of ta -free dstrbutons. It aso provded that such rues
shoud not affect the e tent to whch accumuated earnngs and profts are
ncreased by reason of ncrease n vaue of property accrued before March 1,
1913, but reazed on or after such date. In order to effeet a unform rue for
a pror ta abe years, t provded that the stated rues sha be apped for
the purpose of the Revenue ct of 1938 or any pror Revenue ct as f such
rues wore a part of eac such ct when t was enacted. The rues appy not
ony for the purpose of determnng when a dstrbuton s a ta abe dvdend
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but aso for the purpose of determnng accumuated earnngs and profts n
computng equty nvested capta for e cess-profts ta purposes.
The Senate amendments rearrange the provsons of the ouse b, defne earn-
ngs and profts, provde a method for determnng that part of the earnngs and
profts consstng of the ncrease n vaue of property accrued before March 1,
1913, and, as to pror cts, provde that the rues for determnng earnngs and
profts sha not affect the ta abty of any ta payer for a partcuar year now
pendng before, or heretofore determned by, the oard of Ta ppeas, or any
court of the Unted States.
The ouse recedes on amendment No. 23 and wth amendments Nos. 21, 22, and
24, whch substtute for the Senate provsons two subsectons provdng as
foows:
Subsecton (1) provdes that the gan or oss reazed from the sae or other
dsposton (after ebruary 2S, 1913) of property by a corporaton s to be
determned for two purposes: (1) The computaton of earnngs and profts of the
corporaton as a whoe, prmary for nvested-eapta purposes and (2) the com-
putaton of earnngs and profts of the corporaton for any perod begnnng after
ebruary 28, 1913, for the purpose of determnng the em ratter of dvdend ds-
trbutons. In (1) there s used the ad|usted bass (under the aw appcabe
to te year n whch the sae or other dsposton s made) for determnng gan,
but dsregardng vaue as of March 1, 1913. In (2) there s used such ad|usted
bass for determnng gan, gvng effect to the vaue as of March 1, 1913, when-
ever appcabe. The term ad|usted bass means ad|usted bass specfed by
the aw, for e ampe, see secton 113(b) of the Interna Revenue Code, but s
sub|ect to the mtatons of the thrd sentence of subsecton (1) reatve to
ad|ustments proper n determnng earnngs and profts. The proper ad|ustments
may dffer under subsecton (1) (1) and (2). Where the operaton of subsecton
(1) resuts n a oss to be apped n decrease of earnngs and profts, such oss
may be sub|ect to an ad|ustment requred by subsecton (m) (2).
The provsons n the ouse and Senate bs, that gan or oss so reazed sha
ncrease or decrease the earnngs and profts to, but not beyond, the e tent
recognzed n computng net ncome under the aw appcabe to the year n whch
such sae or dsposton was made, are retaned. s used n ths subsecton the
term recognzed rentes to a reazed gan or oss whch s recognzed pur-
suant to the provsons of aw, for e ampe, see secton 112 of the Interna Reve-
nue Code. It does not reate to osses dsaowed or not taken nto account.
The provson n the ouse b and Senate amendment, for cases n whch the
ad|ustment, prescrbed n secton 113, to the bass ndcated n paragraph (1)
or (2), as the case may be, of subsecton (1), dffers from the ad|ustment to
such bass proper for the purpose of determnng earnngs or profts, and the
provsons wth respect to ta -free dstrbutons, are aso retaned.
Subsecton (m) provdes rues for determnng, for the purposes of secton
115(b) of the Code, that part of the earnngs and profts whch s represented
by ncrease n vaue of property accrued pror to March 1, 1913, but reazed on
or after such date.
Paragraph (1) of subsecton (m) sets forth the genera rue wth respect to
computng the ncrease to be made n that part of the earnngs and profts con-
sstng of ncrease n vaue of property accrued before March 1, 1913. Iustra-
tons of the appcaton of ths paragraph are set forth n e ampes (1) and (4)
of the Senate nance Commttee Report No. 2114, pages 25 and 20 page 547,
ths uetn .
Paragraph (2) of subsecton (m) s an e cepton to the genera rue n para-
graph (1) of subsecton (m) and aso operates as a mtaton on the appcaton
of subsecton (1). It provdes that, f the appcaton of subsecton (1) to a
sae or other dsposton after ebruary 28. 1913, resuts n a oss whch s to
be apped n decrease of earnngs and profts for any perod begnnng after
ebruary 28, 1913, then, notwthstandng subsecton (1) and n eu of the rue
provded n paragraph (1) of subsecton (m), the amount of such oss so to be
apped sha be reduced by the amount, f any, by whch the ad|usted bass of the
property used n determnng the oss, e ceeds the ad|usted bass computed wth-
out regard to the vaue of the property on March 1, 1913. If the amount so
apped n reducton of the oss e ceeds such oss, the e cess over such oss
sha ncrease that part of the earnngs and profts consstng of ncrease n vaue
of property accrued before March 1, 1913. The foowng e ampes w show
the appcaton of subsecton (m) (2) :
ampe (1). Nondeprecabe property was acqured pror to March 1, 1913,
at a cost of 8, ts vaue as of March 1,1913, was 12, and t was sod n 1939 for
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10. Under subsecton (1) (2) the ad|usted bass woud be 12 and there woud
be a oss of 2. ssumng that such oss s recognzed under secton 112 of the
Interna Revenue Code, the appcaton of subsecton (1) (2) woud resut In
a oss from the sae n 1939 to be apped In decrease of earnngs and profts
for that year. Subsecton (m) (2) however, appes and the oss of 2 s reduced
by the amount by whch the ad|usted bass of 12 e ceeds the cost of 8,
namey, 4. The amount of the oss s, accordngy, reduced from 2 to 0 and
there s no decrease n earnngs and profts for the year 1939 as the resut
of the sae. The amount apped n reducton of the decrease, namey, 4,
e ceeds 2. ccordngy, as a resut of the sae the e cess of 2 ncreases that
part of the earnngs and profts consstng of ncrease In vaue of property
accrued before March 1, 1913.
ampe (2). Nondeprecabe property was acqured pror to March 1, 1913,
at a cost of 10, ts vaue as of March 1, 1913, was 12, and t was sod n 1939
for 8. Under the subsecton (1) (2) the ad|usted bass woud be 12 and there
woud be a oss of 4. ssumng that such oss s recognzed under secton 112
of the Interna Revenue Code, the appcaton of subsecton (1) (2) woud resut
n a oss from the sae n 1939 to be apped n decrease of earnngs and profts
for that year. Subsecton (m)(2), however, appes and the oss of 4 s
reduced by the amount by whch the ad|usted bass of 12 e ceeds the cost
of 10, namey, 2. The amount of the oss s, accordngy, reduced from 4
to 2 and the decrease n earnngs and profts for the year 1939 as the resut
of the sae s 2 nstead of 4. The amount apped n reducton of the decrease,
namey, 2, does not e ceed 4. ccordngy, as the resut of the sae there
s no ncrease n that part of the earnngs and profts consstng of ncrease
n vaue of property accrued before March 1, 1913.
The ouse b and Senate amendment provded that, n order to effect
a unform rue for a pror years, the stated rues are made appcabe
to pror cts, but the Senate amendment added a provson provdng that
such rues shoud not affect the a abty of any ta payer for any year
now pendng before, or heretofore determned by, the oard of Ta ppeas,
or any court of the Unted States. The ta abty may be that of the cor-
poraton the earnngs or profts of whch are beng determned or the ta
abty of a sharehoder of such corporaton, or of some other ta payer.
These ta abtes are eft to be determned accordng to such decsons as
the oard or courts may make under e stng aw. s to a matters e cept
such ta abtes, such stated rues are appcabe, and res |udcata w
not be appcabe. The ouse recedes wth an amendment provdng that
the e cepton added by the Senate amendment reatve to pendng or decded
cases sha appy ony f the ta abty n queston was pendng before
the oard of Ta ppeas or any court of the Unted States on September
20, 1940, or was determned pror to such date by the oard of Ta ppeas
mendments Nos. 25 to 33. both ncusve: These amendments are changes
n secton numbers and cross-references. The ouse recedes on amendments
Nos. 25, 28, 29, 30, 31v 32, and 33, and wth amendments makng further changes
n cross-references on amendments Nos. 2 and 27.
mendment No. 34: Ths amendment adds at the end of Suppement
of Subchapter C of Chapter 1 of the Interna Revenue Code a new secton
provdng a speca rue for the ta aton of certan compensaton receved from
the Unted States for patent nfrngement. The Senate recedes.
mendment No. 35: Ths amendment was nserted by the Senate to carry
out the recommendatons contaned n the Presdent s message of September 14,
1940. Due to the tme eement, the amendment was wrtten n broad anguage
so that the entre sub|ect matter of such message woud be before the conferees
for such acton as they deemed approprate to take. s the amendment passed
the Senate, t conferred authorty on the Presdent (1) to estabsh a system of
aotments and aowances for the dependents of persons servng n the and
or nava forces of the Unted States. (2) to provde a system of nsurance
for such persons, (3) to provde unempoyment aowances for them upon
termnaton of ther servce, and (4) to preserve and modfy ther beneft
rghts under the Soca Securty ct and the Raroad Retrement cts. There
was no comparabe provson n the ouse b. The ouse recedes wth an
amendment whch s dvded nto two parts.
Part I estabshes a new system of nsurance, caed Natona Servce Lfe
Insurance, for persons n the actve servce of the and or nava forces (ncud-
ng tne Coast Guard) of the Unted States. Such nsurance (1) w be payabe
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ony In the event of death (2) w carry premum rates based upon the mer-
can perence Tabe of Mortaty and nterest at the rate of 3 per centum
(3) w be frst ssued as 5-year eve premum term nsurance wth the prvege
of convertng t nto ordnary fe, 20-payment fe, or 30-payment fe (4) w
contan provson for waver of premums, n the dscreton of the dmnstrator,
In the event of the contnuous tota dsabty of the nsured for s months
(5) w provde that the Unted States w bear the e cess mortaty cost and
the cost of waver of premums on account of tota dsabty, when death or
dsabty s traceabe to the e tra hazard of mtary or nava servce (0) w
be payabe n 240 equa monthy nstaments f the benefcary s under 30
years of age, and n 120 equa monthy nstaments f the benefcary s 30
years of age or over wth payments contnung durng the remanng fetme
of such benefcary and (7) w provde that unpad nstaments remanng at
the death of the benefcary w be pad at the same rate and, uness desgnated
n a dfferent order by the nsured, to the persons specfed and n the order
enumerated n secton 02(h) (3) of the amendment.
Persons n the actve servce may not take out Unted States Government
fe nsurance after the date of enactment of ths ct, but w be mted to
Natona Servce Lfe Insurance as provded n ths part. The rghts of Word
War eterans under e stng aw wth respect to Unted States Government
fe nsurance s, however, not changed. No person may carry more than 10,000
of Natona Servce Lfe Insurance nor a combned amount of Natona Servce
Lfe Insurance and Unted States Government fe nsurance n e cess of 10,000
at any one tme. The decson of the dmnstrator s made fna and con-
cusve on a questons of aw and fact, and there s specfc provson that such
decson sha not be revewabe by any other offca or court of the Unted
States, e cept n the event of sut as provded In secton 817. The rght to
waver of premums s the ony tem whch woud nvove any consderabe amount
of controversy between the nsured or hs benefcares and the Government, and
as the waver of premums s an entrey gratutous feature, t s not beeved
that sut aganst the Unted States to secure such gratuty shoud be authorzed.
or ths reason secton 817 authorzng a sut pursuant to secton 19 of the Word
War eterans ct specfcay makes the decsons of the dmnstrator as to
waver or nonwaver of premums bndng on the court.
Part II of the amendment prevents oss of annuty credt under the Raroad
Retrement cts, whch occurred by reason of the nterrupton of servce n the
raroad ndustry by mtary servce durng perods pror to anuary 1, 1937,
when a edera Conscrpton ct was n effect or durng perods of war or durng
perods when members of the Natona Guard or of other Reserve forces of the
Unted States may have been requred by any ct of Congress, or hy a ca of
the Presdent pursuant to such ct, to serve n the armed fortes of the Unted
States. In some cases ndvduas have faed to quafy for annutes because
the tme they spent n mtary servce durng the ast Word War or n other
war perods coud not be ncuded n ther years of servce, and n other cases,
athough the ndvduas have quafed for annutes, such annutes were n
amounts ess than woud be the case coud such perods of mtary servce have
been taken nto consderaton. To prevent such osses to ndvduas whose
raroad servce has been nterrupted by mtary servce n such perods as
above descrbed, Part II of the amendment provdes for the ncuson of such
mtary servce, both for egbty for an annuty and for computng the amount
of the annuty. It provdes methods for ad|udcatng agan cams whch have
been ad|udcated n the past but n whch mtary servce was not consdered
and for the ad|udcaton of cams n the future n whch mtary servce pror
to anuary 1, 1937, may he a factor. Inasmuch as the addtona costs resutng
from the payment of benefts under the Raroad Retrement cts on the bass
of mtary servce s not propery chargeabe to the raroad ndustry, provson
Is made n the amendment for the payment of these costs by specfc Government
appropratons.
The managers on the part of the ouse desre to state that they agree wth
the managers on the part of the Senate that a of the proposas contaned n
Senate amendment numbered 35 shoud be gven prompt and carefu consderaton.
Inherent n those proposas, however, are broad and mportant probems of pubc
pocy whch need ntensve study and nvestgaton before ntegent decsons
may be reached wth respect thereto. It s hoped that a comprehensve study of
the sub|ect matter contaned n the Presdent s message of September 14, 1940,
be made as soon as practcabe to the end that the proposas contaned theren
may be enacted nto aw wth a reasonabe dspatch.
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5
mendment No. 3 : Ths amendment s ntended to permt credt aganst the
edera unempoyment ta for the caendar year 193 . 1937, 1938, or 19 9,
on empoyers of eght or more empoyees, for contrbutons pad by the empoyer
before the s teth day after the date of enactment of ths ct nto an unem-
poyment fund under a State aw. If the empoyer has pad the edera ta
wthout the beneft of the credt, a refund based on the credt woud be per-
mtted. Wth certan mted e ceptons, the tme has e pred under e stng
aw for payng contrbutons upon whch credt aganst the ta for such years
may be based. The ouse recedes wth an amendment aowng the same
e tenson of tme as s provded In the Senate amendment, permttng credt
aganst the ta for the same years, and provdng for refunds based on the
credt. owever, n the case of the ta for 1939 and subsequent years, the
provsons of e stng aw contaned n secton 1001(a)(3) of the edera
Unempoyment Ta ct mt the amount of credt, on account of contrbutons
pad after the due date of the edera return of the ta aganst whch credt s
taken but before uy 1 ne t foowng such due date, to 90 per cent of the amount
whch woud have been aowabe as credt on account of such contrbutons f
they had been pad on or before the due date. The conference agreement retans
that mtaton on the credt aganst the ta for 1939 wth respect to contrbu-
tons pad before the s teth day after the date of enactment of ths ct. No
smar mtaton s provded wth respect to the ta for pror years. In add-
ton to certan carfyng changes from the Senate amendment, the conference
agreement permts credt for contrbutons pad, wthout regard to the date of
payment, f the assets of the ta payer are at any tme durng the 59-day perod
foowng the date of enactment of ths ct, n the custody or contro of a recever,
trustee, or other fducary apponted by, or under the contro of, a court of compe-
tent |ursdcton.
mendment No. 37: Ths amendment adds a new tte, entted War-Profts
Ta , mposng ncreased ncome and e cess-profts tu es n the event of war.
The Senate recedes.
R. L. DOUG TON,
Thomas . Cuen,
ohn W. McCohmack,
eke Cooper,
en T. Tkeadwat,
kank Crowtheb,
arod nutson,
Managers on the part of the ouse.
1940-29-10335
T R NU ILL O 1940.
ouse ot Representatves Report No. 2491, Seven v-s th Congress, Thrd Sesson.
une 10, 1940.
Mr. Doughton, from the Commttee on Ways and Means, submtted the
foowng report to accompany . R. 10039 :
The Commttee on Ways and Means, to whom was referred the b ( . R.
10039) to provde for the e penses of natona preparedness by rasng revenue
and Issung bonds, to provde a method for payng for such bonds, and for
other purposes, havng consdered the same, report favoraby thereon wthout
amendment and recommend that the b do pass.
N D OR T L GISL TION.
There s a growng concern regardng the state of our natona defense.
Recent deveopments n the uropean war have remnded us forcefuy of the
Inadequacy of our means of defense aganst modern weapons of aggresson.
Ths need has been ponted out by the Presdent upon severa occasons par-
tcuary, n hs message to the Congress of May 1 , 1940.
In ths message, and In other requests, the Presdent has requested defense
funds for the fsca year 1941 totang 3,250,000,000. Ths sum ncudes the
amounts carred n the udget for 1941, and the suppementary requests made
Snce anuary 3, 1940, the date of the udget message.
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s outned In the Presdent s message of May 1 , 1940, the four prmary
purposes for whch the addtona appropratons are to be used, are
rst. To procure the essenta equpment of a knds for a arger and thor-
oughy rounded-out rmy
Second. To repace or modernze a od rmy and Navy equpment wth the
atest type of equpment
Thrd. To ncrease producton factes for everythng needed for the rmy
nnd Navy for natona defense. We requre the abty to turn out qucky
nfntey greater suppes
ourth. To speed up to a 24-hour bass a new contracts to be awarded.
The urgent need for the speedy and effectve undertakng and competon of
ths program can not be doubted.
TU ISC L SITU TION.
The workng baance of the Treasury s at present about 1,300,000,000. The
gross pubc debt s 42,787,000,000, and the face amount of obgatons whch
the Secretary of the Treasury may ssue under the mtaton of 45,000,000,000
specfed n secton 21 of the Second Lberty ond ct, as amended, s
1,973,000,000.
The present defct w be 2 0,000,000 ess on une 30, 1940, than was est-
mated on anuary 1, 1940. The natona defense e pendtures, ncudng pubc
works for the rmy and Navy, were estmated n the udget submtted to
Congress ast anuary at 1,940,000,000 and they are now estmated on the
bass of the program submtted to the Congress up to and ncudng une 10
at 3,250,000,000.
These greaty ncreased necessary e pendtures for natona defense woud,
thus, resut In the arge defct ndcated, e cept for ths ta b whch s de-
sgned to rase the revenue to pay for the natona defense program.
rom these estmates t w be seen that t s hghy desrabe that Congress
take some acton at ths sesson to provde the Treasury wth the addtona
ta es eved n the b and to provde t wth the addtona borrowng power
set forth theren. Ths w gve the Treasury that fe bty n ts fnaucng
whch s so necessary for the effectve management of the pubc fnances n
tmes ke these and thus obvate the payment of hgher nterest rates.
T ISC L PROGR M.
Secton 21 of the Second Lberty ond ct, as amended, provdes that the
face amount of bonds, certfcates of ndebtedness, Treasury bs and notes
ssued under that ct, as amended, sha not e ceed 45,000,000,000 outstandng
at any one tme. Secton 302 of the b amends ths provson to permt the
Treasury to ssue, wthn the framework of current statutes reatng to the
pubc debt, 4,000,000,000 of short-term pubc-debt obgatons wth maturtes
not e ceedng fve years, to be desgnated Natona Defense Seres. These
obgatons w be n addton to the 45,000,000,000 face amount of securtes
authorzed under e stng aw.
The ta ncreases provded under the b are estmated to yed addtona
revenue of appro matey 1,004,000,000 for each fu year of operaton. The
ncreased ta es may be dvded nto two categores. Those contaned n Tte I
are permanent n nature and w yed about 322,000,000 annuay. Those
contaned n Tte II are temporary n nature, beng appcabe ony for the
5-year perod, 1940-1945, and w yed about 82,000,000, annuay.
The ncreased revenue attrbutabe to Tte II, wth certan mnor e cep-
tons, w be paced n a speca fund whch sha be avaabe ony for the
retrement of the Natona Defense Seres obgatons. ecause of the
dffcuty of segregatng the addtona revenue attrbutabe to the permanent
ncreases contaned n Tte I, ths amount can not be earmarked for ths speca
purpose. owever, the tota addtona revenue attrbutabe to both Ttes I
and II s ntended to nsure the retrement of these speca obgatons ssued
durng the 5-year perod for whch the temporary ta es are to be effectve.
STUDI S O C SS-PRO ITS T S ND SP CI L MORTIZ TION.
Durng the e ecutve sessons, there have been dscussed proposas to pro-
vde speca amortzaton for natona defense ndustres and to provde for
the mposton of e cess-profts ta es. These two measures each n tsef
requrng a compcated and e haustve egsatve pro|ect must be consd-
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crPd together. It s fp desre of ths commttee, whch s favoraby reportng
a b whch w enabe a arger proporton of our ctzens to partcpate n
the responsbty of provdng an adequate natona defense than has ever
bppn the case before, that there sha not be an opportunty for the creaton of
new war monares or the further substanta enrchment of aready weathy
persons because of the rearmament program. ccordngy we have nstructed
our technca assstants and the approprate Treasury offcas to acceerate
ther work n these two feds so that bs w be prepared for submsson not
ater than the openng of the ne t sesson of Congress, whch If passed by the
Congress may become retroactve and appy to Income earned durng the ca-
endar year of 1940, or may become effectve upon any other date whch
Congress, In the ght of nformaton t then possesses, may deem advsabe.
R NU 8TIM T S.
The foowng tabe, prepared by the Treasury Department, shows the
addtona revenue under the ta ng provsons of the b:
stmated addtona revenue 1 attrbutabe to the proposed Revenue ct of 1940.
Source of revenue.
Tte I:
Income ta Mon of doar .
Corporaton ncome ta 70
Indvdua ncome ta . 252
Tota ncrease, Tte I 322
Tte II:
Corporaton super ncome ta 135
Indvdua super ncome ta 123
Capta stock and e cess-profts ta es 12
stateta .. - --- 29
Gft ta --- 3
cohoc beverage ta es
Dsted sprts 7
ermented mat quors 4
Other 3
Tota ncrease, acohoc bever ge ta es. 125
Tobacco ta es:
Cgarettes 7
Other --- 12
Tota ncrease, tobacco ta es 79
Stamp ta es
Manufacturers e cse ta es:
Gasone 112
Other. 30
Tota ncrease, manufacturers e csetta es 1 2
Msceaneous ta es 27
Tota ncrease, Tte II 82
Tota ncrease, Ttes I and II 1, 004
Treasury Department. Dvson of Research and Statstcs. une 10, 1940.
1 cudng (a) t hp nonrecurrng coectons of foor ta es on acohoc beverages and tobacco, estmated
for fsca year 1941 at 2t,000,000, and ( ) revenues resutng from the e tenson of certan e cse ta es as Dn -
vded n Tte t Sec. 209. Contnuaton of cse Twes, but ncudng the super-ta on such e cs
ta es.
s ntroduced by Mr. Doughon. une 10, 1910.
SUMM RY O C NG S IN T STRUCTUR .
TT. I I tM .N NT C NG S.
These changes appy to ncome ta es for ta abe years begnnng after
December 31, 1939. They are, therefore, appcabe to 1940 ncomes.
(1) The persona e emptons aowed Indvduas for ncome ta purposes
under the e stng aw have been reduced from 2,500 to 2,000 n the case
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of marred persons and heads of fames and from 1,000 to 800 In the case
of snge persons. The b does not affect the 400 -credt for dependents
aowed under e stng aw. Ths credt s aowed f the dependent receves
hs chef support from the ta payer and-s under 18 years of age or ncapabe
of sef-support because mentay or physcay defectve.
(2) The surta es are ncreased on surta net ncomes n e cess of ,000
and the ncreases contnue up to surta net ncomes not n e cess of 100,000,
and from that pont the rates of e stng aw are retaned. Under the present
aw, the rate on surta net Incomes n e cess of 100,000 and not n e cess
of 150,000 s 58 per cent. Whe the rates appcabe to surta net ncomes
n e cess of 100,000 are not ncreased, the surta es payabe by ta payers In
these upper brackets are ncreased by reason of the hgher rates n the ower
brackets.
(3) The requrement as to fng ncome ta returns n the case of nd-
vduas has been changed. Under the e stng aw, an ndvdua s requred
to fe a return f hs net ncome amounts to 1,000 or more n the case of a
snge person, or 2,500. or more n the case of a marred person, and n ether
case f hs gross ncome s 5,000 or more. The b requres a return from a
snge person If hs gross ncome s 800 or more and from marred persons
f ether ther aggregate or separate gross ncome s 2,000 or more.
(4) Nonresdent aens: Under e stng aw, a nonresdent aen ndvdua
not engaged n busness wthn the Unted States or not havng an offce or
pace of busness theren, s ta ed ony upon dvdends, Interest, or other f ed
or determnabe annua or perodca ncome at the rate of 10 per cent. Ths
rate may be reduced to 5 per cent n the case of a resdent of a contguous
country f so provded by treaty. Sub|ect to treaty provsons wth foregn
countres, the 10 per cent rate has been ncreased to 15 per cent, whch cor-
responds to the proportonate ncrease n burden mposed upon mercan ctzens
and resdents by the ncreases n ncome and e cse ta es under the b. Under
e stng aw, f such a nonresdent aen ndvdua has a gross ncome of more
than 21, 00, whch s the eve at whch the average effectve rate equas
10 per cent, he s sub|ect to the fu norma and sur ta on hs f ed or deter-
mnabe annua or perodca Income. The b rases ths eve to 24,000
whch, under the ncreased rates. Is the pont whch equas an effectve rate
of appro matey 15 per cent. Nonresdent aens engaged n busness n the
Unted States or havng an offce or pace of busness theren are sub|ect to
the same rates as appy to mercan ctzens wth respect to Income from
Unted States sources. They w, therefore, be sub|ect to the ncrease In ta
appcabe to mercan ctzens.
CORPOR TIONS.
(1) Domestc corporatons. Your commttee ncreased the rate of ta on
corporatons by 1 per cent. In vew of the ncrease n the ta burden mposed
upon ndvduas under the b, It was beeved that corporatons shoud bear
some part of the Increased burden.
The rates under the proposed b and under the e stng aw are as foows:
Norma ta net ncomes.
Not n e cess of 5,000
In e cess of 5,000 and not n e cess of 20,000
In e cess of 20,000 and not In e cess of 25,000
In e cess of 25,000
(2) oregn corporatons. Snce the ta on domestc corporatons s ncreased,
your commttee aso deemed t advsabe to make the same proportonate n-
crease n the ta on foregn corporatons dervng Income from mercan sources.
Under e stng aw, foregn corporatons havng an offce or pace of busness n
the Unted States are sub|ect to a fat rate of 18 per cent. Ths has been n-
creased under the b to 19 per cent. oregn corporatons not engaged n trade
or busness wthn the Unted States or not havng an offce or pace of busness
theren are ta abe ony upon ther dvdends, nterest, or other f ed or deter-
290217 41 87
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570
mnabe perodca or annua Income, and they are sub|ect to a ta of 15 per cent
on such ncome. In the case of dvdends, the rate s 10 per cent uness receved
by a corporaton organzed under the aws of a contguous country, n whch
case the rate may by treaty be reduced to not ess than 5 per cent The rate
of 15 per cent s ncreased under the b to 1 per cent and the rate of 10 per
cent s ncreased to 11 per cent. No ncrease n ta es w appy where ts
appcaton w be contrary to any treaty obgaton of the Unted States.
TTL II. T MPOR RY C NG S.
The b makes certan temporary ncreases n the nterna-revenue aws for
a perod of fve years. These changes are brefy as foows:
(1) INCOM T .
or ta abe years begnnng after December 31, 1939, and before anuary 1,
1945, the ta computed n accordance wth the changes made n Tte I of the
b s ncreased by 10 per cent thereof. To prevent the rate n the hgher
brackets from beng confscatory, a cushon s Inserted whch prevents such n-
crease from beng greater than 10 per cent of the net ncome n e cess of the
ta computed under e stng aw, as amended by Tte I. Ths cushon begns
to operate where the ta so computed s n e cess of 50 per cent of the net
Income, whch n the case of a marred person Is around 200,000. The foowng
e ampes w show the resut of the operaton of the ta and the cushon:
Ta under
e stng aw
as amended
by Tte I.
Ta under
e stng aw
as amended
by Tte I.
Net ncome.
Super-
ta .
Net ncome.
Super-
ta .
3,000
28
100
480
2.80
10.00
48.00
100,000
39,524
1 9,3 4
,204
3,952.40
300,000
13,0 3. 0
31,379. 0
1,000,000
It w be seen from the above e ampes that n the case of a marred man
wthout dependents wth 5,000 net ncome, the superta s determned by
Increasng the ordnary ta of 100 by 10 per cent, or 10, makng a tota ta of
110. The cushon w not operate In ths case because the ordnary ta
s not n e cess of 50 per cent of the net ncome. In the case of a marred
man wth 300,000 net ncome the 10 per cent superta f apped wthout
the cushon, woud amount to 1 ,93 .40, but snce the ordnary ta s n e cess
of 50 per cent of the net ncome the cushon appes. ccordngy, the super-
ta n ths ast e ampe s computed by appyng the 10 per cent aganst
130, 3 (the amount of the net ncome ess ordnary ta ) nstead of aganst
the ta of 1 9,3 4. Ths makes the superta 13,0 3. 0 nstead of 1 ,93 .40.
(2) C SS-PROnTS T .
The amount of the e cess-profts ta payabe for any ta abe year endng
after une 30, 1940, and before uy 1, 1945, s ncreased by 10 per cent.
Thus, a corporaton wth an e cess-profts ta year endng uy 31, 1940, w
be sub|ect to the 10 per cent ncrease. If the e cess-profts ta payabe s
1,000, the superta w be 100, and the corporaton w pay a tota e cess-
profts ta of 1,100.
(8) C PIT L STOC T .
The capta stock ta s Increased for the year endng une 30, 1940, and
for the four succeedng years endng une 30, from 1 per thousand of ad-
|usted decared vaue to 1.10 per thousand of ad|usted decared vaue.
(4) ST T T .
In the case of a decedent dyng after the enactment of ths b and before
the e praton of fve years after such date, the estate ta payabe (after
appcaton of the credts provded for State death ta es and edera gft
ta es), s ncreased by 10 per cent.
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571
Mso.
(5) GUT T .
The gft ta 1b aso Increased by 10 per cent, effectve for the caendar
year 1940 and subsequent caendar years up to and Incudng the caendar
year 1945.
or the caendar year 1940, the Increase Is n effect apped ony to gfts
made after the date of the enactment of ths b. Ths Is accompshed by
determnng the gft ta for the entre year at the e stng rates and addng
thereto an amount whch bears the same rato to 10 per cent of the ta so
computed as the amount of gfts made after the enactment of the b bears
to the tota amount of gfts made durng the year.
( ) TR NS RS TO OID INCOM T .
Under the e stng aw, an e cse s mposed upon the transfer of stock or
securtes by a ctzen or resdent of the Unted States, or by a domestc
corporaton or partnershp, or by a trust whch s not a foregn trust, to a
foregn corporaton, as pad-n surpus or as a contrbuton to capta.
The rate under e stng aw s 25 per cent and ths has been Increased to
27 per cent In the case of any transfer made durng the perod after the
date of the enactment of ths b and before uy 1, 1945.
(T) TO CCO T S.
The b makes the foowng changes n the ta es on tobacco and tobacco
products:
Tobacco, snuff, cgars, and cgarettes.
Descrpton of ta .
Od rate.
New rate.
Percentage
of Increase.
21 cents
do.
do
Cgars
87 cents
Do
2....
2.33 -
Do
3 .
fe.50
Do
5
I5.83
Do
10.50
12.25
Do..
13.50
15.75
1
Cgarettes.
3
3. 0 .
Do..
7.20
8.40
oent
s cent
Do
1 cent
I cents
foor stocks ta Is mposed upon a the products sted above to whch the
ncreased rates appy, wth the e cepton of cgarette papers. Ths ta Is
equa to the dfference between the od rate and the new rate and s mposed
wth respect to such products hed by any person for sae otherwse than n
reta stock. The ta on chewng tobacco was not Increased, due to the de-
cnng consumpton of ths product and the sma amount of revenue nvoved.
DISTILL D SPIRITS.
Tour commttee ncreased the ta es on dsted sprts at the foowng
rates:
Dsted sprts.
Od rates.
New
rates.
Percent-
age of
ncrease.
2.2
2.00
2.2
3.00
33M
37
33
Imported perfumes
2.78
3.00
oor stocks ta es are mposed upon dsted sprts whch on uy 1, 1940,
are hed by any person and ntended for sae or for use n the manufacture
and producton of any artce ntended for sae. The rate s 75 cents, whch
s the ncreased rate mposed upon quor. n e empton of 100 gaons s
aowed n the case of a retaer. Tour commttee dd not ncrease the ta on
rectfed sprts whch are aso sub|ect to ncreased ta on dsted sprts.
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572
sra
Your commttee Increased the ta on fermented quors from 5 a barre to
a barre, effectve uy 1, 1940. Ths amounts to a 20 per cent ncrease n
the rate of ta . In addton, a foor stocks ta s mposed upon stocks hed by
manufacturers or whoesaers at the rate of 1 per barre.
WIN S.
The ta es on wnes were ncreased at the foowng rates:
Od rate.
New rate.

