SP CI L TT NTION s a recten t0 cautonary notce on ths page that puh-

shed rungs of the ureau do not hare 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 1946-1
NU RY- UN 1916
IN T IS ISSU
Page
Introductory Notes I
Contents - I
Rungs Nos. 12201-12332
Ta Court of the Unted States, The- formery Unted
States oard of Ta ppeas 1-5
Income Ta
Part I ( . Interna Revenue Code and . 193S
ct) 6-233
Part n (1937 and 1936 cts) 234-242
Part m (1935 and 1934 or Pror cts) .... 243-247
mpoyment Ta es 24 -263
Msceaneous Ta es
state Ta es 261-2 1
Saes Ta es, etc 2 5-302
Msceaneous Rungs 303-322
Legsaton 323-34
Inde 349-35
The runf reported n (he I ter m Revenue uetn re for the nformaton of ta payers and ther counse aa
showng the trend of offca opnon n the admnstraton of (he uresa of 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 been formay approved and promugated by the Secretary of the
Treasury. ach rung embodes the admnstratve appcaton of the aw and Treasury Decsons to the entre
state of facta upon whch a partcuar case rests. It s especay to be noted that the same resut w not neces-
sary be reached n another case uness a the matera facta are dentca wth those of the reported case. s t s
not aways feasbe to pubsh a compete statement of the fads underyng each rung, there can be no assurance
that any sew case s dentca wth the reported case. s bearng out ths dstncton, t may be observed that the
rungs pubshed from tme to tme may appear to reverse rungs prevousy pubshed.
Offcers of the ureau of Interna Revenne are especay cautoned aganst reachng a concuson n any case
merey oa the bass of smarty to a pubshed rung, and shoud base ther |udgment on the appcaton of a
pertnent provsons of the taw and Treasury Decsons to a the facta n each case. These rungs shoud be used
as ads n studyng the aw and ts forma constructon as made n the reguatons and Treasury Decsons pre-
vousy ssued.
In addton to pubshng a Interna Revenue Treasury Decsons, t s the pocy of the ureau of Interna
Revenue to 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
to 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 new constructon of the revenue aws but smpy appy rungs aready made pubc to certan
stuatons of fact 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
Revenne are not consecutve. No unpubshed rung or decson w be cted or reed upon by any offcer or
empoyee of the ureau of Interna Revenue as a precedent n the dsposton of other case . Uness otherwse
specfcay ndcated, a pubshed rungs and decsons have receved the consderaton and approva of tha
Chef Connse for the ureau of Interna Revenne.
UNIT D ST T S GO RNM NT PRINTING O IC : W S INGTON : 1946
or soe by Superntendent of Documents, U. S. Government Prntng Offce, Washngton 25, D C
See back of tte for prces
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The Interna Revenue uetn servce for 1946 w consst of b-
weeky buetns and semannua cumuatve buetns.
The bweeky 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 6 months.
The compete uetn servce may be obtaned, on a subscrpton
bass, from the Superntendent of Documents, Government Prntng
Offce, Washngton 25, D. C, for 2.50 per year foregn, 3.75. Snge
copes of the bweeky uetn, 10 cents each.
New subscrbers and others desrng to obtan the 1919, 1920, and
1921 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 ncud-
ng December, 1921, as foows: No. 1, 30 cento No. 2, 25 cents No. 3,
30 cents No. 4, 30 cents: No. 5, 25 cents.
Persons desrng to obtan Saes Ta Cumuatve uetns for
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 1945, ncusve, may do so at prces as foows:
Year.
1922...
1923...
1924...
1926...
1926...
1927...
192 ...
1929...
1930...
1931
1932...
1933...
1934...
1935...
1936...
1937...
193 ...
1939...
1940.
1941.
1942.
1943.
1944.
1945.
1946.
Cumuatve uetn.
rst 6 months. Second 6 months.
1-1
II-
III-
I - 1
-1
I-1
II-1
III-1
I -1
-
I-1
II-1
III- 1
I - 1
-1
1937- 1
193 - 1
1939-1
Part 1
1 Part 2
1940- 1
1941- 1
1942- 1
1946-1
1-2
II-2
III- 2
I - 2
-2
I-2
II-2
III-2
I -2
-2
I-2
II-2
III- 2
I - 2
-2
1937- 2
193 - 2
1939- 2
1940- 2
1941- 2
1942- 2
Prce (cents).
40, 30
30, 40
50, 50
40, 35
40, 30
40, 40
35, 50
50, 55
50, 50
65, 30
30, 55
30, 50
50, 60
50, 50
55, 45
60, 50
60, 50
60
50
1
30, 60
45, 60
40, 60
1. 25
1. 50
1. 00
ouse, Senate, and conference reports on revenue ba from October 3,1913, to Revenue
ct of 193 , Incusve and on amendments thereto.
Persons desrngto obtan the servce n dgest form may do so at
prces as foows: Dgest No. 13 (1922-1924), 60 cents Dgest No. 17
(1925), 25 cents Dgest No. 21 (1926), 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 25, D. C.
()
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INTRODUCTORY NOT S.
The Interna Revenue Cumuatve uetn 1946-1, 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,
msceaneous ta es, and egsaton affectng the revenue statutes, as
ndcated on the tte page of ths uetn, pubshed n the bweeky
uetns (1946, Nos. 1 to 12, ncusve) for the perod anuary 1 to
une 30, 1946. It aso contans a cumuatve st of announcements
reatng to decsons of The Ta Court of the Unted States, formery
Unted States oard of Ta ppeas, pubshed n the Interna
Revenue uetn-Servce from anuary 1 to une 30, 1946.
Income Ta rungs are prnted n three parts. The rungs n
Part I are prnted as Part I, (Interna Revenue Code) and
(Revenue ct of 193 ), the aw headngs correspondng wth the
sectons of the Code, as amended, and the 193 ct, respectvey, and
the reguatons headngs correspondng wth the secton headngs of
Reguatons 111 or 103 and the artce headngs of Reguatons 101.
Rungs under the Revenue cts of 1937 and 1936 are prnted as Part
II, the aw headngs correspondng wth the secton headngs of those
cts and the reguatons headngs correspondng wth the artce head-
ngs of Reguatons 94. Rungs under the Revenue cts of 1935 and
1934 or pror cts are prnted as Part III, the aw headngs corre-
spondng wth the secton headngs of the Revenue ct of 1934 and the
reguatons headngs correspondng wth the artce headngs of
Reguatons 6.
Rungs under Ttes III and I of the Soca Securty ct and
undep 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 106
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 1936 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.
( I)
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I
. 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.
m. T. Ta es Imposed by the Soca Securty ct, the Carrers Ta ng ct
of 1937, and Subchapters , , and C of the Interna Revenue Code.
. T. state Ta Dvson.
0. C. M. Genera Counse s, ssstant Genera Counse s, or Chef Counse s
memorandum.
1. R. . Interna Revenue uetn.
I. R. C. Interna Revenue Code.
I. T. Income Ta Unt.
M, N, , T, Z, etc. The names of corporatons, paces, or busnesses, accord-
ng to conte t.
Mm. Mmeographed etter.
MS. or M. T. 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.
S1L 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. C Ta Court of the Unted States.
T. D. Treasury Decson.
a and y are used to represent certan numbers, and when used wth the word
doars represent sums of money.
NNOUNC M NT R L TING TO D CISIONS O T T COURT OP T UNIT D
ST T S, ORM RLY NOWN S T UNIT D ST T S O RD O T
PP LS.
In order that ta payers and the genera pubc may be nformed
whether the Commssoner has acquesced n a decson of The Ta
Court of the Unted States, formery known as the Unted States
oard of Ta ppeas, dsaowng a defcency n ta determned by
the Commssoner to be due, announcement w be made n the b-
weeky Interna Revenue uetn at the earest practcabe date.
Notce that the Commssoner has acquesced or nonacquesced n a
decson of The Ta Court reates ony to the ssue or ssues decded
adversey to the Government. Decsons so acquesced n shoud be
reed upon by offcers and empoyees of the ureau of Interna
Revenue as precedents n the dsposton of other cases.
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CUMUL TI CONT NTS.
Rung No.
Page.
1946-1-12205
127
1946-1-12207
24
1946-2-12210
19
1946-2-12217
30
1946-3-12230
179
1946-4-12242
115
1946- -12244
195
1946-4-12247

1946-5-12256
177
1946-6-1226
169
1946-6-12267
176
1946-6-12264
130
1946-6-1226
209
1946-6-12265
134
1946-7-1227
103
1946-7-122 2
302
1946-7-122 1
250
1946-7-122 0
156
1946-7-12277
52
1946-9-12303
310
1946-0-12302
303
1946- -12296
1
1946-9-1229
27
1946-9-12305
31
1946-10-12310
11
1946-9-12304
30
1946-10-12311
264
1946-11-12317
61
1946-11-12322
173
1946-11-12324
26
1946-12-12329
159
1946-2-12214
234
1946-2-12215
270
1946-2-12216
2 0
1946-3-12225
67
1946-3-12229
191
1946-4-12243
190
1946-3-12231
266
1946-4-12245
2 5
1946-4-12246
295
1946-1-12236
69
1946-5-12249
53
1946-5-12255
122
1946-5-12257
2 2
1946-7-12272
6
1946-7-12273
9
1946-7-12274
11
1946- -12292
244
1946- -12293
22
1946-10-12312
230
1946-11-12323
237
1946-6-12262
79
1940-5-12250
55
1946-1-12204
246
1946-5-12251
66
1946-11-12319
101
1946-6-12260
2
1946-6-12260
2
1946-6-12260
1
1946-6-12260
4
1946-6-12260
-1
1946-6-12260
4
1946-11-12316
1,2,5
1946-12-12326
2
1946-12-12326
2
1946-12-12326
2
1946-12-1232
2
1946-12-12326
2
Rung.
1670.
1671
1672
1673
1674
Chef Counse s memoranda:
24742
24 10
24 23
24 49
24910
Ta Court of Unted States:
96.
97...
9 ...
99..
100..
101
327...
1019..
11 5..
11 6..
11 7.
Rung.
Ta Court of Unted States
Contnued.
1223.
13 0
156
1644
2027
202
2094
217
21 .
223
2254
2291
2650
3029.
3074
331
3340.
344 .
3453
3454
3603
3746..
3 9.
396
3972
4027
4094
4140
4371
43 7
4421
4453
4454
4471
44 1
4541
4552
4553
4554.
4560
4561
45 3
4619
465
4 72
4904
4932.
4977.
50 0
60 5
5192
5217
5344
55 3
6705
6706
6719
6724
6773
5774....
5794.
5795
5796
5797
5 44
5 66
6909
5957
6027...
6037
Rung No.
1946-6-12260
1946-1-12201
1946-1-12201
1946-7-12271
1946-10-12306
1946-10-1230
1946-10-1230
1946-1-122
1946-4-12236
1946-S-122S
1946- -122
1946-6-12260
1946-6-12260
1946-10-12306
1946-7-12271
1946-3-12223
1946-10-12306
1946-4-12235
1946-9-12297
1946-9-12297
1946-1-12201
1946-7-12271
1946-10-1230
1946-5-1224
1946-5-1224
1946-12-1232
1946- -122S
1946-12-1232
1945- -122
1946- 2-12209
1946-10-12306
1946-9-12297
1946-9-12297
1946-9-12297
1946-12-12326
1946-12-12326
1946-3-12223
1946-12-12326
1946-12-12326
1946-7-12271
1946-7-12271
1946- -122
1046-12-1232
1946-12-1232
1946-3-12223
1946-9-12297
194(1-12-1232
1946-7-12271
1946-2-12209
1946-10-1230
1946-10-1230
1946-9-12297
1946-11-1231
1946-1-12201
1946-6-122 0
1946-4-12235
1946-9-12297
1946-11-12316
1946-6-12260
1946-6-122 0
1946-11-12316
1946-11-12316
1946-11-12316
1916-11-12316
1946-11-1231
1946-7-12271
1946-9-12297
1946-12-12326
1946- -122
1946-12-1232
( )
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e
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I
Rung.
Ta Court of Unted States-
Contnued.
6090
61 0.
6376
6397
67 3
6906
6907
700
7502
77 4
394
41953
1049 0
109606
109913
110247
112051
112452
Offce decsons (I. T.):
3775
3776
3777
377
3779
37 0
7 1
37 2
37 3
7 4
37 5
37 6
37 7
37
37 9
3790
791
3792
3793
3794
3795
3796
3797
379
Rung No.
1946- -122 S
4
1946-9-12297
3
1946-1-12201
2
1946-10-12306
5
1946-12-12326
6
1946-6-12260
3
1946-6-12260
3
1946- -122
2
1946-10-12306
2
1946-5-1224
2
1946-9-12297
2
1946-7-12271
4
1946-5-1224
3
1946-9-12297
3
1940-5-1224
4
1946-7-12271
3
1946-7-12271
1
1946-3-12223
3
1946-1-12202
76
1946-1-12203
65
1946-2-12212
63
1946-2-12213
111
1946-3-12226
112
1946-3-12227
113
1946-3-1222
119
1946-4-12237
4
1946 -1223
4
1946-4-12239
5
1946-4-12241
9
1946-5-12252
75
1945-5-12253
232
1946-5-12254
153
1946-6-12263
100
1946-7-12276
50
1946-7-12279
14
1946- -122 9
6
1946- -12290
96
1946- -12291
114
1946- -12295
15
1946-9-12299

1946-9-12300
99
1946-9-12301
127
Rung.
Offce decsons (I. T.) Con.
3799
3 00 .
3 01
3 02
3 03
3 04
3 05
Offce decsons (MS.):
294
295
296
297
29
299
Offce de sons (T.|:
152
153
154
155
156
167
15
159
160
161
162
163.
Mmeographs:
6967
6972
6972 (Supp. 1)..
6976
69 7.
6020.
Crcuar:
1 52
Rung No.
1946-10-12307
66
1946-10-1230
2
1946-10-12309
109
1946-11-1231
1
1946-11-12320
103
1946-11-12321
151
1946-12-1232
120
1946-2-1221
312
1946-3-12234
313
1946-6-12270
314
1946- -12294
315
1946-10-12313
316
1946-12-12330
317
1946-1-1220
321
1946-2-12219
319
1946-2-12221
319
1946-2-12222
321
1946-5-1225
319
1946-5-12259
321
1946-7-122 3
320
1946-7-122 4
322
1945- 10-12314
320
322
1946- 10-12315
1946-12-12331
320
1946-12-12332
322
1946-3-12232
255
1946-2-12211
25
1946-3-12224
44
1946-7-12275
49
1946-3-12233
260
1946-4-12240
W
1946-6-12261
72
1946-6-12269
300
1946-12-12327
74
1946-1-12206
209
1946-2-12220
323
1946-7-122 5
32
1946-7-122 6
330
1946-7-122 7
331
1946-11-12325
334
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CONT NTS O CUMUL TI ULL TINS (I. T.) I to 5 S. T. I OR 1920 ND 1921 INT RN L
R NU 1-1. 1-2. II-, II-2, m-1, III-2, I -1, I -2. -. -2, I-1, I-2. II-1. II-2, III-U
III-2, I -1. I -2. -. -2. I-1. I-2. -1. II-2, III-1, IU-2. I -1. I -2. -1. -2. 1937-1.
1937-2. 193 -1. 193 -2, 1939-1 (P RT 1 ND P RT 2). 1939-2. 1940-1. 1940-2. 1941-1. 1941-2, 1942-1.
1942-2. NNU L ULL TINS OR 1943. 1944. ND 1945, ND S MI NNU L ULL TIN 1946-1.
Cumuatve uetn.
Rung Nos.
Income Ta :
December, 1919 (No. 1)
anuarv- une, 1920 (No. 2)
uv-December, 1920 (No. 3)
anuarv- une, 1921 (No. 4)
uy-December, 1921 (No. 5)
Saes Ta :
1920 (S. T. 1-20)
anuary- une, 1921
uy-December, 1921..
Interna Revenue uetn:
anuary- une, 1922 (No. 1-1)
uv-December, 1922 (No. 1-2)
anuarv- une, 1923 (No. II 1)
uv-December, 1923 (No. 11-2)
anuarv- une, 1924 (No. III-)
uy-December, 1924 (No. 111-2)
anuary- une, 1925 (No. I -1)
uy-December, 1925 (No. I -2)
anuarv- une, 1926 (No. -)
uv-December, 1926 (No. -2).
anuary- une, 1927 (No. I-1)..
uv-December, 1927 (No. I-2)
anuary- une, 192 (No. II-1)
uy-December, 192 (No. II-2)
anuarv- une, 1929 (No. III-1)
uy-D ecember, 1929 (No. III-2)
anuary- une, 1930-(No. I -1).
uy-December, 1930 (No. I -2)
anuary- une, 1931 (No. -)_.
uy-December, 1931 (No. -2)___
anuarv- une, 1932 (No. I-1)..
uv-December, 1932 (No. I-2).
anuary- une, 1933 (No. II-1)..
uv-December, 1933 (No. II-2)
anuarv- une, 1934 (No. III-1)
uy-December, 1934 (No. III-2)
anuarv- une, 1935 (No. I -1).
uy-December, 1935 (No. I -2) --
anuarv- une, 1936 (No. -1).
uy-December, 1936 (No. -2)
anuarv- une, 1937 (1937-1)...
uv-December, 1937 (1937-2).
anuary- une, 193 (193 -1). - -
uy-December, 193 (193 -2)
anuary- une, 1939 (1939-1 Part 1 and Part 2).
uy-December, 1939 (1939-2)
anuary- une, 1940 (1940-1)
uy-December, 1940 (1940-2)
anuary- une, 1941 (1941-1)
uv-December, 1941 (1941-2)
anuarv- une, 1942 (1942-1).
uv-December, 1942 (1942-2)
anuary-December, 1943 (12 months)
anuary-December, 1944 (12 months)
anuary-December, 1945 (12 months)
anuary- une, 1946 (1946-1)..
1-655
656-1033
1031-136
1369-1710
1711-1996
1-112
113-265
266-356
1-3 3
3 4-665
666-956
957-1276
1277-1641
1642-1949
1950-2251
2252-2523
2524-2 13
2 14-3026
3027-3291
3292-3557
355 -37 4
37 5-4052
4053-424
4249-44 7
44 -46 3
46 4-4 7
4 -5124
5125-533
5339-5531
5532-5961
5962-6262
6263-65 1
65 2-6 71
6 72-7224
7225-7563
7564-7 4
7 5- 149
150- 459
460- 792
793-911
9119-9424
9425-9654
9655-9 96
9 97-10126
10127-10304
10305-1054
10549-10761
10762-10943
10944-1113
11139-11302
11303-11590
11591-11916
11917-12200
12201-12332
(vn
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T T COURT O T UNIT D ST T S.
CUMUL TI LIST O NNOUNC M NTS R L TING TO
D CISIONS O T T COURT O T UNIT D ST T S,
ORM RLY T UNIT D ST T S O RD O T PP LS,
PU LIS D IN T INT RN L R NU ULL TIN S R -
IC ROM NU RY 1 TO UN 30, 1946, INCLUSI .
nnouncements reatng to the acquescence or nonacquescence of the Commssoner In
decsons of The Ta Court of tho Unted States, formery the Unted States oard of Ta
ppeas, as prnted In the weeky Interna Revenue uetns from December 22. 192), to
December 31, 1931, ncusve, are pubshed n Cumuatve uetn -2 (1931), pages 1-106.
Those prnted In weeky uetns from anuary 1, 1932. to December 31, 1939, Incusve,
are pubshed n Cumuatve uetn 1939-2, pares 1-73. Those prnted n weeky u-
etns from anuary 1, 1940, to December 31, 1942, ncusve, and In semmonthy uetns
from anuary 1, 1943, to December 31, 1944, Incusve, are pubshed n Cumuatve uetn
1944, pages 1-51. Those prnted n semmonthy uetns durng the caendar year 1945 are
pubshed n Cumuatve uetn 1945, pages 1-9. The st beow, therefore, contans ony
such announcements prnted In the bweeky uetns from anuary 1 to une 30, 1946,
ncusve.
1946-12-12326
The Commssoner acquesces n the foowng decsons:
Ta payer.
Docket No.
oume.
Page.
.
kers, oyd D
en et u ., Lcand
rmour, Phfp D
ssocated Patentees, Inc.1.
13.
oyd-Rchardson Co
urke, Chares
urke, Syva
uter Consodated Coa Co.
Campbe et u ., N. Stuart
Cardeza, Charotte D. M., estate of 1
Chapman, Samue
5957
1223
4471
112051
223
4560
4561
5344
55 3
327
0
693
1232
359
979
695
1167
1167
1 3
272
202
1365
1 cquescence reates to resut ony.
1 cquescence reates ony to the Issue whether the sae by the ta payer of an Interest In Inherted property
upon whch he camed a deductbe oss was a transacton entered Into for proft.
1 state ta decson.
cquescence reates ony to the foowng ssues: (a) s to the porton of corpus producng the 5,000
annuty, when the ony possbe remandermen were ssue yet to be begotten by a man 64 years od n 1939,
chdess and havng an nvad wfe who ded soon thereafter, whether such property was Intestate property
of the creator of the trust and, as such, part of the gross estate of decedent, hs ony chd and her. (6) s to
the two-thrds of the remanng corpus over whch decedent had and by her w e ercsed a power of appont-
ment n favor of her son, when the ony possbe egatees n defaut of appontment were ssue yet to be be-
gotten by a man 64 years od n 1939, chdess and havng an nvad wfe who ded soon thereafter, whether
such property was ntestate property of the creator of the trust and, as such, part of the gross estate of dece-
dent, hs ony chd and her, (c) s to the remanng one-thrd of the corpus, same ssue as In (a), above.
1 Un|ust enrchment ta decson.
(1)
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cquescences Contnued.
Ta payer.