Prrmt.
811 -_, .. I
10
12
m
Do
20
24
20
W.
3
20
Do
M
s.
20
10
12
20
DMISSIONS T S.
Under e stng aw, an admssons ta of 10 per cent s mposed e cept where
the amount pad for admsson s ess than 41 cents. Instead of rasng the rate
of ta , your commttee deemed t much smper and more feasbe from an
admnstratve pont of vew to decrease the e empton from 40 to 30 cents.
OT MI8C I N OUS T S.
The foowng tabe shows the ncreases n other msceaneous ta es:
Descrpton of ta .
Odr
New rate.
age of
ncrease.
o seats
Saes outsde of bo offce..
Cabarets, roof gardens, etc.
Cub dues
Corporate securtes
Capta stock ,
Do
Do..
Do-
Insurance poces-
Passage tckets.
Do
Do....
Safe-depost bo es
Pstos and revove)
Whoesaers n quor.
Retaers n quor
rewers (more than 00 barres)
rewers (ess than 00 barres)
Whoesaers In mat quors
Retaers In mat quors
Speca cases
Rectfers
Do
Sts
Do
Tres
Tubes
Totet preparatons
utomobes -
Other automobes
uto parts
Rados -
rearms
Matches ---
ectrca energy.
Gasone
Lubrcatng os -
Transportaton of o by ppe no.
Transfers of bonds.
Conveyances
Payng cards..
10 per cent.
do
1 cents...
10 per cent.
10 cents
do..
2 cents.
4 cents.
5 cents.
3 cents.
f
3
5
10 per cent.
do
100.
25..
100.
50.
.do.
20.
u
100.
50
20
2M cents...
4 ( MS
10 per cent.
2 per cent..
3 per cent..
2 per cent..
5 per cent..
do..
10 per cent.
cents
3 per cent..
1 cent
4 cents
4 per cent..
4 cents
0 cents
10 cents
11 per cent,
do.
2 cents
11 per cent.
11 cents
do..
3 cents
cents
8 cents
4 cents
1.10
3.30
5.80
11 per cent.
.do
110.
27.50..
110....
do.
22..
2.20
220
110
5
22
tU cents
4M cents
11 per cent..
M per cent.
IM per cent.
2 percent.
b per cent. do
11 per cent..
M cents
M per cent.
IM cents
4M cents
4M per cent.
cents
55 cents
11 cents
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573
Msc.
CONTINU TION O T MPO Y CIS T S.
The b aso provdes for the contnuaton of the temporary Import and e cse
ta es whch ether e pre or have ther rates reduced n 1941. Under the b
these ta es w not e pre or have ther rates reduced unt 1945.
T S NOT INCR S D.
(1) No ncrease Is provded n the case of certan ta es of a reguatory
nature, such as the ta es on whte phosphorus matches, m ed four, fed
cheese, narcotcs, sugar, btumnous coa, and certan types of frearms. Lke-
wse, the b does not Increase certan e cse ta es on mports such as those
eved wth respect to coa, umber, copper, petroeum products, and certan
vegetabe os. The revenue from these ta es s sma, and snce they are
desgned for a partcuar functon whch an Increase n ther rates mght mpar,
your commttee fee they shoud not be ncreased and some of them are affected
by recproca trade agreements.
(2) The b makes no changes n the ta es eved under the soca securty
program. These ta es are drected to a speca purpose and It s not fet that
they shoud be ncreased for the defense program.
(3) In the case of the ta es on communcaton factes (teephone, teegraph,
rado and cabe), severe admnstratve dffcutes convnce your commttee of
the nadvsabty of ncrease n rates.
DISCUSSION O PRINCIP L INCOM T C NG S.
(a) Lowerng of persona e emptons. Tte I of the b owers the persona
e empton from 1,000 to 800 n the case of snge persons and from 2,500 to
2,000 n the case of marred persons or heads of fames. Ths w make
appro matey 2,190,000 new ta payers. Of the addtona revenue to be derved
from ths source appro matey 14,000,000 w be derved from new ta payers.
Ths s a permanent change and frst goes nto effect wth respect to ta abe
years begnnng after December 31, 1939.
( ) Tte I of the b aso ncreases permanenty the surta rates wth respect
to ta abe years begnnng after December 31, 1939. The norma ta rate, whch
s 4 per cent under e stng aw, Is not changed n the b. The foowng tabe
shows the surta rates under the e stng aw and under the b:
Tabb I. Comparson of surta rates, e stng aw, and proposed b.
mount of surta net ncome.
stng
aw rate.
Proposed
bU rate.
mount
of rate
ncrease.
ceedng.
Not e ceed-
ng.
Per cent.
Per cent.
Per cent.
4,000
,000
4
4
0
,000
8,000
1
8,000
10,000
8
2
10,000
12,000
7
10
3
12,000
14,000
8
12
4
14,000
1 ,000
9
15
1 ,000
18,000
11
18
7
18,000
20,000
18
21
8
20,000
22.000
1
24
9
22,000
2 ,000
17
27
10
2 ,000
32,000
19
30
11
32,000
38,000
21
33
12
38.000
44.000
24
3
12
44,000
50,000
27
40
13
50,000
0,000
31
44
13
.000
0,000
3
44
9
0,000
2,000
35
47
12
2,000
8,000
39
47
8
8,000
70,000
43
47
4
70,000
74,000
43
50
7
74,000
80,000
47
0
3
80,000
90,000
51
3
2
90,000
100,000
5

1
100,000
150,000
8
58
0
150,000
200,000
0
0
0
200,000
2 0,000
2
2
0
250,000
300,000
4
4
0
300.000
400,000

0
4110,000
500.000
8
8
0
500,000
750,000
70
70
0
750,000
1,000,000
72
72
0
1,000,000
2,000,000
73
73
0
2,000,000
,000,000
74
74
0
,000,000 and up
75
75
0
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574
(c) Tota ncome-ta burden. (1) Permanent Increases: In order to secure
a compete pcture of the tota Income ta burden, the foowng tabes are
ncuded wth respect to a marred man wth no dependents. Tabe II show
the ncreased norma and surta rates on a marred man wth no dependents
under e stng aw and under the b. Whe there s no change n the norma
ta rate over that of e stng aw, the norma ta tsef s ncreased by reason
of the owerng of the e emptons to 800 for snge persons and to 2,000
for marred persons.
Tabe II. Comparson of norma ta and surta , e stng aw and proposed
b, marred person, no dependents, a ncome earned.
Net Income.
Norma ta .
Surta .
Surta
ncrease.
Present
aw.
Proposed
tan.
Present
aw.
Proposed
ML
2,000
0
0
0
0
0
2, 00
0
10
0
0
0
3,000
8
28
0
0
0
4,000
44
4
0
0
0
5,000
80
100
0
0
0
8,000
, 1
ne
13
0
0
7,000
1 2
172
20
40
20
8,000.. ..
188
208
0
80
20
p,000
224
244
105
140
15
10,000.
2 0
280
1 8
200
45
11,000
29
31
210
280
70
12,000
.
332
352
270
3 0

13,000
3 8
388
335
4 0
125
14,000.
404
424
405
5 0
155
15,000
444
4 4
480
80
200
20,000.
44
4
945
1,4 0
515
25,000
844
8 4
1, 45
2, 30
985
30,000
1,044
1,0 4
2, 28
4,040
1. 515
40,000
1,444
1,4 4
4, 38
7,220
2, 85
50,000
1,844
1,8 4
7,025
10,980
3.955
0,000
2,244
2,2 4
10,085
15,300
5,215
70,000
2, 44
2, 4
13,80
19,940
. 135
80,000.
3,044
3,0 4
18,225
24,880
, 55
3, 444
8,4 4
23,225
30,120
.895
100,000
3,844
3,8 4
28, 25
35, 0
7,035
150,000
5,844
5,8 4
7, 50
4, 20
7,070
200,000
7,844
7,8 4
87, 00
94,580
7,080
250,000.
9,844
9,8 4
118,450
125,540
7,090
300,000
11,844
11,8 4
150,400
157.500
7,100
400,000
15,844
1 ,8 4
21 , 350
223,4 0
7,110
500,000
19,844
19,8 4
284,300
291,420
7,120
750,000.
29,844
29,8 4
459,250
4 ,380
7, 130
1,000,000
39,844
39,8 4
39,200
4 ,340
7, 140
2,000,000
79,844
79,8 4
1, 3 9,175
1,37 ,320
7, 145
5,000,000
199,844
199,8 4
3,589,150
3,59 ,300
7.150
It w be noted that a marred person wth a net ncome of 2,500 pays no
ta under e stng aw. owever, under the b he w pay a norma ta
of 10 for each ta abe year begnnng after December 31, 1939. The same
person wth a net ncome of 3,000 w pay for each such ta abe year a
norma ta of 28. No surta s mposed ether under the b or under the
e stng aw unt the net ncome of a marred man e ceeds ,500 under the
present aw and ,000 under the b. In the case of a snge person, no surta
s mposed unt the net ncome e ceeds 5,000 under the present aw and
4,800 under the b. The argest ncrease n the surta rate over e stng
aw s wth respect to marred persons wth net ncomes between 4 ,000 and
58,000, where the rate s ncreased 13 per cent. In the case of a snge person,
the argest ncrease s wth respect to net ncomes from 45,000 to 57,000,
where the rate s aso ncreased 13 per cent.
(2) Temporary ncrease: In addton to the permanent Increases caused by
the change n the e emptons and the surta rates, Tte II of the b mposes
a 10 per cent superta wth respect to ta abe years begnnng after December
31, 1939, and before anuary 1, 1945. Ths s shown n the foowng tabe:
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Mso.
Tabe III. Comparson of tota ta burden, e stng ac and proposed b,
marred person, no dependents, a ncome earned.
Net 1
Present
aw.
Proposed
b e cud-
ng super-
Super-ta .
Proposed
b ncud-
ng super-
ta .
ffectve rate n per cent.
Present
aw.
Proposed b.
Wthout
super-
ta .
2,noo.
2,500.
. .
N|no.
5,000.
7,000
8,000 .
o,oo rII I
11,000 .
12,000
13.000
14,000...
15,000
20,000
25.000
30,000
40,000
0,000
0.000
70.000
80,000
90.000.
100.000
150,000
200,000
2.50,000.
300,000 ...
400.000 ,
500,000
750,000
1.000,000,
2,000,000..
8
44
SO
11
172
248
320
415
got
02
703
800
924
1,589
2,489
3,5 9
,979
8,8 9
12, 329
1 .449
21,2 9
2 ,509
32, 4 9
3.394
95, 344
128, 294
1 2, 244
232, 194
304,144
489,094
79,044
1,449,019
3,788, 994
10
28
M
100
13
212
288
I
480
. ,9
712
Mf
984
1,144
2,124
3,494
,104
8, 84
12,844
17, 4
22, 04
27,944
33.584
39, 524
71), 1M
102, 444
135, 404
1 9,3 4
239,324
311,284
49 ,244
8 ,204
1,45 , 184
3,79 ,1 4
1.00
2.80
.40
10.00
13. 0
21.20
28.80
38.40
48.00
9. 0
71.20
84.80
98.40
114.40
212. 40
349.40
510.40
8 8.40
1, 284. 40
1,75 . 40
2, 2 0.40
2,794. 40
3, 358. 40
3, 952. 40
7,048.40
9, 7 5. 0
11,459. 0
13,0 3. 0
1 ,0 1. 0
18,871. 0
25,375. 0
31, 379. 0
4,381. 0
120,383. 0
11.00
30.80
70.40
110.00
149. 0
233.20
81 .80
422.40
528.00
. 0
783.20
932.80
L 082.40
1,2 8.40
2. 33 . 40
3,843.40
5, 14. 40
9, 2.40
14,128.40
19,320.40
24, 8 4. 40
30, 738. 40
3 , 942. 40
43,47 . 40
77,532. 40
112,199. 0
14 ,8 3. 0
182,427. 0
255,391. 0
330,1 5. 0
521, 19. 0
717,583. 0
1, 510,5 5. 0
3,91 , 547. 0
0.27
1.10
1. 0
1.93
2.4
8.10
3.
4. IS
4. 0
.02
8.41
.78
.1
7. 9
9.9
11.90
14.95
17.74
20. 5
23. 0
2 .59
29. 3
32.47
42.2
47. 7
1.33
54.08
58.0
0.83
5. 21
7.90
72.45
7 .78
0.40
.93
1. 0
2.00
2.27
3.03
3. 0
4.27
4.80
5.42
.93
.52
7.03
7. 3
10. 2
13.98
17.01
21.71
2 . 9
29.27
32.29
34.93
37.32
39. 2
4 .99
1.22
4.1
. 45
59.83
2.2
.17
8. 2
72.81
7 .92
rom the above tabe It w be noted a marred man, wthout dependents,
havng a net ncome of 20,000 w pay n permanent ta es 2,124, an Increase
of 535 over e stng aw, and n addton he w pay a super-ta , under Tte II
of the b, of 212.40 for fve years, makng a tota annua ta for such 5-year
perod of 2,33 .40 or 11. 8 per cent of hs net ncome as aganst 7.95 per cent
under e stng aw. One wth 50,000 net ncome w pay 12,844 n permanent
ta , and 1,284.40 super-ta , makng a tota of 14,128.40 as aganst 8,8 9 under
e stng aw, or 28.2 per cent of hs net ncome as aganst 17.74 per cent under
e stng aw.
(d) Requrement for fng ndvdua ncome ta returns. Under e stng aw,
an ndvdua, f snge. Is not requred to fe an ncome ta return uness hs
gross ncome s 5,000 or more or hs net ncome s 1,000 or more. In the ease
of a marred ndvdua, no return s requred under e stng aws uness hs gross
Income s 5,000 or more, or the net Income s 2,500 or more. return s aso
requred f such ndvdua and hs spouse each has a gross ncome and the
aggregate gross ncome s 5,000 or more. The b requres a return from a
snge ndvdua f hs gross ncome s 800 or more and from a marred nd-
vdua f (1) such ndvdua has a gross ncome of 2,000 or more and the other
spouse has no gross Income or (2) f such Indvdua and hs spouse each has
for the ta abe year a gross ncome and the aggregate gross ncome s 2,000 or
over. Many persons have faed to fe returns upon the assumpton that ther
ncome was nsuffcent, when, n fact, they were abe for the fng of a return
and the payment of a ta . Ths change w requre appro matey 8,000,000
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57
addtona returns, and t s beeved w resut n the coecton of substanta
addtona ta es. It s estmated that under e stng aw appro matey
7,500,000 ndvdua returns are fed.
N LYSIS O ILL Y S CTIONS.
Tte I.
Ths tte contans permanent amendments to the Interna Revenue Code,
S CTION I. S O T TITL .
Ths secton provdes that the ct may be cted as the Revenue ct of 1940.
S CTION 2. SU T ON INDI IDU LS.
Ths secton ncreases the surta rates on ta payers other than corporatons.
Ths surta schedue has been dscussed n a prevous porton of the report.
The ncrease s effectve n the case of ta abe years begnnng after December
81,1939.
S CTION 8. CORPOR TION T .
The rates of Income ta on corporatons are ncreased 1 per centum effectve
wth respect to ta abe years begnnng after December 31, 1939. Ths secton
makes the specfc rates named n e stng aw 1 per centum arger regardess
of the character of the corporaton, whether arge or sma, or whether of a
speca cass or of a genera cass. The effect of e stng aw, together wth the
amendment, s to sub|ect to the 1 per centum ncrease corporatons, such as
banks and Insurance companes, whose rate of ta under e stng aw s th
same as the rate on corporatons In genera.
S CTION 4. NONR SID NT LI N INDI IDU LS.
Ths secton Increases the rate of Income ta upon nonresdent aen nd-
vduas not engaged n trade or busness wthn the Unted States and not havng
an offce or pace of busness theren from 10 per centum to 15 per centum,
such Indvduas beng ta ed under e stng aw on ther recepts from f ed and
determnabe Income from Unted States sources, such as nterest, rents, dv-
dends, royates, etc.
Ths secton aso, In vew of ths ncreased rate, makes an ad|ustment n th
fgure of 21, 00 In e stng aw, whch s the pont at whch a nonresdent
aen ndvdua s e empted from the fat 10 per centum ta provded for n
e stng aw and s sub|ected to ta at norma and sur ta rates on the same
tems of ncome as above mentoned. Twenty-one thousand s hundred doars
Is changed to 24,000, and the secton aso ncreases from 10 per centum to 15
per centum the mnmum rate of ta payabe by an ndvdua havng gross
Income of such amount.
S CTION . WIT OLDING O T T SOURC .
stng aw provdes for varous rates at whch ta es may be wthhed at
the source n the case of nonresdent aens and foregn corporatons. These rates
are ncreased by ths secton to correspond wth the ncreased rates of ta
mposed bv other sectons of the b. The new wthhodng rates are to take
effect on une 2 , 1940.
S CTION . P RSON L MPTIONS.
Ths secton broadens the base for the Imposton of the ncome ta by
owerng the persona e empton of marred persons from 2,500 to 2,000,
and the persona e empton of snge persons from 1,000 to 800. The secton
aso reduces to 800 the persona e empton of nonresdent aen ndvduas,
whch under e stng aw Is a fat 1,000 regardess of marta status.
smar change Is made, n ths secton, n the case of Unted States ctzens
dong busness In any possesson of the Unted States.
S CTION 7. R TURNS O INCOM T .
Under e stng aw, the requrement of fng a return n the case of nd-
vduas Is based upon the amount of the net ncome equa to or n e cess of
the persona e empton, or a gross ncome of 5,000 or over. Ths secton
abandons the net-ncome test as the bass for the requrement of a return and
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577
Msc.
substtutes a test of gross ncome equa to or n e cess of the persona e emp-
ton. Thus, a return s requred from an ndvdua who s snge or marred
and not vng wth husband or wfe f hs gross Income s 800 or over, and
from a marred ndvdua vng wth husband or wfe f havng a gross
ncome of 2,000 or over f the other spouse has no gross ncome, or havng a
gross ncome together wth the spouse of 2,000 or over.
smar change has been made wth respect to fducary returns.
Ths secton aso reduces from 1,000 to 800 the amount of payments to
ndvduas whch requres an nformaton return from the payor of the
ncome.
S CTION 8. CIG R TT P P RS.
Ths secton amends secton 2000(d) of the Interna Revenue Code to remove
the present e empton of packages and books contanng 25 papers or ess from
the e stng ta on cgarette papers n packages or books. Packages and books
contanng 25 papers or ess w thus be sub|ect to the ta n the same manner
as those contanng more than 25 and not more than 50 papers. The amend-
ment made by ths secton s effectve uy 1, 1940.
S CTION 9. TR TY O LIG TIONS.
Ths secton provdes that none of the amendments made by ths tte of the
b sha appy n any case so as to be contrary to any treaty obgaton of
the Unted States.
S CTION 10. T L T RS TO W IC TITL PPLIC L .
Ths secton provdes that the amendments made by ths tte sha be
appcabe ony wth respect to ta abe years begnnng after December 31,
1939, but an e cepton s made of the amendments made by secton 5, reatng
to the rates of wthhodng of ta at the source, whch, as has aready been
ponted out, s effectve une 2 , 1940, and secton 8, reatng to the ta on
cgarette papers, whch s effectve uy 1, 1940.
Tte II.
Ths tte contans temporary provsons ncreasng rates of ta n genera
for a perod of fve years, and mposes necessary foor stocks ta es to compe-
ment the ncreases n certan e cse ta es. these provsons, e cept as
specfcay ponted out herenafter, are effectve uy 1, 1940, to contnue unt
uy 1, 1945.
S CTION 201. SUP R-T ON INCOM S.
Ths secton adds a new secton 15 to Chapter 1 of the Interna Revenue
Code provdng that for ta abe years begnnng after December 31, 1939, and
before anuary 1, 1945, each ta payer s ta (after appyng the amendments
made n Tte I of the b) sha be ncreased by 10 per centum of the amount
thereof. or the purposes of ths 10 per centum ncrease, the ta whch s to
be ncreased s computed before the appcaton of the foregn ta credt and
the credt for ta es wthhed at source. Suppose, for e ampe, that the net
ncome of the corporate ta payer s 100,000, of whch 0,000 s attrbutabe
to a foregn country, to whch a ta of 25,000 has been pad. Under e stng
aw the Unted States ta before appyng the credt s 18,000, and the credt
s that proporton of 18,000 whch 0,000 bears to 100,000, or three-ffths,
or 10,800, thus makng the ta payabe 7,200.
Under the b the ta w be computed as foows:
Net ncome 100,000
Ta (computed wthout secton 15) 19,000
10 per cent ncrease 1,900
Tota 20, 900
oregn ta credt three-ffths of 20,900 12,540
Ta payabe under b.
8,3 0
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578
Ths secton aso provdes, however, that n no case sha the effect of the
secton be to ncrease by more than 10 per centum the amount by whch the
net ncome e ceeds the ta computed wthout regard to secton 15. Ths
mtaton has the effect of affordng reef to noncorporate ta payers whose
ncome ta , computed wthout regard to the super-ta provsons, amounts to
more than 50 per centum of ther net ncome. It s provded that such ta -
payers sha pay a super-ta of not more than 10 per centum of ther Income
remanng after deducton of ncome ta computed wthout regard to the super-
ta provsons. Ths mtaton may be ustrated by the foowng e ampe:
The net ncome of an ndvdua entted to the ma mum earned ncome
credt and havng no capta gans or osses, after appcaton of the persona
e empton and credt for dependents, s 750,000, and hs ta abty com-
puted wthout regard to secton 15 s 497,724. The dfference between the
net ncome and the ta abty s 252,27 . The ta under secton 15 s 497,724
pus 10 per centum of 252,27 , or 522,951. 0. If such a mtaton had not
been provded for, the ta under secton 15 woud have been 547,49 .40. It
shoud be noted that the effect of ths mtaton on the 10 per centum Increase
s to reeve from any Increase a ta payer who under e stng aw, as amended
by Tte I, has no net ncome, because he has a net ong-term capta oss,
but s sub|ect to ta under secton 117(c)2 of the Interna Revenue Code.
The secton docs not appy n any case where ts appcaton woud be
contrary to the terms of any treaty obgaton of the Unted States.
S CTION 202. T S O WIT OLDING.
Secton 202 of the b nserts a new subsecton (h) at the end of secton
143 of the Interna Revenue Code. Ths subsecton ncreases temporary the
11, 15, and 1 per centum rates of wthhodng prescrbed by sectons 143 and
144, as amended by secton 5 of Tte I, to 12 o, 1 o and 17 o per centum,
respectvey. The ncreased rates are to be n effect durng the perod after
une 25, 1940, and before anuary 1, 1945. The ncreased rates of wth-
hodng correspond to the rates of ta effectve for the 5-year perod on non-
resdent aen ndvduas and foregn corporatons not engaged n trade or
busness n the Unted States and not havng an offce or pace of busness
theren. The date une 2 s used to mark the start of the perod of the
Increased rate because t was deemed necessary to have a date as cose as
reasonaby possbe to the date of enactment of the ct, but whch woud
provde necessary tme for the wthhodng agents to compy wth the aw.
Ths subsecton does not appy n any case where ts appcaton woud be
contrary to the terms of a treaty obgaton of the Unted States.
S CTION 203. P RSON L OLDING COMP NI S.
Secton 203 of the b amends secton 500 of the Interna Revenue Code by
desgnatng the present secton as subsecton (a) and addng a new subsecton
(b) at the end. The new subsecton Increases by 10 per centum the amount
of surta payabe by any persona hodng company under the e stng aw.
The tota amount of surta under the amendment s thus obtaned by ascer-
tanng the surta payabe and then addng thereto 10 per centum of that
fgure. The 10 per centum ncrease s to be n effect for any ta abe year
begnnng after December 31, 1939, and before anuary 1, 1945.
S CTION 204. C SS-PRO ITS T .
Ths secton amends the Interna Revenue Code to provde for a 10 per
centum ncrease n the amount of e cess-profts ta payabe for Income-ta
ta abe years endng after une 30, 1940, and before uy 1, 1945. The pro-
vsons for the ncreased ta w consequenty affect e cess-profts ta abty
for fve ncome-ta ta abe years.
S CTION 205. C PIT L STOC T .
Secton 1200 of the Interna Revenue Code s amended by ncreasng the
rate of capta stock ta from 1 for each 1,000 of the ad|usted decared vaue
of capta stock to 1.10 for ench such 1,000 of vaue. Ths sha appy for
the year endng une 30, 1940, and for the ne t four succeedng years endng
une 30.
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579
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S CTION 20 . ST T T .
10 per centum ncrease s proposed In the amount of estate ta payabe
n the case of estates of decedents dyng wthn a perod of fve years after
the date of the enactment of the proposed ct Such ncrease w be com-
puted upon the amount of ta as determned by the rate schedue or sched-
ues of e stng aw after subtractng from the amount so obtaned the amount
of credt for gft ta es pad, as provded for n sectons 813(a) and 93 (b) of
the Interna Revenue Code, and aso the amount of any State, nhertance,
egacy, or successon ta es pad to any State, Terrtory, the Dstrct of Coumba,
or possesson of the Unted States (not e ceedng 80 per centum of the basc
estate ta of 192 Subchapter of Chapter 3 of the Interna Revenue Code),
as provded for n secton 813(b).
Thus, f the basc estate ta (Subchapter of Chapter 3), computed n
accordance wth the rate schedue set out n secton 810, amounts to 1,500,
and the addtona estate ta (Subchapter of Chapter 8), computed as pre-
scrbed n secton 935, amounts to 8,100, and the credt aganst the amount
of basc estate ta on account of the payment of any such estate, nhertance,
egacy, or successon ta es amounts to 1,200, and the gft ta credt amounts
to 100, the operaton of the proposed super-ta s ustrated In the foowng
tabe:
asc estate ta (Chapter 3 of Code) 1,500
ddtona estate ta (Chapter 3 of Code) 8,100
Tota ta under e stng aw before credts 9, 00
Credts under e stng aw:
Gft ta credt 100
Credt for State ta es 1,200
Tota estate ta under e stng aw 8,300
10 per centum of 8,300 830
Tota estate ta under b 9,130
S CTION 207. OUT T .
Ths secton provdes for each of the caendar years 1941 to 1945, both
Incusve, an ncrease of 10 per centum n the gft ta computed accordng
to the rate schedue set forth n secton 1001 of the Code.
The foowng e ampe ustrates the computaton of the ta for the year
1943. ssume the ta payer made net gfts of 50,000 n 1943, and aggregate
net gfts of 100,000 for precedng caendar years, and that no specfc e empton
has been camed, or s camed for 1943.
Gft ta under e stng aw.
1942 and pror year gfts 100, 000
1943 gfts 50,000
Tota 150, 000
Ta under secton 1001 (a) 1 13, 575
Ta under secton 1001 (a)2 7, 200
1943 gft ta payabe under e stng aw , 375
Ta under h.
110 per centum of ta under 1001 (a) 1, or 13,575 14,932.50
110 per centum of ta under 1001 (a)2, or 7,200 7, 920. 00
Tota 1943 gft ta 7,012.50
or the caendar year 1940, In order to prevent the n|ustce that woud be
caused by appyng the ncrease over the whoe year f some of the gfts were
made before the enactment of the ct, It s provded that ony that porton of
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580
the 10 per centum Increase sha be apped whch corresponds to the rato
whch the amount of the 1940 gfts made after the enactment of the ct bears
to the tota amount of 1940 gfts. or the purpose of ths proraton the frst
4,000 of gfts to each donee s not counted as a gft, and chartabe, etc., gfts
aowed as a deducton under e stng aw are not counted. The specfc e emp-
ton of 40,000 granted by secton 1004(a) 1 s not to be taken nto account
(whether camed In whoe or n part for 1940) n ascertanng the rato to
be apped.
The foowng e ampe w ustrate the computaton of the ta for 1940.
ssume the ta payer has made (from 1932 to 1939, ncusve) net gfts of
1,040,000 and before 1940 has camed no part of the specfc e empton of
40,000. In 1940 he makes gfts to charty: 100,000 to charty n March,
and 75,000 to Y charty n ugust. e aso gves 0,000 to ohn Smth n
pr and 40,000 to hm n September. The ta w be computed as foows:
1939 and pror year gfts 1,040,000
1940 gfts before enactment of ct :
(1) Gfts to ohn Smth 0,000
(2) Gfts to charty 100,000
1940 gfts after enactment of ct:
(1) Gfts to ohn Smth 40,000
(2) Gfts to Y charty 75, 000
Oft ta under e stng aw.
1939 and pror year gfts , 1, 040. 000
1940 gfts to ohn Smth ( 100,000 mnus frst 4,000) 9 ,000
1940 gfts to charty 175, 000
Tota 1,311,000
Deduct gfts to charty 175, 000
1,13 . 000
Deduct 40,000 specfc e empton camed 40,000
1,09 .000
Ta under secton 1001 (a) 1 ISO. 900
Ta under secton 1001 (a)2 17 ,550
Gft ta payabe for 1940 under e stng aw 13,440
Ta under b.
Rato of 1940 ta abe gfts after enactment to tota 1040 ta abe _ 40,000
gfts I 9 .000Or S
10 per centum of 13,440 1,344
2 of 1,344 5 0
Pus reguar 1940 ta 13, 440
Tota 1940 gft ta 14,000
Sf TION 208. T ON TR NS RS TO OID INCOM T .
Ths secton amends secton 1250 of the Interna Revenue Code by ncreasng
the e cse-ta rate theren provded from 25 per centum to 271/f per centum.
Secton 1250 provdes for an e cse ta on transfers made by ctzens or res-
dents of the Unted States or domestc corporatons and partnershps to foregn
corporatons, uness under secton 1251 pror to the transfer t s estabshed
to the satsfacton of the Commssoner that the transfer s not to avod edera
ncome ta es. The ncrease n ta rate s to be effectve for the perod after the
date of the enactment of the ct and endng before uy 1, 1945.
S CTION 209. CONTINU TION O CIS T S.
Certan e cse ta es and ncreased rates of e cse ta es under e stng aw
are due to e pre In 1941. Snce the b proposes to ncrease the rates of such
ta es (the Increases are specfed n secton 210) unt uy 1, 1945, t s neces-
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581
Mso.
sary to e tend the temporary provsons. Secton 209 of the b therefore
provdes for such contnuaton. The ta es so e tended or Increased by ths
secton are as foows:
Stamp ta es:
Issues of securtes, bond transfers, and deeds of conveyance.
Stock transfers.
Manufacturers e cse ta es I
Lubrcatng os.
Gasone.
ectrca energy.
Tres and Inner tubes.
Toet preparatons.
utomobe trucks.
Passenger automobes and motorcyces.
Parts and accessores for automobes.
Rado sets.
Mechanca refrgerators.
Matches.
Msceaneous ta es:
Teegraph, teephone, rado, and cabe factes, eased wres, etc.
Transportaton of o by ppe ne.
dmssons to theaters, concerts, cabarets, etc.
Import ta es on petroeum, coa, umber, and copper.
The admssons ta , In so far as the e empton Is concerned, s treated n
secton 211.
S CTION 210. MISC LL N OUS CIS S.
Secton 210 of the b nserts a new Chapter 9 In the Interna Revenue Code,
to be entted Super-ta or ve Tears. Secton 1 50 of such new chapter
provdes for an ncrease n the rates of ta now appcabe wth respect to
most of the msceaneous e cses and occupatona ta es. The e cses affected,
and the ncreased rates, caed super-ta rates, are specfed n the schedue
contaned In secton 1 50. The amount of the ncrease n each case has been
stated prevousy n ths report The Increased rates are effectve for the
perod after une 30, 1940, and before uy 1, 1945. Thus, f the ta s on
the sae of an artce, as n the case of the manufacturer s e cse on rado
parts, and such sae occurs after une 30, 1940, It s ta abe at the ncreased
or super-ta rate. If the ta Is on transportaton, as n the case of the trans-
portaton of crude petroeum by ppe ne, and such transportaton orgnates
after une 30, 1940, It s ta abe at the ncreased or super-ta rate. If the ta
s occupatona ta , the Increased rate appes for the fsca year begnnng
uy 1, 1940, or part thereof durng whch the occupaton s carred on, and
contnues for four more years.
S CTION 211. DMISSIONS T .
The present aw e empts from admssons ta admssons of ess than 41
cents unt uy 1, 1941, and thereafter admssons of 3 or ess. The b, n
secton 211, e empts ony admssons of ess than 81 cents unt uy 1, 1945,
after whch tme admssons of 3 or ess w be e empt
S CTION 212. TO CCO, SNU , CIG RS, CIG R TT S, ND CIG R TT P P RS.
Ths secton amends the Interna Revenue Code to ncrease the rates of ta
appcabe to tobacco (other than chewng tobacco), snuff, cgars, cgarettes,
and cgarette papers and to Impose a foor stocks ta on a these artces
e cept cgarette papers. Subchapter of Chapter 15 of the Interna Revenue
Code s amended by addng a new secton 2004 whch, for the perod begnnng
uy 1, 1940, and before uy 1, 1945, ncreases a rates of ta wth respect to
the artces named by 1 per centum.
Whe the ta rates wth respect to cgarette papers are ncreased to 7/2,
1 and 2 cents, respectvey, no Increase of the rate of ta wth respect to
cgarette tubes Is made. The ta on cgarette tubes returns very tte revenue
and s coectbe by stamp. It was thought mpractcabe to provde for an
ncrease of of a cent because the admnstratve dffcutes nvoved n ssung
new stamps woud be out of a proporton to the very sma ncreased revenue
that woud resut from an ncreased rate of a .
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582
ecause of the ncrease n the rates of tobacco ta provded for n the pro-
posed new secton 2004, t s proposed to add to the Interna Revenue Code
a new secton 2005 whch w mpose a foor stocks ta on tobacco products
(other than chewng tobacco) hed on uy 1, 1940, by any person for sae
otherwse than n reta stocks. The rate of the foor stocks ta s the
dfference between the rates of ta mposed by e stng aw and the ncreased
rates contaned n the proposed new secton 2004. s a resut of the foor
stocks ta , a such artces on whch ta must be pad whch are removed for
sae or consumpton after une 30, 1940, w bear a tota ta equa to the
ncreased rates of ta mposed by secton 2004 on artces manufactured after
une 30, 1940.
The proposed new subsecton 2005(b) provdes that every person requred to
pay the foor stocks ta sha, on or before ugust 1, 1940, make a return
and pay such ta . speca provson has been ncuded n subsecton (b)
desgned to smpfy the coecton of foor stocks ta wth respect to artces
hed by manufacturers and mporters. It s recognzed that many such ta -
payers w, on uy 1, 1940, have on hand (a) artces to whch no ta stamps
have been aff ed ( ) artces to whch ta stamps have been aff ed and (e)
unattached ta stamps purchased at the od rates of ta .
Under secton 2005(b) the Commssoner w have authorty n the case of
manufacturers and mporters to dspense wth the requrement of a foor
stocks ta return wth respect to artces sub|ect to ta hed on uy 1, 1940,
to whch ta stamps have not been aff ed. The foor stocks ta payabe wth
respect to such artces woud then be pad by the ta payers aff ng the usua
ta stamps, purchased however at the ncreased rates of ta rather than the
od rates of ta . or e ampe, the manufacturers ta due wth respect to a
package of 20 sma cgarettes at the od rate woud be cents the foor stocks
ta , 1 cent. Instead of aff ng a stamp purchased for cents on the package
of cgarettes and fng a foor stocks ta return wth respect to the 1-oent
foor stocks ta , the ta payer coud aff a stamp purchased for 7 cents ato-
gether. In order to make ths smpfed procedure possbe, provson s made
In secton 2005(b) to gve the Commssoner authorty to make an assessment
aganst ta payers wth respect to unattached ta stamps on hand uy 1, 1940,
for the dfference between the amount pad for such stamps and the ncreased
rates of ta . Ths provson of aw s smar to one contaned n secton 100
of the Revenue ct of 1917 and secton 1311 of the Revenue ct of 1918.
s to artces to whch ta stamps have aready been aff ed, ths procedure
coud ony be foowed f ta payers aff ed to stamped artces an addtona
stamp to cover the foor stocks ta . Wth respect to such stamped artces.
It woud be smper to have the foor stocks ta pad by means of return and
dspense wth the necessty of aff ng an e tra stamp.
S CTION 213. DISTII D SPIRITS.
Ths secton Increases the rates of ta on dsted sprts, brandy, hgh-proof
wnes, queurs, etc., whch are cassfed as dsted sprts, and Imported per-
fumes contanng dsted sprts, by 75 cents per proof gaon or, n some cases,
wne gaon when beow proof. The ncrease appes to dsted sprts, artces
cassfed as dsted sprts, and brandy wthdrawn from bond after une 30,
1940, and before uy 1, 1945, and to such perfumes Imported durng such perod.
foor stocks ta s Imposed on dsted sprts, artces so cassfed, and
brandy hed by any person for sae or for use n the manufacture or producton
cf an artce ntended for sae. Ths ta s at a rate of 75 cents per proof gaon.
n e empton of 100 wne gaons s accorded to reta deaers. The foor stocks
ta Is mposed ony on dsted sprts upon whch the Interna revenue ta has
been pad, n order not to mpose a foor stocks ta on dsted sprts agng n
warehouses and not yet wthdrawn. Ths corresponds to the ta aton, at the n-
creased rate, of sprts, etc., removed after une 30, 1940, and before uy 1, 1945.
Returns and payment of the foor stocks ta must be made on or before ugust
1, 1940, but the Commssoner may e tend the payment to a date not ater than
ebruary 1, 1941. dmnstratve provsons and penates appcabe to the
reguar dsted sprts ta es are Incorporated by reference.
technca amendment to the provsons reatng to drawback of ta Increases
the rates of drawback to 3 and 2.75 where the ta has been pad at such rates.
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S CTION 214. WIN S ND RM NT D M LT LI UORS.
Ths secton ncreases by 20 per centum the rates of ta on wnes produced n
or mported nto the Unted States. The ncrease appes to such wnes sod or
removed for consumpton or sae after une 30, 1940, and before uy 1, 1945.
Ths ncrease s effectuated by an ncrease n the specfc rate n the schedues
under the wne ta .
smar ncrease s made n the rate of ta on fermented mat quors (beer,
ager beer, ae, porter, and smar mat beverages) sod or removed for con-
sumpton or sae durng such perod. The rate s ncreased from 5 per barre
to per barre. foor stocks ta s mposed on fermented mat quors, at a
rate equa to the ncrease n rate of ta made appcabe to such artces by
secton 8190, hed on uy 1, 1940, by any person, other than a reta deaer,
and ntended for sae.
S CTION 215. PL YING C RDS.
Ths secton Increases from 10 cents to 11 cents the rate of ta on each pack
of payng cards manufactured or Imported and sod, or removed for consump-
ton or sae, n the cuse of artces manufactured, etc., after une 30, 1940, and
before uy 1, 1945
S CTION 21 . CR DITS O T ON UTOMO IL S, TC.
Secton 3403(e) of the Interna Revenue Code aows a credt aganst the auto-
mobe, .truck, and motorcyce ta on account of the sae n connecton wth the
vehce of tres and tubes wth respect to whch the ta on tres or tubes has
been pad. Ths credt under e stng aw s 2 per centum, In the case of auto-
mobe trucks, and 3 per centum n the case of automobes and motorcyces, of
the purchase prce or saes prce of smar tres and tubes.
Ths secton of the b ncreases the credt to 2 per centum and 3 per
centum, respectvey, wth respect to such vehces sod after une 30, 1940, and
before uy 1, 1945. These ncreases correspond to the ncrease made by secton
210 of the b n the rates of ta on automobes, etc. The credt s aowabe
at 2 per centum and 3 per centum regardess of the rate of the ta pad on
the tres and tubes or ther date of acquston.
Tte III.
a
S CTION 801. SP CI L UND.
Ths secton provdes that the Secretary of the. Treasury sha as soon as
practcabe after the end of each quarter determne the addtona amount of
ta es coected attrbutabe to the ncreases n ta es made, and to the foor
stocks ta es mposed, by the amendments to the Interna Revenue Code n Tte
II of the b, and the amounts so determned sha be set asde as a speca fund
whch sha be avaabe ony for the retrement of any of the Natona Defense
Seres obgatons authorzed by secton 302 of the b. In the amount to be
set asde In the speca fund there s not to be ncuded the amount of ta es
attrbutabe soey to the e tenson of e cse ta es and rates of e cse ta es
contaned n secton 209 of the b, nor any amount coected under admssons
ta es attrbutabe to a basc admsson charge of more than 40 cents. If at any
tme the amounts n the fund are not suffcent for the retrement of the ob-
gatons of the Natona Defense Seres, the Secretary of the Treasury s author-
zed and drected to transfer to the fund moneys out of the genera fund of the
Treasury. ny amounts n the speca fund not necessary for the retrement
of the obgatons sha be deposted n the genera fund of the Treasury.
The revenues attrbutabe to Tte II of the b w be coected and pad
Into the Treasury n accordance wth estabshed procedures. Shorty after
each quarter the Secretary of the Treasury, actng upon nformaton obtaned
by the ureau of Interna Revenue from the offces of coectors of nterna
revenue, w determne the amounts coected durng the precedng quarter
whch under ths secton are requred to be set asde n the speca fund, and
on the bass of such determnaton he w transfer the amount thereof to the
speca fund for the retrement of the natona defense obgatons outstandng.
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584
It w be obgatory upon the Treasury, begnnng uy 1, 1940, to retre the
natona defense obgatons and charge the amount so retred to the speca
fund. The Secretary of the Treasury has stated before ths commttee that It
s hs ntenton to arrange the maturtes of any natona defense obgatons
ssued under the authorty contaned In ths b so as to nsure as neary as
possbe the appcaton of the Increased revenue from the enactment of Tte II
to the retrement of natona defense obgatons durng the year n whch such
revenue s receved.
S CTION 802. N TION L D N8 O LIG TIONS.
Ths secton amends secton 21 of the Second Lberty ond ct, as amended.
That secton now provdes that the face amount of bonds, certfcates of In-
debtedness, Treasury bs and notes ssued under the Second Lberty ond ct,
as amended, sha not e ceed 45,000,000,000 outstandng at any one tme. On
une 30, 1940, there w be a margn under ths mtaton of ony 1,700,000,000
whch can be avaed of by the Treasury to ssue addtona pubc-debt obga-
tons for the purpose of obtanng funds In addton to 700,000,000 to be
recovered from governmenta corporatons, to meet the ncreased defct In the
fsca year 1941 If the Presdent s defense recommendatons are adopted by the
Congress. More than 1, 00,000,000 of ths defct w be due to addtona
emergency natona defense e pendtures. On the bass of present recommenda-
tons, tota natona defense e pendtures w amount to about 3,250,000,000,
the hghest amount spent for ths purpose In any year n our hstory, e cept
for the two fsca years when ths country partcpated In the Word War.
In order to fnance natona defense e pendtures after une 30, 1940, It Is
proposed to permt the Treasury to ssue wthn the framework of current
statutes reatng to the pubc debt, 4,000,000,000 of short-term pubc-debt
obgatons wth maturtes not e ceedng fve years, to be desgnated Natona
Defense Seres. These obgatons w be n addton to the 45,000,000,000
face amount of pubc-debt obgatons permtted to be outstandng under the
Second Lberty ond ct, as amended. Ths addtona 4,000,000,000 author-
zaton for natona defense obgatons permts ony a temporary ncrease n the
mtaton on outstandng pubc-debt obgatons because, to the e tent that
such natona defense obgatons are retred under the provsons of secton
801, the authorzaton w be reduced.