Docket No. oume. Page.
D.
Dade-Commonweath Tte Co
Dana, Chares
Davenport, Macom Cfton
Dep, rank
Dependabe Packng Provson Co., a Corporaton .
Dependabe Packng Co., a Partnershp
Dougherty Co. The P..
Draper Co., Inc --
.
s et u ., On O
nns et a., Carre Mae, e ecutors of estate of rank
G. nns, Sr
nns, Sr., rank G., estate of
.
arfa Mutua Wood Products Co., arfa , S. C
edera Unon Insurance Co
dety-Phadepha Trust Co. et a., e ecutors of
estate of Charotte D. M. Cardeza
rst Natona Dank n Oshkosh, trustee of bert W.
Prest Trust for the eneft of Itoa M. Ransom,
transferee
ouche, G. R
razer, oseph W.
Genera oods Corporaton
Geyer, ertram
Geyer, Mary
Geyer, Mercedes G
Geyer, Corne Newe, Inc
Gever Co., The
Gbbs et a., Raph ., e ecutors of estate of Lous .
ob
Gbert, oseph
Gbert, ctor . -
Gshot Machne Co
4932
5909
394
5719
96
97
50 0
6376
7502
700
700
77 4
396
327
5217
5724
109606
217
11 7
11 5
11 6
1019
11
13 0
5 66
3746
21 6
332
177
62
1351
1365
1365
791
22
13
1096
1096
1279
374
202
221
462
1152
209
96
96
96
96
96
5
10
10
1 Un|ust enrchment ta decson.
Order of dsmssa entered December 29, 1945, order of dsmssa vacated anuary 23, 1946, and decson
of no defcency entered anuary 25, 1946.
1 state ta decson.
4 cquescence reates ony to the foowng ssues: (o) s to the porton of corpus producng the 5.0ft
annuty, when the ony possbe remandermen were Issuo yet to be begotten by a man 64 years od n 19 9,
chdess and havng on Invad wfe who ded soon thereafter, whether such property was ntestate property
of the creator of the trust and, as such, part of the gross estate of decedent, hs ony chd and her. (I) s
to the two-thrds of the remanng corpus over whch deqedent had and by her w e ercsed a power of
appontment n favor of her son, when the ony possbe egatees In defaut of appontment were ssue yet
to be begotten by a man 64 years od n 1939, chdess and havng an nvad wfe who ded soon thereafter,
whether such property was Intestate property of the creator of the trust and, as such, port of the gross estate
of decedent, bs ony chd and her. (0 s to the remanng one-thrd of the corpus, same ssue as n ( ).
above.
cquescence reates to resut ony.
Gft to decson.
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3
cqotescences Contnued.
Ta payer.
Docket No.
oume.
.
arry Co., S. . -
etter, zabeth S.
uber, rnst
.
oseph, rank
oseph et u ., rank
.
anawha aey ank, The
nght, dward .
nght, Mton
nght, Samue
ob, Lous ., estate of1
oppers Co.
raus, d ward G
L.
Lantz ros. (Partnershp)
LeRoy, Robert4
Lese, May ., estate of
Lese, Sr., Warren, ndvduay and as e ecutor of
estate of May . Lese.
Lousana Land poraton Co
M.
Maoy, veyn
Maoy, rank R --
Matne Co., The --
Marsha, erbert
Mar , stee G
Mcntosh, zabeth nght
Mtteman et u ., Maurce
Motor Products Corporaton
Murphy, Mary
Murphy, Wam R__ --
Myer, ma M
Myers, dward C
N.
etteton, bert ., estate of
0.
Oho attery Ignton Co
1644
4552
5 44
5773
5774
3029
5795
5796
5794
13 0
110247
4541
112452
2291
4619
4619
4421
6907
6906
61 0
331
3602
5797
156
1049 0
4564
4553
50 5
6037
4371
3074
oard of Ta ppeas.
1 Nonacquescence pubshed In Cumuatve uetn I I (1927). page 7, wthdrawn.
1 (t ta decson.
1 Parta nonacquescence pubshed n Cumuatve uetn 1944, page 42, wthdrawn.
Parta nonacquescence pubshed n Cumuatve uetn 1945, page , wthdrawn.
Nonacquescence pubshed n Cumuatve uetn 1943, page 37, wthdrawn.
1 state ta decson.
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t |uT sc Nc S Contnued.
Ta payer.
Parsons et u ., T. GrenvUe
Patterson en|amn rankn 1
Penczek, Chares 1
Penczek, rank 1
Pper, Wam T
Prest ( bert W.) Trust for the eneft of Itoa M.
Ransom, transferee
Purvn, Wam
R.
Rdgewood Provsons, Inc.
Rogers, W.
Russe, Cfton
S.
Sans, red - -
Santa uaa Mnng Co.1
Snger Sewng Machne Co.4
Smth, Robert L
Smth, Wam W -
Southand Ice Co., The
Spencer, Carone McCuoch, estate of
Spencer et a., ohn Mtche, e ecutors of estate of
Carone McCuoch Spencer
Syracuse Trust Co., The, e ecutor of estate of bert
. Netteton
Tayor, W. L
Tayor-Wharton Iron Stee Co.
Thornton, orence .
Townsend, va . :.
Tyer, Stea kns
W.
Webodt, Pear O...
Webodt, Werner .
Wofford Tatem
Wyant, I.
Docket No.
44 1
41953
101
100
4977
5217
45 3
3340
344
5706
99
109913
2027
202
2094
3453
3454
5705
2254
2254
4371
4027
43 7
6090
4094
4140
4454
4453
2650
465
oume.
6
21
5
5
5
oard of Ta ppeas.
Nonacquescencc pubshed In Cumuatve uetn -2 (1931), page 97, wthdrawn.
Un|ust enrchment ta decson.
Nonacquescence pubshed n Cumuatve uetn 1943, page 39, wthdrawn.
cquescence reates ony to the ssue whether amounts camed as donatons durng the ta abe yean
1934 and 1935 are aowabe as ordnary and necessary busness e penses.
state ta decson.
cquescence reates to resut ony.
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5
The Commssoner does NOT acquesce n the foowng decsons:
Ta payer.
Docket No.
oume.
Page.
Campbe et u ., N. Stuart1
Cardeza, Charotte D. M., estate of
Converse, dmund C
.
dety-Phadepha Trust Co. et a., e ecutors of
estate of Charotte D. M. Cardeza 1 --
.
Gray, Wam rkman
.
aowe, oward T
M.
Mares, Mar|ore D., e ecutr of estate of Pompeo
M. Mares
Mares, Pompeo M., estate of
Mc enna, Roy C
Mtche, Carence .
Mutua ertzer Co
s.
Snger Sewng Machne Co. .
T.
Tower udng Corporaton..
55 3
327
4 72
327
5192
4904
67 3
67 3
3972
3 9
6027
2027
202
2094
6397
273
202
1014
202
290
1239
5S3
5 3
712
159
1122
So
125
Nonacquescence reates ony to the Issue whether the oss sustaned by the ta payer upon the sae o
an Interest Ln Inherted property was a capta oss or an ordnary oss.
state ta decson.
Nonacquesceuoe reates ony to the foowng ssues: (o) s to the porton of corpus producng the 5,000
annuty, whether that porton of the corpus was dsposed of by the w or was ntestate property of dece-
dent s father as of the date of hs death and, as such, part of the gross estate of decedent, hs ony chd and
her. (6) s to the two-thrds of the remanng corpus over whch decedent had and by her w e ercsed a
power of appontment n favor of her son, whether renuncaton by the apponteo prevented Incuson n
gross estate of the property so apponted, (c) s to the two-thrds of the remanng corpus mentoned n
It), mmedatey above, when the appontment was eercsed and renounced, whether egatees n defaut
of appontment coud take the property so apponted or whether t was ntestate property of the creator
of the trust and, as such, a part of the grossestateof decedent, hs ony chd and her, (f) Whether a bequest
of 25,000 n trust to mantan a mausoeum s deductbe from gross estate as funera e penses, (e) Whether
the e ecutors may deduct 6 per cent from gross estate for e ecutor s commssons when, for Pennsyvana
nhertance ta purposes, the Orphans Court mted the commssons to 3 per cent.
Oft ta decson.
Nonacquescence reates ony to the Issue concernng the proper amount of ta payer s openng nventory
for 1 34.
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INCOM T RULINGS. P RT L
. INT RN L R NU COD .
C PT R 1. INCOM T .
SU C PT R . G N R L PRO ISIONS.
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) -1: What ncuded n gross 1946-7-12272
ncome. Ct. D. 166
INCOM T INT RN L R NU COD D CISION O SUPR M COURT.
1. Gboss Income mbezzed Monet Reverba op Ta Court s
udgment Where Determnaton Invoved Mstake of Law.
mbezzed money does not consttute ta abe Income to the em-
bezzer under secton 22(a) of the Interna Revenue Code. ta abe
gan s condtoned upon (1) the presence of a cam of rght to the
aeged gan and (2) the absence of a defnte, uncondtona ob-
gaton to repay or return that whch woud otherwse consttute a
gan. The concuson that the ta payer receved no ta abe ncome
from the embezzement Is unatered by the fact that he subse-
quenty dsspated a of such funds In gambng houses. The Ta
Court s determnaton that the embezzed money consttuted ta abe
Income to the embezzer Invoved a cear-cut mstake of aw. The
court beow was therefore |ustfed n reversng that udgment
2. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Nnth
Crcut (14 ed. (2d), 933), reversng memorandum opnon of
The Ta Court of the Unted States, affrmed.
Supreme Court of the Unted States.
Commssoner of Interna Revenue, pettoner, v. Lard Wco and faud Wco .
On wrt of certorar to the Unted States Crcut Conrt of ppeas for the Nnth Crcut
ebruary 25, 194a
opnon.
Mr. ustce Murphy devered the opnon of the Court.
The soe ssue here s whether embezzed money consttutes ta abe Income to
the embezzer under secton 22(a) of the Interna Revenue Code.1
26 U. S. C secton 22(a).
( )
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19.22(a)- .
The facts are stpuated. The ta payer was empoyed as a bookkeeper by a
transfer and warehouse company In Reno, Nev., from 1937 to 1942. e was pad
hs saary prompty each month when due, t not beng the custom to aow hm
to draw hs saary n advance. In une, 1942, the company s books were audted
and t was dscovered for the frst tme that the ta payer had converted 12,74 .60
to hs own use durng 1941.1 Ths amount was composed of msceaneous sums
of money beongng to the company whch he had receved and coected at
varous tmes n hs capacty as bookkeeper. e faed to depost ths money to
the credt of the company. Instead he pocketed and wthdrew payments n cash
made to hm by customers, negectng to credt the customers accounts or
the company s accounts recevabe wth the funds receved.
The ta payer ost practcay a of ths money n varous gambng houses
n Reno. The company never condoned or forgave the takng of the money
and st hods hm abe to restore t. The ta payer was convcted In a Nevada
State court n 1942 of the crme of embezzement. e was sentenced to serve
from 2 to 14 years n prson and was paroed n December, 1913.
The Commssoner determned that the ta payer was requred to report the
12,74 .60 embezzed n 1941 as Income receved n that year and asserted a ta
defcency of 2,97 .09. The Ta Court sustaned the Commssoner but the court
beow reversed. (14 ed. (2d), 933.) We granted certorar because of a
confct among crcuts as to the ta abty of embezzed money.
Secton 22(a) of the Interna Revenue Code defnes gross ncome to Incude
gans, profts and ncome derved from deangs n property
growng out of the ownershp or use of or nterest n such property aso
from the transacton of any busness carred on for gan or proft, or
gans or profts and ncome derved from any source whatever. The queston
thus s whether the wrongfu acquston of funds by an embezzer shoud be
ncuded n the statutory phrase gans or profts and Income derved from any
source whatever, thereby consttutng ta abe ncome to the embezzer.
The Commssoner rees upon the estabshed prncpe that orthodo con-
cepts of ownershp fa to refect the outer boundares of ta aton. s ths
Court has stated, ta abty may rest upon the en|oyment by the ta payer of
prveges and benefts so substanta and mportant as to make t reasonabe
and ust to dea wth hm as f he were the owner, and to ta hm on that bass.
( urnet v. Wes, 2 9 U. S., 670, 67 Ct. D. 6 , C. . II-1, 261 (1933) . See
everng v. Cfford, 309 U. S., 331 Ct. D. 1444, C. . 1940-1, 105 everng t.
orst, 311-U. S., 112 Ct. D. 1472, C. . 1940-2, 206 .) ppyng that rue to ths
case, the Commssoner urges that the act of appropratng the property of another
to one s own use Is an e ercse of a ma|or power of ownershp even though the
act s conscousy and entrey wrongfu. s aganst a the word e cept the
true owner the embezzer Is the ega owner, at east whe he remans In posses,
son. The money or property acqured n ths unawfu manner, t s sad, shoud
therefore be treated as ta abe ncome to the wrongdoer under secton 22(a).
We can not agree.
Secton 22(a) s cast n broad, sweepng terms. It ndcates the purpose
of Congress to use the fu measure of ts ta ng power wthn those defnabe
categores. ( everng v. Cfford, supra, 334.) The very essence of ta abe
ncome, as that concept s used n secton 22(a), s the accrua of some gan,
proft or beneft to the ta payer. Ths requrement of gan, of course, must be
read n ts statutory conte t. Not every beneft receved by a ta payer from hs
abor or nvestment necessary renders hm ta abe. Nor s mere domnon
over money or property decsve n a cases. In fact, no snge, concusve cr-
teron has yet been found to determne n a stuatons what s a sufcent gan
to support the mposton of an Income ta . No more can be sad n genera than
that a reevant facts and crcumstances must be consdered. (See Mag,
Ta abe Income (1945).)
or present purposes, however, t s enough to note that a ta abe gan Is
condtoned upon (1) the presence of a cam of rght to the aeged gan and
(2) the absence of a defnte, uncondtona obgaton to repay ov return that
whch woud otherwse consttute a gan. Wthout some bona fde ega or
equtabe cam, even though t be contngent or contested In nature, the ta payer
The sum of 110,147.41 waa embezzed darng 1942 but that amount a not In Issue
n ths case.
The decson beow Is n accord wth Mc nght v. Commssoner (127 ed. (2d), 072
(C. C. . 5)). but a n confct wth urre v. everng (126 ed. (2d), 723 (C. C. . )).
See aso oston Conso. os Co. v. Commssoner (12 ed. (2d), 47 , 476-477 (C. C. .
1, concurrng opnon)).
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19.22(a)- .
6
can not be sad to have receved any gan or proft wthn the reach of secton
22(a). (See North mercan O v. urnet, 2 6 U. S., 417, 424 Ct. D. 499, C. .
I-1, 293 (1932) .) Nor can ta abe Income accrue from the mere recept of
property or money whch one Is obged to return or repay to the rghtfu owner,
as n the case of a oan or credt Ta abe ncome may arse, to be sure, from the
use or n connecton wth the use of such property. Thus If the ta payer uses
the property hmsef so as to secure a gan or proft therefrom, he may be ta abe
to that e tent. nd f the uncondtona ndebtedness s canceed or retred
ta abe ncome may adhere, under certan crcumstances, to the ta payer. ut
apart from such factors the bare recept of property or money whoy beongng
to another acks the essenta characterstcs of a gan or proft wthn the meanng
of secton 22(a).
We fa to perceve any reason for appyng dfferent prncpes to a stuaton
where one embezzes or steas money from another. Mora turptude s not a
touchstone of ta abty. The queston, rather, s whether the ta payer n fact
receved a statutory gan, proft or beneft. That the ta payer s motve may
have been reprehensbe or the mode of recept Iega has no bearng upon the
appcaton of secton 22(a).
It s obvous that the ta payer n ths Instance, In embezzng the 12,74 .60,
receved the money wthout any sembance of a bona fde cam of rght. nd
he was at a tmes under an unquafed duty and obgaton to repay the money
to hs empoyer. Under Nevada aw the crme of embezzement was compete
whenever an appropraton was made the empoyer was entted to repevy the
money as soon as t was approprated or to have t summary restored by a
magstrate. The empoyer, moreover, at a tmes hed the ta payer abe to
return the fu amount. The debtor-credtor reatonshp was defnte and un-
condtona. rght, tte and nterest n the money rested wth the empoyer.
The ta payer thus receved no ta abe ncome from the embezzement.
Ths concuson s unatered by the fact that the ta payer subsequenty dss-
pated a of the embezzed funds In gambng houses. The oss or dsspaton of
money can not create ta abe ncome here any more than the nsovency or bank-
ruptcy of an ordnary borrower causes the oans to be treated as ta abe Income
to the borrower. (See Mc nght v. Commssoner, 127 ed. (2d), 572, 573-574.)
In each nstance the ta abty Is determned from the crcumstances surroundng
the recept and hodng of the money rather than by the dsastrous use to whch
t s put. Lkewse, the fact that a theft or oan may gve rse to a deductbe
oss to the owner of the money does not create ncome to the embezzer or the
borrower. Such deductons, ackng any necessary correspondng reatonshp
to gans and beng a matter of egsatve grace, fa to demonstrate the e stence
of ta abe ncome.
ad the ta payer used the embezzed money and obtaned profts therefrom
such profts mght have been ta abe regardess of the egaty nvoved. Or
had hs empoyer condoned or forgven any part of the unawfu appropraton
the ta payer mght have been sub|ect to ta abty to that e tent ut nether
stuaton s present n ths proceedng and we need not e pore such possbtes.
Sanctonng a ta under the crcumstances before us woud serve ony to gve
the Unted States an un|ustfed preference as to part of the money whch rght-
fuy and competey beongs to the ta payer s empoyer.
The Ta Court s determnaton that the embezzed money consttuted ta abe
ncome to the embezzer, a resut In accord wth ts pror decsons on the ssue,
nvoved a cear-cut mstake of aw. The court beow was therefore |ustfed
n reversng that |udgment. (Cf. Commssoner v. Scottsh mercan Co., 323
State v. Troson (21 Ncv., 41 , 32 P., 930).
Nevada Comped Laws (1929), secton 6S1 Perkns v. orne (3 Nev., 557) Stude-
boker Co. v. Wtcher (44 Nev., 46 . 199 P., 477).
Nevada Comped Laws 1929), sectons 11243-11246.
See ohnson v. Unted States (31 D. S., 1 9 Ct. D. 1576, C. . 1943, 10421) : Unted
States v. Suvan (274 U. S., 259 T. D. 402 , C . I-2, 177 (1927) ) CaUce v.
Commssoner (135 ed. (2d), 4 ) Chadck v. Unted States (77 ed. (2d), 961)
Natona Cty ank v. everng (9 ed. (2d), 93 Ct. D. 13 6, C. . 1939-1 (Part 1),
2111). See aso Uann v. Nash 1932 (1 . 752) Southern v. . . 1933 (1 . .,
71 .
See pruance . Commssoner (43 . T. ., 221), reversed sub nom. Mc nght v. Com-
mssoner (127 ed. (2d), 572) urre v. Commssoner (Prentce- a 1941 . T. .
Memorandum Decsons, par. 41.0 5, affrmed, 126 ed. (2d), 723). The admnstratve
nterpretaton s to the same effect as The Ta Court s decsons. (G. C. M. 16572, C. .
Y-1, 2 (19 6).)
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19.22(a)- .
T . S., 119 Ct D. 1619, C. . 1944, 340 Dobson v. Commssoner, 320 U. S., 4 0
Ct D. 1597, C. . 1944, 56 Trust of ngham v. Commssoner, 325 U. S., 365
Ct. D. 1643, I. R. . 1945-13, 6 .)
ffrmed.
Mr. ustce ackson took no part In the consderaton or decson of ths case.
Dssentng opnon by Mr. ustce urton.
Secton 19.22(a)-: What ncuded n gross 1946-7-12273
ncome. Ct. D. 1669
( so Secton 1 1, Secton 19.1 1-1.)
INCOM T INT RN L R NU COD D CISION OP SUPR M COURT.
1. Gross Income Partnershp usband and Wfe Ta Court s
ndngs Supported by vdence.
In order to reduce Income ta es the ta payer e ecuted a b of sae
to hs wfe by whch he purported to se her an undvded haf n-
terest n hs busness. The wfe e ecuted a partnershp agreement
under whch she undertook to share profts and osses wth her hus-
band. She pad for her nterest wth money gven her by the hus-
band and by notes payabe from the profts of the busness ascrbed to
the wfe after the partnershp was formed. The wfe contnued to
hep n the stores as she had before, but the husband retaned fu
contro of the management of the busness, and for the year here In-
voved fed soca securty ta returns as owner of the busness. The
wfe coud not draw checks on the busness bank account, and whe
profts were determned annuay and credted equay, no wth-
drawas thereof coud be made uness both partners agreed. ed:
The evdence supported the fndng of The Ta Court that the part-
nershp arrangements were merey superfca and dd not resut In
. changng the husband s economc nterest n the busness, and that
the wfe was not a genune partner theren.
2. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Thrd
Crcut (149 ed. (2d), 232), affrmng decson of The Ta Court of
the Unted States (3 T. C, 540), affrmed.
Supreme Court of the Unted States.
. L. Lusthaus, pettoner, v. Commssoner of Interna Revenue.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Thrd Crcut.
ebruary 25, 1946.
OPINION.
Mr. ustce ack devered the opnon of the Court.
The queston In ths case s the same as n Commssoner v. Tower, No. 317,
decded ths day Ct D. 1670, page 11, ths uetn . ere, too, the Comms-
soner made a defcency assessment aganst the husband, pettoner, for pur-
ported partnershp earnngs reported In hs wfe s return for 1940 and not reported
by the pettoner. The Commssoner s acton was based on a determnaton,
made after an Investgaton, that for ncome ta purposes no partnershp e sted
between the pettoner and hs wfe. The foowng are the controng facts:
Pettoner has operated a furnture busness snce 191 and snce 1933 he has
conducted a reta furnture busness at two stores ocated n Unontown, Pa.
s wfe heped out at the stores whenever she was needed wthout recevng
compensaton. In 1939 the pettoner found hmsef confronted wth the pros-
pect of arge profts and correspondngy arge ncome ta es. Ths caused hm
concern and he caed n hs accountant and attorney. Together they worked
out a pan for the supposed husband-wfe partnershp here nvoved. The wfe
703672 46 2
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519.22(a)-. 10
had tte to do wth the whoe transacton, and testfed when asked about the
detas that on the advce of counse I dd what he tod me to do. In accord-
ance wth the pan the pettoner e ecuted a b of sae to hs wfe by whch
he purported to se her an undvded haf Interest In the busness for 105,253. 1.
t the same tme the wfe e ecuted a partnershp agreement under whch she
undertook to share profts and osses wth her husband. The wfe pad for her
undvded haf nterest n the foowng way. Pettoner borrowed 25,000 from
a bank and gave hs wfe a check for 50,000 drawn aganst the amount bor-
rowed and further funds whch he had wthdrawn from the busness and de-
posted wth the bank for that purpose. The wfe then gave pettoner her
check for 50,255. 1 and the pettoner repad the 25,000 to the bank. Pettoner s
wfe aso gave hm 11 notes n the amount of 5,000 each of whch accordng to
an understandng were to be pad from the profts to be ascrbed to the wfe
under the partnershp agreement.1 Pettoner reported n a 1040 gft ta return
that he had made a gft of 50,000 to hs wfe. Pennsyvana ssued pettoner
and hs wfe a certfcate authorzng them to carry on the busness as a partner-
shp. When the partnershp was formed pettoner s wfe owned her home,
vaued at twenty-fve to thrty-thousand doars and securtes worth up to
25,000.
fter the partnershp was formed the wfe contnued to hep out In the storea
whenever she was needed |ust as she had aways done. ut pettoner retaned
fu contro of the management of the busness. s wfe was not permtted to
draw checks on the eusness bank account. Durng the ta abe year here In-
voved the husband fed soca securty ta returns as owner of the busness.
Nether partner coud se or assgn the Interest ascrbed by the partnershp
agreement wthout the other s wrtten consent. Though, at the cose of each
year the profts of the busness were credted on the books to pettoner and hs
wfe equay, no wthdrawas were to be made under the partnershp agreement
uness both partners agreed. The husband drew no saary. Durng 1940, whch
s the ta year here nvoved, the busness net profts were n e cess of 0,000,
from whch the respondent wthdrew about 4,500 and hs wfe wthdrew ony
59.01. The foowng year they wthdrew appro matey 16,000 and 19,900
respectvey, the wfe s wthdrawa beng used argey to pay back some of the
5,000 notes gven as part of her aeged contrbuton to the partnershp capta.
On ths evdence The Ta Court found that the wfe acqured no separate Interest
n the partnershp by turnng back to her husband the 50,000 whch he had
gven her condtoned upon her turnng t back to hm and that the partnershp
arrangements were merey superfca, and dd not resut In changng the hus-
band s economc nterest n the busness. It concuded that whe the partner-
shp was cothed In the outer garment of ega respectabty Its e stence
coud not b9 recognzed for ncome ta purposes. (3 T. C, 540.) The crcut
court of appeas affrmed. (149 ed. (2d), 232.) The pettoner chaenges The
Ta Court s fndng that the wfe was not a genune partner on the ground that
the evdence dd not support It. We hod that t dd.
or the reasons set out n our opnon n Commssoner v. Tower, No. 17,
decded ths day, the decson of the crcut court of appeas s affrmed.
ffrmed.
Mr. ustce ackson took no part n the consderaton or decson of ths ease.
Dssentng opnon by Mr. ustce Reed, In whch the Chef ustce |ons.
1 The Tn Court found as foows on ths phase:
e the husband woud make her a gft of a part of the purchase prce and take
her promssory notes for the baance. She coud pay off the notes from her share of
her profts of the busness. part of the testmony supportng ths fndng was gven
by the husband as foows:
. nd what were the terms of that ora agreement
. ust as I stated, that she the wfe woud pay me 50,000 n cash and the baance
to be pad n notes.
. Payabe yeary 1
. Payabe yeary In notes.
. In the amount of 5,000 each for 11 years
. Yes.
. Where was she to get the amount to be pad off yeary t
. rom the profts of the busness.
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11 19.22(a)-.

Secton 19.22(a)-: What ncuded n gross 1946-7-12274
ncome. Ct. D. 1670
( so Secton 1 1, Secton 19.1 1-1.)
INCOM T INT RN L R NU COD D CISION O SUPR M COURT.
1. Gross Income- -Partnershp usband and Wfe Ta Court s
ndngs Supported by vdence.
In order to reduce ncome ta es a corporaton of whch the ta -
payer was presdent and prncpa stockhoder was dssoved and a
mted partnershp was formed, the ta payer gvng to hs wfe stock
n the corporaton bn the condton that she contrbute the vaue of
the donated stock to the partnershp. Under the partnershp agree-
ment the ta payer contnued to have the controng voce In the
busness, the wfe takng part n nether the management nor oper-
aton of the busness and contrbutng no vta addtona servce.
ed: udged by the actua resut acheved, The Ta Court was
ustfed In fndng that the partnershp brought about no rea change
In the economc reaton of the husband and wfe to the ncome
n queston. There was more than ampe evdence to support the
court s fndng that no genune unon for partnershp busness
purposes was ever Intended and that the husband earned the Income.
The fact that the wfe mght be consdered a partner under State
aw s mmatera.
2. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, S th
Crcut (14 ed. (2d), 3 ), reversng decson of The Ta Court of
the Unted States (3 T. C, 390), reversed.
Supreme Court of the Unted States.
Commssoner of Interna Revenue, pettoner, v. rancs . Tower.
On wrt of certorar to the Unted States Crcut Court of ppeas for the S th Crcut.
ebruary 25, 1946.
OPINION.
Mr. ustce ack devered the opnon of the Court.
The Commssoner of Interna Revenue determned that respondent s wfe had
n her ncome ta returns for 1940 and 1941 reported as her earnngs, ncome that
actuay had been earned by her husband but had not been reported n hs returns.
defcency assessment was consequenty eved aganst the respondent by the
Commssoner. The partcuar earnngs nvoved were a porton of net Income
attrbuted to a partnershp, to whch, accordng to ts records, 0 per cent of the
capta bad been contrbuted by respondent and hs wfe, of ths, 51 per cent had
been contrbuted by the respondent and 39 per cent by hs wfe. If as respondent
asserts, the crcumstances surroundng the formaton and operaton of ths part-
nershp were such as to brng t wthn the meanng of sectons 1 1 and 1 2 of
Tte 26 of the Unted States Code, then the respondent and hs wfe are abe
ony for ther respectve ndvdua share of the busness Income. These sectons
provde that partners are abe for ta es on partnershp ncome ony n ther
ndvdna capacty, and that each partner sha report hs dstrbutve share
of the ordnary net ncome of the partnershp. ut secton 11 of
Tte 26 of the Unted States Code eves a ta on the net ncome of every nd-
vdua, and the net Income Is requred to be computed on the bass of gross
Income as defned In secton 22(a), whch brondy ncudes a earnngs of any
ndvdua from any source whatever. nd we have hed that the domnant
purposes of a sectons of the revenue aws, ncudng these, s the ta aton of
ncome to those who earn or otherwse create the rght to receve It and en|oy
the beneft of It when pad. ( everng v. orst, 11 U. S., 112, 119 Ct. D.
1472, C. . 1940-2, 206 .) The basc queston n decdng whether the Comms-
soner s defcency assessment was proper, s: Was the ncome attrbuted to the
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19.22(a)-.
12
wfe as a partner ncome from a partnershp for whch she aone was abe In
her Indvdua capacty, as provded by 26 U. S. C, sectons 1 1 and 1 2, or
dd the husband, despte the camed partnershp actuay create the rght to
receve and en|oy the beneft of the ncome, so as to make t ta abe to hm under
sectons 11 and 22(a)
The respondent asked The Ta Court to revew and redetermne the Comms-
soner s defcency assessment, nsstng that the ncome n queston was not the
respondent s but hs wfe s share n a partnershp. Tre Commssoner urged n
The Ta Court that the wfe had contrbuted nether servces nor capta to the
partnershp and that her aeged membershp n the partnershp was a sham.
Respondent admtted that she had not contrbuted her servces, but contended
that she had made a contrbuton of capta as shown by the amount attrbuted
to her on the partnershp books and that she was a bona fde partner. er aeged
contrbuton conssted .of assets whch the husband camed to have gven to
her throe days before the formaton of the partnershp.
The Ta Court concuded that the respondent had never e ecuted a compete
gft of the assets whch hs wfe ater purportedy contrbuted to the partnershp
that after the partnershp was formed respondent contnued to manage and
contro the busness as he had done for many years before that hs economc
reaton to the porton of the partnershp ncome whch was attrbuted to hs
wfe was such that t contnued to be avaabe to be used for the same purposes
as before, ncudng ordnary famy purposes that the effect of the whoe part-
nershp arrangement, so far as t nvoved respondent and hs wfe was a mere
reaocaton of respondent s busness ncome wthn the famy group and that
the dssouton of the corporaton and the subsequent formaton of the partner-
shp fufed no busness purpose other than a reducton of the husband s ncome
ta . The Ta Court concuded that ths famy partnershp ncome was In fact
earned by the husband that there was no rea partnershp between pettoner
and hs wfe for purposes of carryng on a busness enterprse that the wfe
receved a porton of the ncome ony by reason of her marta reatonshp,
and hed that the entre ncome was, therefore, ta abe to the respondent under
26 U. S. C, secton 22(a) (3 T. C, 396). The Crcut Court of ppeas for the
S th Crcut reversed. (14 ed. (2d), 3 .) The Crcut Court of ppeas
for the Thrd Crcut Court sustaned a hodng by The Ta Court, based on facts
n a matera respects smar to the ones n ths case, that a the ncome from
a husband-wfe partnershp was ta abe ncome of the husband under 26 U. S. O.
secton 22(a). (Lusthaus v. Commssoner, 149 ed. (2d), 232.) Other crcut
courts of appeas have aso sustaned smar hodng by The Ta Court1 s
Is ndcated by numerous Ta Court decsons, attempts to escape surta es by
dvdng one earned Income nto two or more through the devce of famy part-
nershps have recenty created an acute probem. ecause of the varous vews
e pressed as to controng ega prncpes n the decsons dscussng such
arrangements, we granted certorar both n ths and the Lusthaus case.
statement of some of the pertnent facts shown by the record and on whch
The Ta Court based ts concuson w cast some ght on the probem. roady
speakng, these facts foow a genera pattern found n many of the famy
partnershp cases. The busness here nvoved, It. . Towers Iron Works, a
ocated n Greenve, Mch., and has manufactured and sod sawm machnery
and wood and meta stampngs. Respondent s partcpaton n the busness dates
back 2 years. e has managed and controed the company snce the death of
hs father n 1927. Durng the ta years n queston the busness had 40 to 60
empoyees on ts pay ro. rom 1933 to 1937 the busness was operated as a
corporaton. The respondent was the presdent of the corporaton and owned
445 out of the 500 shares outstandng, hs wfe was vce presdent and owned 5
shares, and one Mr. mdon was the secretary, ownng 25 shares. These three
aso consttuted the board of drectors, and whe Towers managed the corporate
affars, mdon acted as bookkeeper. Mrs. Towers performed no busness servces.
In 1937 substanta profts ponted to ncreased ta es. Respondent s attorney
and hs ta accountant advsed hm that dssouton of the corporaton and for-
maton of a partnershp wth hs wfe as a prncpa partner, woud resut In
ta savngs and em nate the necessty of fng varous corporate returns. The
suggested change was put nto effect. ugust 25, 1937, respondent transferred
ar v. ones (131 ed. (2d), 292 (C. C. . 10)) Mead v. Commssoner (1 1 ed.
(2d), 323 (C. C. . 51) rgo v. Commssoner (150 ed. (2d), 67 (C. C. . 5)) Lorcm
. Commssoner (14 ed. (2d). 527 (C. C. . 6)).
ee cases coected n Pau, Partnershps In Ta vodance (13 . W. L. Revew, 121).
or about s months mmedatey foowng ncorporaton the respondent owned on|

425 shares.
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13 19.22(a)-.
190 shares of the corporaton s stock to hs wfe on the condton that she pace
the corporate assets represented by these shares nto the new partnershp.
Respondent, treatng the stock transfer to hs wfe as a gft vaued at 57,000,
ater pad a gft ta of 213.44. Three days after the stock transfer the corpora-
ton was qudated, a mted partnershp was formed and a certfcate of part-
nershp was duy fed for record as requred by Mchgan aw. ccordng to
the books, the vaue of the donated stock became the wfe s contrbuton to the
partnershp. The formaton of the partnershp dd not In any way ater the
conduct of the busness, e cept that both mdon and Tower ceased to draw
saares. y an agreement made shorty thereafter, a read|ustment was made
n the amount of profts each partner was to receve, under whch mdon a
share became the equvaent of, f not more than, the amount of the saary he
had prevousy drawn. Under the partnershp agreement the respondent con-
tnued to have the controng voce n the busness, as to purchases, saes,
saares, the tme of dstrbuton of ncome, and a other essentas. Respondent s
wfe, as a mted partner, was prohbted from partcpaton In the conduct of
the busness. So far as appears, the part of her purported share of the partner-
shp busness she actuay e pended was used to buy what a husband usuay buys
for hs wfe such as cothes and thngs for the famy or to carry on actvtes
ordnary of nterest to the famy as a group.
We are of the opnon that the foregong facts were suffcent to support The
Ta Court s fndng that the wfe was not a partner n the busness. partner-
shp s generay sad to be created when persons on together ther money, goods,
abor, or sk for the purpose of carryng on a trade, professon, or busness and
when there s communty of nterest n the profts and osses. When the e st-
ence of an aeged partnershp arrangement s chaenged by outsders, the ques-
ton arses whether the partners reay and truy ntended to on together for
the purpose of carryng on busness and sharng n the profts or osses or both.
nd ther ntenton In ths respect s a queston of fact, to be determned from
testmony dscosed by ther agreement, consdered as a whoe, and by ther
conduct n e ecuton of ts provsons. (Drennen v. London ssurance Co., 113
U. S., 51, 50 Co v. ckman, . L. Cas., 26 .) We see no reason why ths
genera rue shoud not appy n ta cases where the Government chaenges
the e stence of a partnershp for ta purposes.9 ere The Ta Court, actng
pursuant to ts authorty In connecton wth the enforcement of edera aws,
has found from testmony before t that respondent and hs wfe dd not ntend
to carry on busness as a partnershp. Ths fndng of fact, snce supported by
evdence, s fna. (Commssoner v. dnnger, 20 U. ., 467, 475 Ct. D. 1596,
C. . 1944, 4 4 Dohson v. Commssoner, 20 U. S., 4 9 Ct. D. 1597, C. . 1944,
66 .) The decson of The Ta Court was therefore correct uness, as respondent
contends, The Ta Court erroneousy dsregarded or mpropery apped certan
ega prncpes.
Respondent contends that the partnershp arrangement here In queston woud
have been vad under Mchgan aw and argues that The Ta Court shoud
consequenty have hed t vad for ta purposes aso. ut The Ta Court In
matng a fna authortatve fndng on the queston whether ths was a rea
partnershp s not governed by how Mchgan aw mght treat the same cr-
cumstances for purposes of State aw. Thus, Mchgan coud and mght decde
that the stock-transfer here was suffcent under State aw to pass tte to the
wfe, so that n the event of her death t woud pass to whatever members of
her famy woud be entted to receve t under Mchgan aw of descent and
dstrbuton. ut Mchgan can not by ts decsons and aws governng ques-
tons over whch It has fna say, aso decde ssues of edera ta aw and
thus hamper the effectve enforcement of a vad edera ta eved aganst
earned ncome. The contenton was re|ected n Lucas v. ar (2 1 U. S., 111).
There husband and wfe made an agreement for ont ownershp of the hus-
band s future ncome. ssumng that the husband s future earnngs were
under Caforna aw consdered as party owned by the wfe, ths Court refused
Snce the Commssoner had determned that the wfe was not reay a partner, the
harden rested upon the respondent to produce suffcent evdence to convnce The Ta Court
that the Commssoner s determnaton was wrong. (Wech v. everng, 290 U. S., I
Ct. D. 755, C. . II-2, 112 (1933) Commssoner v.- ennger, 320 D. ., 467, 475
Ct. D. 159 , C. . 1944, 4 4 .)
Ward v. Thompson (22 ow., 330, 33, 334) eehan v. aentne (145 U. S., 611, 61 ).
What woud be the effect for ta purposes shoud ta payers after hodng themseves
out as a partnershp ater chaenge the e stence of the partnershp. Is a queston not
here presented. (See ggns v. Smth, 30 U. S., 473, 477 Ct. D. 1434, C. . 1940-1,
127 .)
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f 19.22(a)- .
14
to accept the State s concept of the effect of the agreement whch woud have
reduced the edera ta on Income actuay earned by the husband. nd In
everng v. Cfford (309 U. S., 331, 334-335 Ct. D. 1444, C. . 1940-1, 105 ),
we hed that the purpose of 26 U. S. C. secton 22(a) to ta a ncome aganst
the person who controed ts dstrbuton coud not be frustrated by famy
group arrangements, even though the dstrbuton arrangements were vad for
State aw purposes. The statutes of Congress desgned to ta Income actuay
earned because of the capta and efforts of each ndvdua member of a |ont
enterprse are not to be frustrated by State aws whch for State purposes
prescrbe the reatons of the members to each other and to outsders. (Cf.
urke-Waggoner ssn. v. opkns, 269 U. S., 110, 114 T. D. 3790, C. . -, 147
(1926) .)
Respondent contends that The Ta Court s hodng that he s ta abe for the
profts from the partnershp Is contrary to a prncpe ong recognzed by ths
Court that The ega rght of a ta payer to decrease the amount of what woud
otherwse be hs ta es, or atogether avod them, by means whch the aw
permts, can not be doubted. (Gregory v. everng, 293 U. S., 465, 469 Ct. D.
911, C. . I -, 193 (1935) .) We do not re|ect that prncpe. It woud
ceary appy, for e ampe, In a stuaton where a member of a partnershp,
In order to keep from payng future ta es on partnershp profts and n order
to get nto a ower ncome ta bracket ses hs Interest to a stranger, renqush-
ng a contro of the busness. ut the stuaton s dfferent where the ta -
payer draws a paper purportng to se hs partnershp Interest even to a
stranger, though actuay he contnues to contro the busness to the e tent
he hnd before the sae and channes the Income to hs wfe. Then a show-
ng that the arrangement was made for the e press purpose of reducng ta es
smpy ends further support to the Inference that the husband st contros
the ncome from hs partnershp nterest, that no partnershp reay e sts
and that earnngs are reay hs and are therefore ta abe to hm and not to
hs wfe. The arrangement we are here consderng was of the type where proof
of a motve to reduce ncome ta es smpy ent further strength to the nference
drawn by The Ta Court that the wfe was not reay a partner. (See Pau,
Seected Studes In edera Ta aton, 2d seres, pages 293-300.) To rue other-
wse woud mean orderng The Ta Court to shut ts eyes to the reates of ta
avodance schemes.
Respondent urges further that The Ta Court erroneousy concuded that the
gft was neffectve for ta purposes because t was condtona and therefore
Incompete. The Government defends The Ta Court s concuson. We do not
fnd t necessary to decde ths Issue. The queston here s not smpy who
actuay owned a share of the capta attrbuted to the wfe on the partnershp
books. person may be ta ed on profts earned from property, where he nether
owns n r contros t. (Lucas v. are, supra.) The ssue Is who earned the
ncome and that ssue depends on whether ths husband and wfe reay Intended
to carry on busness as a partnershp. Those ssues can not be decded smpy
by ookng at a snge step In a compcated transacton. To decde who worked
for, otherwse created or controed the ncome, a steps n the process of
earnng the profts must be tnken nto consderaton. (See Commssoner .
Court odng Co., 324 U. S., 331, 334 Ct D. 1636, I. R. . 1945-7, 3 .) Of
course, the queston of ega ownershp of the capta purportedy contrbuted
by a wfe w frequenty throw ght on the broader queston of whether an
aeged partnershp Is rea or pretended. ut here The Ta Court s fndngs
were supported by a suffcent number of other factors n the transacton,
so that we need not decde whether ts hodng as to the competeness of the
gft was correct. (Cf. everng v. aock, 309 U. S., 106, 117, 11 Ot. D. 1440.
O. . 1940-1, 223 urnet v. Wes, 2 9 U. S., 670, 677 Ct. D. 6 , O. . -1, 261
(1933) .)
There can be no queston that a wfe and a husband may, under certan
crcumstances, become partners for ta , as for other, purposes. If she ether
nvests capta orgnatng wth her or substantay contrbutes to the contro
and management of the busness, or otherwse performs vta addtona servces,
or does a of these thngs she may be a partner as contempated by 26 U. S. C. sec-
tons 1 1, 1 2. The Ta Court has recognzed that under such crcumstances
the Income beongs to the wfe wfe may become a genera or a mted
Under some crcumstances Income has been hed ta abe to a person even when hedoea
not own or contro It. (Unted tate v. oUet d Choago R. Co., 15 D. ., 44, 46 Ct D.
1540, C. . 1942-1, 19 .)
See e. g. Croft v. Commttoner (T. C No. 14 2, decded ebruary 9, 1944)
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15
29.22 (a)-
partner wth her husband. ut when she does not share In the management and
contro of the busness, contrbutes no vta addtona servce, and where the
husband purports In some way to have gven her a partnershp nterest, The Ta
Court may propery take these crcumstances Into consderaton n determnng
whether the partnershp Is rea wthn the meanng of the edera revenue aws.