1940-29-1033
R NU CT O 1940.
Senate Report No. 18 , Seventy-s th Congress, Thrd Sesson. Caendar No. 194 .1
une 15, 1940.
Mr. arrson, from the Commttee on nance, submtted the foowng re-
port to accompany . R. 10039 :
The Commttee on nance, to whom was referred the b ( . . 10039) to
provde for the e penses of natona preparedness by rasng revenue and
Issung bonds, to provde a method for payng for such bonds, and for other
purposes, havng consdered the same, report favoraby thereon wth amend-
ments and recommend that the b as amended do pass.
Your commttee concurs In the provsons of the ouse b wth the foowng
changes:
(1) Increases on tobacco and tobacco products under the ouse b have
been emnated. Tour commttee Is of the opnon that the ta on tobacco
and tobacco products s aready very hg and that any ncrease In ths ta
woud have a tendency to n|ure the tobacco farmer and decrease the con-
sumpton of tobacco products. Under the commttee amendment the rates of
e stng aw now appcabe to snuff, snuff four, manufactured tobacco, cgars,
cgarettes, and cgarette papers are contnued.
(2) Under e stng aw packages and books contanng 25 papers or ess
are e empt from the ta on cgarette papers. Tour commttee beeves that
ths e empton shoud be contnued for the reason that Its emnaton woud
resut n consderaby curtang the consumpton of smokng tobacco. The
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commttee amendment, therefore, restores ths e empton, whch had been
emnated n the ouse b.
(8) The provsons of the ouse b affectng dsted sprts, wnes, and
fermented mat quors were agreed to wth the foowng e ceptons:
(a) The ouse b dd not Increase the ta on rectfed sprts. Your com-
mttee beeves that some Increase shoud be made In ths ta . ccordngy, the
rate has been Increased from 30 cents on each proof gaon to 40 cents on each
proof gaon. correspondng foor stocks ta of 10 cents Is mposed on ac-
count of the Increased rate.
( ) Under the ouse b an e empton of 100 wne gaons Is aowed reta
deaers In the case of foor stocks ta es mposed upon dsted sprts. Your
commttee Is of the opnon that no e empton shoud be aowed. The aowance
of an e empton woud gve an opportunty for the reta trade to stock up
wth ta -pad quor pror to the tme the Increased rates were effectve.
(4) Your commttee has changed the ta wth respect to admssons. Under
e stng aw admssons of 40 cents or ess are e empt from ta . dmssons of
over 40 cents are sub|ect to a ta at the rate of 1 cent on each 10 cents or fracton
thereof. Whe the ouse b dd not change the rate of ta under e stng
aw, t e empted ony admssons of ess than 31 cents. Your commttee has
provded the foowng rates for ta ng admssons, whch w consderaby
Increase the revenue derved from ths source over that produced by the ouse
b:
dmssons up to and ncudng 9 cents No ta .
dmssons, of more than 9 cents and ess than 20 cents- 1 cent.
dmssons of 20 cents or more - 1 cent on each 10 cents
or fracton thereof.
The 1-cent ta w appy to admssons from 10 to 19 cents, both Incusve.
n admsson of 20 cents w be ta ed at 2 cents. dmssons from 21 to 30
cents w be ta ed at 3 cents admssons from 31 to 40 cents w be ta ed
at 4 cents and admssons from 41 to 50 cents w be ta ed at 5 cents.
dmssons over that amount w be ta ed at 1 cent for each 10 cents or
fracton thereof.
(5) few mnor changes were made In the Income ta provsons.
(a) The rate of ta on foregn corporatons not engaged n trade or busness
n the Unted States and not havng an offce or pace of busness theren, whch
n the case of dvdends Is 10 per cent under e stng aw, was changed to 15
per cent Instead of 11 per cent as provded n the ouse b and the rate of
ta on other f ed or determnabe Income, whch under the e stng aw s 15
per cent and under the ouse b was changed to 1 per cent, s eft at 15
per cent. These changes were deemed necessary so that the same rate of ta
w appy to foregn corporatons not engaged n trade or busness wthn the
Unted States and not havng an offce or pace of busness theren as appcabe
to nonresdent aen ndvduas of ke character. The temporary defense ta
ncreases ths 15 per cent rate for the 5-year perod to 1 per cent.
Snce these ta es are wthhed at the source, t s Impossbe for the wth-
hodng agent to determne In many cases whether the actua recpent of the
ncome s a corporaton or an ndvdua. ny dfferenta between the cor-
porate rate and the Indvdua rate can be easy avoded and w cause sub-
stanta admnstratve dffcuty. or these reasons the ouse b was changed
In ths respect. Correspondng changes are made wth respect to the rate of
wthhodng.
( ) Under the ouse b a trust was requred to fe an ncome ta return
If the gross Income for the ta abe year was 100 or over. Your commttee
beeves that ths puts an undue burden upon the fducary and w resut n
the fng of unnecessary returns. ccordngy the b s changed so that a
trust Is ony requred to fe a return where Its net ncome for the ta abe year
a 100 or over or ts gross ncome s 800 or over. n Indvdua s not re-
qured to fe a return uness hs gross ncome Is 800 or over.
( ) Your commttee has added to the ouse b a provson to the effect
that artces sub|ect to the manufacturers e cse ta es whch pror to uy 1,
1940, were devered under eases, contracts of sae, or condtona saes, sha
be sub|ect to ta wth respect to payments made after une 30, 1940, on the
bass of the rates In effect pror to uy 1, 1940, and not at the ncreased rates.
(7) The temporary ta es, Imposed for the 5-year perod, are referred to n
the ouse b as superta es. Your commttee has amended the b so
that these ta es w be desgnated as defense ta es nstead of superta es.
290217 41 88
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58
R NU STIM T S.
The foowng tabe prepared by the Treasury Department shows the add-
tona revenue under the commttee b:
stmated addtona revenue1 attrbutabe to the proposed Revenue ct
of mo.
SOU C O R NU .
Tte I:
Income ta
Corporaton ncome ta 70,000,000
Indvdua ncome ta 252, 000,000
Tota Increase, Tte I 322,000,000
Tte II (defense ta es) :
Corporaton ncome ta 135,000,000
Indvdua ncome ta 123,01)0,000
Capta stock and e cess-profts ta es 12,000,000
state ta 29,000,000
Gft ta 3,000,000
cohoc beverage ta es
Dsted sprts 7 ,000,000
ermented mat quors 4 , 000. 000
Other 7,000. 000
Tota ncrease, acohoc beverage ta es 129, 000,000
Stamp ta es , 7,000,000
Manufacturers e cse ta es
Gasone 112,000,000
Other 30, 000.000
Tota ncrease, manufacturers e cse ta es 142,000.000
Msceaneous ta es 105,000,000
Tota ncrease, Tte II 85,000.000
Tota Increase, Ttes I and II 1,007,000,000
Treasury Department, Dvson of Researcb and Statstcs, une 17, 1940.
1 cudng (a) the nonrecurrng coectons of foor ta es on acohoc beverages, est-
mated for fsca year 1941 at 27,000,000, and (b) revenues resutng from the e tenson
of pertan e cse ta es as provded n Tte II, Sbc. 209. Contnuaton of cse Ta es,
but Incudng t e defense ta on such e cse ta es.
s reported by the Senate nance Commttee une 17, 1940.
It w be noted that despte the emnaton of the ta on tobacco and
tobacco products, your commttee b rases about 3,000,000 more than the
ouse b. Ths s due to the change In the admssons ta , and the Increased
ta on rectfed sprts.
(8) Your commttee has amended the ouse b to provde that the Pres-
dent Is hereby authorzed and drected to reduce appropratons for the e -
ecutve branch of the Government for the fsca year endng une 30, 1941
(e cept appropratons for natona defense, f ed charges, and trust funds),
In such manner that the tota amount of such reductons sha not be ess
than 10 per cent of the tota amount of the appropratons affected. Such
reductons n appropratons sha be Impounded and returned to the Treasury.
(9) Your commttee added an amendment termnatng on the date of the
enactment of the Revenue ct of 1940 the power and authorty of the Pres-
dent and the Secretary of the Treasury under the Sver Purchase ct of
1934, wth respect to the acquston of foregn sver, and aso repeang the
Interna revenue ta on transfers of any Interest In sver buon contaned In
secton 1805 of the Interna Revenue Code.
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Tte I Permanent Changes.
These changes appy to ncome ta es for ta abe years begnnng after
December 31, 1939. They are, therefore, appcabe to 1940 ncomes.
(1) The persona e emptons aowed ndvduas for ncome ta purposes
under the e stng aw have been reduced from 2,500 to 2,000 n the case
of marred persons and heads of fames and from 1,000 to 800 n the case
of snge persons. The b does not affect the 400 credt for dependents
aowed under e stng aw. Ths credt s aowed f the dependent receves
hs chef support from the ta payer and s under 18 years of age or ncapabe
of sef-support because mentay or physcay defectve.
(2) The surta es are ncreased on surta net ncomes n e cess of ,000
and the ncreases contnue up to surta net ncomes not n e cess of 100,000,
and from that pont the rates of e stng aw are retaned. Under the present
aw, the rate on surta net ncomes n e cess of 100,000 and not n e cess
of 150,000 s 58 per cent. Whe the rates appcabe to surta net Incomes
In e cess of 100,000 are not ncreased, the surta es payabe by ta payers
In these upper brackets are ncreased by reason of the hgher rates n the
ower brackets.
(3) The requrement as to fng ncome ta returns In the case of nd-
vduas has been changed. Under the e stng aw. an ndvdua s requred
to fe a return f hs net ncome amounts to 1,000 or more n the case
of a snge person, or 2,500 or more n the case of a marred person, and n
ether case f hs gross ncome s 5,000 or more. The b requres a return
from a snge person f hs gross ncome s 800 or more and from marred
persons f ether ther aggregate or separate gross Income s 2,000 or more.
(4) Nonresdent aens: Under e stng aw, a nonresdent aen ndvdua
not engaged n busness wthn the Unted States or not havng an offce or
pace of busness theren, s ta ed ony upon dvdends, nterest, or other f ed
or determnabe annua or perodca ncome at the rate of 10 per cent. Ths
rate may be reduced to 5 per cent n the case of a resdent of a contguous
country f so provded by treaty. Sub|ect to treaty provsons wth foregn coun-
tres, the 10 per cent rate has been ncreased to 15 per cent, whch corresponds
to the proportonate ncrease n burden mposed upon mercan ctzens and
resdents by the ncreases n ncome and e cse ta es under the b. Under
e stng aw, f uch a nonresdent aen ndvdua has a gross ncome of more
than 21, 00, whch s the eve at whch the average effectve rate equas 10
per cent, he s sub|ect to the fu norma and sur ta on hs f ed or determnabe
annua or perodca ncome. The b rases ths eve to 24,000 whch, under
the ncreased rates, s the pont whch equas an effectve rate of appro matey
15 per cent. Nonresdent aens engaged n busness In the Unted States or
havng an offce or pace of busness theren are sub|ect to the same rates as
appy to mercan ctzens wth respect to ncome from Unted States sources.
They w, therefore, be sub|ect to the Increase In ta appcabe to mercan
ctzens.
CORPOR TIONS.
(1) Domestc corporatons. Your commttee Increased the rate of ta on
corporatons by 1 per cent. In vew of the Increase n the ta burden mposed
upon ndvduas under the b, t was beeved that corporatons shoud bear
some part of the ncreased burden.
The rates under the proposed b and under the e stng aw are as foows
Norma ta net Incomes.
stng
aw.
UI,
In e cess of 5,000 and not In e cess of 20,000
Per cent.
12M
14
1
18
Per cent.
13M
15
17
IS
(2) oregn corporatons. Snce the ta on domestc corporatons s ncreased,
your commttee aso deemed t advsabe to make the same proportonate n-
crease n the ta on foregn corporatons dervng ncome from mercan sources.
Under e stng aw, foregn corporatons havng an offce or pace of busness n
the Unted States are sub|ect to a fat rate of 18 per cent. Ths has been n-
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588
creased under the b to 19 per cent. oregn corporatons not engaged In trade
or busness wthn the Unted States or not havng an offce or pace of busness
theren are ta abe ony upon ther dvdends, Interest, or other f ed or deter-
mnabe perodca or annua Income, and they are sub|ect to a ta of 15 per cent
on such ncome. In the case of dvdends, the rate Is 10 per cent uness receved
by a corporaton organzed under the aws of a contguous country, n whch case
the rate may by treaty be reduced to not ess than per cent The rate of 10
per cent Is Increased to 15 per cent and under the defense ta , to 1 per cent.
No ncrease In ta es w appy where ts appcaton w be contrary to any
treaty of the Unted States.
Trn. II. Temporary Changes.
The b makes certan temporary ncreases n the nterna-revenue aws for a
perod of fve years. These changes are brefy as foows:
(1) INCOM T .
or ta abe years begnnng after December 81, 1930, and before anuary 1,
1945, the ta computed n accordance wth the changes made n Tte I of the
b Is ncreased by 10 per cent thereof. To prevent the rate n the hgher brackets
from beng confscatory, a cushon Is Inserted whch prevents such ncrease from
beng greater than 10 per cent of the net Income n e cess of the ta computed
under e stng aw, as amended by Tte I. Ths cushon begns to operate where
the ta so computed s n e cess of 50 per cent of the net ncome, whch n the
case of a marred person s around 200,000. The foowng e ampes w show
the resut of the operaton of the ta and the cushon:
Ta under
e stng aw
as amended
Ta under
e stng aw
as amended
Net Income.
Super-
ta .
Net ncome.
Super-
ta .
by Tte I.
by Tte I.
13,000
So
2.80
10.00
48.00
(100,000
39,524
1 9.384
58 ,204
3,952.40
13.0 3.80
31,379. 0
5,000 .
1300,000
10,000
480
s.nno.ooo
It w be seen from the above e ampes that n the case of a marred man
wthout dependents wth 5,000 net Income, the defense ta s determned by
Increasng the ordnary ta of 100 by 10 per cent, or 10, makng a tota ta of
110. The cushon w not operate n ths case because the ordnary ta Is not
n e rpss of 50 per cent of the net ncome. In the case of a marred man wth
300,000 net ncome the 10 per cent defense ta f apped wthout the cushon,
woud amount to 1 ,93 .40, but snce the ordnary ta s n e cess of 50 per
cent of the net ncome the cushon appes. ccordngy, the defense ta n
ths ast e ampe s computed by appyng the 10 per cent aganst 130, 3 (the
amount of the net Income ess ordnary ta ) Instead of aganst the ta of
1 9,3 4. Ths makes the defense ta 13,0 3. 0 nstead of 1 ,93 .40.
(8) C SS-P O ITS T .
The amount of the e cess-profts ta payabe for any ta abe year endng after
une 30, 1940, and before uy 1, 1945, Is Increased by 10 per cent. Thus, a
corporaton wth an e cess-profts ta year endng uy 81, 1940, w be snb|ect
to the 10 per cent Increase. If the e cess-profts ta payabe s 1,000, the
defense ta w be 100, and the corporaton w pay a tota e cess-profts ta
of 1,100.
(8) C PIT L STOC T .
The capta stock ta s Increased for the year endng une 80, 1940, and
for the four succeedng years endng une 30, from 1 per thousand of ad|usted
decared vaue to 1.10 per thousand of ad|usted decared vaue.
(4) ST T T .
In the case of a decedent dyng nfter the enactment of ths b and before
the e praton of fve years after such date, the estate ta payabe (after ap-
pcaton of the credts provded for State death ta es and edera gft ta es),
s ncreased by 10 per cent.
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589
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( ) GI T T .
The gft ta Is aso Increased by 10 per cent, effectve for the caendar year
1940 and subsequent caendar years up to and ncudng the caendar year
1945.
or the caendar year 1940, the Increase s n effect apped ony to gfts
made after the date of the enactment of ths b. Ths Is accompshed by
determnng the gft ta for the entre year at the e stng rates and addng
thereto an amount whch bears the same rato to 10 per cent of the ta so
computed as the amount of gfts made after the enactment of the b bears to
the tota amount of gfts made durng the year.
(8) TR NS RS TO OID INCOM T .
Under the e stng aw, an e cse s Imposed upon the transfer of stock or
securtes by a ctzen or resdent of the Unted States, or by a domestc cor-
poraton or partnershp, or by a trust whch s not a foregn trust, to a foregn
corporaton as pad-n surpus or as a contrbuton to capta. The rate under
e stng aw s 25 per cent and ths has been ncreased to 27 per cent n the
case of any transfer made durng the perod after the date of the enactment
of ths b and before uy 1,1945.
(T) DISTILL D SPIRITS.
Your commttee ncreased the ta es on dsted sprts at the foowng
rates:
Dsted sprts.
Od rates.
New
age of
ncrease.
Dsted sprts generay
rand -- -
Imported perfumes.--
Rectfed sprts
2.2
2.00
2.25
.30
3.00
2.75
3.00
.40
oor stocks ta es are mposed upon dsted sprts whch on uy 1, 1940,
are hed by any person and ntended for sae or for use n the manufacture
and producton of any artce ntended for sae. The rate s 75 cents, whch
s the ncreased rate Imposed upon quor. Your commttee aso ncreased the
ta on rectfed sprts from 80 cents per gaon under e stng aw to 40 cents.
In addton a foor stocks ta of 10 cents per gaon s provded.
(8) R.
Your commttee ncreased the ta on fermented quors from 5 a barre to
a barre, effectve uy 1, 1940. Ths amounts to a 20 per cent ncrease In
the rate of ta . In addton, a foor stocks ta s mposed upon stocks hed
by manufacturers or whoesaers at the rate of 1 per barre.
(9) WITT S.
The ta es on wnes were ncreased at the foowng rates:
Od rate.
New rate.
Percent-
age of
Increase.
Cents.
Cents.
Per cent.
t wnes
Do.
5
15
18
30
20
20
20
20
20
Do
25
ft
8
Do _
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590
The reasons for the change n the rates on st wnes n secton 214 and
for the strkng out of any reference to the fortfcaton ta , s that It s
antcpated that . R. 9117 w became aw before ths b. The changes here
made In the rates w ncorporate the basc rates provded In . . 9117, whch
rates are ncreased by the b for the 5-year perod.
(10) DMISSIONS T S.
Under e stng aw, an admssons ta of 10 per cent s Imposed e cept
where the amount pad for admsson s ess than 41 cents. Instead of rasng
the rate of ta , your commttee deemed It much smper and more feasbe
from an admnstratve pont of vew to decrease the e empton from 40 to 9
cents. Upon admssons of from 10 to 19 cents, Incusve, your commttee paced
a ta of 1 cent. Upon admssons of 20 cents or more the rate s 1 cent for each
10 cents, or fracton thereof.
(11) OT R MISC LL N OUS T S.
The foowng tabe shows the ncreases n other msceaneous ta es:
Descrpton of ta .
Od rate.
New rate.
o seats
aes outsde of bo offce
Cabarets, roof gardens, eto..
Cub dues
Corporate securtes
Capta stock
Do
Do
Do
Insurance poces
Passage tckets
Do
Do
Safe-depost bo es
Pstos and revovers
Whoesaers In quor
Retaers In quor ....
rewers (more than 00 barres).
rewers (ess than 500 barres)...
Whoesaers In mat quors
Retaers n mat quors
Speca cases
Rectfers
Do
Sts
Do
Tres
Tubes
Toet preparatons
utomobes
Other automobes
uto parts..
Rados
rearms
Matches
ectrca energy.
Gasone
Lubrcatng os.
10 per cent.
...do
OS cents...
10 per cent.
10 cents
do..
2 cents
4 cents
5 cents
3 cents
1
3
U
10 per cent.
do
100.
25-.,
100..
50.
do..
20.
2
200
100
50-.
20-.
cents...
4 cents
10 per cent.
2 per cent..
3 per cent..
2 per cent..
5 per cent..
do..
Transportaton of o by ppe ne..
Transfers of bonds
Conveyances
ayng cards
10 per cent.
5 cents
3 per cent..
1 cent
4 cents
4 per cent..
4 cents
0 cents
10 cents
11 per cent.
do..
2 cents
11 per cent.
11 cents
....do
8 cents
5 cents
cents
4 cents
1.10
3.30
5. 0
11 per cent.
do
110.
27.50.
110...
55.
do..
22.
2.20.
220..
110..
55..
22
2 t cents
cents
11 per cent...
2 per cent..
3 per cent.
2 per cent.
5 per cent.,
do..
11 per cent...
5 4 cents
3 4 per cent..
1 cents
4M cents
per cent..
cents _.
cents
11c
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591
Msc.
(12) CONTINU TION O T MPOR RY CIS T S.
The b aso provdes for the contnuaton of the temporary mport and e cse
ta es whch ether e pre or have ther rates reduced n 1941. Under the b
these ta es w not e pre or have ther rates reduced unt 11)45. These are as
foows:
Stamp ta es:
Issues of securtes, bond transfers, and deeds of conveyance.
Stock transfers.
Lubrcatng os.
Gasone.
ectrca energy.
Tres and nner tubes.
Toet preparatons.
utomobe trucks.
Passenger automobes and motorcyces.
Parts and accessores for automobes.
Rado sets.
Mechanca refrgerators.
Matches.
Msceaneous ta es:
Teegraph, teephone, rado, and cabe factes, eased wres, etc
Transportaton of o by ppe ne.
dmssons to theaters, concerts, cabarets, etc.
Import ta es on petroeum, coa, umber, and copper.
The admssons ta s dscussed n another part of ths report.
(18) T S NOT INCR S D.
(1) No ncrease s provded n the case of certan ta es of a reguatory
nature, such as the ta es on whte phosphorus matches, m ed four, fed
cheese, narcotcs, sugar, btumnous coa, and certan types of frearms. Lke-
wse, the b does not ncrease certan e cse ta es on mports such as those
eved wth respect to coa, umber, copper, petroeum products, and certan
vegetabe os. The revenue from these ta es s sma, and snce they are de-
sgned for a partcuar functon whch an ncrease n ther rates mght mpar,
your commttee fee they shoud not be ncreased and some of them are affected
by recproca trade agreements.
(2) The b makes no changes n the ta es eved under the soca securty
program. These ta es are drected to a speca purpose and t s not fet that
they shoud be ncreased for the defense program.
(3) In the case of the ta es on communcaton factes (teephone, tee-
graph, rado and cabe), severe admnstratve dffcutes convnce your com-
mttee of the nadvsabty of ncrease n rates.
(4) No ncreases are provded n the case of the ta es on tobacco and tobacco
products.
Dscusson of Prncpa Income Ta Changes.
(a) Lowerng of pergona e emptons. Tte I of the b owers the persona
e empton from 1,000 to 800 n the case of snge persons and from 2,500
to 2,000 n the case of marred persons or heads of fames. Ths w make
sppro matey 2,190,000 new ta payers. Of the addtona revenue to be
derved from ths source appro matey 14,000,000 w be derved from new
ta payers. Ths s a permanent change and frst goes nto effect wth respect
to ta abe years begnnng after December 31, 1939.
( ) Tte I of the b aso ncreases permanenty the surta rates wth respect
to ta abe years begnnng after December 81, 1939. The norma ta rate,
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592
whch Is 4 per cent under e stng aw, s not changed n the b. The foowng
tabe shows the surta rates under the e stng aw and under the b:
Tabe I. Comparson of surta rates, e stng aw and proposed b.
mount of surta net Income.
stng
aw rate.
Proposed
b rate.
mount
of rate
Increase.
ceedng.
Not e ceed-
ng.
Percent.
Per cent.
Percent.
14,000
,000
4
4
0
8,000
8,000
8
1
8,000
10,000
8
8
2
10,000
12,000
7
10
3
12,000
14,000
8
12
4
14,000
1 ,000
9
IS
8
1 ,000
18,000
11
18
7
18.000
20,000
13
21
8
20,000
22,000
1
24
9
22,000
2 ,000
17
27
10
2 ,000
32,000
19
30
11
32,000
38,000
21
33
12
38,000
44,000
24
3
12
44,000
0,000
27
40
IS
0,000
,000
31
44
18
0,000
0,000
3
44
9
0,000
2,000
3
47
12
2,000
8,000
39
47
8
8,000
70,000
43
47
4
70,000
74,000
43
80
7
74,000
80,000
47
0
3
80,000
90,000
1
53
2
90.000
100,000
8
5
1
100,000
1 0,000
8
8
0
1 0,000
200,000
0
0
0
200.000
290,000
2
2
0
2 0,000
300,000
4
4
0
300,000
400,000