It Is the command of the ta payer over the Income whch s the concern of
the ta aws. ( arrton v. Schaffner, 312 U. S., 579, 5 1, 5 2 Ct. D. 1503, C. .
1941-1, 321 .) nd Income earned by one person s ta abe as hs, f gven to
another for the donor s satsfacton. ( everng v. orst, 311 U. S., 112, 119.)
It Is for ths reason, among others, that we sad n everng v. Cfford, supra,
335, that transactons between husband and wfe cacuated to reduce famy
ta es shoud aways be sub|ected to speca scrutny. or If under crcum-
stances such as those now before us, the end resut of the creaton of a husband-
wfe partnershp, though vad under State aws, s that ncome produced by the
husband s efforts contnues to be used for the same busness and famy purposes
as before the partnershp, faure to ta t as the husband s ncome woud frustrate
the purpose of 26 U. S. C. secton 22(a). y the smpe e pedent of drawng
up papers, snge ta earnngs can not be dvded nto two ta unts and surta es
can not be thus avoded.
udged by the actua resut acheved. The Ta Court was |ustfed n fndng
that the partnershp here brought about no rea change n the economc reaton
of the husband and hs wfe to the ncome n queston. efore the partnershp
the husband managed, controed, and dd a good dea of the work Invoved n
runnng the busness, and he had funds at hs dsposa whch he ether used n
the busness or e pended for famy purposes. The wfe dd not contrbute her
servces to the busness and receved money from her husband for her own and
famy e penses. fter the partnershp was formed the husband contnued
to contro and manage the busness e acty as he had before. The wfe agan
took no part In the management or operaton of the busness. If t be sad that as
a mted partner she coud not share n the management wthout becomng a
genera partner the resut s the same. No capta not avaabe for use In the
busness before was brought Into the busness as a resut of the formaton of the
partnershp. nd the wfe drew on ncome whch the partnershp books attrb-
uted to her ony for purposes of buyng and payng for the type of thngs she
had bought for hersef, home and famy before the partnarshp was formed.
Consequenty the resut of the partnershp was a mere paper reaocaton of
ncome among the famy members. The actuates of ther reaton to the
ncome dd not change. There was, thus, more than ampe evdence to support
The Ta Court s fndng that no genune unon for partnershp busness purposes
was ever Intended and that the husband earned the Income. Whether the ev-
dence woud have supported a dfferent fndng by The Ta Court s a queston
not here presented.
Reversed.
Concurrng opnon by Mr. ustce Rutedoe.
The Chef ustce and Mr. ustce Reed dssent for the reasons stated n ther
dssentng opnon In Lusthaut v. Commssoner, No. 263, decded to-day Ct. D.
166 , page 9, ths uetn .
Mr. ustce ackson took no part In the consderaton or decson of ths case.
Secton 20.22(a)-: What ncuded n gross 1946- -12295
ncome. I. T. 3795
( so Secton 23(a), Secton 29.23(a)-6
Secton 23(e), Secton 29.23(e)-.)
INT RN L R NU COD .
Treatment for edera ncome ta purposes of the grantng to
an empoyee of an opton to purchase stock of the empoyer cor-
poraton, or an affate of the empoyer corporaton, and the sub-
sequent e ercse, transfer, or apse of such an opton.
dvce has been requested as to the ncome ta consequences whch
attach to the grantng to an empoyee of an opton to purchase stock
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29.22(a)- .
16
of the empoyer corporaton, or of an affate of the empoyer cor-
poraton as set forth n secton 141(d) of the Interna Revenue Code,
and the subsequent e ercse, transfer, or apse of such an opton.
Secton 22(a) of the Interna Revenue Code ncudes n an em-
poyee s ta abe ncome any economc or fnanca beneft conferred
on hm as compensaton, whatever the form or mode by whch t s
effected. (See Commssoner v. ohn . Smth, 324 U. S., 177, Ct. D.
1633, C. . 1945, 49 Od Coony Trust Co. v. Commssoner, 279
U. S., 716, Ct. D. 0, C. . III-2,222 (1929).)
Secton 29.22(a)- of Reguatons 111, as amended by Treasury
Decson 5507, approved pr 12, 1946 (page 1 , ths uetn), ap-
pes to optons granted to empoyees on or after ebruary 26, 1945,
the date of the Supreme Court s decson n Commssoner v. ohn
. Smth, supra, and provdes n part as foows:
If property s transferred by an empoyer to an empoyee for an amount ess
than ts far market vaue, regardess of whether the transfer Is n the form
of a sae or e change, the dfference between the amount pad for the property
and the amount of ts far market vaue s n the nature of compensaton and
sha be ncuded n the gross ncome of the empoyee. In computng the gan
or oss from the subsequent sae of such property ts bass sha be the amount
pad for the property, ncreased by the amount of such dfference ncuded n
gross ncome.
In vew of the foregong, f an empoyee receves an opton on or
after ebruary 26, 1945, to purchase stock of the empoyer corpora-
ton, or of an affate of the empoyer corporaton as set forth n
secton 141(d) of the Interna Revenue Code, and the empoyee
e ercses such opton, the empoyee reazes ta abe ncome by way
of compensaton on the date upon whch he receves the stock to the
e tent of the dfference between the far market vaue of the stock
when t s receved and the prce pad therefor.
If the empoyee transfers such opton for consderaton n an arm s
ength transacton, the empoyee reazes ta abe ncome by way of
compensaton on the date he receves such consderaton to the e tent
of the vaue of such consderaton.
If the empoyee transfers such opton n a transacton other than
at arm s ength and the transferee thereafter e ercses the opton, the
empoyee reazes ta abe ncome by way of compensaton on the date
upon whch the transferee receves the stock to the e tent of the df-
ference between the far market vaue of the stock at that tme and
the prce pad therefor ess the vaue of any consderaton prevousy
receved by the empoyee for the transfer of the opton, whch atter
vaue s ta abe when receved by the empoyee.
No deducton s aowed to the empoyee by reason of the apse of
such opton e cept to the e tent of any consderaton n money or
property prevousy pad by the empoyee for the opton and not
recovered by hm, such unrecovered consderaton beng deductbe,
pursuant to secton 23(e) of the Interna Revenue Code, n the year
n whch the opton e pres.
If such opton s granted to the empoyee by the empoyer corpora-
ton, the amount of compensaton reazed by the empoyee under the
foregong prncpes s deductbe by the empoyer corporaton, n the
year n whch the empoyee reazes such compensaton, to the e tent
set forth n secton 23(a) (1) of the Interna Revenue Code.
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17
| 29.22(a)- .
Treasury Decson 5507, supra, does not appy to the case of the
e ercse or transfer, at whatever date, of an opton whch was granted
to an empoyee pror to ebruary 26, 1945, to purchase stock of the
empoyer corporaton, or of an affate of the empoyer corporaton as
set forth n secton 141(d) of the Interna Revenue Code.
ccordngy, n vew of the pror deveopment of the reguatons
and nterpretatons reatve to empoyee stock optons (see T. D. 3435,
C. . II-, 50 (1923) L T. 3204, C. . 193 -2, 126 T. D. 4 79, C. .
1939-1 (Part 1), 159), as respects an opton granted to an empoyee
pror to ebruary 26, 1945, uness at the tme such opton was granted
there was a substanta dfference between the far market vaue of the
stock and the opton prce therefor, or, wthn the purvew of secton
29.22(a)- of Reguatons 111 pror to the amendments made by
Treasury Decson 5507, supra, the empoyee woud otherwse ceary
reaze ncome by way of compensaton through the e ercse or trans-
fer of the opton, ths offce w hod that the e ercse or transfer of
such opton, as the case may be, does not resut n ncome to the em-
poyee by way of compensaton under the prncpes enuncated n the
precedng paragraphs, provded, however, that on or before uy 1,
1946, the empoyee to whom such opton s granted and any trans-
feree thereof, and the empoyer corporaton or any other ta payer
who granted such opton to the empoyee, fe n dupcate wth the
Commssoner of Interna Revenue at Washngton, D. C, wrtten
consents (1) agreeng that the bass to the empoyee, and to any
transferee of the opton, for the stock acqured or to be acqured
pursuant to the opton sha be the actua prce pad therefor and
that no deducton sha at any tme be camed attrbutabe to any
aspect of the opton arrangement, under secton 23(a)(1) or any
other subsecton of the Interna Revenue Code, by the empoyer
corporaton or the ta payer who granted the opton, and (2) ndemn-
fyng the Commssoner aganst the fng of a cam for credt or
refund, or any other acton by any ta payer concerned, nconsstent
wth the consents fed.
or purposes of the precedng paragraph, n determnng what
consttutes a substanta dfference between the far market vaue of
the stock and the opton prce n any partcuar case, consderaton
w be gven, among other thngs, to the number of shares sub|ect to
the opton, to the prevous varatons n far market vaue of the stock,
and to te type o busness and hstory of the empoyer corporaton
and ts affates.
oseph D. Nunan, r.,
Commssoner of Interna Revenue,
pproved pr 12, 1946.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
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29.22(a)- .
1
Secton 29.22(a)-: What ncuded n gross 1946- -12296
ncome. T. D. 5507
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RT 29.
INCOM T T L Y RS GINNING T R D C M R 1, 1941.
Reguatons 111 amended Property transferred for an amount
ess than ts far market vaue.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washng ton, D. O.
To Coectors of Interna Revenue and Others Concerned:
Paragraph 1. Secton 29.22(a)- of Reguatons 111 Part 29,
Tte 26, Code of edera Reguatons, Cum. Sup. s amended by
strkng out the second paragraph and nsertng n eu thereof the
foowng:
If property s transferred by a corporaton to a sharehoder, for an amount
ess than ts far market vaue, regardess of whether the transfer s n the
form of a sae or e change, such sharehoder sha Incude n gross ncome
the dfference between the amount pad for the property and the amount of ts
far market vaue to the e tent that such dfference s n the nature of a
dstrbuton of earnngs or profts ta abe as a dvdend. In computng the
gan or oss from the subsequent sae of such property ts bass sha be the
amount pad for the property, ncreased by the amount of such dfference
ncuded n gross ncome. Ths paragraph does not appy, however, to the
ssuance by a corporaton to ts sharehoders of the rght to subscrbe to Its
stock, as to whch see artce 22(a)- .
If property s transferred by an empoyer to an empoyee for an amount ess
than ts far market vaue, regardess of whether the transfer s n the form
of a sae or e change, the dfference between the amount pad for the property
and the amount of ts far market vaue s n the nature of compensaton and
sha be ncuded n the gross ncome of the empoyee. In computng the gan
or oss from the subsequent sae of such property ts bass sha be the amount
pad for the property, Increased by the amount of such dfference ncuded In
gross ncome.
Par. 2. In the case of property transferred by an empoyer to an
empoyee pursuant to the e ercse of an opton granted to the empoyee
before ebruary 26, 1945, the provsons of these reguatons pror to
the amendment made by ths Treasury Decson sha appy.
(Ths Treasury Decson s ssued under the authorty contaned
n sectons 62 and 3791 of the Interna Revenue Code (53 Stat., 32,
467 26 U. S. C, 62, 3791).)
oseph D. Nunan, r.,
Commssoner of Interna Revenue.
pproved pr 12, 1946.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster pr 12, 1946,11.42 a. m.)
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19
29.22(a)-21.
Secton 29.22 (a)-21: Trust ncome ta abe to
the grantor as substanta owner thereof.
( so Secton 29.22(a)-22 Secton 161, Secton
29.161-1 Secton 162, Secton 29.162-1
Secton 166, Sectons 29.166-1 and 29.166-2
Secton 167, Sectons 29.167-1 and 29.167-2.)
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RT 29. IN-
COM T T L Y RS GINNING T R D C M R 31, 1941.
Reguatons 111 amended Ta abty of Income of certan trusts.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 111 Part 29, Tte 26, Code of
edera Reguatons, Cum. Sup. to the prncpes set forth n the dec-
son of the Supreme Court n the case of everng v. Cfford (309
U. S., 331 Ct. D. 1444, C. . 1940-1, 105 ), such reguatons are
amended as foows:
Paragraph 1. The foowng new sectons are added mmedatey
foowng secton 29.22(a)-20:
Sec. 29.22(a)-21. Trust Income Ta abe to thb Grantor as Substanta
Owner Thereof. (a) Introducton. Income of a trust s ta abe to the grantor
under secton 22(a) athough not payabe to the grantor hmsef and not to be
apped n satsfacton of hs ega obgatons f he has retaned a contro of the
trust so compete that he s st In practca effect the owner of ts ncome.
( everng v. Cfford, 309 U. S., 331.) In the absence of precse gudes supped
by an approprate reguaton, the appcaton of ths prncpe to varyng and
dversfed factua stuatons has ed to consderabe uncertanty and confuson.
The provsons of ths secton accordngy resove the present dffcutes of app-
caton by defnng and specfyng those factors whch demonstrate the retenton
by the grantor of such compete contro of the trust that he s ta abe on the
ncome therefrom under secton 22(a). Such factors are set forth n genera
n subsecton (6) and n deta n subsectons (c), (d), and (e), beow.
(b) In genera. In conformty wth the prncpe stated n subsecton (a)
above, the ncome of a trust s attrbutabe to the grantor (e cept where such
ncome s ta abe to the grantor s spouse or former spouse under secton 22(k)
or 171) f
(1) the corpus or the ncome therefrom w or may return after a rea-
tvey short term of years (see subsecton (c))
(2) the benefca en|oyment of the corpus or the Income therefrom s sub-
|ect to a power of dsposton (other than certan e cepted powers), whether
by revocaton, ateraton, or otherwse, e ercsabe by the grantor, or another
person ackng a substanta adverse nterest n such dsposton, or both
(see subsecton (d)) or
(3) the corpus or the Income therefrom Is sub|ect to admnstratve contro,
e ercsabe prmary for the beneft of the grantor (see subsecton (e)).
(c) Reversonary nterest after a reatvey short term. Income of a trust
s ta abe to the grantor where the grantor has a reversonary nterest In
the corpus or the ncome therefrom whch w or may reasonaby be e pected
to take effect n possesson or en|oyment
(1) wthn 10 years commencng wth the date of the transfer, or
(2) wthn 15 years commencng wth the date of the transfer f the
ncome s or may be payabe to a benefcary other than a donee de-
scrbed In secton 23(o) and f any one or more of the foowng powers
of admnstraton over the trust corpus or ncome are e ercsabe soey
by the grantor, or spouse vng wth the grantor, or both, whether
or not e ercsabe as trustee: a power to vote er drect the votng of
stock or other securtes, a power to contro the nvestment of the trust
funds ether by drectng nvestments or renvestments or by vetong
1946-2-12210
T. D.54
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29.22(a)-21.
20
proposed nvestments or renvestments, and a power to reacqure the
trust corpus by substtutng other property, whether or not of an equva-
ent vaue.
Where the grantor s reversonary Interest Is to take effect In possesson
or en|oyment by reason of some event other than the e praton of a specfc
term of years, the trust ncome s nevertheess attrbutabe to hm f such
event s the practca equvaent of the e praton of a perod ess than or
equa to 10 or 15 years, as the case may be. or e ampe, a grantor s
ta abe on the ncome of a trust f
( ) the corpus s to return to hm or hs estate on the death of a
person whose fe e pectancy s s years at the date of the transfer
n trust or
( ) the corpus s to return to hm or hs estate on the graduaton
from coege or pror death of hs son, who s 1 years of age at the
date of the transfer In trust.
In, genera, a reversonary nterest may reasonaby be e pected to take
effect n possesson or en|oyment wthn 10 or 15 years, as the case may
be, where the corpus or the Income therefrom Is to be reacqured If the
grantor survves any stated contngency whch s of an nsubstanta char-
acter. Thus, the grantor s ta abe where the trust ncome s to be pad
to the grantor s - wfe for three years, and the corpus s then to be returned
to the grantor f he survves such perod, or to be pad to the grantor s wfe
f he s aready deceased.
ny postponement of the date specfed for the reacquston of possesson
or en|oyment of the reversonary nterest s consdered a new transfer n
trust commencng wth the date on whch the postponement s effected and
termnatng wth the date prescrbed by the postponement ut Income for
any perod sha not be ta abe to the grantor by reason of the precedng
sentence f such ncome woud not be ta abe to hm n the absence of such
postponement.
ampe. paces property n trust for the beneft of hs son . Upon
the e praton of 12 years or the earer death of the property Is to be
pad over to or hs estate. Nether nor hs wfe has any power of
admnstraton over the trust corpus or Income. fter the e praton of
nne years e tends the term of the trust for an addtona two years
s consdered to have made a new transfer n trust for a term of fve years.
e s not ta abe on the Income for the frst three years of such term
because he woud not be ta abe thereon f the term of the trust had not been
e tended. Is ta abe, however, on the Income for the remanng two years.
(d) Power to determne or contro benefca en|oyment of ncome or corpus.
Income of a trust Is ta abe to the grantor where, whatever the duraton of the
trust, the benefca en|oyment of the corpus or the ncome therefrom Is sub|ect
to a power of dsposton (e cept as provded n secton 167(c) and as hereafter
provded n e ceptons (1) to (5), ncusve), whether by revocaton, ateraton,
or otherwse, e ercsabe (n any capacty and regardess of whether such e er-
cse s sub|ect to a precedent gvng of notce or s mted to some future date)
by the grantor, or any person not havng a substanta adverse Interest In the
benefca en|oyment of the corpus or Income, whchever Is sub|ect to the power,
or both. The grantor s not ta abe, however, If the power, whether e ercsabe
wt respect to corpus or ncome, may ony affect the benefca en|oyment of the
ncome for a perod commencng more than 10 years from the date of the
transfer (or 15 years where any power of admnstraton specfed n subsecton
(c) s e ercsabe soey by the grantor, or spouse vng wth the grantor, or
both, whether or not as trustee). or e ampe, If a trust created on anuary 1,
19- 0, provdes for the payment of ncome to the grantor s wfe, and the grantor
does not reserve any such admnstratve power but reserves the power to subst-
tute other benefcares In eu of hs wfe.on or after anuary 1, 1050, the grantor
s not ta abe on the trust ncome for the perod pror to anuary 1,1950. ut the
ncome w be attrbutabe to the grantor for the perod begnnng on such date
uness the power s renqushed. If the begnnng of such perod Is postponed,
such postponement s consdered a new transfer n trust commencng wth the
date on whch the postponement s effected and termnatng wth the date pre-
scrbed by the postponement. ut ncome for any perod sha not be ta abe to
the grantor by reason of the precedng sentence f such Income woud not be ta -
abe to hm n the absence of such postponement Where the Income affected by
the power s for a perod begnnng by reason of some event other than the e pra-
ton of a specfc term of years, the grantor w be ta abe f such event Is the
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21
29.22(a)-21.
practca equvaent of the e praton of a perod ess than or equa to 10 or 15
years, as the case may be, In accordance wth the crtera stated n subsecton (c).
Ths subsecton sha not appy to any one or more of the foowng e cepted
powers:
(1) a power e ercsabe ony by w, other than a power n the grantor to
appont the ncome of the trust where the ncome s accumuated for such
dsposton by the grantor, or may be so accumuated In the dscreton of
the grantor, or any person not havng a substanta adverse nterest In the
dsposton of such ncome, or both. or e ampe, If a trust provdes that
the ncome s to be accumuated durng the grantor s fe and that the grantor
may appont the accumuated ncome by w, the grantor Is ta abe on the
trust ncome
(2) a power to determne the benefca en|oyment of the corpus or the
ncome therefrom If such corpus or ncome, as the case may be, s rrevocaby
payabe for the purposes and n the manner specfed n secton 23(o)
(3) a power whch merey enabes the grantor or another person to ds-
trbute or appy ncome to or for a current ncome benefcary or to accumu-
ate such ncome for hm, provded that any accumuated Income must u-
tmatey be payabe to the benefcary from whom dstrbuton or appcaton
s wthhed, or, f payabe upon the compete termnaton of the trust or In
con|uncton wth a dstrbuton of corpus whch dstrbuton s augmented
by such accumuated ncome, Is utmatey payabe to the current Income
benefcares In shares whch have been rrevocaby specfed n the trust
Instrument. ccumuated Income ha be consdered so payabe athough
t Is provded that f any benefcary does not survve the date of dstrbuton,
the share of such deceased benefcary Is to be pad to a desgnated aternate
taker, other than the grantor or hs estate, If such date may reasonaby be
e pected to occur wthn the benefcary s fetme, and If the share of such
aternate taker has been Irrevocaby specfed In the trust Instrument
(4) a power whch merey enabes the grantor or another person to pay
out corpus to or for a current Income benefcary, provded that any such
payment of corpus must be chargeabe aganst the proportonate share of
corpus hed n trust for the payment of ncome to such benefcary as f such
corpus consttuted a separate trust, or provded that the power Is mted
by some reasonaby defnte e terna standard. or the requrements of
such standard, see e cepton (5)
(5) a power to apporton Income (whether by dstrbuton or accumu-
aton) to or wthn a cass of benefcares f such power s e ercsabe
e cusvey by a trustee other than the grantor or spouse vng wth the
grantor and Its e ercse Is not sub|ect to the approva or consent of any
person other than such trustee and Is mted by some reasonaby defnte
e terna standard. Such standard must be set forth n the trust Instrument,
must consst of the needs and crcumstances of the benefcares wthn
the cass, and must be susceptbe of enforcement by a court of equty. or
e ampe, a provson authorzng the payment of Income to members of
a cass n such amounts as the trustee sha determne wse and proper In
the e ercse of hs honest dscreton, or n such amounts as the trustee
determnes to be n the best nterests of the benefcares, does not meet the
requrements of the e terna standard contempated by t|s e cepton. Nor
does a power to appont wthn a cass of benefcares fa wthn ths
e cepton f the trustee s enabed to add to or emnate from the cass
of benefcares desgnated to receve the ncome e cept n so far as provson
may be made for after-born chdren.
The appcaton of ths e cepton may be Iustrated by the foowng e ampes,
In whch t Is assumed that the trustee s nether the grantor nor hs wfe:
ampe (1). transfers property to as trustee to pay the ncome n equa
shares to , C, and D, the grantor s, three ssters. In any year, however, may
dstrbute to any one sster an amount not to e ceed 60 per cent of the ncome
for that year, provded that the needs of such sster n the partcuar year, due
to Iness or poor fnanca crcumstances, are proportonatey greater than those
of the other ssters. The ncome of the trust Is not ta abe to the grantor by
reason of such mted power n the trustee. Such ncome, however, woud be
ta abe f the e ercse by of hs power of dstrbuton were not dependent
upon the needs of the ssters.
ampe (2). transfers property to as trustee to pay to s wfe such
part of the Income as may consder wse and proper for the comfort and
happness of the wfe and to pay the baance of the Income to s son. The
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29.22(a)-21.
22
ncome s ta abe to the grantor snce the power to apporton Income s not
mted by any reasonaby defnte e terna standard.
mere power to aocate recepts as between corpus and ncome, eyen though
e pressed n broad anguage, s not deemed a power oyer benefca en|oyment
wth respect to ncome or corpus.
(e) dmnstratve contro. Income of a trust, whatever ts duraton, s ta -
abe to the grantor where, under the terms of the trust or the crcumstances
attendant on ts operaton, admnstratve contro s e ercsabe prmary for
the beneft of the grantor rather than the benefcares of the trust. dmnstra-
tve contro s e ercsabe prmary for the beneft of the grantor where
(1) a power e ercsabe by the grantor, or any person ackng a substanta
adverse nterest n ts e ercse, or both, whether or not n the capacty of
trustee, enabes the grantor or any person to purchase, e change, or otherwse
dea wth or dspose of the corpus or the Income therefrom for ess than
an adequate and fu consderaton n money or money s worth or
(2) a power e ercsabe by the grantor, or spouse vng wth the grantor,
or both, whether or not n the capacty of trustee, or e ercsabe by any other
person n a nonfducary capacty, or by such person and ether of the
foregong, or both, enabes the grantor to borrow such corpus or ncome,
drecty or ndrecty, whether wth or wthout adequate securty or nterest
or
(3) a power e ercsabe n a fducary capacty by a person other than the
grantor or spouse vng wth the grantor enabes the grantor to borrow such
corpus or ncome, drecty or ndrecty, and such power has been e ercsed
and the grantor has not competey repad the oan, ncudng any nterest,
before the begnnng of the ta abe year or
(4) any one of the foowng powers of admnstraton over the trust
corpus or ncome s e ercsabe by any person In a nonfducary capacty: a
power to vote or drect the votng of stock or other securtes, a power to
contro the nvestment of the trust funds ether by drectng nvestments
or renvestments or by vetong proposed Investments or renvestments, and
a power to reacqure the trust corpus by substtutng other property, whether
or not of an equvaent vaue.
If a power s e ercsabe by a person as trustee, It s presumed that the power
Is e ercsabe n a fducary capacty prmary n the nterests of the benefcares.
Such presumpton may be rebutted ony by cear and convncng proof that the
power s not e ercsabe prmary n the Interests of the benefcares. If a power
s not e ercsabe by a person as trustee, t s presumed that the power s e er-
csabe n a nonfducary capacty. ut such presumpton may be rebutted f t
appears, from a the terms of the trust and the crcumstances surroundng ts
creaton and admnstraton, that the power Is e ercsabe prmary In the
nterests of the benefcares.
The mere fact that a power e ercsabe by the trustee s descrbed n broad
anguage does not ndcate that the trustee s authorzed to purchase, e change,
or otherwse dea wth or dspose of the trust property or ncome for ess than an
adequate and fu consderaton n money pr money s worth. On the other hand,
such authorty may be ndcated by the actua admnstraton of the trust.
(/) Lmtatons of secton. Despte the mtatons of ths secton, the grantor
of a trust drectng the payment or appcaton of the ncome therefrom n sats-
facton of the grantor s ega obgatons sha contnue to be ta abe on the
ncome. The grantor may aso be ta abe on the Income of a trust on the ground
that such ncome s attrbutabe to hm n a capacty unreated to domnon and
contro over the trust as such as defned In subsectons (c), (d), and (e) of
ths secton. Thus, the provsons of ths secton do not affect the prncpes
governng the ta abty of future Income to the assgnor thereof whether or not
the assgnment s by means of a trust Nor, for e ampe, do the provsons of
ths secton affect the appcabty of secton 22(a) to the creator of a famy
partnershp. See further sectons 166 and 167.
Secton 22(a) sha be apped n the determnaton of the ta abty of trust
Income for ta abe years begnnng pror to anuary 1, 1946, wthout reference to
ths secton.
Sec. 29.22(a)-22. Trust Income Ta abe to Person Other Than Grantor.
Where a person other than the grantor of property transferred n trust has a power
e ercsabe soey by hmsef to vest the corpus or the ncome therefrom n
hmsef, the ncome therefrom sha be ncuded n computng the net Income
of such person. ven though such a power has been partay reeased or
otherwse modfed so that the person hodng t can no onger vest the corpus
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23
29.22(a)-21.
or the ncome of the trust n hmsef, the ncome sha contnue to be ta abe to
such person f, after such reease or modfcaton, he has retaned such contro
of the trust as woud, wthn the prncpes of secton 29.22(a)-21, sub|ect a
grantor of such a trust to ta on the ncome thereof. Ths secton sha not
appy wth respect to a power over Income, as orgnay granted or thereafter
modfed, f the grantor s otherwse ta abe under secton 20.22 (a)-21. See aso
secton 29.166-2.
Secton 22(a) sha be apped n the determnaton of the ta abty of trust
Income for ta abe years begnnng pror bo anuary 1, 194 , wthout reference
to ths secton.
Par. 2. Secton 29.161-1 s amended as foows:
( ) y strkng out the fourth paragraph of subsecton (a) and
nsertng n eu thereof the foowng:
The provsons of sectons 161, 162, and 163 (reatng to estates and trusts,
fducares, and benefcares) contempate that the corpus of the trust, or the
Income therefrom, s, wthn the meanng of the Interna Revenue Code, no onger
to be regarded as that of the grantor. If, by vrtue of the nature and purpose
of the trust, the corpus or ncome therefrom remans attrbutabe to the grantor,
these provsons do not appy. Thus, the provsons of sectons 166 and 167 dea
wth certan trusts whch are e cuded from the scope of sectons 161, 162, and
163. Other trusts not specfed In sectons 166 and 167 where the Income s at-
trbutabe to the grantor are kewse e cuded from the scope of sectons 161,
162, and 163. or e ampe, a grantor s ta abe under secton 22(a) on the Income
of a trust If he s st n practca effect the owner of the Income. See secton
29.22 (a)-21. grantor Is aso ta abe under secton 22(a) on the ncome of
a trust provdng for the payment and appcaton of such ncome n satsfacton
of hs ega obgatons. So-caed amony trusts to whch secton 22(k) or secton
171 appes may be of a type to whch the provsons of sectons 161, 162, and 163
aso appy, or of a type whch Is e cuded from the provsons of sectons 161,162,
and 163. cept to the e tent that secton 22 (k) or secton 171 governs the ta -
abty of amounts pad, credted, or to be dstrbuted attrbutabe to trust
property, the treatment of such trusts under sectons 161, 162, and 163 or under
sectons 22(a), 166, and 167 s not affected by secton 22(k) or secton 171. See
secton 165 as to the e emptons of empoyees trusts.
( ) y strkng out the frst sentence of subsecton ( ) and nsert-
ng n eu thereof the foowng:
The fducary s requred to make and fe the return and pay the ta on the net
Income of the estate or trust e cept as otherwse provded n sectons 22(a), 165,
166, and 167, and sectons 29.22(a)-21, 29.22(a)-22, 29.166-1, 29.166-2, and
29.167-1.
Pah. 3. Secton 29.162-1, as amended by Treasury Decson 545 ,
approved une 15,1945 C. . 1945,45 , s further amended as foows:
( ) y strkng out the ntroductory cause at the begnnng of the
fourth paragraph thereof whch reads as foows:
There s Incuded In the ncome of the estate or the trust, uness t Is ncuded In
the ncome of the grantor of the trust (see sectons 29.163-1 and 29.167-1)
and by nsertng n eu thereof the foowng:
There Is ncuded n the ncome of the estate or the trust, uness It s Incuded
n the ncome of the grantor of the trust, or n the ncome of some other person
granted the power e ercsabe soey by hmsef to vest the property n hmsef
(see sectons 29.166-1, 29.166-2, 29.167-1, 29.22(a)-21, and 29.22(a)-22)
( ) y strkng out the ast sentence of the fourth paragraph and
nsertng n eu thereof the foowng:
In a such cases the ta wth respect to such Income Incuded n the Income of
the estate or trust for Its ta abe year Is payabe by the fducary, e cept where
the Income s deductbe by the estate or trust for such ta abe year (and s In-
cudbe n the ncome of the egatee or benefcary).
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29.22(a)-21.
24
Par. 4. Secton 29.166-1 s amended by changng the headng thereof
to read as foows:
Trusts Wth Respect to the Corpus of Whch the Grantor Is Regarded as
Remanng n Substance the Owner Ta abe Years egnnng Pror to an-
uary 1, 1946.
Par. 5. There s added mmedatey after secton 29.166-1 the fo-
owng new secton:
Sec. 29.166-2. Trusts Wth Power to Revest Corpus n the Grantor Ta ab
Years egnnng fter December 31, 1945. (a) Scope. Where the power to
revest n the grantor tte to any part of the corpus of a trust Is vested n the
grantor or n any person not havng a substanta adverse nterest n the ds-
poston of such part of the corpus or the ncome therefrom, or both, the Income
of that part of the corpus sub|ect to the power to revest s not ta abe In accord-
ance wth the provsons of sectons 161, 162, and 163 but remans attrbutabe
and ta abe to the grantor, e cept as provded n sectons 22(k) and 171. Ths
secton deas wth the ta aton of such ncome. s used n ths secton the term
corpus means any part or the whoe of the property, rea or persona, con-
sttutng the sub|ect matter of the trust.
or rues appcabe to trusts the Income of whch s ta abe to the grantor
under secton 22(a) because the grantor has retaned a contro of the trust so
compete that he s st In practca effect the owner of ts Income, see secton
29.22 (a)-21.
or rues appcabe to trusts the Income of whch s ta abe under secton
22(a) to a person other than the grantor because of a power, e ercsabe soey
by such other person, to vest the property or the ncome therefrom In hmsef,
see secton 29.22(a)-22.
(6) Test of ta abty to grantor. Secton 166 provdes for ta abty of In-
come to the grantor by reason of the fact that he has retaned power to revest
the corpus n hmsef. or the purposes of ths secton the grantor s deemed
to have retaned such power f he or any person not havng a substanta nterest
n the corpus or the Income therefrom adverse to the grantor, or both, may cause
the tte to the corpus to revest n the grantor. bare ega nterest, such as
that of a trustee, s never substanta and never adverse. If the tte to the
corpus w revest In the grantor upon the e ercse of such power, the ncome of
the trust s attrbuted and ta abe to the grantor (e cept as provded n secton
22 (k) or 171) regardess of
(1) whether such power or abty to retake the trust corpus to the
grantor s own use Is effected by means of a power to revoke, to termnate,
to ater or amend, or to appont
(2) whether the e ercse of such power s condtoned on the precedent
gvng of notce or on the eapsng of a perod of years, or on the happenng
of a specfc event
(3) the tme at whch the tte to the corpus w revest n the prantor n
possesson and en|oyment, whether such tme Is wthn the ta abe year or
not. or whether such tme be f ed, determnabe, or certan to come
(4) whether the power to revest n the grantor tte to the corpus s n the
grantor, or n any person not havng a substanta nterest n the corpus or
ncome therefrom adverse to the grantor, or n both
(5) when the trust was created.
person may have an Interest that s both substanta and adverse to the
grantor n the dsposton of ony part of the corpus or the ncome therefrom.
If the power to revest tte In the grantor s vested n hm n con|uncton wth
such person, or s vested soey n such person, there s to be e cuded n com-
putng the net ncome of the grantor ony the Income of such part
(c) Income and deducton . If ncome from the corpus of a trust Is Incuded
In the gross Income of the grantor under ths secton because of a power to
revest such corpus In the grantor, he sha be aowed those deductons wth
respect to such corpus as he woud have been entted to had the trust not been
created.
Par. 6. There s added at the end of the fourth paragraph of secton
29.167-1(6), as amended by Treasury Decson 5392, approved uy
15,1944 rC. . 1944, 32 1, the foowng sentence:
See secton 29.22(a)-21.
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25 29.22(a)-21
Par. 7. There s added at the end of the fourth paragraph of secton
29.167-2, as amended by Treasury Decson 5392, the foowng
sentence:
See secton 29.22(a)-21.
(Ths Treasury Decson s ssued under authorty contaned n
secton 62 of the Interna Revenue Code (53 Stat., 32 26 U. S. C,
1940 ed., 62).)
oseph D. Nunan, r.,
Commssoner of Interna Revenue.
pproved December 29, 1945.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster December 29, 1945, 4.10 p. m.)
Secton 29.22(a)-21: Trust ncome ta abe to 1040-2-12211
the grantor as substanta owner thereof. Mm. 596
( so Secton 29.22(a)-22.)
Pocy regardng e tent of appcaton of Treasury Decson 51
fpage 19, ths uetn reatng to ta abty of ncome of certan
trusts.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C, anuary 046.
Coectors of Interna Revenue, Interna Revenue gents n Charge,
and Others Concerned:
Reference s made to Treasury Decson 54S , approved December 29,
1945 page 19, ths uetn , whch amends Reguatons 111 so as to
ncude theren a statement of those factors whch demonstrate that
the grantor of a trust has retaned such contro that he s ta abe on
the ncome therefrom under secton 22(a) of the Interna Revenue
Code wthn the prncpes of Ieverng v. George . Cfford, r.
(309 U. S., 331, Ct. D. 1444, C. . 1940-1,105).
The Treasury Decson provdes that secton 22(a) of the Code sha
be apped n determnng the ta abty of trust ncome for ta abe
years begnnng pror to anuary 1, 1946, wthout reference to the
amendment to the reguatons made by the Treasury decson. ow-
ever, n cases not yet fnay determned for such ta abe years, t w
be the pocy of the ureau, where no nconsstent cams pre|udca
to the Government are asserted by trustees or benefcares, not to
assert abty of the grantor under the genera provsons of secton
22(a) of the Code, f the trust ncome woud not be ta abe to the
grantor under the amendment to the reguatons.
Correspondence n regard to ths mmeograph shoud refer to ts
number and the symbos IT: C .
Wm. T. Sherwood,
ctng Commssoner.
pproved anuary 4,1946.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
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f 29.22(b) CD 1-1 26
Secton 29.22 (a)-22: Trust ncome ta abe to person
other than grantor.
INT RN L R NU COD .
Reguatons 111 amended. (See T. D. 54 , page 19.)
Secton 29.22(a)-22: Trust ncome ta abe to person
other than grantor.
INT RN L revenue code.
Ta abty of trust ncome for ta abe years begnnng pror to
anuary 1,1946. (See Mm. 596 , page 25.)
S CTION 22(b). GROSS INCOM : CLUSIONS
ROM GROSS INCOM .
Secton 29.22(b) (1)-1: Lfe nsurance mounts 1946-11-12324
pad by reason of the death of the nsured. T. D. 5515
so Secton 19.22(b) (1)-1, Reguatons 103
rtce 22(b) (1)-1, Reguatons 101 rtce
22(b) (1)-1, Reguatons 94 and rtce 22
(b) (1)-1, Reguatons 6.)
TITL 26 INT RN L R NU C PT R I, SU C PT R , P RT 20. P RT
19, P RT 9, ND P RT 3.
Reguatons 111, 103, 101, 94, and 0 amended mounts receved
under a fe nsurance pocy pad by reason of the death of the
Insured.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. G.
To Coectors of Interna Revenue and Others Concerned:
Paragraph 1. Secton 29.22(b) (1)-1 of Reguatons 111 Part 29,
Tte 26, Code of edera Reguatons, Cum/Sup. s amended to read
as foows:
Lfe Insurance mounts Pad bt Reason of the Deat of the Insured.
The proceeds of fe nsurance poces, pad by reason of the death of an Insured
to hs estate or to a benefcary (ndvdua, partnershp, or corporaton), drecty
or n trust, are e cuded from the gross ncome of the benefcary, e cept n the
case of certan transferees as provded n secton 29.22(b) (2)-3 and n the case
of a spouse to whom such payments are Income under secton 22(k). It s
mmatera whether the proceeds are receved n a snge sum or otherwse. If,
however, such proceeds are hed by the nsurer under an agreement to pay nterest
thereon, the nterest payments must be ncuded n gross ncome.
Par. 2. Secton 19.22(b) (1)-1 of Reguatons 103 Part 19, Tte 26,
Code of edera Reguatons, 1940 Sup , as amended by Treasury De-
cson 5271, approved une 14,1943 C. . 1943,92 , s further amended
to read as foows:
Lfe Insurance mounts Pad by Reason of the Death of the Insured.
The proceeds of fe nsurance poces, pad by reason of the death of an nsured
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27
29.22(b) (13)-1.
to hs estate or to a benefcary (Indvdua, partnershp, or corporaton), d-
recty or n trust, are e cuded from the gross ncome of the benefcary, e cept
n the case of certan transferees as provded n secton 19.22(b) (2) ( )-3 and
n the case of a spouse to whom such payments are Income under secton 22(k).
It s mmatera whether the proceeds are receved In a snge sum or otherwse.
If, however, such proceeds are hed by the Insurer under an agreement to pay
nterest thereon, the nterest payments must be ncuded n gross Income.
Par. 3. rtce 22(b) (1)-1 of Reguatons 101 secton 9.22(b)
(1)-1, Tte 26, Code of edera Reguatons, 1939 Sup. , as amended
by Treasury Decson 5231, approved ebruary 22, 1943 C. . 1943,
9 , artce 22(b) (1)-1 of Reguatons 94 secton 3.22(b) (1)-1, Tte
26, Code of edera Reguatons , as amended by such Treasury De-
cson, and artce 22(b) (1)-1 of Reguatons 6, as amended by such
Treasury Decson, are each amended to read as foows:
Lot Insurance mounts Pad by Reason op the Death of the Insured.
The proceeds of fe nsurance poces, pad by reason of the death of an nsured
to hs estate or to a benefcary (ndvdua, partnershp, or corporaton), drecty
or n trust, are e cuded from the gross ncome of the benefcary, e cept n the
case of a transferee for vauabe consderaton. It s mmatera whether the
proceeds are receved n a snge sum or otherwse. If, however, such proceeds
are hed by the Insurer under an agreement to pay nterest thereon, the Interest
payments must be Incuded n gross Income.
(Ths Treasury Decson s ssued under the authorty contaned n
sectons 22(b) and 02 of the Interna Revenue Code (53 Stat., 10, 32
26 U. S. C, 22(b), 62), and sectons 22(b) and 62 of the Revenue cts
of 193 , 1936, and 1934 (52 Stat., 45 , 4 0, 26 U. S. C, Sup., 22(b),
62 49 Stat., 1657, 1673, 26 U. S. C, Sup., 22(b), 62 4 Stat., 6 7, 700,
26U. S. C, 22(b), 62).)
oseph D. Nunan, r.,
Commssoner of Interna Revenue.
pproved May 16, 1946.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster May 17, 1946, 12.23 p. m.)
Secton 29.22(b) (13)-1: Compensaton of
members of mtary and nava forces.
( so Secton 19.22(b) (13)-1, Reguatons 103
Secton 3 0 , Sectons 29.3 0 -1, 29.3 0 -2,
29.3 0 -3, and 29.3 0 -4, Reguatons 111
Sectons 19.3 0 -1, 19.3 0 -2, 19.3 0 -3, and
19.3 0 , Reguatons 103.)
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RT 1 ND
P RT 29.
Reguatons 111 and 103 amended to conform to sectons 141 and
142 of the Revenue ct of 1945, reatng to veterans and servcemen.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 5, D. C.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 111 Part 29, Tte 26, Code of
edera Reguatons, Cum. Sup. and Reguatons 103 Part 19, Tte
1946-9-1229
T. D. 550
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5 29.22(b) (13)- .
2S
26, Code of edera Reguatons, 1940 Sup. to sectons 141 and 142
of the Revenue ct of 1945 (Pubc Law 214, Seventy-nnth Con-
gress), approved November , 1945, such reguatons are amended as
foows:
R GUL TIONS 111.
Paragraph 1. There s nserted mmedatey precedng secton
29.22(b) (13)-1 the foowng:
S C. 141. DDITION L LLOW NC OR MILIT RY ND
N L P RSONN L. (R NU CT O 1945.)
(a) In Genera. Secton 22(b) (13) (reatng to the e cuson from
gross ncome for mtary and nava personne) s amended to read as
foows:
(13) ddtona aowance fob mtary and nava person-
ne.
( ) In the case of compensaton receved durng any ta -
abe year and before the termnaton of the present war as
procamed by the Presdent, for actve servce as a comms-
soned offcer (or a commssoned warrant offcer) n the m-
tary or nava forces of the Unted States durng such war, or,
n the case of a ctzen or resdent of the Unted States, as a
member of the mtary or nava forces of any of the other
Unted Natons durng such war, so much of such compensaton
as does not e ceed 1,500.