0
400,000
00,000
8
8
0
00,000
7 0,000
70
70
0
750,000
1,000.000
72
72
0
1,000,000
2,000,000
73
78
0
2,000,000
8,000,000
74
74
0
,000,000 and up
7
75
0
(c) Tota ncome tan our den. (1) Permanent ncreases: In order to secure
a compete pcture of the tota ncome ta burden, the foowng tabes are In-
cuded wth respect to a marred man wth no dependents. Tabe II shows the
Increased norma and sur ta rates on a marred man wth no dependents under
e stng aw and under the b. Whe there s no change In the norma ta rate
over that of e stng aw, the norma ta Itsef Is Increased by reason of the
owerng of the e emptons to 800 for snge persons and to 2,000 for marred
persons.
b, marred person, no dependents, a ncome earned.
Norma ta .
Surta .
Net Income.
Surta
Present
aw.
Proposed
b.
Present
aw.
Proposed
bn.
2,000-
0
0
0
0
0
2,500 __
0
10
0
0
0
3,000...
8
28
0
0
0
4,000
44
4
0
0
0
5,000.
80
100
0
0
0
11
13
0
0
0
7,000
152
172
20
40
30
8,000....
188
208
0
80
20
9,000 _
224
244
105
140
3
10,000
2 0
280
158
200
48
11,000
29
31
210
280