( ) Compensaton receved durng any ta abe year and
before the termnaton of the present war as procamed by the
Presdent, for actve servce as a member beow the grade of
commssoned offcer (or commssoned warrant offcer) n the
mtary or nava forces of the Unted States durng such war.
(b) Ta abe Years to Whch ppcabe. Subparagraph ( ) of
secton 22(b) (13), as amended by subsecton (n) of ths secton, sha
be appcabe wth respect to ta abe years begnnng after December
31, 1942 subparagraph ( ) thereof sha be appcabe wth respect to
ta abe years begnnng after December 31, 1940.
(c) Crkdts oh Refunds for 1941 and 1942. If at any tme pror to
anuary 1, 1947, the aowance of a credt or refund of an overpayment
of the ta for any ta abe year begnnng after December 31, 1940, and
before anuary 1, 1943, Is otherwse prevented by the operaton of any
aw or rue of aw (other than secton 3701, reatng to compromses), a
credt or refund of the overpayment of such ta to the e tent that the
overpayment s attrbutabe to the enactment of ths secton may, never-
theess, be aowed or made f a cam therefor s fed before anuary 1,
1947.
Par. 2. Secton 29.22(b) (13)-1, as amended by Treasury Decson
5305, approved November 12, 1943 C. . 1943, 260 , s further
amended to read as foows:
Sec. 29.22(b) (13)-1. Comensaton of Members of Mtary and Nava
orces. In addton to the e emptons and credts otherwse appcabe, secton
22(b) (13) provdes that there sha be e cuded from gross ncome:
(a) In the case of compensaton receved for actve servce as a member beow
the grade of commssoned offcer (or commssoned warrant offcer) n the
mtary or nava forces of the Unted Stntes, the entre amount of such com-
pensaton.
(b) In the case of compensaton receved n a ta abe year begnnng after
December 31, 1942, for actve servce (1) as a commssoned offcer (or com-
mssoned warrant offcer) n the mtary or nava forces of the Unted States,
or (2) as a member of the mtary or nava forces of any of the other Unted
Natons, f such member s a ctzen or resdent of the Unted States, so much of
such compensaton as docs not e ceed 1,500.
The e cusons under secton 22(b) (13) and ths secton are appcabe ony
to compensaton receved pror to the termnaton of the present war to be f ed
by procamaton of the Presdent. Such e cusons are appcabe wthout re-
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29
29.22(b)(13)-1.
gard to the marta status of the recpent of the compensaton, and f a husband
and wfe both meet the requrements of the statute, then each s entted to
the beneft of an e cuson. or the purposes of ths secton the mtary and
nava forces of the Unted States ncude (but are not necessary mted to)
the rmy, the Navy, the Marne Corps, the Coast Guard, the rmy Nurse Corps,
emae, the Navy Nurse Corps, emae, the Women s rmy u ary Corps or
the Women s rmy Corps, the Women s Reserve branch of the Nava Reserve,
the Marne Corps Women s Reserve, and the Coast Guard Reserve, ncudng
the Coast Guard Women s Reserve. Personne servng wth the rmy Specast
Corps are not wthn the scope of the e empton. or the purposes of ths sec-
ton the term member of the mtary or nava forces of any of the other Unted
Natons sha mean any Indvdua whose dutes n the servce of any of the
Unted Natons other than the Unted States correspond to those of any member
of the mtary or nava forces of the Unted States as defned n ths secton.
person s n actve servce f he s actuay servng n such forces, not neces-
sary n the fed or n the theater of war. Personne n the nactve reserve
or on retrement are not n actve servce. Perods durng whch a person Is
absent from duty on account of sckness, wounds, eave, nternment by the
enemy, or other awfu cause are perods of actve servce.
In the case of a husband and wfe domced n a State recognzed for edera
ncome ta purposes as a communty property State, any e cuson from gross
ncome under secton 22(b) (13) operates before apportonment of the gross
ncome of the spouses In accordance wth communty property aws. or e ampe,
a man and hs wfe are domced n such a State and he s entted to the beneft
of the e cuson under secton 2(b) (13) as a commssoned offcer of the armed
forces. e receves durng 1943 compensaton for actve servce In such forces
n the amount of 2,000. Of such amount ony . 00 s taken Into account n de-
termnng the gross ncome of both husband and wfe.
Par. 3. There s nserted mmedatey precedng Subpart the fo-
owng:
S C. 142. D RM NT O C RT IN T S O T R NS ND
S R IC M N. (R NU CT O 1945, PPRO D NO M
R , 1945.)
(a) In Genera. Chapter 3 (msceaneous provsons) s amended
by nsertng at the end thereof a new secton readng as foows:
S C. 3 0 . D RM NT O T TTRI UT L TO S R IC
P Y OR COMMISSION D S R IC ND O T TTRI UT-
L TO PR -S R IC RN D INCOM .
(a) Defntons s used n ths secton
(1) Ta attrbutabe to servce pay. The term 1 ta attrbut-
abe to servce pay means
( ) n the case of a war year for whch the ta payer had no
gross Income other than compensaton for actve servce as a
member of the mtary or nava forces of the Unted States, the
ta mposed under chapter 1 for such year or
( ) n the case of a war year for whch the ta payer had
gross ncome n addton to compensaton for actve servce as a
member of the mtary or nava forces of the Unted States, the
e cess of the ta mposed under chapter 1 for such year over
the ta that woud have been mposed f such compensaton had
been e cuded from gross ncome
e cept that n the ense of a commssoned offcer (or a commssoned
warrant offcer) of the reguar component of the rmy, Navy, Marne
Corps, or Coast Guard, such term sha not appy to any war year
uness, at the tme prescrbed for the payment of the ta under
chapter 1 for such year, a perod of tme was beng dsregarded under
secton 3 04.
(2) War tear. The term war year
( ) when used wth respect to the ta attrbutabe to
servce pay means any ta abe year begnnng after December
31, 1939, and before anuary 1, 1947

(4) rst nstament date. The term frst Instament date
means May 15, 1946, In the case of ta payers reeased from actve
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29.22(b)(13)- .
30
duty In the mtary or nava forces of the Unted States pror to
December 1, 1945 and n other cases une 15, 1947, or the ffteenth
day of the s th month whch begns after the date of the ta payer s
reease from actve duty n such forces, whchever s the earer
e cept that. If the frst Instament date wth respect to any war
year woud otherwse occur earer than the ffteenth day of the
thrd mouth foowng the cose of such year, the frst nstament
date wth respect to such year sha be the ffteenth day of such
thrd month.
(b) tenson of Tme for Payment. Upon appcaton wth respect
to any war year, made pror to the frst nstament date, and under
reguatons prescrbed by the Commssoner wth the approva of the
Secretary
(1) the tme for payment of an amount of the ta under chapter
1 for such year whch Is equa to the ta attrbutabe to servce pay
for sue year and whch has not been pad before the fng of such
appcaton

sha, n eu of the tme otherwse appcabe, be as foows: one-twefth
thereof on the frst nstament date and an addtona twefth thereof
every three months thereafter unt such ta Is pad.
(c) Suspenson of Perod of Lmtaton. The runnng of the perod
of mtaton provded n secton 276(c) (reatng to the coecton of the
ta after assessment) n respect of any ta the tme for the payment of
whch s prescrbed under subsecton (b), sha be suspended for the
perod begnnng wth the date of the fng of the appcaton under such
subsecton and endng s months after the date prescrbed theren for
the payment of the ast nstament of such ta .
(d) stmated Ta . If the ta payer s egbe for the benefts of
subsecton (b) wth respect to any war year
(1) for the purposes of the appcaton of secton 5 wth respect
to such year, compensaton for actve servce as a member of the
mtary or nava forces of the Unted States may be dsregarded In
determnng the gross Income reasonaby e pected for such year, and
In determnng the estmated ta for such year and
(2) for the purposes of secton 294(d) the ta for such year sha
be determned as If such compensaton were e cuded from gross
ncome.
Ths subsecton sha not appy wth respect to a ta payer for any war
year who at the tme prescrbed for makng the decaraton of estmated
ta for such year s a commssoned offcer (or a commssoned warrant
offcer) of the reguar component of the rmy, Navy, Marne Corps, or
Coast Guard.
(b) Refund of Interest Pad. ny nterest pad pror to the date
of the enactment of ths ct wth respect to ta attrbutabe to servce
pay for any war year, or wth respect to ta attrbutabe to pre-servce
earned ncome for any war year, sha be credted or refunded f cam
therefor s fed wth the Commssoner pror to anuary 1, 1947.
Sec. 29.3 0 -1. Deferment of Certan Ta es of Members of the Mtart ob
Nava. orces. (a) In genera. Secton 3 0 provdes that, n the case of mem-
bers of the mtary or nava forces of the Unted States, that porton of the
ta under Chapter 1 whch s attrbutabe to servce pay for a war year, may,
n eu of the tme otherwse prescrbed by aw, be pad n 12 equa quarter-annua
nstaments begnnng wth the frst nstament date. s to what consttutes
the frst nstament date for the purposes of secton 3 0 see secton 29.3S0 -2.
The term war year as defned n secton 3 0 (a) (2) means, n the case of
ta attrbutabe to servce pay. any ta abe year begnnng after December 31,
1939, and before anuary 1,1947.
or the purposes of secton 3 0 the mtary or nava forces of the Unted
States ncude (but are not necessary mted to) the rmy, the Navy, the
Marne Corps, the Coast Guard, the rmy Nurse Corps, emae, the Navy Nurse
Corps, emae, the Women s rmy u ary Corps or the Women s rmy Corps,
the Women s Reserve branch of the Nava Reserve, the Marne Corps Women s
Reserve, and the Coast Guard Reserve, ncudng the Coast Guard Women s
Reserve. Such forces do not ncude the rmy Specast Corps.
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31
29.22(b) (13)-1.
Secton 0 s appcabe ony to the ndvdua who performs servce as a
member of the mtary or nava forces of the Unted States. ence, t has no
appcaton to the spouse of such Indvdua, uness the spouse aso performs
such servce.
Nothng contaned n secton 3 0 or these reguatons sha be construed to
requre payment of the ta for any ta abe year before the postponed due date
of the ta for such year under secton 3 04, f such secton s appcabe, nor
before the ast day of any perod of e tenson aowed under the provsons of
secton 513 of the Soders and Saors Cv Reef ct of 1940.
(6) ppcaton for deferred payments. In order to obtan the prvege of
deferred payments under secton 3 0 wth respect to ta for a ta abe year,
the ta payer must make wrtten appcaton, pror to the frst Instament date,
to the coector of nterna revenue for the dstrct n whch the return for such
ta abe year s fed. No partcuar form s requred but the appcaton shoud
contan a compete statement of the facts necessary to determne the ta payer s
egbty for the benefts of secton 3S0S, the ta abe years and the amounts of
ta nvoved, and the due date of the frst payment. The essenta facts ncude:
(1) Rank and organzaton.
(2) Whether the ta payer s an offcer of the reguar component of the
rmy, Navy, Marne Corps, or Coast Guard.
(3) Date of nducton or entrance nto armed forces.
(4) Date of reease from actv duty, If so reeased.
(5) If the ta payer performed servce outsde the contnenta Unted
States or on sea duty, the date on whch the ta payer eft the contnenta
Unted States or commenced to serve on sea duty and the date on whch he
returned to the contnenta Unted States or ceased to serve on sea duty.
(6) If, under the provsons of secton 513 of the Soders and Saors
Cv Reef ct, an e tenson of tme for payment of the ta for a war year
has been granted, the date upon whch such perod of e tenson e pres.
(7) The amount of ta for whch deferment s camed for each ta abe
year nvoved.
(c) Interest. If deferred payments are authorzed under the provsons
of secton 3 0 , one-twefth of the ta n respect of whch deferment s author-
zed s payabe on the frst nstament date, one-twefth thereof on the cor-
respondng date of the thrd month foowng the frst nstament date, and
one-twefth on the correspondng date of each succeedng thrd month after the
precedng nstament date unt the fu amount of the ta s pad.
No nterest sha be charged or pad If the ta s pad upon the prescrbed
dates. Interest at the rate of 6 per cent per annum sha be charged on Insta-
ments not pad at the tme prescrbed from the date the Instament became
due unt the nstament s pad. If the ta payer fas to pay an nstament
of the ta on the prescrbed date, such faure sha not acceerate the due date
of the remanng nstaments.
ny nterest pad pror to November , 1945, on that porton of the ta for any
ta abe year whch coud be deferred under the provsons of secton 3 0 sha
be credted or refunded to the ta payer, f cam therefor Is fed pror to anu-
ary 1, 1947, wth the coector of Interna revenue as the authorzed repre-
sentatve of the Commssoner.
d) Suspenson of perod of mtaton. If deferred payments In respect of
the ta for any ta abe year are authorzed n accordance wth the provsons
of secton 3 0 , the runnng of the perod of mtatons under secton 276(c) on
the coecton of such ta s suspended for the perod begnnng wth the date
of fng of the appcaton under secton 3 0 (b) and endng s months after
the date prescrbed for payment of the ast nstament of such ta .
Sac. 29.3 0 -2. bst Instament Date. (a) Genera rue. Under the def-
nton contaned n secton 3 0 (a)(4), f nether secton 3 04 and the regua-
tons thereunder nor secton 513 of the Soders and Saors Cv Reef ct s
appcabe, the frst nstament date wth respect to ta for a war year s as
foows:
(1) Ta payers reeased from actve duty pror to December 1,1945.
In the case of ta payers reeased from actve duty In the mtary or nava
forces of the Unted States pror to December 1, 1945, the frst Instament
date wth respect to ta for a war year Is May 15. 1946, or the 15th day
of the thrd month foowng the cose of such war year, whchever s th
ater.
(2) Other ta payers. In the case of ta payers reeased from actve duty
n the mtary or nava forces of the Unted States on or after December 1,
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5 29.22(b) (13)- .
32
1945, and In the case of ta payers who have not been reeased from such
actve duty, the frst nstament date wth respect to ta for a war year
s () une 15, 1947, or () the 15th day of the s th month whch begns
after the date of the ta payer s reease from actve duty, whchever Is
the earer, but In no case sha the frst Instament date be earer than the
15th day of the thrd month foowng the cose of such war year.
In the case of ta payers who make ther returns on a caendar year bass
the frst nstament date, f nether secton 3 04 and the reguatons there-
under nor secton 513 of the Soders and Saors Cv Reef ct s appcabe,
Is as foows:
C L ND R Y RS 1940 TO 1945, INCLUSI .
Reeased from actve duty
efore December 1, 1945
On or after December 1, 1945, but
not ater than November 30,1946.
On or after December 1, 1946
rst nstament date
May 15, 1946.
15th day of s th month whch
begns after date of reease.
une 15, 1947.
C L ND R T R 194 .
Reeased from actve duty rst Instament date
efore October 1, 1946 March 15, 1947.
Durng October, 1946 pr 15, 1947.
Durng November, 1946 May 15, 1947.
On or after December 1,1946 une 15, 1947.
(6) Speca provsons. If, by reason of servce on sea duty or outsde the
contnenta Unted States, the due date of the ta for a war year s postponed
under the provsons of secton 3 04 and the reguatons thereunder or, f coec-
ton of the ta for a war year Is deferred under the provsons of secton 513
of the Soders and Saors Cv Reef ct, the frst Instament date may
be ater than the date determned under the genera rue set forth n secton
29.3 0 -2(o). In such event the frst Instament date wth respect to ta for
such war year sha be whchever of the foowng s the atest:
(1) the date determned under secton 29.3 0 -2(o), or
(2) the postponed due date of the ta determned under secton 3 04 and
the reguatons thereunder, or
(3) the ast day of the perod of deferment aowed under secton 513
of the Soders and Saors Cv Reef ct.
Sec. 29.3 0 -3. Ta ttrbutabe to Servce Pat. The term ta attrbut-
abe to servce pay s used n secton 3S0 to characterze that porton of the
ta Imposed under Chapter 1 for a war year whch resuts from the ncuson
In gross ncome of the compensaton for actve servce as a member of the mtary
or nava forces of the Unted States. Under the defnton contaned n secton
0 (a) (1) the term ta attrbutabe to servce pay. for a war year means:
(a) If the ta payer had no gross ncome for such war year other than
the compensaton for actve servce n such forces, the ta Imposed under
Chapter 1, or
(6) If the ta payer had gross ncome for such war year n addton to
the compensaton for actve servce n snch forces, the e cess of the ta
mposed under Chapter 1 for such year over the ta that woud be mposed
were such compensaton e cuded from the gross ncome.
member of the mtary or nava forces of the Unted States Is n actve
servce If he s actuay servng n such forces, not necessary n the fed or
In the theater of war. Personne n the nactve reserve or on retrement are
not n actve servce. Perods durng whch a person s absent from duty on
account of sckness, wounds, pave, nternment by the enemy, or other awfu
cause are perods of actve servce.
In computng the amount of the ta attrbutabe to servce pay for a war
year the ta mposed under Chapter 1 sha be determned wthout regard to
the credt under secton 31 for ta es pad to a foregn country or a possesson
of the Unted States and wthout regard to the credts provded n sectons 32
and 35 for ta es wthhed nt the source.
or the purposes of secton 3 0S, the term ta attrbutabe to servce pay
has no appcaton to commssoned offcers of the reguar component of the rmy,
Navy, Marne Corps, or Coast Guard for any war year uness, by reason of
servce on sea duty or outsde the contnenta Unted States, the due date of the
ta for such year s postponed under the provsons of secton 3 04 and the
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33
29.22(b) (13)-1.
reguatons thereunder. or e ampe, a commssoned offcer of the reguar
component of the rmy was assgned to duty n Great rtan n ebruary, 1042,
and served contnuousy n the uropean theater thereafter unt he returned
to the Unted States In uy, 1943. ssumng that the offcer makes hs
returns on the caendar year bass, the reguar due dates of the ta es under
Chapter 1 for the war years 1942 to 1044, ncusve, fa pror to anuary 15,
1946, whch s the 15th day of the s th month after the date of hs return to
the Unted States. ccordngy, under the provsons of secton 3 04, the due
dates of the ta es for the ta abe years 1942 to 1044, Incusve, are postponed
and the ta payer s egbe for the benefts of secton 3 0 wth respect to the
ta es for such years. owever, nasmuch as the reguar due date of the ta
for the ta abe year 1945 s March 15, 1946, and such date s ater than anuary
15, 1946, there s no postponement of the due date of the ta for such ta abe
year under the provsons of secton 3 04 and payment of the ta for 1945 may
not be deferred under the provsons of secton ) .
The computaton of the ta attrbutabe to servce pay may be Iustrated
by the foowng e ampe:
ampe. Captan , a reserve offcer n the Unted States Navy, Is a marred
man and has no dependents. Durng the caendar years 1942 and 1943 he receved
compensaton for actve servce on sea duty. s base pay amounts to 1,500
n 1942 and 4,000 n r43. In addton to hs servce pay, he receved ncotne
In the form of dvdends whch amounts to T6.000 n each of the caendar years
1942 and 1913. s aowabe deductons for each year for ncome ta purposes
amount to . 400 and he had no vctory ta deductons. s wfe had no ncome
or deductons for ether year. s ta abty for the caendar year 1943 and
the amount of such ta attrbutabe to servce pay Is computed as foows:
192.
Compensaton for actve servce 1,500.00
Dvdends 6.000. 00
Gross ncome , 7, 500. 00
Less: owabe deductons 400. 00
Net ncome 7,100. 00
Less: Persona e empton 1, 200. 00
Surta net ncome 5, 900. 00
Less: arned ncome credt (not ess than 300) 300.00
Norma ta net ncome 5. 600.00
Norma ta at 6 per cent 336. 00
Surta on 5,900 960.00
Tota ta 1,296.00
191,3.
INCOM T .
Compensaton for actve servce 4,000.00
Less: 1,500 e cuson under secton 22(b) (13) 1, 500. 00
aance of servce pay 2, 500. 00
Dvdends 0, 000.00
Gross ncome , 500. 00
Less: owabe deductons z 400. 00
Net ncome ,100. 00
Less: Persona e empton 1, 200. 00
Surta net ncome 6,900.00
Less: arned ncome credt (not ess than 300) 300. 00
Norma ta net Income 6, 600. 00
Norma ta at 6 per cent 96. 00
Surta on 6,900 1,106. 00
Tota ta under sectons 11 and 12 1, 592. 00
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29.22(b) (13)- . 34
ICTORY T .
Gross ncome 3,500.00
Deductons None
ctory ta net ncome ,500. 00
Less: ctory ta e empton 624. 00
Income sub|ect to vctory ta 7, 76.00
ctory ta at 5 per cent on 7, 76 393. 0
Less: ctory ta credt (40 per cent of ta ) 157.52
Net vctory ta 236.23
Ta for 1943 after gvng effect to secton 6 of the Current Ta Payment ct
of 1943.
Income ta under sectons 11 and 12 1, 592. 00
Net vctory ta 236.2
Tota ta 1, 2 .2
Increase In 1943 ta under secton 6(a) of Current Ta Pay-
ment ct of 1943:
Tota ta for 1942 1, 296
Less amount forgven (three-fourths of 1,296) 972
Unforgven porton added to 1943 ta 321. 00
Ta abty for 1943 2,152. 2
Computaton of ta for 1943 after e cudng compensaton for actve servce n
armed forces.
1942.
Gross ncome 7, 500.00
Less: Servce pay Incuded n gross Income 1, 500.00
Gross Income (e cusve of servce pay) 6, 000.00
Less: owabe deductons: 400. 00
Net ncome 5,600.0)
Less: Persona e empton 1, 200. 00
Surta net Income 4,400.00
Less: arned Income credt (not ess than 300) 300.00
Norma ta net ncome 4.100.00
Norma ta at 6 per cent 246. 00
Surta on 4,400 660.00
Tota ta 906.00
1943.
INCOM T .
Gross ncome , 500.00
Less: Servce pay ncuded In gross Income 2, 500.00
Gross Income (e cusve of servce pay) 6,000.00
owabe deductons 400.00
Net Income 5,6 1.00
Less: Persona e empton 1,200.00
Surta net ncome 4,400.00
: arned ncome credt (not ess than 300) 300.00
Norma ta net Income 4,100.00
Norma ta at 6 per cent 246.00
Surta on 4,400 660.00
Tota ta under sectons 11 and 12 906.00
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35 . 29.22(b) (13)-1.
ICTO T ta
Gross Income (e cusve of servco pay) 6,000.00
Less: Deductons None
ctory ta net ncome 6, 000. 00
Less: ctory ta e empton 624. 00
Income sub|ect to vctory ta 5,376. 00
ctory ta at 5 per cent on 5,376 26 . 0
Less: ctory ta credt (40 per cent of 26 . 0) 107.52
ctory ta 161.2
Ta for 1943 after e cudng servce pay and gvng effect to secton 6 of the
Current Ta Payment ct of 1943.
Income ta under sectons 11 and 12 906. 06
ctory ta 161.2
Tota ta 1,067.2
Increase n 1943 ta under secton 6(a) of the Current Ta
Payment ct of 1943:
Ta for 1942 I 906.00
Less: mount forgven (three-fourths of 906) 679.50
Unforgven porton added to 1943 ta 226. 50
Ta for 1943 f compensaton for actve servce e cuded 1, 293. 7
Ta abty for 1943 2,152, 2
Ta abty for.1943 f compensaton for actve servce e cuded 1, 293. 7
Ta attrbutabe to servce pay under secton 3 0 . 5 . 50
Sec. 2D.3 0 -4. stmated Ta foe Wab Years Secton 3r0 (d) contans spe-
ca rues for the appcaton of secton 5 , reatng to decaratons of estmated
ta , and secton 294(d), reatng to penates In connecton wth estmated ta ,
In the case of certan members of the mtary or nava forces of the Unted
States who are egbe for the beneft of deferred payments under secton 3 0 .
Under the rues prescrbed, f a or part of the ta under Chapter 1 for a war
year coud be deferred under the provsons of secton 3 0 , the amount of the
compensaton for actve servce as a member of the mtary or nava forces
of the Unted States sha not be taken nto account
(a) n determnng the gross ncome reasonaby e pected for such year
for the purpose of ascertanng whether a decaraton of estmated ta
s requred under the provsons of secton 5 (a)
(6) n determnng the amount of the estmated ta for such year under
the provsons of secton 5 (b) and
(c) n determnng the amount of the ta for such year for the purposes
of secton 294(d), reatng to penates In connecton wth estmated ta .
If the ta payer s egbe for the benefts of secton 3 0 the provsons of
secton 3 0 (d) are appcabe even though the ta payer does not take advantage
of the authorzed deferment or does not make appcaton therefor.
The provsons of secton 3 0 (d) and ths secton have no appcaton to a
member of the mtary or nava forces who at the tme prescrbed for makng
the decaraton of estmated ta for a ta abe year Is a commssoned offcer
(or a commssoned warrant offcer) of the reguar component of the rmy,
Navy, Marne Corps, or Coast Guard.
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29.22(b) (13)-1. 36
R GUL TIONS 103.
Par. 4. There s nserted mmedatey precedng secton 19.22(b)
(13)-1 the foowng:
S C. 141. DDITION L LLOW NC OR MILIT RY ND N L
P RSONN L. (R NU CT O 1945.)
(a) In Genera. Secton 22(b) (13) (reatng to the e cuson from
gross ncome for mtary and nava personne) s amended to read as
foows:
(13) ddtona aowance for mtary and nava person-
ne.

( ) Compensaton receved durng any ta abe year and
before the termnaton of the present war as procamed by
the Presdent, for actve servce as a member beow the grade
of commssoned offcer (or commssoned warrant offcer) n the
mtary or nava forces of the Unted States durng such war.
(b) Ta abe Tears to Whch ppcabe. subparagraph
( ) sha be appcabe wth respect to ta abe years be-
gnnng after December 31, 1940.
(c) Credts or Refunds fob 1941 and 1942. If at any tme pror to
anuary 1, 1947, the aowance of a credt or refund of an overpayment
of the ta for any ta abe year begnnng after December 31, 1940, and
before anuary 1, 1943, s otherwse prevented by the operaton of any
aw or rue of aw (other than secton 3761, reatng to compromses),
a credt or refund of the overpayment of such ta to the e tent that
the overpayment s attrbutabe to the enactment of ths secton may,
nevertheess, be aowed or made f a cam therefor Is fed before
anuary 1, 1947.
Par. 5. Secton 19.22(b) (13)-1, as amended by Treasury Decson
5297, approved September 20, 1943 C. . 1943, 247 , s further
amended to read as foows:
Sec 19.22(b) (13)-1. Compensaton of Members of Mtary and Nava
b C S. In addton to the e emptons and credts otherwse appcabe, there
sha be e cuded from gross ncome the entre amount of the compensaton
receved n a ta abe year begnnng after December 31, 1940, for actve servce
as a member beow the grade of commssoned offcer (or commssoned warrant
offcer) of the mtary or nava forces of the Unted States.
The e cuson from gross ncome under secton 22(b) (13) and ths secton s
appcabe ony to compensaton receved pror to termnaton of the present
war to be f ed by procamaton of the Presdent. Such e cuson s appcabe
wthout regard to the marta status of the recpent of the compensaton, and
f a husband and wfe both meet the requrements of the statute, then each
s entted to the beneft of an e cuson.
or the purposes of ths secton the mtary and nava forces of the Unted
States ncude (but are not necessary mted to) the rmy, the Navy, the
Marne Corps, the Coast Guard, the rmy Nurse Corps, emae, the Navy
Nurse Corps, emae, the Women s rmy u ary Corps or the Women s
rmy Corps, the Women s Reserve branch of the Nava Reserve, the Marne
Corps Women s Reserve, and the Coast Guard Reserve, Incudng the Coast
Guard Women s Reserve. Personne servng wth the rmy Specast Corps
are not wthn the scope of the e empton.
person s n actve servce f he s actuay servng n the mtary or nava
forces, not necessary In the fed or In the theater of war. Personne n the
Inactve reserve or on retrement are not n actve servce. Perods durng
whch a person s absent from duty on account of sckness, wounds, eave,
nternment by the enemy, or other awfu cause are perods of actve servce.
In the case of a husband and wfe domced n a State recognzed for edera
Income ta purposes as a communty property State, any e cuson from gross
ncome under secton 22(b) (13) operates before apportonment of the gross
ncome of the spouses n accordance wth communty property aws.
The amount of any overpayment attrbutabe to the appcaton of secton
22(b) (13) to a ta abe year begnnng n 1941 sha be refunded or credted f a
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37
29.22(b)(13)-1.
cam therefor Is fed before anuary 1, 1947. Such refund or credt sha be
aowed notwthstandng the operaton of any provson of aw (other than secton
3761, reatng to compromses) or rue of aw. Such provsons or ru .-s of aw
ncude, for e ampe, statutes of mtatons and res |udcata.
Par. 6. There s nserted mmedatey after subsecton (f) of secton
3 01 the foowng:
S C. 142. .D RM NT O C RT IN T S O T R NS ND
S R IC M N. (R NU CT O 1945.)
(a) In Genera. Chapter 3 (msceaneous provsons) s amended
by Insertng at the end thereof a new secton readng as foows:
S C. 3 0 . D RM NT O T TTRI UT L TO S R IC
P Y OR COMMISSION D S R IC ND O T TTRI UT-
L TO .PR -S R IC RN D INCOM ,
(a) Defntons. s used n ths secton
(1) Ta attrbutabe to see vce pat. The term ta attrbut-
abe to servce pay means
( ) In the case of a war year for whch the ta payer had
no gross Income other than compensaton for actve servce as
a member of the mtary or nava forces of the Unted States,
the ta mposed under chapter 1 for such year or
( ) In the case of a war year for whch the ta payer had
gross Income n addton to compensaton for actve servce as a
member of the mtary or nava forces of the Unted States,
the e cess of the ta Imposed under chapter 1 for such year over
the ta that woud have been Imposed If such compensaton had
been e cuded from gross ncome
e cept that n the case of a commssoned offcer (or a commssoned
warrant offcer) of the reguar component of the rmy, Navy, Marne
Corps, or Coast Guard, such term sha not appy to any war year
uness, at the tme prescrbed for the payment of the ta under
chapter 1 for such year, a perod of tme was beng dsregarded under
secton 3 04.
(2) Wab tear. The term war year
( ) when used wth respect to the ta attrbutabe to servce
pay means any ta abe year begnnng after December 31, 1939,
and bafore anuary 1, 1947 and
( ) when used wth respect to the ta attrbutabe to pre-
servce earned Income means any ta abe year begnnng after
December 31, 1939, but before anuary 1, 1942, and before the
ta payer entered upon actve servce as a member of the mtary
or nava forces of the Unted States, but does not ncude any
year uness part of the ta mposed by chapter 1 for such year
became due and payabe after the ta payer entered upon such
actve servce.
(3) Ta attrbutabe to pre-servce earned ncome. The term
ta attrbutabe to pre-servce earned Income means the e cess
of the ta Imposed by chapter 1 for any war year over the ta that
woud have been mposed for such year If there had been e cuded
from the net ncome for such year the amount of the earned net
ncome (as such term was defned n secton 25(a) (4) as In force
wth respect to such year, e cept that n computng such earned net
ncome, compensaton for actve servce In such forces sha be ds-
regarded).
(4) rst nstament date. The term frst Instament date
means May 15, 1946, n the case of ta payers reeased from actve
duty n the mtary or nava forces of the Unted States pror to
December 1, 1945 and n other cases une 15, 1947, or the ffteenth
day of the s th month whch begns after the date of the ta payer s
reease from actve duty In such forces, whchever s the earer
e cept that, If the frst Instament date wth respect to any war
year woud otherwse occur earer than the ffteenth day of the
thrd month foowng the cose of such year, the frst Instament
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29.22(b) (13)- .
3S
date wth respect to such year sha be the ffteenth day of such
thrd month.
(b) tenson of Tme for Payment. Upon appcaton wth re-
spect to any war year, made pror to the frst Instament date, and under
reguatons prescrbed by the Commssoner wth the approva of the
Secretary
(1) the tme for payment of an amount of the ta under chapter
1 for such year whch Is equa to the ta attrbutabe to servce pay
for such year and whch has not been pad before the fng of such
appcaton and
(2) the tme for the payment of an amount of the ta under
chapter 1 for such year whch Is equa to the ta attrbutabe to
pre-servce earned ncome for such year and whch has not been
pad before the fng of such appcaton,
sha, n eu of the tme otherwse appcabe, be as foows: one-twefth
thereof on the frst nstament date and an addtona twefth thereof
every three months thereafter unt such ta s pad.
(c) Suspenson of Pehod of Lmtaton. The runnng of the perod
of mtaton provded n secton 270(c) (reatng to the coecton of the
ta after assessment) n respect of any ta the tme for the payment of
whch s prescrbed under subsecton (b), sha be suspended for the
perod begnnng wth the date of the fng of the appcaton under
such subsecton and endng s months after the date prescrbed theren
for the payment of the ast nstament of such ta .
_
(b) Refund of Interest Pad. ny Interest pad pror to the date of
the enactment of ths ct wth respect to ta attrbutabe to servce
pay for any war year, or wth respect to ta attrbutabe to pre-servce
earned ncome for any war year, sha be credted or refunded f cam
therefor s fed wth the Commssoner pror to anuary 1, 1947.
Sec. 19.3 0 -1. Deferment of Certan Ta es of Members of the Mtary
or Nava orces. (a) In genera. Secton 3 0 provdes that, n the case of
members of the mtary or nava forces of the Unted States, that porton of the
ta under Chapter 1 whch s attrbutabe to servce pay for a war year or to
pre-servce earned ncome for a war year, may, n eu of the tme otherwse
prescrbed by aw, be pad h 12 equa quarter-annua Instaments begnnng
wth the frst nstament date. s to what consttutes the frst nsta-
ment date for the purposes of secton 3 0 see secton 19.3 0 -2.
The term war year as defned n secton 3 0 (a) (2) means, n the case of
ta attrbutabe to servce pay, any ta abe year begnnng after December 31,
1939, and before anuary 1, 1947. In the case of the ta attrbutabe to pre-
servce earned Income, the term means any ta abe year begnnng after De-
cember 31, 1939, but before anuary 1, 1942, and before the ta payer entered
upon actve servce as a member of the armed forces of the Unted States, but
does not Incude any ta abe year uness part of the ta Imposed by Chapter 1
for such ta abe year became due and payabe after the ta payer entered upon
such actve servce.
or the purposes of secton 0 the mtary or nava forces of the Unted
States Incude (but are not necessary mted to) the rmy, the Navy, the
Marne Corps, the Coast Guard, the rmy Nurse Corps, emae, the Navy Nurse
Corps, emae, the Women s rmy u ary Corps or the Women s rmy Corps,
the Women s Reserve branch of the Nava Reserve, the Marne Corps Women s
Reserve, and the Coast Guard Reserve, Incudng the Coast Guard Women s
Reserve. Such forces do not ncude the rmy Specast Corps.
Secton 3 0 Is appcabe ony to the Indvdua who performs servce as a
member of the mtary or nava forces of the Unted States. ence, t has no
appcaton to the spouse of such ndvdua, uness the spouse aso performs
such servce.
Nothng contaned n secton 3 0 or these reguatons sha be construed to
requre payment of the ta for any ta abe year before the postponed due date
of the ta for such year under secton 3S04, If such secton Is appcabe, nor
before the ast day of any perod of e tenson aowed under the provsons of
secton 513 of the Soders and Saors Cv Reef ct of 1940.
( ) ppcaton for deferred payments. In order to obtan the prvege of
deferred payments under secton 3 0 wth respect to ta for a ta abe year,
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39
29.22(b) (16)-1.
the ta payer must make wrtten appcaton, pror to the frst Instament date,
to the coector of Interna revenue for the dstrct In whch the return for such
ta abe year Is fed. No partcuar form Is requred but the appcaton shoud
contan a compete statement of the facts necessary to determne the ta payer s
egbty for the benefts of secton 3S0 , the ta abe yenrs and the amounts of
ta nvoved, and the due date of the frst payment. The essenta facts ncude:
(1) Rank and organzaton.
(2) Whether the ta payer Is an offcer of the reguar component of the
rmy, Navy, Marne Corps, or Const Guard.
(3) Date of nducton or entrance nto armed forces.
(4) Date of reease from actve duty, f so reeased.
(5) If the ta payer performed servce outsde the contnenta Unted
States or on sea duty, the date on whch the ta payer eft the contnenta
Unted States or commenced to serve on sea duty and the date on whch he
returned to the contnenta Unted Stares or ceased to serve on sea duty.
(6) If, under the provsons of secton 513 of the Soders and Saors
Cv Reef ct, an e tenson of tme for payment of the ta for a war year
has been granted, the date upon whch such perod of e tenson e pres.
(7) The amomt of ta for whch deferment s camed for each ta abe
year Invoved.
(c) Interest. If deferred payments are authorzed under the provsons of
ecton 3 0 , one-twefth of the ta In respect of whch deferment s authorzed
s payabe on the frst nstament date, one-twefth thereof on the correspondng
date of the thrd month foowng the frst nstament date, and one-twefth on
the correspondng date of each succeedng thrd month after the precedng
nstament date unt the fu amount of the ta Is pad.
No Interest sha be charged or pad f the ta Is pad upon the prescrbed
dates. Interest at the rate of 6 per cent per annum sha be charged on nsta-
ments not pad at the tme prescrbed from the date the nstament became due
unt the Instament s pad. If the ta payer fas to pay an nstament of the
ta on the prescrbed date, such faure sha not acceerate the due date of the
remanng nstaments.
ny Interest pad pror to November , 1945, on that porton of the ta for
any ta abe year whch coud be deferred under the provsons of secton 3 0
sha be credted or refunded to the ta payer, If cam therefor s fed pror to
anuary 1, 1947, wth the coector of Interna revenue as the authorzed repre-
sentatve of the Commssoner.
(d) Suspenson of perod of mtaton. If deferred payments n respect of the
ta for any ta abe year are authorzed n accordance wth the provsons of
secton 3 0 , the runnng of the perod of mtatons under secton 276(c) on the
coecton of such ta s suspended for the perod begnnng wth the date of
fng of the appcaton under secton 3 0 (b) and endng s months after the
date prescrbed Cor payment of the ast Instament of such ta .
Sec. 19.3 0 -2. bst Instament Date. (a) Genera rue. Under the def-
nton contaned n secton 3 0 (a)(4), f nether secton 3 04 and the regu-
atons thereunder nor secton 513 of the Soders and Saors Cv Reef ct
s appcabe, the frst Instament date wth respect to ta for a war year
s as foows:
(1) Ta payers reeased from actve duty pror to December 1, 19)5. In
the ense of ta payers reeased from actve duty n the mtary or nava forces
of the Unted States pror to December 1, 1945, the frst Instament date wth
respect to ta for a war year s May 15, 1946, or the 15th day of the thrd
month foowng the cose of such war year, whchever Is the ater.
(2) Other ta payers. In the case of ta payers reeased from actve duty
n the mtary or nava forces of the Unted States on or after December 1,
1945, and n the case of ta payers who have not been reeased from such
actve duty, the frst nstament date wth respect to ta for a war year Is (1)
une 15,1947, or (II) the 15th day of the s th month whch begns after the
date of the ta payer s reease from actve duty, whchever Is the earer, but
In no case sha the frst nstament date be earer than the 15th day of the
thrd momth foowng the cose of such war year.
In the case of ta payers who make ther returns on a caendar year bass
the frst Instament date, f nether secton 3 04 and the reguatons there-
under nor secton 513 of the Soders and Saors Cv Reef ct Is appcabe,
s as foow :
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29:22(b)(13)-.
40
C L ND R Y RS 1040 ND 1041.
Reeased from actve duty
efore December 1, 1945
On or after December 1, 1945, but
rst nstament date
May 15, 1946.
15th day of s th month whch be-
not ater than November 30,1940.
On or after December 1,1940
gns after date of reease.
une 15, 1947.
(6) Speca provsons. If, by reason of servce on sea duty or outsde the
contnenta Unted States, the due date of the ta for a war year s postponed
under the provsons of secton 3 04 and the reguatons thereunder or, f co-
ecton of the ta for a war year s deferred under the provsons of secton 513
of the Soders and Saors Cv Reef ct, the frst nstament date may
be ater than the date determned under the genera rue set forth a secton
9.3 0 -2(a). In such event the frst nstament date wth respect to ta for
such war year sha be whchever of the foowng Is the atest:
(1) the date determned under secton 19.3 0 -2(o), or
(2) the postponed due date of the ta determned under secton 3S04 and
the reguatons thereunder, or
(3) the ast day of the perod of deferment aowed under secton 513 of
the Soders and Saors Cv Reef ct.
Sec. 19.3 0 -3. Ta ttrbutabe to Servce Pay. The term ta attrb-
utabe to servce pay Is used n secton 3 0 to characterze that porton of the
ta mposed under Chapter 1 for a war year whch resuts from the ncuson
In gross ncome of the compensaton for actve servce as a member of the m-
tary or nava forces of the Unted States. Under the defnton contaned n
secton 3 0 (a) (1) the term ta attrbutabe to servce pay for a war year
means:
(a) f the ta payer had no gross ncome for such war year other than
the compensaton for actve servce n such forces, the ta mposed under
Chapter 1, or
(ft) f the ta payer had gross ncome for such war year n addton to
the compensaton for actve servce n such forces, the e cess of the ta
mposed under Chapter 1 for such year over the ta that woud be mposed
were such compensaton e cuded from the gross ncome.
member of the mtary or nava forces of the Unted States s n actve serv-
ce f he s actuay servng n such forces, not necessary n the fed or n the
theater of war. Personne n the Inactve reserve or on retrement are not n
actve servce. Perods durng whch a person s absent from duty on account of
sckness, wounds, enve, nternment by the enemy, or other awfu cause are
perods of actve servce.
In computng the amount of the ta attrbutabe to servce pay for a war
year the ta mposed under Chapter 1 sha be determned wthout regard to the
credt under secton 31 for ta es pad to a foregn country or a possesson of
the Unted States and wthout regard to the credts provded n secton 32 for
ta es wthhed at the source.
or the purposes of secton 3 0 , the term ta attrbutabe to servce pay
has no, appcaton to commssoned offcers of the reguar component of the rmy,
Navy, Marne Corps, or Coast Guard for any war year uness, by reason of serv-
ce on sea duty or outsde the contnenta Unted States, the due date of the
ta for such year s postponed under the provsons of secton 3 04 and the regu-
atons thereunder. or e ampe, a commssoned offcer of the reguar compo-
nent of the rmy was assgned to duty n Great rtan n ebruary, 1942, and
served contnuousy n the uropean theater thereafter unt he returned to the
Unted States n uy, 1945. The reguar due date of the ta under Chapter 1
for the war year 1941 fas pror to anuary 15,1946, whch s the 15th day of the
s th month after the date of hs return to the Unted States. ccordngy,
under the provsons of secton 3 04, the due date of the ta for the ta abe year
1941 s postponed and the ta payer s egbe for the benefts of secton 3 03
wth respect to the ta for such year.