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593
Msc.
bU, marred person, no dependents, a ncome earned Contnued.
Net Income.
Norma ta .
Present
Surta .
Present
aw.
Proposed
b.
Surta
Increase.
332
3 8
404
444
44
844
1,044
1,444
1,844
2,244
2, 44
3,044
3,444
3,844
.844
7,844
9,844
11,844
1 ,844
19,844
29,844
39,844
79,844
199,844
352
388
424
404
4
8 4
1,0 4
1,4 4
1,8 4
2,2 4
2 4
3,0 4
8,4 4
3,8 4
,8 4
7,8 4
9,8 4
11,8 4
1 ,8 4
19,8 4
29,8 4
39,8 4
79,8 4
199,8 4
270
335
405
480
945
1, 45
2525
4,535
7,028
10,085
13,805
18,225
23,225
28, 25
7, 50
87, 00
118,450
150,400
21 ,3 0
284,300
459,250
39,200
1, 8 9,175
8, 89,1 0
3 0
4 0
500
80
1,4 0
2 30
4,040
7,220
10,980
1 ,300
19,940
24,880
30,120
35, 0
4, 20
94, 80
125,540
157,500
223,4 0
291,420
4 ,380
4 ,340
1,37 , 320
8, 59 , 300
90
125
155
200
15
985
1, 1
2, 8
3,95
5,215
,13
,
8,895
7,035
7,070
7,080
7,090
7,100
7,110
7,120
7,130
7,140
7,145
7,150
It w be noted that a marred person wth a net Income of 2,500 pays no
ta under e stng aw. owever, under the b he w pay a norma ta
of 10 for each ta abe year begnnng after December 31, 1939. The same
person wth a net ncome of 3,000 w pay for each such ta abe year a norma
ta of 28. No surta s mposed ether under the b or under the e stng aw
unt the net ncome of a marred man e ceeds ,500 under the present aw and
,000 under the b. In the case of a snge person, no surta s mposed
unt the net ncome e ceeds 5,000 under the present aw and 4,800 under the
b. The argest ncrease n the surta rate over e stng aw s wth respect
to marred persons wth net ncomes between 4 ,000 and 58,000, where the
rate s ncreased 13 per cent. In the case of a snge person, the argest ncrease
s wth respect to net ncomes from 45,000 to 57,000, where the rate s aso n-
creased 13 per cent
(2) Temporary ncrease: In addton to the permanent ncreases caused by
the change n the e emptons and the surta rates, Tte II of the b mposes a
10 per cent defense ta wth respect to ta abe years begnnng after December
31, 1939, and before anuary 1, 1945. Ths s shown n the foowng tabe:
Tabe III. Comparson of tota ta burden, e stng aw and proposed b,
marred persons, no dependents, a ncome earned.
Net Income.
aw.
Proposed
b e cud-
ng defense
ta .
Defense
ta .
feet ve rate In per
Proposed
b ncud-
ng defense
ta .
Present
aw.
Proposed b.
Wthout
defense
ta .
Wth
defense
ta .
2,000
2,500
3,000....
4,000
5,000...
,000...
7,000...
8,000
SI I
no
172
248
10
28
4
100
13
212
1.00
2.80
.40
10.00
13. 0
21.20
28.80
11.00
30.80
70.40
110.00
149. 0
233.20
31 .80
0.27
1.10
1. 0
1.93
24
3.10
0.40
.93
1. 0
200
2.27
3.03
8. 0
0.44
1.03
1.7
2.20
249
3.33
8.9
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Tabe I. Comparson of tota ta burden, e stng aw and proposed bU,
marred persons, no dependents, a ncome earned Contnued.
Net ncome.
Present
aw.
Proposed
b e cud-
ng defense
ta .
Defense
Proposed
b Incud-
ng defense
ta .
ffectve rate In per cent.
Proposed bU.
ta .
Present
aw.
Wthout
defense
ta .
Wth
ta .
9 000
329
384
38.40
422.40
8.
4.37
4. 9
t ,oo : :::::::: :::
415
480
48.00
2a 00
4.15
4.80
28
tm /Z/ . . . .
tot
9
9. 0
. 0
4. 0
43
5.98
DOS
713
71.20
788.20
.02
.93
.53
703
848
84.80
932.80
n
. 3
7.18
14 000
809
984
98.40
1,082.40
78
7. OS
7.73
s,ooo
924
1,144
114.40
1,258.40
.1
7. 3
39
20,000
1,589
2,124
212.40
2,33 .40
7.9
10. 3
11. 8
25,000
2,489
3,494
349.40
8,843.40
9.9
18.98
1 .37
30.000.
8,5 9
,104
510.40
5. 14.40
11.90
17.01
18.71
40,000
,979
8, 84
8 8.40
9, 2.40
14.98
31.71
23.88
50.000
8,8 9
12.844
1,284.40
14,128.40
17.74
25. 9
24 28
0,000
12,829
17, 4
1, 7 . 40
19,320.40
20.
29.27
32.20
1 , 449
22, 04
2,2 0.40
24,8 4.40
23.50
82.29
8 . 3
80,000
21,2 9
27,944
2,794.40
30,738.40
2 . 9
34.93
88.43
90,000
28, 9
33, 84
3,358.40
3 ,942.40
29. 3
37. 32
41.05
100,000
32,4 9
39, 24
3,952. 40
43,47 . 40
32.47
39. 2
43.48
150,000
3,394
70,484
7,048.40
77, 32.40
43.2
48.99
51. 9
200,0110.
95,344
102,444
9,7 5. 0
112,199. 0
47. 7
1.23
8.10
250,000.
128,294
135,404
11, 459. 0
14 ,8 3. 0
51.32
4.1
a 78
300,000
1 2,244
1 9,3 4
13,0 3. 0
182,427. 0
54.08
.41
0.81
400,000
232,194
239,324
1 ,0 7. 0
2 ,391. 0
8.0
9.83
3.85
500.000
304, 144
311,284
18, 871. 0
330,1 5. 0
0.81
2.28
.03
750,000.
489,094
49 ,244
2 , 37 . 0
21, 19.80
.21
.17
9.55
1,000.000
79,044
8 ,204
31, 379. 0
717, 583. 0
7.90
8. 2
71.7
2,000,000
1,449,019
1,458,184
4, 381. 0
1, 10, 85. 0
72.4
72.81
75.53
5,000,000
8,788,994
8,79 ,1 4
120,383. 0
3,91 , 47. 0
75.78
7 92
7a 33
rom the above tabe It w be noted a marred man, wthout dependents,
havng a net Income of 20,000 w pay In permanent ta es 2,124, an In-
crease of 535 over e stng aw, and n addton he w pay a defense ta ,
under Tte II of the b, of 212.40 for fve years, makng a tota annua ta
for such 5-year perod of 2,33 .40, or 11. 8 per cent of hs net ncome as aganst
7.95 per cent under e stng aw. One wth 50,000 net Income w pay 12,844
In permanent ta , and 1,284.40 defense ta , makng a tota of 14,128.40 as
aganst 8,809 under e stng aw, or 28.2 per cent of hs net Income ns
aganst 17.74 per cent under e stng aw.
d) Requrement for fng ndvdua ncome ta returns. Under e stng
aw, an Indvdua, f snge, s not requred to fe an ncome ta return uness
hs gross ncome s 5,000 or more or hs net Income Is 1,000 or more. In
the case of a marred ndvdua, no return Is requred under e stng aw,
uness hs gross ncome s 5,000 or more, or the net ncome Is 2,500 or more.
return s aso requred If such ndvdua and hs spouse each has a gross
ncome, and the aggregate gross ncome s 5,000 or more. The b requres
a return from a snge Indvdua If hs gross ncome s 800 or more and
from a marred ndvdua If (1) such ndvdua has a gross ncome of 2,000
or more and the other spouse has no gross ncome or (2) f such Indvdua
and hs spouse each has for the ta abe year a gross Income and the aggregate
gross ncome s 2,000 or over. Many persons have faed to fe returns upon
the assumpton that ther ncome was nsuffcent, when, n fact, they were abe
for the fng of a return and the payment of a ta . Ths change w requre
appro matey, 8,000.000 addtona returns, and It s beeved w resut n the
coecton of substanta addtona ta es. It s estmated that under e stng
aw appro matey 7,500,000 ndvdua returns are fed.
S CTION 301. SP CI L UND.
Ths secton provdes that the Secretary of the Treasury sha as soon as
practcabe after the end of each quarter determne the addtona amount of
ta es coected attrbutabe to the ncreases n ta es made, and to the foor
stocks ta es mposed, by the amendments to the Interna Revenue Code n
Tte II of the b, and the amounts so determned sha be set asde as a
speca fund whch sha be avaabe ony for the retrement of any of the
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Natona Defense Seres obgatons authorzed by secton 302 of the b. In
the amount to be set asde n the speca fund there s not to be ncuded the
amount of ta es attrbutabe soey to the e tenson of e cse ta es and rates
of e cse ta es contaned n secton 209 of the b, nor any amount coected
under admssons ta es attrbutabe to a basc admsson charge of more than
40 cents. If at any tme the amounts n the fund are not suffcent for the
retrement of the obgatons of the Natona Defense Seres, the Secretary of
the Treasury s authorzed and drected to transfer to the fund moneys out
of the genera fund of the Treasury. ny amounts n the speca fund not
necessary for the retrement of the obgatons sha be deposted n the genera
fund of the Treasury.
The revenues attrbutabe to Tte II of the b w be coected and pad
nto the Treasury n accordance wth estabshed procedures. Shorty after
each quarter the Secretary of the Treasury, actng upon Informaton obtaned
by the ureau of Interna Revenue from the offces of coectors of nterna
revenue, w determne the amounts coected durng the precedng quarter
whch under ths secton are requred to be set asde n the speca fund,
and on the bass of such determnaton he w transfer the amount thereof
to the speca fund for the retrement of the natona defense obgatons out-
standng. It w be obgatory upon the Treasury, begnnng uy 1, 1940, to
retre the natona defense obgatons and charge the amount so retred to
the speca fund. The Secretary of the Treasury has stated before ths com-
mttee that t s hs ntenton to arrange the maturtes of any natona defense
obgatons Issued under the authorty contaned n ths b so as to nsure
as neary as possbe the appcaton of the ncreased revenue from the enact-
ment of Tte II to the retrement of natona defense obgatons durng the
year n whch such revenue s receved.
S CTION 802. N TION L D NS O LIG TIONS.
Ths secton amends secton 21 of the Second Lberty ond ct, as amended.
That secton now provdes that the face amount of bonds, certfcates of n-
debtedness, Treasury bs and notes ssued under the Second Lberty ond
ct, as amended, sha not e ceed 45,000,000,000 outstandng at any one tma
On une 30, 1940, there w be a margn under ths mtaton of ony 1,700,-
000,000 whch can be avaed of by the Treasury to ssue addtona pubc-debt
obgatons for the purpose of obtanng funds n addton to 700,000,000 to
be recovered from governmenta corporatons, to meet the ncreased defct n
the fsca year 1941 f the Presdent s defense recommendatons are adopted
by the Congress. More than 1, 00,000,000 of ths defct w be due to add-
tona emergency natona defense e pendtures. On the bass of present recom-
mendatons, tota natona defense e pendtures w amount to about 3,250,000,-
000, the hghest amount spent for ths purpose n any year n our hstory,
e cept for the two fsca years when ths country partcpated In the Word
War.
In order to fnance natona defense e pendtures after une 30, 1940, t s
proposed to permt the Treasury to ssue wthn the framework of current
statutes reatng to the pubc debt, 4,000,000,000 of short-term pubc-debt
obgatons wth maturtes not e ceedng fve years, to be desgnated Natona
Defense Seres. These obgatons w be n addton to the 45,000,000,000
face amount of pubc-debt obgatons permtted to be outstandng under the
Second Lberty ond ct, as amended. Ths addtona 4,000,000,000 author-
zaton for natona defense obgatons permts ony a temporary ncrease n
the mtaton on outstandng pubc-debt obgatons because, to the e tent
that such natona defense obgatons are retred under the provsons of
secton 301, the authorzaton w be reduced.
1940-29-10337
R Nt CT O 1940.
ouse of Representatves Report No. 2007, Seventy-s th Congress, Thrd Sesson.
une 21, 1940.
Mr. Doughton, from the commttee of conference, submtted the foowng
conference report to accompany . R. 10039 :
The commttee of conference on the dsagreeng votes of the two ouses on
the amendments of the Senate to the b ( . R. 10039) to provde for the e -
penses of natona preparedness by rasng revenue and Issung bonds, to provde
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59
a method for payng for such bonds, and for other purposes, havng met, after
fu and free conference, have agreed to recommend and do recommend to ther
respectve ouses as foows:

ST T M NT O T M N G RS ON T P RT O T OUS .
The managers on the part of the ouse at the conference on the dsagreeng
votes of the two ouses on the amendments of the Senate to the b ( . R.
10039) to provde for the e penses of natona preparedness by rasng revenue
and ssung bonds, to provde a method for payng for such bonds, and for other
purposes, submt the foowng statement n e panaton of the effect of the
acton agreed upon by the conferees and recommended n the accompanyng con-
ference report:
mendment No. 1: The Senate amendment provdes that the ta on foregn
corporatons not engaged n trade or busness n the Unted States and not
havng an offce or pace of busness theren sha be at a unform rate of 15
per cent. Under the ouse b the rate was 11 per cent n the case of ncome
from dvdends, and 1 per cent n the case of a other f ed and determnabe
recepts. (See amendments Nos. 2, 3. and 10.) The ouse recedes.
mendment No. 2: The Senate amendment restores the 15 per cent wth-
hodng rate n the case of nterest on ta free covenant bonds pad to foregn
corporatons not engaged n trade or busness n the Unted States and not
havng an offce or pace of busness theren. Under the ouse b the rate
was 1 per cent (See amendments Nos. 1, 3, and 10.) The ouse recedPs.
mendment No. 3: The Senate amendment provdes for wthhodng of cor-
poraton ta at the source n the case of foregn corporatons not engaged n
trade or busness n the Unted States and not havng an offce or pace of
busness theren at the unform rate of 15 per cent rather than the 1 per cent
and 11 per cent rates provded n the ouse b. (See amendments Nos. 1, 2,
and 10.) The ouse recedes.
mendment No. 4: The Senate amendment substtutes for the requrement of
the ouse b that every trust wth a gross ncome of 100 or over fe an ncome
ta return, a requrement that every trust wth a gross ncome of 800 or over
fe a return and every trust wth a net ncome of 100 or over fe a return. The
ouse recedes.
mendment No. 5: The Senate amendment emnates the provson of the
ouse b under whch cgarette papers n books of 25 papers or ess were to
be sub|ect to the cgarette paper ta . The ouse recedes.
mendments Nos. and 7: These amendments make changes n secton num-
bers. The ouse recedes.
mendment No. 8: Ths amendment makes a change n a cross reference, and
the ouse recedes.
mendments Nos. 9, 11, 12, 13, 14, 15, 1 , 17, 18, 19, 21, 22, 27, 28, 29, 32, 33,
34, 35, and 43: These amendments change the desgnaton n the headngs of
sectons and subsectons and of coumns n schedues, and references thereto,
from Super-ta to Defense ta . The ouse recedes.
mendment No. 10: The Senate amendment provdes for a unform wth-
hodng rate of 1 .5 per cent for the 5-year perod rather than the 12 o
per cent, 1 per cent, and 17 o per cent rates provded n the ouse b.
The amendment aso contans a carfyng change to assure the mantenance of
treaty obgatons n the case of wthhodng on dvdends. (See amendments
Nos. 1, 2, and 3.) The ouse recedes.
mendments Nos. 20, 23, and 24: The Senate amendments provde that n
cases where artces eased or sod wth respect to whch under secton 3441(c)
of the Interna Revenue Code payment of the ta s requred as the nstament
payments for the artce are receved, the ncreased rates n the b w not
appy f the ease, contract of sae, or condtona sae was made before uy 1,
1940, and devery of the artce was made before that date. The ouse recedes.
mendment No. 25: The Senate amendment emnates the ouse-provson
under whch admssons of more than 30 cents and ess than 41 cents were
sub|ect to ta , for the 5-year perod. It substtutes therefor the foowng rates:
If the amount pad s 10 cents or more, and ess than 20 cents, 1 cent If the
amount pad s 20 cents or more, 1 cent for each 10 cents or fracton thereof
If the amount whch woud be charged for a snge admsson s 10 cents or
more, 1 cent for each 10 cents or fracton thereof of the amount pad for a
season tcket or subscrpton.
The other provsons of the amendment merey rewrte the provsons of
e stng aw.
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The ouse recedes wth an amendment whch restores the ouse provson
but reduces the e empton so that admssons of ess than 21 cents are e empt.
mendment No. 2 : The Senate amendment emnates the ncreased rates of
ta on tobacco products provded for the 5-year perod by the ouse b and
the foor stocks ta Imposed thereunder.
The ouse recedes wth an amendment whch emnates a ncreases n ta
on tobacco products, e cept cgarettes, and emnates the Increase In ta on
cgarette papers. The conference agreement aso substtutes for the ouse rates
on cgarettes of 3.50 per thousand and 8.40 per thousand rates of 3.25 per
thousand and 7.80 per thousand. The conference agreement aso mposes a
foor stocks ta at the ncreased rates on a cgarettes hed on uy 1, 1940,
for sae.
mendment No. 30: The Senate amendment ncreases, for the 5-year perod,
the rate on rectfyng dsted sprts from 30 cents per proof gaon to 40 cents
per proof gaon. There s no comparabe provson n the ouse bL The
Senate recedes.
mendment No. 31: The Senate amendment emnates the e empton from
the foor stocks ta on dsted sprts of 100 wne gaons hed by a reta
deaer n quors. Under the amendment foor stocks of rectfed dsted sprts
are sub|ected to a rate 10 cents per proof gaon hgher than the basc rate of
75 cents. or admnstratve reasons, ths addtona rate Is not to appy to
dsted sprts whch are rectfed sprts soey by reason of te addton of
not more than 2 per cent by voume of coorng, bendng, smoothng, or favor-
ng materas, and s not to appy to queurs, cordas, or smar compounds.
Technca changes are made n the provsons reatng to return and payment
of the foor stocks ta .
The ouse recedes wth an amendment whch emnates the addtona
10-cent rate on foor stocks of rectfed sprts. The amendment aso contans
an e empton of 100 wne gaons hed by any person on reta stocks on uy 1,
1940, on premses as to whch he Is for any perod begnnng on that date
e cusvey engaged n busness as a retaer.
mendments Nos 3 , 37, 38, 39, and 40: These Senate amendments ncrease
the rates on certan st wnes and strke out references to the ta on fortfca-
ton of wne. These amendments are consstent wth the recent ncrease n
ta on st wnes and the emnaton of the ta on fortfcaton of wnes. The
ouse recedes.
mendments Nos. 41 and 42: mendment No. 41 strkes out the e empton of
reta deaers from the foor stocks ta on fermented mat quors. mendment
No. 42 nserts a modfed e empton of reta stocks. Ths provdes that the
e empton sha appy ony to reta stocks whch, on uy 1, 1940, are hed on
reta premses. Such premses are confned to premses wth respect to whch
the deaer s a reta deaer e cusvey. If wth respect to such premses the
deaer s a whoesae deaer or brewer aso, the e empton s not aowed as to
any of the fermented mat quor hed on the premses. The ouse recedes.
mendment No. 44: Ths amendment Inserts a new tte number, Tte I .
The ouse recedes.
mendment No. 45: The Senate amendment amends the Pubc Saary Ta
ct of 1939 to provde that no ncome ta sha be assessed or coected after
the date of enactment of the b whch s attrbutabe to compensaton receved
pror to anuary 1, 1939, for persona servce as a State offcer or empoyee even
though such compensaton was pad drecty or Indrecty by the Unted States.
There Is no comparabe provson n the ouse b. The ouse recedes wth
an amendment whch provdes that, f the amount of defcency n ncome ta
whch Is attrbutabe to such compensaton Is pad wth nterest on or before
March 15, 1941, no cv or crmna penates sha be mposed on account of
faure to pay such amount or make return of such compensaton.
mendment No. 4 : Ths amendment nserts a new secton mposng an e cess
profts ta . The Senate recedes.
mendment No. 47: Ths amendment proposes ta es whch become effectve
n the event of war. The Senate recedes.
R. L. DOTTG TON,
Thos. . Cuen,
ohn W. McCobmack,
ems Cooper,
en T. Treadway,
rank Crowtheb,
arod ntttson,
anagers on the part of the ouse.
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98
1940-30-10347
PRO ISIONS O N RUPTCY CT WIT R SP CT TO SIS O
PROP RTY OR INCOM -T PURPOS S.
ouse of Representatves Report No. 2372, Seventy-s th Congress. Thrd Sesson.
une 4, 1940.
Mr. McLaughn, from the Commttee on the udcary, submtted the fo-
owng report to accompany . R. 9884 :
The Commttee on the udcary, to whom was referred the b ( . R. 98 4)
amendng the ankruptcy ct wth respect to the bass of property and e cud-
ng certan corporatons from the provsons of Chapter I, after consderaton,
report favoraby thereon wth amendments and recommend that the b as
amended do pass.
The amendments are as foows:
Page 2, ne 9, strke out the date as of whch the pan became effectve
and nsert the date of entry of the order confrmng the pan.
and nsert the date of entry of the order confrmng the arrangement.
and nsert the date of entry of the order confrmng the arrangement.
Page 4, ne 14, to page , ne 1 , strke out sectons 4, 5, , and 7.
mend the tte to read:
b amendng the ankruptcy ct wth respect to the bass of property.
The b had two purposes:
1. Sectons 1, 2, and 3 provded for dentca amendments to sectons 270,
39 , and 522 of the ankruptcy ct. Those sectons, whch are themseves
dentca, dea wth the bass of property for ncome-ta purposes. Where a
proceedng for corporate reorganzaton under Chapter , for an arrange-
ment under Chapter I, or for a rea-property arrangement under Chapter
II resuts n a canceaton or reducton of ndebtedness, those three sectons
requre (wth mted e ceptons) that the bass of the debtor s property for
ncome-ta purposes. State as we as edera, be decreased by an amount
equa to the amount of such canceaton or reducton. The frst three sectons
of the b amend sectons 270, 39 , and 522 so as to prevent the bass of the
debtor s property from beng decreased, as a resut of those sectons to an
amount ess than the far market vaue of such property. Your commttee s
amendments to sectons 1, 2, and 3 of the b are desgned to make more def-
nte and certan the tme as of whch the far market vaue of the property n
queston s to be determned, by f ng such tme as the date of entry of the
order confrmng the pan or the arrangement, as the case may be.
2. Sectons 4, 5, , and 7 of the b, whch are emnated by the ast of your
commttee s amendments, provded for amendments to Chapter I of the
ankruptcy ct whch were desgned to prevent corporatons whch are pub-
cy ndebted or owned from fng a petton for an arrangement under Chapter
I, rather than a petton for reorganzaton under Chapter , the chapter
specay desgned for the reorganzaton of such corporatons, and to estabsh a
numerca test of such pubc ndebtedness or ownershp.
Your commttee beeves that, whe the amendments proposed by sectons
4, 5, , and 7 are desrabe, the eement of emergency requrng ther mmedate
passage has been emnated by the decson of the Unted States Supreme Court
n Securtes and wchange Commsson v. . S. Reaty t Improvement Co.
That decson was rendered on May 27, 1940, after the ntroducton of the b.
Snce mmedate acton on these proposas does not appear to be necessary, the
ast of your commttee s amendments provdes for the strkng out of sectons
4. 5, . and 7. The commttee s concuson s supported by a of the wtnesses
who testfed at the hearngs before the commttee s Subcommttee on ank-
ruptcy and Reorganzaton and aso by the report of the Securtes and change
Commsson on the b.
N C SSITY O PROMPT N CTM NT O 1I S M ND D.
Wth respect to the amendments proposed by sectons 1, 2, and 8, however,
your commttee beeves, for the reasons herenafter set forth, that the present
provsons of secton 270 are unfar to a substanta number of debtor corpora-
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599
Msc.
tons heretofore reorganzed or now n the process of reorganzaton under
Chapter that those provsons are frequenty a serous obstace to the de-
veopment of a far and feasbe pan and that sectons 39 of Chapter I and
522 of Chapter II are open to the same crtcsms. So ong as sectons 270,
39 , and 522 contnue n ther present form, these unfar and undesrabe conse-
quences w contnue to affect the substanta voume of proceedngs under those
chapters whch are now n the courts or are hereafter nsttuted. or that
reason your commttee beeves t to be essenta that the sectons be amended at
the earest practcabe date.
The Subcommttee on ankruptcy and Reorganzaton of the Commttee on
the udcary hed hearngs on the b on the mornng and afternoon of une 3.
Representatves of the Treasury Department and the Securtes and change
Commsson and members of the Natona ankruptcy Conference appeared and
testfed at those hearngs. The Natona ankruptcy Conference s an nforma
group composed of members of bar assocatons, assocatons of credt men, and
commerca awyers, the Natona ssocaton of Referees n ankruptcy, aw
schoo professors, and others whch for more than fve years cooperated wth
your commttee n the preparaton of the 1938 amendments of the ankruptcy
ct.
The amendments proposed by sectons 1, 2, and 3 were favoraby reported by
the Treasury Department and the Securtes and change Commsson. The
Treasury Department sad n ts report on the b . R. 9884:
, the frst three sectons of . R. 98 4 woud amend sectons 270,
39 , and 522 to mt any reducton of bass thereunder to an amount not ess
than the far market vaue of the property nvoved. If the commttee s of the
opnon that an amendment s desrabe at ths tme, the method adopted meets
wth the approva of the Treasury Department. The amendment woud mpose
a defnte mtaton upon the amount of the ad|ustment provded and woud
appear to meet adequatey the chef crtcsm urged aganst the e stng aw.
fter carefu consderaton of varous approaches to the probem, the Treasury
s of the opnon that the drect approach foowed n the b may prove to be the
most satsfactory both from the vewpont of effectveness and admnstraton.
of the other wtnesses who testfed at the hearngs agreed wth your
commttee s concuson that t s essenta that sectons 270, 39 , and 522 be
amended at the earest practcabe date. Whe two of the wtnesses before the
subcommttee woud have preferred that the amendments take a somewhat
dfferent form, even those wtnesses agreed that t was preferabe to enact at
ths tme the amendments proposed n sectons 1, 2, and 3 of the amended b
rather than to defer acton on the probem unt the ne t sesson of the Congress.
The bass of property for ncome-ta purposes s mportant from at east
two ponts of vew: (1) The amount of deprecaton (or depeton) whch may
be camed annuay n future ncome-ta returns, and (2) the determnaton of
gan or oss resutng from future saes or e changes of the property n queston.
The record of the hearngs contans testmony and e hbts wth regard to the
practca consequences of secton 270 as observed by the Securtes and change
Commsson n the e ercse of ts advsory functons under Chapter . Up to
May 17, 1940, pans of reorganzaton were confrmed n 38 cases n whch the
Commsson partcpated as a party pursuant to secton 208 of that chapter.
Under of these pans the tota ndebtedness of the debtor corporaton was
entrey wped out under 12 others, t was reduced by more than one-haf
and under 4 others t was reduced by at east one-thrd. In one case the reduc-
ton amounted to more than 40,000,000. In addton, as of May 17, 1940, the
Commsson was partcpatng n 31 other proceedngs under Chapter In whch
a pan had been fed, but had not yet been confrmed by the court as of that
date. Under of these pans t was proposed to wpe out more than haf of
the ndebtedness of the debtor corporaton under 12 others t was to be reduced
by more than one-haf and under 5 others t was to be reduced by more than
one-thrd. In one of these cases, the reducton proposed amounted to more than
23,000,000. These fgures suffcenty ndcate the mportance of the provsons
of secton 270, as apped to corporatons heretofore or hereafter reorganzed
under Chapter .
It appears key that n a substanta number of these cases, the appcaton
of secton 270 w resut n a decrease of the bass of the debtor s property to
a fgure substantay beow ts far market vaue, or even to zero. Where the
bass s reduced to zero, the resut s that () the reorganzed company
can not take any deducton for deprecaton or depeton n future State, or
edera ncome-ta returns, not even deprecaton or depeton based on the
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present far market vaue of ts property, and () f the property sboud be
sod, the entre proceeds woud consttute ta abe ncome, eyen f the sae shoud
be at a fgure ess than ts present far market vaue, whch of course woud
be drastcay ess than ts orgna cost. Where the bass s reduced to any
other fgure beow the far market vaue of the debtor s property the onerous
consequences to the reorganzed company are ony ess severe.
Tour commttee s concusons are as foows:
(a) To the e tent that sectons 270, 39 , and 22 requre, n the case of debtors
reorganzed under Chapters , I, and II, a decrease of bass for takng
deprecaton or depeton upon ther property or for measurng gan or oss on
future saes to a fgure beow the present far market vaue of such property, those
sectons are ntrnscay unfar to debtors reorganzed under those chapters.
Ths unfarness woud be emnated by the amendments proposed n sectons 1,
2, and 3 of the b. Those amendments provde a far market vaue foor
beow whch the bass sha not be reduced.
( ) The present sectons frequenty provde an appeang argument for not
reducng the outstandng ndebtedness of the debtor corporaton even though, n
the ght of present vaues, a faure to effect such reducton resuts In an unsound
capta structure and a pan whch does not meet the test of feasbty estab-
shed by sectons 221(2), 3 (3), and 472(3), and n most cases wth the accom-
panyng rsk of recurrent reorganzaton. In other words, the deveopment of a
far and feasbe pan Is pre|udced by the n|ecton of an atogether e traneous
consderaton, that s, the undesrabe ta consequences. smar possbty s
avoded under the proposed amendment by the provson whch makes cear that
a determnaton of vaue for reorganzaton purposes sha not be deemed a
determnaton of vaue for the purposes of the ta bass sectons.
(c) The present sectons may we ead debtors whch shoud reorganze under
Chapters , I, or II to resort to another and ess approprate method of
reorganzaton, such as forecosure, wth the accompanyng necessty of payng
dssenters n cash. Ths rsk woud aso be mnmzed by the amendments pro-
posed n the b.
In order to correct the Inequty resutng from the appcaton of sectons 270,
39 , and 522 to pans or arrangements aready confrmed under sectous 12, 74, and
77 and Chapters , I, and II, the b propery proposes to make the amend-
ments effectve as of une 22, 1938, the date of approva of the ct whch frst
nserted those sectons n the ankruptcy ct. The amendments w thus take
effect as f they were a part of such ct as orgnay enacted.

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IND .
.
dmssons ta . (.See Msceaneous ta es: dmssons ta .)
grcutura d|ustment ct, cam for refund of processng
ta es. (See Processng ta es.)
abama ubrcatng o ta , deducton
cohoc beverages ta , Rhode Isand
coho ta :
asc permts, procedure
Investgatons, offers n compromse, edera coho
dmnstraton ct
Reabeng procedure under edera coho dmnstra-
ton ct, reguatons amended
Sprts and wnes, rectfcaton, defense ta , reguatons
amended
egheny County, Pa., property ta es
mendments:
Code of edera Reguatons
Subpart ( ), Part 171, Tte 2
Secton 171.4c (added)
Secton 171.4d (added)
Subpart (C), Part 171, Tte 2
Secton 171.4e (added)
Secton 171.4f (added)
Gaugng Manua
Paragraph 48
Paragraph 85
Interna Revenue Code
Chapter 2 , Subchapter (added) -
Secton 2800, subsectons (g) and (h) (added)
Reguatons 4 (1940), sectons 183. 0, 183.95, 183.13 (a),
(b), 183.1 1, 183.1 7, 183.1 8, 183.1 9, 183.25 , 183.2 4,
183.2 5, 183.295, 183.309, and 183.390 .
Reguatons 5 (1940), sectons 184.58, 184.121, 184.142,
184.148, 184.149, 184.150, 184.24 , 184.255, 184.25 ,
184.29 , 184.310, and 184.412
Reguatons (1938)
Secton 21 -
Secton 3 (added)
Reguatons 7 (1937)
Paragraphs 48, 112, 113, 114, 155, 1 1, 205, 215, 284,
285, 291, 309, 310, and 311
rtce L III, paragraphs 3 3-372 (added)
Reguatons 8 (1934)
rtce 72 -
rtces 194-200
Reguatons 10 (1940), sectons 185.27,185.54,185.84,185.90
(a), (b), 185.103, 185.109, 185.110, 185.112, 185.125,
185.131, 185.231, 185.234, 185.238, 185.27 , 185.3 9,
185.444, and 185.4 1
Reguatons 11 (1940), sectons 189. 5, 189.78, 189.79
189.95, 189.111, 189.11 , and 189.153
290217 41 39 ( 01)
Rung No.
1051
10354
10338
104 4
10442
10403
10447
10338
10338
104 4
104 4
10548
10458
10314
10314
10433
10457
1039
1039
10380
10315
103 2
10388
10432
10397
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02
mendments Contnued.
Reguatons 15 (1940), sectons 190. 8, 190.108 (a), (b),
190.120, 190.130, 190.131, 190.132, 190.157, 190.158,
190.220, 190.2 7, 190.2 8, 190.270, 190.272, 190.290,
190.341, 190.349. 190.3 0, 190.403, 190.408, and 190.4 9.
Reguatons 18 (1940), secton 192.113 --
Reguatons 23 (1940), secton 181.15(d)
Reguatons 42 (1932), artces 1, 8, 25, 27, 32, 39, and 42..
Reguatons 43 (1932), artces 1, 3, 4, , 7, 8, 10, 11, 12,
29, 30, 34, 40, 41, 43, 49, and 57
Reguatons 44 (1939), artces 314.2, 314.4, 314.35, 314.44,
and 314.52
Reguatons 40 (1940), sectons 310.2, 31 .9, 31 .32, 31 .41,
31 .51, 31 .52, 31 .54, 31 .5 , 31 . 0, 31 . 2, 31 .73,
and 31 .82
Reguatons 4 (1938), artces 41 and 1
Reguatons (1933), artces 8 and 19
Reguatons 71 (1932), artces 2, 2 , 32, 33, 9, and 121....
Reguatons 77, artce 191
Reguatons 79 (193 )
rtce 3
rtce 5 -
Reguatons 80 (1937)
rtces 1 and 8
rtces 15 and 17
Reguatons S(
rtce 23(k)-
rtce 113(b)-2
rtce 113(b)--3 (added)
rtce 113( )-4
Reguatons 90, artces 211( ), 211(1)( ), 503 , and 503 -
Reguatons 94
rtce 23(I )-1
rtce 113(b)-2
rtce 113(h) 3 (added) -
rtce 113(b)-4 --
Reguatons 99, artces 300 and 303(a)
Reguatons 100
rtces 2, 3(a), 3( )2, and 4
rtce 707 (added)...
Reguatons 101
rtce 23(k)-
rtce 113(b)-2
rtce 113( )-3 (added)
rtce 113(b) 4
Reguatons 103
Secton 19.1-1
Secton 19.11-1
Secton 19.12-1
Secton 19.12-2
Sectons 19.13-5 to 19.13-7
Secton 19.14-2
Secton 19.1.5-1
Secton 19.22(a)-13.
Secton 19.22(c)-
Secton 19.23(k)-
Secton 19.23(1)-1
Secton 19.25-3
Secton 19.2,5-7,.
Secton 19.47-1
Sectons 19.51-1 to 19.51-3
Sectons 19.55(b)-2 to 19.55(b)-5 -
Rung No.
10403
10413
10378
103 3
10371
103 8
10387
10351
103 4
103 5
10317
10441
1038
10385
10440
10317
10401
10401
10401
10510
10317
10401
10401
10401
10502
10479
10479
10317
10401
10401
10401
1044
1044
1044
1044
1044
1044
1044
10323
10329
10317
10474
1044
1044
1044
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03
mendments Contnued.
Reguatons 103 Contnued.
Secton 19.102-1
Secton 19.101-1
Secton 19.113(b) ()-2
Secton 19.113(b) ()-3 (added)
Secton 19.115-3
Secton 19.115-7
Sectons 19.115-12 to 19.115-14 (added)
Sectons 19.124 to 19.124-9 (added)
Secton 19.131-8
Secton 19.142-1
Secton 19.142-2
Secton 19.142-5
Secton 19.143-1
Secton 19.143-3
Secton 19.143-7
Secton 19.144-1
Secton 19.144-2
Sectons 19.147-1 to 19.147-3
Secton 19.147-7
Secton 19.147-8
Sectons 19.148-3, 19.148-4, and 19.149-1
Secton 19.1 3-1
Secton 19.201 (b)-
Secton 19.204(a)-
Secton 19.207-1
Secton 19.211-7
Secton 19.213-1
Secton 19.214-1
Secton 19.215-1.
Secton 19.217-2
Secton 19.219-1
Secton 19.231-1
Secton 19.2G2-2
Secton 19.2G2-4
Secton 19.302-1.
Secton 19.500-1
Treasury Decsons
4873
4927
4929
4958
mortzaton deducton:
mergency factes
Certfcaton, procedure
Reguatons amended
nnutes:
Dsabty payments under Cv Servce Retrement ct,
ta abty
ndowment, ncome, and fna sum pocy
Lfe ncome, 25-year endowment pocy
pprentces, tranng costs, busness e pense deducton
rmy:
Contracts under nson ct. (See nson ct.)
Nurse Corps, femae members, aowances for quarters
and subsstence, ta abty
ssgnment of Cams ct of 1940, natona-defense program-.
utomobes. (See Manufacturers e cse ta es.)
wards, compensatory damage, Natona Labor Reatons
oard, deducton
Rung No.
1044
1014
10401
10401
10538
10501
10538
10474
1044
1044
1044
1044
10322
10322
10322
10322
10322
1044
1044
1041
10473
1044
1044
1044
1041
1044
1044
1044
1044
1044
10140
1044
1044
10322
1044
1044
103 9
10490
10389
103 9
10490
10482
10491
10474
10494
1040
10435
10415
104 7
10472
10430
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04
.
ad debts:
anks
Charge-off deducton
Recoveres
Deducton n pror year
Prevous deducton wthout ta beneft
Recoveres
Deducton n pror year
Unrefunded contrbutons to fnance natona conventon
ankruptcy ct, amendment wth respect to bass of property.
Commttee report
ankruptcy, Government s cams for soca securty ta es,
mtaton perod
anks:
ad debts
Charge-off deducton
Recoveres
Deducton n pror year, ta abty
Insovent, assessment and coecton of ta es
asc permts, acoho ta , procedure
randy:
Producton, defense ta rate, reguatons amended
Remova n packages, Gaugng Manua amended
usness e penses:
pprentces, tranng costs, deducton
wards, compensatory damage, Natona Labor Rea-
tons oard, deducton
Sck or accdent benefts, aocaton under reguatons
of edera Communcatons Commsson
C.
Caforna, communty property and ncome
Capta gans and osses:
Deducton of capta osses of one spouse, |ont return
of husband and wfe
Partner tradng n noncapta assets for partnershp
and own account
Capta stock ta :
Defense ta rate, reguatons amended
tenson of tme for fng 1940 returns and payment
of ta
Carrers Ta ng ct of 1937. (See mpoyment ta es.)
Cgarettes. (See Msceaneous ta es: Stamp ta es.)
Cams, Unted States, appcabty of State statute of mta-
tons.
Code of edera Reguatons, amendments. (See mend-
ments: Code of edera Reguatons.)
Commssons, assgnment after termnaton of agency con-
tract, assgnor s ta abty
Commttee reports:
Revenue ct of 1940
Conference (Report No. 2 97)
ouse of Representatves (Report No. 2491)
Senate (Report No. 185 )
Second Revenue ct of 1940
Conference (Report No. 3002)
ouse of Representatves (Report No. 2894)
Senate (Report No. 2114)
Rung No.
10317
10324
1032
10542
10324
1032
10542
10421
10349
10347
10344
10317
10324
1032
10542
10482
10338
10457
10548
10415
10430
10424
10408
10540
10500
10351
103 1
10374
10519
10337
10335
1033
104 3
10455
104 2
G
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05
Communty property and ncome:
Caforna, earnngs separate property under marta
agreement
Stock, transfer at death ntestate, Te as
Compensaton:
rmy and Navy Nurse Corps, aowances for quarters and
subsstence, ta abty
Saares pad former empoyees n mtary servce, em-
poyer s deducton
Contracts:
rmy and Navy. (See nson ct.)
War materas, funds from foregn government for pant
e panson, ncome
Contrbutons:
Chartabe, husband and wfe, |ont return
New York unempoyment nsurance fund, deducton,
treatment of ater refund
I nrefunded, to fnance natona conventon, bad debt
deducton
Conventon, recproca ta , between Unted States and Sweden:
Reguatons
Resdents and prvate pensons defned, dvdends ds-
trbutons n Sweden
Corporatons:
Credts. (See Credts.)
Dstrbutons, earnngs or profts, reguatons amended
oregn
Incuson of term arshp or arshps n term shp
or shps
Ta aton of, changes effected by 1940 Revenue ct
Returns. (See Returns.)
Stock dvdends dstrbutons, reguatons amended
Court decsons:
radee et ttL v. Whte
Coorado Scrum Co. v. Commssoner
Commssoner Coorado Serum Co. v
Commssoner Neuberger v
Commssoner Rey Investment Co. v
Commssoner Southwestern Serum Co. v
Commssoner Wson v Co
Crane- ohnson Co. v. everng
Drsco v. Washngton County re Insurance Co
rvn Servce Corporaton, In the maer of
ubank everng v
Cans v. everng
everng Crane- ohnson Co. v
everng v. ubank
everng Ganes v
everng v. orst
everng v. anney
everng v. Northwest Stee Rong Ms, Inc
everng v. Oregon Mutua Lfe Insurance Co
everng v. Pan- mercan Lfe Insurance Co
everng v. Schmme
everng Taft v
ggms Mehrust v
orst everng v -
anney everng v
Marsha v. Unted States
Mehrust v. ggns
Neuberger v. Commssoner
Northwest Stee Rong Ms, Inc. everng v
Oregon Mutua Lfe Insurance Co. everng v
Pan- mercan Lfe Insurance Co. everna v
Rung No.
10408
1034
104 7
10453
1042
10539
10325
10421
10313
10492
10538
10373
10543
10501
10309
10320
10320
10500
10499
10320
10431
1049
1052
10344
10519
10540
1049
10519
10540
10518
10540
10497
10537
1053
10534
10539
10395
10518
10540
10408
10395
10500
10497
10537
1053
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0
Court decsons Contnued.
Rey Investment Co. v. Commssoner
Schmme evenng v
Sncar Co., Ltd., v. Unted States
Southwestern Serum Co. v. Commssoner
Stewart Unted States v
Summern Unted States v
Taft v. evenng
Unted States Marsha v
Unted Sates Sncar Co., Ltd., v
Unted States v. Stewart ..
Unted States v. Summern
Unted States Wson Co., Inc., v
Unted States Wson Co., Inc., of ansas v
Washngton County re Insurance Co. Drsco v
Whte radee e a. v
Wson Co. v. Commssoner
Wson Co., Inc., v. Unted States
Wson Co., Inc., of ansas v. Unted States
Credt or refund:
Contrbutons to New York unempoyment nsurance fund,
when ncuded as ncome
Soca securty ta es, treatment as ncome
State ta es, prevous deducton wthout ta beneft
Credts:
Corporatons
Contract restrctng dvdend payments
Dvdends pad, foregn stockhoders, payment wth-
hed under ecutve order
oregn ta es, Cuba
Mnera fue ta
Ta on sae , assgnments, etc
ortfed wnes ta , gross ncome
Credts aganst net ncome:
Dependents, credt for, foregn refugees
Persona e empton, head of famy, bood or marrage rea-
tonshp
Cuba:
Mnera fue ta , credt
Ta on saes, assgnments, etc., credt
I).
after-dscovered addtona ncome, a ssess-
Deccdents, returns,
ment mtaton
Defense ta , computaton, returns (fna), years begnnng
after December 31, 1939
Dependents, credt for, foregn refugees
Depeton:
owances, amended returns fed after statutory perod
e pred, eecton
O and gas wes, charges to capta and e pense
Dsted sprts:
ottk d-n-bond stamps, e change and redempton, regu-
atons amended
ottng of ta -pad, reguatons amended
oor stocks ta , reguatons prescrbed
Petroeum sts, dstng apparatus, regstraton, regu-
atons amended
Producton, defense ta rates, reguatons amended
Warehousng, defense ta rates, reguatons amended I 10-132 I 3 8
Rung No.
10499
10534
10512
10320
10498
10374
10539
10408
10512
10498
10374
10512
10512
1052
10309
10431
10512
10512
10325
104 8
10542
1049
10497
10448
10517
10504
10484
104 0
10428
10517
10504
10407
10499
10394
1039
10397
10314
10378
10433
G
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#
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07
Rung o., Page.
Dvdends:
Credt re contracts restrctng payment
Pad, credt for, foregn stockhoders, payment wthhed
under ecutve order
Stock dstrbutons by corporatons, reguatons amended.
Doube ta aton, ta conventon wth Sweden, resdents and
prvate pensons defned, dvdends dstrbutons n Sweden.
Dues and ntaton fees. (See Msceaneous ta es.)
.
arned ncome:
Seamen operatng between Unted States ports, e empton-
Sources wthout Unted States, -month perod
ectrca energy. (See Manufacturers e cse ta es.)
mpoyee s penson trusts:
empton of prvate pensons, conventon between Unted
States and Sweden
Payments to, aocaton under reguatons of edera Com-
muncatons Commsson
Penson pan not evdenced by trust nstrument..
mpoyment ta es:
Carrers Ta ng ct of 1937
Power of attorney form
Returns, power of attorney to fe
Interna Revenue Code
mpoyees
Coa hauers
ree-ance |ockey
Indvduas performng servces for a unversty
women s cub
Indvdua performng patro servces for var-
ous merchants
Loggng contractor
Pecemnkers and skdders
mpoyment
ght personne operatng between foregn and
Unted States arports
Martme servce, members of crew on cabe shp
n waters outsde the Unted States
cepted servces
grcutura abor
Cooperatve assocaton, status of varous
types of servces
Cotton, gnnng of
Casua abor, rues for determnng whether
servces consttute
Student performng servces for e empt organza-
ton between academc years
Returns
Power of attorney to fe
Wages pad n one perod for servces n a pror
perod
Speca refunds of empoyees ta on wages over
3,000 .
Trustees performng speca servces
Wages, computaton of, pad n one perod for servces
n a pror perod, how reported
Wages, what consttutes
Dsmssa payments
Dvdends and ncrements on stock purchased
under proft-sharng pan
Payments to former empoyees n armed forces
of the Unted States
When ta attaches, bonus payments made under
proft-sharng pan
1049
10497
10448
10501
10492
10507
10508
10477
10492
10424
10531
10383
10383
10454
10425
10509
10384
10411
10343
10438
10330
10487
10319
10478
104 1
10383
10383
10437
10544
1054
10437
10357
10417
10495
10417
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#
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08
mpoyment ta es Contnued.
Reguatons 90 amended
eguatons 100 amended
Soca Securty ct
Government cam, corporate reorganzaton resutng
n bankruptcy
Returns
Power of attorney to fe
Wages pad n one perod for servces n a pror
perod
Wages, computaton of, pad n one perod for servces
n a pror perod, how reported
states and trusts, ncome, amounts dstrbutabe after cose of
year, to whom ta abe
state ta :
Defense ta , reguatons amended
Gross estate
unds of nonresdent not Unted States ctzen, bank
as trustee or custodan
Payments under Soca Securty ct to wdow, etc., of
an nsured decedent
Reverson of trust corpus to donor upon contngency
termnabe at hs death
Transfers condtoned upon survvorshp, reguatons
amended
Unted States savngs bonds, ta abe status
cess profts ta :
Corporatons, defense ta computaton
Defense ta rates, reguatons amended
ng returns, payment of ta
changes, stock, gan or oss, reorganzaton
empt corporatons:
Coege aumn assocaton
re nsurance company, determnaton of rght to e emp-
ton
Lmted dvdend housng corporatons, New York
State teachers assocaton
empt ncome:
nnuty payments
ndowment, ncome, and fna sum pocy
Lfe ncome, 25-year endowment pocy
Dsabty payments under Cv Servce Retrement ct
arned ncome outsde Unted States sources, -month
perod
arnngs of shps documented under foregn aws, ncuson
of term arshp or arshps n term shp or shps
Gans reazed on deangs n farm oan bonds
Seamen operatng between Unted States ports, earned
ncome
tenson of tme for fng 1940 rcturn and payment of capta
stock ta
.
arm oan bonds, deangs n, gan, gross ncome
ermented mat quors:
ppcaton of surety for reef from bond, reguatons
amended
oor stocks ta , reguatons prescrbed
rearms and machne guns. (See Msceaneous ta es:
Stamp ta es Manufacturers e cse ta es.)
oor stocks ta , cgarettes. (See Msceaneous ta es: Stamp
ta es.)
Rung No.
10510
10479
10344
10383
10383
10437
10437
10400
10385
10527
10511
10309
10440
10439
103 7
10389
10547
10342
10382
1052
10429
10318
1040
10435
10494
10477
10373
10498
10507
10508
103 1
10498
10413
10314
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2

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#
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09
oregn corporatons:
Incuson of term arshp or arshps n term shp or
shps
Ta aton of, reguatons, ncome ta conventon, Sweden
oregn |ournasts, newspaper correspondents, resdents of
Unted States, ta abty
oregn refugees, dependents, credts aganst net ncome
oregn ta es, credt for. (See Credts.)
ront foot beneft charges, Montgomery County, Md., deduc-
ton
G.
Gan or oss:
d|usted bass
Canceaton of ndebtedness, reguatons amended
O property, new drng costs, offset by e cess de-
peton aowance
changes
tenson of maturty date on notes
Stock, reorganzaton
tenson of maturty date on notes
Saes-
ass, ad|usted
O property, new drng costs, offset by e cess
depeton aowance
Sck or accdent benefts, penson trust payments-
Gans, deangs n farm oan bonds, gross ncome
Gasone. (See Manufacturers e cse ta es.)
Georga, stock transfers from guardan to ward
Gfts, nterest coupons, donor s ta abt3
Gft ta :
Defense ta , reguatons amended
Transfers sub|ect to a reserved power, reguatons amended
Unted States savngs bonds, ta abe status
.
usband and wfe, returns:
Capta osses of one spouse, deducton mtaton
Chartabe contrbutons, deducton
I.
Improvements by essee, reguatons amended
Income from sources wthn Unted States possessons, ncome
earned n Phppnes, receved by agents whe ctzen n
Unted States
Inspecton of returns. (See Returns.)
Insurance companes, fe, dsabty reserves, percentage deduc-
ton
Interest:
onds and mortgages of mted dvdend housng corpora-
tons, New York, e empton
Coupons, grantor s ta abty
Inventores, need of, reguatons amended
.
ewery. (See Manufacturers e cse ta es.)
.
entucky, transfer of stock from guardan to ward
Rung No.
10373
10313
104 CO
104 0
1047
10401
10399
10308
10342
10308
10399
10424
10498
10535
10518
1038
10441
10439
10540
10539
10323
10485
1053
10537
10429
10518
10328
1037
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10
L.
Leases:
oregn government factes used n manufacturng war
materas
O and gas
ssgnee s drng costs
Lousana
Legsaton:
ssgnment of Cams ct of 1940, natona-defense pro-
gram
ankruptcy ct
Marred women, repatraton
Merchant Marne ct, 193 , amended
Natona Defense ct, rmy and Navy contracts
Revenue ct of 1940
Soders and Saors Cv Reef ct of 1940
Lmtaton perod, decedent s return, after-dscovered addtona
ncome
Lmtatons statute, State, appcabty to cam of Unted
States
Lmted dvdend housng corporatons and bond nterest,
e empton
Loca benefts ta es, Montgomery County, Md., deducton
Locomotve engneers, traveng e penses
Losses:
partment, subettng
Partner tradng n noncapta assets for partnershp and
own account, mtaton
Lousana:
O, gas, or other mnera deeds and eases
Stock transfers from mnor to tutor or tutr
Lubrcatng o. (See Manufacturers e cse ta es.)
Lubrcatng o ta , abama
M.
ectrca energy
urnshed before and after uy 1, 1940, bed after
that date, ta computaton
Reguatons 42 (1932) amended
Saes to educatona nsttutons, churches, etc., domes-
tc or commerca consumpton
Gasone, ubrcatng o, matches, defense ta rates, regu-
atons amended
ewery, saes by manufacturer s whoy-owned corporaton
organzed four days pror to effectve date of ct
Lubrcatng os sod for nonubrcatng uses
Tres, tubes, toet preparatons, automobes, rados, re-
frgerators, frearms, defense ta rates, reguatons
amended
Matches. (See Manufacturers e cse ta es.)
Merchant Marne ct, 193 , amended
Premnary reguatons
Mchgan property ta es, deducton
Msceaneous ta es:
dmssons ta
dmssons, dues, ntaton fees, date of payment
determnng rate appcabe
ree and reduced rate admssons (students, Cvan
Conservaton Corps members, ensted personne)
Rung No.
10423
10394
10521
10310
10472
10349
10379
10528
10348
10321
10470
10480
10407
10374
10429
1047
10341
10449
10450
10500
10310
10521
10535
1051
10333
103 3
10523
103 8
10395
10409
10387
10528
10520
10329
10377
10522
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#
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11
Msceaneous ta es Contnued.
dmssons ta Contnued.
Overstampng tckets
Rate on ower admsson charge, reguatons amended-.
Swmmng poo, etc., operated by a cty or other
muncpaty
Safe depost bo es
Date of payment determnng rate of ta appcabe._
Defense ta rate, Reguatons 42 (1932) amended
Stamp ta es
ond, corporate, renewa by ndvdua as straw
man
Cgarettes
oor stocks ta
Defense ta rates, Reguatons 8 (1934)
amencsd
Returns and payment of ta
Increased rates of ta , Reguatons 8 (1934),
amended
Conveyances, o, gas, or other mnera deeds and
eases, Lousana
rearms and machne guns, pstos equpped wth
ug, spur, sot, etc., for attachng shouder stock
Payng cards, Reguatons (1933), amended
Reguatons 71 (1932), artces 2, 2 , 32, 33, 9, and
121, amended
Stock ssues, ssued upon e ercse of opton warrants,
reorganzaton under Chapter , ankruptcy ct__
Stock transfers
Communty property at death ntestate, Te as
Guardan to ward
Georga
entucky
New ersey
Mnor to tutor or tutr , Lousana
Stock hed by mted partnershp (New York)
upon death of a mted partner
Transfer on corporaton s books on or after uy
1, 1940
Teegraph, etc., factes, Reguatons 42 (1932) amended--
Transportaton of o by ppe ne, Reguatons 42 (1932)
amended
Montgomery County, Md.:
Loca benefts ta es
Rea property ta es, accrua date
Motor fue ta , Te as, deducton
N.
Natona Defense ct, rmy and Navy contracts
ont rues for admnstraton
Natona-defense program:
ssgnment of Cams ct of 1940
Natona Labor Reatons oard, compensatory damage awards,
deducton ,
Navy:
Contracts under nson ct. (See nson ct.)
Nurse Corps, femae members, aowances for quarters and
subsstence, ta abty
Nebraska property ta es
Rung No.
10331
10371
10418
10377
103 3
10375
10388
10332
103 2
10310
10521
1045
103 4
103 5
10410
1034
10535
1037
10345
10535
10451
10358
103 3
103 3
1047
10530
10307
10348
10352
10472
10480
10430
104 7
10532
10533
10534
G
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12
New ersey, stock transfers from guardan to ward
Newspaper correspondents, foregn, resdng n Unted States,
ta abty
New York:
Lmted dvdend housng corporatons, e empton
Unempoyment nsurance fund, contrbutons to, deducton,
treatment of ater refund
Nonresdent aens:
Ta aton of
Changes effected by 1940 Revenue ct
Reguatons, ncome ta conventon, Sweden
North Carona property ta es, accrua date
O.
O and gas wes:
Charges to capta and e pense
Gan or oss, saes, bass, ad|usted, new drng costs, offset
by e cess depeton aowance
Os, saes for nonubrcatng uses
Oeomargarne:
Schedue of producton and materas used
Mav, 1940 and 1939
une, 1940 and 1939
uy, 1940 and 1939
ugust, 1940 and 1939.__
September, 1940 and 1939 -
October, 1940 and 1939
P.
Penates, addton to ta for fraud, estate s abty
Penson trust, empoyees , payments to, aocaton under regua-
tons of edera Communcatons Commsson
Persona e empton, head of famy, bood or marrage reaton-
shp
Persona hodng companes, gross ncome, recepts under o and
gas eases
Petroeum sts, dstng apparatus, regstraton, reguatons
amended
Pttsburgh property ta es
Payng cards. (See Msceaneous ta es: Stamp ta es.)
Processng ta es:
Cam for refund
Condtons of aowance
Suffcency of cam
Ta es pad wth respect to products e ported, court s
|ursdcton
Coectbe from vendee, vendor s deducton
Payments or credts by processors under Charotte cause
contracts, deducton
Property ta es. (See Ta es: State.)
Pubc Saary Ta ct of 1939, offcers and empoyees of States,
compensaton pad ndrecty by Unted States, ta defcency,
reef from addtons to ta
.
uarters and subsstence, aowances for, femae members
rmy and Navy Nurse Corps
Rung No.
10345
104
10429
10325
10543
10313
1030
10394
10399
10409
10312
103
10412
10444
10481
10514
1048
10424
10428
10393
10378
10447
10320
10431
10512
104 9
10505
1050
10359
104 7
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13
R.
Rados. (See Manufacturers e cse ta es.)
Raroad tranmen, traveng e penses ,
Refunds:
Contrbutons to New York unempoyment nsurance fund,
when ncuded as ncome
Processng ta es. (.See Processng ta es.)
Soca securty ta es, treatment as ncome
Refrgerators. (See Manufacturers e cse ta es.)
Reguatons:
mendments. (See mendments: Reguatons.)
stabshment of constructon reserve funds, Merchant
Marne ct
Nonresdent aens, ta aton of, ncome ta conventon,
Sweden
nson ct
Rentas, budngs and equpment, natona defense program,
amortzaton deducton
Reorganzaton, e change of stock, gan or oss
Returns:
mended, statutory perod e pred, depeton aowance
Capta stock ta , 1940, e tenson of tme for fng
Cgarette foor stocks, procedure for fng
Corporatons, defense ta computaton on e cess profts
ta
Decedent s, after-dscovered addtona ncome, assessment
mtaton
Defense ta computaton, forms for vears begnnng after
December 31, 1939
cess profts ta , fng returns, payment of ta
usband and wfe
Capta osses of one spouse, deducton mtaton
Chartabe contrbutons, deducton
Informaton, corporatons, dstrbutons n qudaton,
reguatons amended
Inspecton of, reguatons amended
Nonresdent aens, foregn corporatons, abty to fe,
payments of ta at source
Revenue ct of 1940
Commttee reports
( See aho Second Revenue ct of 1940.)
Rhode Isand acohoc beverages ta
S.
Safe depost bo es. (See Msceaneous ta es.)
Saes securtes, gan or oss bass, dentfcaton of securtes
sod
Seamen, operatng between Unted States ports, earned ncome,
e empton
Commttee reports
Securtes, sae of, gan or oss bass, dentfcaton of securtes
sod
Shps, foregn, ncuson of term arshp or arshps
Soca Securty ct. ( See mpoyment ta es.)
Rung No.
10341
10325
104 8
10520
10313
10390
10350
10342
10499
103 1
10332
103 7
10407
10105
10547
10540
10539
10473
10355
103 9
10490
10543
10321
10335
1033
10337
10354
10489
10507
10508
10470
10455
104 2
104 3
10489
10373
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14
Soca securty ta es:
ocabe to ong-term contract, deducton from gross n-
come
Credts aganst, refunds of, edera unempoyment ta es,
reguatons amended
Government cam, corporate reorganzaton resutng n
bankruptcy
Payments under Soca Securty ct to wdow, etc., of n-
sured decedent, gross estate
Refunds, treatment as ncome
Sprts and wnes, rectfcaton, defense ta , reguatons amended
Stamp ta es. (See Msceaneous ta es: Stamp ta es.)
States:
Income ta , determnaton of porton deductbe on edera
return
Offcers and empoyees .
Compensaton pad ndrecty by Unted States, ta
defcency, reef from addtons to ta
Statute of mtatons, appcabty to cam of Unted
States
Ta es. (See Ta es: State.)
Sts, petroeum, dstng apparatus, regstraton, reguatons
amended
Sugar, manufactured, ta on manufacture of, reguatons
amended
Suts, recovery of ta es, account stated
Sweden, ncome ta conventon wth, reguatons
Resdents and prvate pensons defned, dvdends dstrbu-
tons n Sweden
T.
Ta es:
Credts for, fortfed wnes
oregn, credt for, Cuba
Mnera fue ta
Ta es on saes, assgnments, etc
Penates, fraud, estate s abty
State-
cohoc beverages ta , Rhode Isand, deducton
Contrbutons to New York unempoyment nsurance
fund, deducton, treatment of ater refund
Credt or refund, prevous deducton wthout ta
beneft
Loca benefts ta es, Montgomery County, Md., de-
ducton
Lubrcatng o ta , abama, deducton
Motor fue ta , Te as, deducton
Property ta es, accrua date
egheny County, Pa
Mchgan, deducton
Montgomery County, Md
Nebraska
North Carona, accrua date
Pttsburgh
Teegraph, etc., factes. (See Msceaneous ta es.)
Te as:
Motor fue ta , deducton
Transfer of stock hed as communty property at death
ntestate
Tres and tubes. (Sec Manufacturers e cse ta es.)
Rung No.
10525
10510
10344
10511
285
104 8
88
10480
493
10403
419
10422
84
10359
432
10374
435
10378
374
10502
350
10408
195
10313
43
10492
143
10315
377
10484
39
10517
137
10504
13(
1048
159
10354
9
10325
8
10542
82
1047
74
1051
72
10307
7
10447
70
10328
2
10530
73
10532
210
10533
211
10534
211
1030

10447
70
10307
7
1034
28
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15
Tobacco:
Statement of manufactured, produced, by casses
pr, 1940 and 1939
May, 1940 and 1939
une, 1940 and 1939.
uy, 1940 and 1939
ugust, 1940 and 1939.
September, 1940 and 1939 -
October, 1940 and 1939
Toet preparatons. (See Manufacturers e cse ta es.)
Transportaton of o by ppe ne. (See Msceaneous ta es.)
Traveng e penses, ocomotve engneers
Trust companes, assessment and coecton of ta es
U.
Unted States oard of Ta ppeas, decsons of, st of acques-
cences and nonaequescences
Unted States savngs bonds, status for edera estate and gft
ta purposes
.
nson ct:
cess proft on rmy and Navy contracts
ssgnment of Cams ct of 1940, natona-defense
program
ements of cost of performng contract or subcon-
tract
Interest on ndebtedness ncurred to acqure speca
equpment, workng capta, etc., treatment of
Natona Defense ct
ont rues for admnstraton
Reguatons
Subcontract after une 28, 1940, prme contract before
that date, rates appcabe
cess proft on Navy contracts
Competon dates, determnaton
Contract for matera for repacements, agreement to
mtaton on proft
W.
War materas, manufacture of:
unds from foregn government for pant e panson, n-
come
Lease of foregn government factes, ncome
Wnes:
ortfed, credts for ta es on
Gross ncome
Reguatons amended -.
Producton, fortfcaton, ta -payment, reguatons
amended
Sprts, rectfcaton, defense ta , reguatons amended
Wthhodng ta at source:
Conventon, Unted States and Sweden, ncreased rate of
wthhodng, e empton
Income of foregn persons where actua transfer thereof
prohbted
Nonresdent aens, foregn corporatons, changes effected
by 1940 Revenue ct
Rates of wthhodng, reguatons amended
Reease to rtsh Government, tte to securtes taken
under cquston of Securtes Order, 1940
Rung No.
10311
103 0
10402
10443
10471
10513
10545
10341
10482
10541
10439
10472
10370
10391
10348
10352
10390
10339
10419
10334
1042
10423
104S4
39
10315
377
103S0
379
10403
419
10492
I 13
1035
141
10543
151
10322
138
1041
142
o
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0
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2

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4
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3

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Bureau of Internal Revenue Cumulative Bulletin 1940-2

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Copyright:

Bureau of Internal Revenue Cumulative Bulletin 1940-2

Hochgeladen von

Copyright:

SP CI L, TT NTION s drected t0 cautonary notce on ths page that pub-

The foowng s nserted mmedatey precedng secton 314.50:

Secton 314.35 s amended to read as foows:

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