The computaton of the ta attrbutabe to servce pay may be ustrated
by the foowng e ampe:
ampe. , a reserve offcer n the Unted States rmy, s marred and has
no dependents. e makes hs returns on the caendar year bass. e entered
upon actve duty wth the armed forces n 1941 and durng such year receved
compensaton for actve servce n the amount of 2,000. In addton to hs
servce pay he receved ta abe dvdends n the amount of 0,000. s aow-
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41
29.22(b) (13)-1.
abe deductons for 1941 amount to 700. s wfe had no ncome or deductons.
s ta abty for the caendar year 1941 and the amount of such ta attrbut-
abe to servce pay s computed as foows:
Gross ncome , 000
Less: owabe deductons 700
Net Income 7,300
Less: Persona e empton .. 1, 500
Surta net Income 5, 00
Less: arned ncome credt (mnmum) 300
Income sub|ect to norma ta 5, 500
Norma ta at 4 per cent 220
Surta on 3, 00 534
Ta abty for 1941 754
Computaton of ta for 1941 after e cudng compensaton for actve servce
n armed forces.
Gross ncome , 000
Less: Servce pay 2,000
Gross Income (e cusve of servce pay) 6,000
Less: owabe deductons 700
Net ncome: 5,300
Less: Persona e empton 1, 500
Surta net ncome 3, 00
Less: arned ncome credt (mnmum) 300
Income sub|ect to norma ta _ 3, 500
Norma ta at 4 per cent 140
Surta on 3, 00 2 2
Tota ta 422
Ta abty for 1941 , 754
Ta abty for 1941 f compensaton for actve servce e cuded 422
Ta attrbutabe to servce pay 332
Sec. 19.3 0 -4. Ta ttrbutabe to Pre-Servce arned Income. The de-
ferment provded In secton 3S0 for members of the mtary or nava forces of
the Unted States wth respect to ta attrbutabe to pre-servce earned ncome
s appcabe ony to a war year as defned In secton 3 0 (a) (2) ( ). See sec-
ton 19.3 0 -1.
The term ta attrbutabe to pre-servce earned ncome means the e cess
of the ta mposed under Chapter 1 for the ta abe year over the ta that woud
be mposed f there were e cuded from the net ncome for such year the amount
of the earned net ncome. or the purpose of such computaton the earned net
ncome sha be determned n accordance wth the provsons of secton 25(a) (4)
under the aw appcabe to the ta abe year, e cept that n computng the earned
net ncome under such secton compensaton for actve servce n the armed
forces sha not bo fatten nto account. s to what consttutes earned net ncome,
see secton 19.25-2.
In computng the amount of the ta attrbutabe to pre-servce earned ncome
for a war year, the ta Imposed under Chapter 1 sha be determned wthout
regard to the credt under secton 31 for ta es pad to a foregn country or a
possesson of the Unted States and wthout regard to the credt under secton 32
for ta wthhed at the source.
703673 1 1
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S 29.22(b) (13)- .
42
The appcaton of ths secton may be Iustrated by the foowng e ampe:
ampe. , a marred man wth two dependent chdren, was empoyed as
a saes representatve n 1041. e receved a saary of 100 a week pus com-
mssons on saes and pad hs own traveng e penses. On uy 1, 1941, he re-
ceved a commsson as coone n the rmy of the Unted States and In ebruary,
1942, he was transferred to Great rtan. was returned to the Unted States
n ugust, 1945, and was reeased from actve servce In September, 1945.
Durng the caendar year 1941 was pad a tota of 1 ,000, saary and com-
mssons, for hs servces as a saesman. Durng the same perod he Incurred
e penses of 3,700 for traveng, meas, and odgng In connecton wth hs em-
poyment. s base pay as a coone n the rmy for the atter haf of 1911
amounted to 2,000. Durng the caendar-year 1941 he aso receved dvdends of
0,000, ncome from rents, 2,200, and ta abe nterest In the amount of 00.
e pad 3,S00, State and oca ta es, 2,300, Interest on a mortgage, and made con-
trbutons to varous chartabe organzatons n the aggregate amount of 1,650.
s ncome ta abty for the caendar year 1041 s computed as foows:
Gross Income
Saary and commssons (saesman) 1 ,000
Compensaton for servce In armed forces 2,000
Dvdends 6,000
Income from rents 2,200
Interest ncome 00
Tota 29,000
Deductons
Ta es (State and oca) 3, 00
Traveng e penses , , 700
Interest pad 2,300
Contrbutons 1, 650
Tota 11,450
Net ncome 17,550
Less: Persona e empton 1, 500
Credt for dependents 00
Surta net ncome 15,250
Less: arned ncome credt (ma mum) 1,400
Norma ta net ncome IS, 50
Norma ta (4 per cent of 13, 50) 554
Surta . 2, 00
Tota ta 3,354
On ebruary 1, 1946, fed hs Income ta return for the caendar year 1941
and at the same tme made appcaton for deferred payments under secton 3 0
on that part of hs ta attrbutabe to servce pay and to pre-servce earned
ncome. Under the facts stated the caendar year 1941 s a war year wth
respect to the ta attrbutabe to servce pay snce It began after December 31,
1939, and before anuary 1, 1947. It s aso a war year wth respect to pre-
servce earned ncome snce t began after December 31, 1939, and before anuary
1, 1942, and the entre amount of the ta for such year became due and payabe
after entered actve servce as a member of the armed forces. Snce was
dscharged pror to December 1, 1945, the frst nstament date s May 13,
1946, uness e s entted to the benefts of secton 3 04 and such date Is earer
tban the postponed due date under the atter secton. Snce was outsde the
contnenta Unted States on March 15,1942, the due date of the ta for 1941, and
contnuousy thereafter unt ugust, 1945, the postponed due date under secton
3 04 s the 15th day of the s th month foowng hs return to the Unted States,
or ebruary 15, 1946. ence, the frst nstament date s May 15, 1946, and
the appcaton for deferment under secton 3S0 Is tmey.
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43 29.22(b) (13)-1.
The amount of the ta for 1941 whch Is attrbutabe to servce pay for such
year s computed as foows:
Gross ncome for 1941 29,000.00
Less: Servce pay to be e cuded 2, 000. CO
27,000. 00
Less: Deductons 11,450.00
Net Income 15, 550. 00
Less: Persona e empton 1,500. 00
Credt for dependents SCO. 00
2,300.00
Surta net ncome 13,250.00
Less: arned ncome credt (ma mum) 1,400.00
Norma ta net ncome 11, 50. 00
Norma ta (4 per cent of 11, 50) 474.00
Surta 2,1 2. 50
Tota ta 2,650.50
Tota ta abty for 1941 3, 354. 00
Ta after servce compensaton e cuded 2, 650. 50
Ta attrbutabe to servce compensaton T 697. 50
The amount of the ta for 1941 whch s attrbutabe to pre-servce earned n-
come s computed as foows:
Net ncome for 1941 17, 550. 00
Pre-servce earned ncome:
arned ncome (dsregardng servce pay) 1 ,000.00
Deductons attrbutabe to earned ncome 3, 700. 00
arned net Income (before mtaton) 14,300.00
arned net Income (after mtaton) 14,000.00
Net Income after e cuson 3, 550. 00
Less: Persona e empton 1, 500. 00
Credt for dependents 00 00
2,300. 00
Surta net ncome 1,250. 00
Less: arned ncome credt (10 per cent of earned net ncome or 10
per cent of net Income, whchever s smaer, but not ess than 300) _ 300. 00
Norma ta net ncome 950. 00
Norma ta at 4 per cent 3 . 00
Surta 75. 00
Tota 113. 00
Tota ta abty 3, 354. 00
Ta f pre-servce earned Income e cuded : 113. 00
Ta attrbutabe to pre-servce earned Income 3, 241. 00
Taw sub|ect to deferment.
Ta attrbutabe to servce compensaton 697. 50
Ta attrbutabe to pre-servce earned ncome , 241. 00
Tota 3, 93 . 50
Snce the tota ta abty for 1941, 3,354, s ess than 3,93 .50, the de-
ferment appes to the tota ta and the frst nstament of 279.50 (one-twefth
of 3 54) s due and payabe on May 15, 1946.
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29.22(b)(13)- .
41
(Ths Treasury Decson s ssued under the authorty contaned n
secton 62 of the Interna Revenue Code (53 Stat., 32 26 U. S. C, 62)
and sectons 141 and 142 of the Revenue ct of 1945 (Pubc Law 214.
Seventy-nnth Congress).)
oseph D. Nunan, r..
Commssoner of Interna Revenue.
pproved pr 15, 1946.
oseph . O Conne, r., ,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster pr 15, 1946, 4.31 p. m.)
Secton 29.22(b) (13)-1: Compensaton of m- 1946-3-12224
tary and nava forces. Mm. 5972
( so Secton 3 0 .)
Provsons of Revenue ct of 1945 reatng to members of the
armed forces.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C, anuary 9,1946.
Coectors of Interna Revenue, Interna Revenue gents n Charge,
and Others Concerned:
1. Reference s made to sectons 141, 142(a), and 142(b) of the
Revenue ct of 1945, whch provde addtona reef for members and
veterans of the armed forces. The purpose of ths mmeograph s to
summarze these provsons and to descrbe the admnstratve pro-
cedure to be used. s stated n prevous mmeographs, the pocy of
the ureau s to deaLwth a ta matters affectng members of the
armed forces n a cooperatve and sympathetc manner. ccord-
ngy, cams cerks, audtors, and other Interna Revenue empoyees
concerned shoud be nstructed to gve speca and prompt attenton
to such cams and appcatons as may arse under these provsons.
CLUSIONS O S R IC P Y.
2. Commssoned offcers, or commssoned warrant offcers, n the
mtary and nava forces of the Unted States/ ctzens or resdents of
the Unted States as members of the mtary or nava forces of any
of the other Unted Natons. The Revenue ct of 1945 makes no
change wth respect to the e cuson of the frst 1,500 of actve servce
pay receved by ta payers n the foregong cassfcatons. Ths e -
cuson has been n effect for ta abe years begnnng on or after an-
uary 1, 1943, and w contnue unt the present war s decared ter-
mnated by the Presdeht.
. nsted personne. ctve servce pay receved by members of
the armed forces of the Unted States beow the grade of commssoned
offcer or commssoned warrant offcer, durng ta abe years begnnng
on or after anuary 1 1941, w be e cuded from gross ncome for
the purpose of computng ncome ta unt the present war s decared
termnated by the Presdent.
4. rmed forces personne or veterans nqurng wth respect to the
addtona e cusons shoud be nformed o theseTbenefts. If the ta
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45
29.22(b)(13)-.
has been pad for years n whch addtona e cusons may be aowed,
nstructon and assstance shoud be gven n the preparaton of appro-
prate cams for refund or credt on orm 43. It foows that any
unpad assessment shoud be abated to the e tent that t may be reduced
by takng nto consderaton the addtona e cuson. It w be neces-
sary, however, to e amne the returns and accounts on whch credts,
refunds, or abatements are based to determne the vadty of the cam
and the e tent to whch t may be aowed. refund or credt of any
overpayment of the ta for 1941 and 1942 (ta abe years begnnng
after December 31,1940, and before anuary 1, 1943) may be aowed
f the cam s fed before anuary 1,1947, even though the aowance
s otherwse prevented by the statute of mtatons or the operaton of
any other aw or rue (other than compromses as provded for n sec-
ton 3761 of the Code).
D RM NT O P YM NT O T S.
5. The new ct provdes that payment of unpad ta es for war
tears whch are attrbutabe to actve servce pay and pre-servce
earned ncome may be made n 12 quartery nstaments begnnng on
a prescrbed fdst nstament date. Ths deferment s aowabe
upon appcaton before the frst nstament date to persons who served
as members of the armed forces of the Unted States durng the pres-
ent war (not to persons who served ony n the forces of any other
naton). In order that the amounts of ta sub|ect to e tenson for pay-
ment and the nstament dates on whch payments are due may be
ready determned, the foowng e panaton of the terms used n the
ct are gven:
(a) Ta attrbutabe to servce pay means the tota ta for a war
year reduced by the ta on ncome other than actve servce pay re-
ceved from the Unted States. owever, f the servce person s a
commssoned offcer, or commssoned warrant offcer, of the reguar
component of the rmy, Navy, Marne Corps, or Coast Guard, none of
Ms abty may be defned as ta attrbutabe to servce pay un-
ess he was beng granted reef on the due date(s), from payng ta
because he was on sea duty or outsde the contnenta Unted States.
(b) Ta attrbutabe to -pre-servce earned ncome s computed as
fo ows: (1) Determne ta abe ncome, as defned under Chapter 1
of the Code, for war year and compute the ta (2) subtract earned
ncome other than servce earned ncome from ta abe ncome deter-
mned n (1) and compute the ta on ths baance (3) subtract the ta
computed n (2) from the ta computed n (1). The resutng ab-
ty s the ta attrbutabe to pre-servce earned ncome.
(o) War year when used wth respect to the ta attrbutabe to
servce pay means any ta abe year (caendar or fsca) begnnng
after December 31,1939, and before anuary 1,1947. War year when
used wth respect to pre-servce earned ncome means any ta abe
year (caendar or fsca) begnnng after December 31, 1939, and
before anuary 1, 1942, f the ta abe year began before the ta payer
entered upon actve servce and f at east a part of the ta became due
and payabe after he entered upon actve servce.
(a) The -frst nstament date for ta payers reeased from actve
servce at any tme before December 1, 1945, s May 15, 1940 . The
frst nstament date n a other cases s une 15,1947, or the 15th day
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I 29.22(b)(13)-.
4G
of the s th month whch begns after the date of the ta payer s
reease from actve duty, whchever s the earer. owever, none of
the above dates s to be effectve to brng the frst nstament due be-
fore the 15th day of the thrd month foowng the cose of the ta abe
year to whch the ta appes nor are any of the above dates to be
effectve to brng the frst nstament due before the postponed due
date estabshed because of sea duty, or duty outsde the contnenta
Unted States.
The tabe set forth beow presents a convenent reference for deter-
mnng frst nstament dates:
caendar year
If deferred ta Is attrbutabe to
fsca year
Date of reease (If any).
1940,1M1
194 IMS
1944,1946
1M6
egnnng
after
an. 1, 1940,
and endng
egnnng
after
Mar. 31, 1945,
and endng
egnnng
after
Mar. 31, 1946,
and endng
The tnt Instament date s
before
Mar. 1,1946.
before
Mar. 1, 1M7.
before
Dec. 1,1M7.
efore Dec. 1, IMS
May 16,1946
Mar. 11,1M7
May 16, 1946
Reguar due
date.
Reguar due
date.
Darng:
December, IMS...-.
une 16,1946
uy 16,1946
ug. 16,1946
Sept. 16,1946
Oct. 16,1946
Nov. 16,1946
Dec. 16,1946
an. 16,1947
eb. 16,1947
Mar. 15.1947
pr. 15,1947
May 15,1947
Mar. 16,1M7
Mar. 16,1947
Mar. 16,1M7
Mar. 16, IM7
Mar. 16,1947
Mar. 16. IM7
Mar. 16,1M7
Mar. 16.1947
Mar. 16,1M7
Mar. 15,1947
pr. 1 ,1947
May 15,1947
une 16,1946
uy 16,1946
ug. 16,1946
Sept. 15,1946
Oct. 15,1946
Nov. 15,1946
Dec. 15.1946
an. 15,1947
eb. 15,1947
Mar. 15.1947
pr. 15. 1947
May 15,1947
anuary, IMS
Reguar due
date or the
15th day of
s th month
begnnng
after dae of
reease
whchever
s the ater.
ebruary, IMS
March, 1946
pr, IMS
May, 194 _
The reguar
due date of
return-
une, 1946
uy. 4f
ugust,.194
September, 1949_
October, 1946
November, 1946
In servce after Nov. 30,1946.
une 16.1M7
une 15.1947
une 16,1947
une 15,1947
Reguar due
date.
COLL CTORS PROC DUR ON D RM NTS O T S OR MILIT RY ND
N L P RSONN L.
6. Snce the grantng of an e tenson of tme for payment w be
condtoned upon an appcaton made pror to the frst nstament
date, an e amnaton of the return(s) and account(s) for the year(s)
nvoved w be necessary to determne the unpad ta attrbutabe
to (1) servce pay and (2) pre-servce earned ncome. The appca-
ton for e tenson may be made by the ta payer n any convenent
wrtten form. No forma type of appcaton form w be prescrbed,
athough the coector may, f he desres, prepare a mmeographed
form for ths purpose to ad n convenenty servng the ta payers.
When the return(s) and account(s) have been e amned, the ta -
payer shoud be advsed that hs appcaton has been gven consdera-
ton and that he w receve, pror to the nstament dates, notces of
the amounts to be pad. If the return(s) and account(s) dscose any
unpad ta whch may not be deferred under the provsons of the ct,
the ta payer shoud be advsed to that effect and as to the amount
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47
29.22(b) (13)-1.
whch may not be deferred. owever, coectors shoud contnue to
fve fu recognton to the e tensons provded n secton 513 of the
oders and Saors Cv Reef ct, secton 3 04 of the Code, and
Treasury Decson 5279 (C. . 1943, 952) as they appy to such unpad
abtes. The pocy set forth n Mmeograph 5931 shoud aso con-
tnue to serve as the bass for coecton of abtes not sub|ect to the
new nstament method of payment.
7. When an e tenson has been granted under the nstament
method of payment, the date of appcaton and the statutory authorty
shoud be noted on the account. When the amounts of the nstaments
have been determned, notces shoud be prepared. The form to be
used for ths purpose s to be mmeographed by coectors and shoud
be substantay smar to hbt I attached to ths mmeograph.
tcker fe shoud be estabshed for the notces so that each one can be
maed to the ta payer appro matey 10 days before the due date of
the nstament. If more than one year s abty for a partcuar ta -
payer s nvoved, notces shoud be prepared for each account. If the
nstament dates for each of the accounts concde, the varous notces
shoud be maed n one enveope at the approprate tme. The date
of mang of each notce shoud aso be noted on the account. Whe
one-twefth of the amount e tended s to be pad on the frst nsta-
ment date and one-twefth s to be pad every three months thereafter
unt the fu amount of the ta e tended s pad, the ta payer may
compete payment before the specfed nstament dates f he wshes.
owever, advance payment of nstaments shoud not be construed
as advancng any of the remanng nstament dates. When advance
payments of nstaments are receved, the notces to whch such
payments appy sha be so marked to prevent ther beng maed.
. It wTbe the pocy to aow the nstament method of payment
to contnue unt the date of the twefth nstament s reached even
though the ta payer ether competey fas to make payment of one or
more nstaments or does not make tmey payment of one or more
nstaments. Under the nstament method of payment, ta attrb-
utabe to servce pay and pre-servce earned ncome w be consdered
for practca and admnstratve purposes to be 12 equa and separate
amounts. Thus nterest on any denquent nstament w be com-
puted at the rate of 6 per cent per annum from the due date of the
nstament to the date of payment.
9. Suspenson of perod of mtaton. The runnng of the perod
of mtaton for coecton of ta es after assessment as set forth n sec-
ton 276(c) of the Code sha be suspended for the perod begnnng
wth the date of fng an appcaton for the nstament method of
payment and endng s months after the date prescrbed for the pay-
ment of the ast nstament.
STIM T D T .
10. If a ta payer s egbe for deferment of payment of ta wth
respect to any war year, he may dsregard compensaton receved
for actve servce as a member of the mtary or nava forces of the
Unted States n determnng hs gross ncome for the purpose of com-
putng estmated ta for such year. Ths provson s aso to be apped
forthe purpose of consderng penates for underestmaton of ta .
owever, ths provson sha not appy to any person who at the
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I 29.22(b) (13)- .
4
tme for makng a decaraton of estmated ta for any war year, s
a commssoned offcer or a commssoned warrant offcer of the reguar
component of the rmy, Navy, Marne Corps, or Coast Guard.
INT R ST.
11. ny nterest pad pror to November , 1945 (the date of enact-
ment of the Revenue ct of 1945), wth respect to ta for whch pay-
ment coud be deferred under the ct, sha be credted or refunded
f the cam s fed before anuary 1, 1947. It foows that any such
nterest that has accrued w not be assessed, and that any such nter-
est whch has been assessed but not coected, w be abated. ny
nterest accrung or assessed on or after November , 1945, and
before the date whch woud be the frst nstament date wth
respect to ta for whch payment coud be deferred w for admns-
tratve reasons not be assessed or coected. If such nterest has been
pad t w be credted or refunded f the cam s fed wthn the tme
prescrbed under the genera rues provded n secton 322 of the Code.
12. The provsons of the Revenue ct of 1945 shoud not be con-
strued as confctng wth secton 3 04 of the Code, secton 513 of the
Soders and Saors Cv Reef ct, or Treasury Decson 5279.
Instead, as e paned n ths mmeograph, the Revenue ct of 1945
provdes for further reef and benefts to veterans and servcemen.
13. Correspondence reatve to the contents of ths mmeograph
shoud refer to ts number and to the symbos C: Co.
Wm. T. Sherwood,
ctng Commssoner.
hbt I.
NOTIC O INCOM T INST LLM NT DU UND R 13 U RT RLY P YM NT PL N
OR T R NS ND S R IC M N.
1
Taabe year.
Tota ta deferred.
Unpad baance.
mount of ths
Date ths Insta-
ment Is due.
Your remttance, together wth th
notce, shoud reach the offce of
.....(address)
To Insure proper credt pease return ths notce wth your
remttance.
not ater than the date shown abort.
Make check or money order payabto
to Coector of Interna Revenue.
n Instament not pad on tme w
bear nterest at the rate of 6 per cent
per annum from the date due unt
pad.
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49
29.22(b) (13)-1.
Secton 29.22(b) (13)-1: Compensaton of 1946-7-12275
mtary ana nava forces. Mm. 5972
( so Secton 3 0 .) (Suppement 1)
Cassfcaton of warrant offcers.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C, March 6,1946.
Coectors of Interna Revenue, Interna Revenue gents n Charge,
and Others Concerned:
Reference s made to Mmeograph 5972 page 44, ths uetn ,
whch summarzes provsons of the Revenue ct of 1945 reatng to
members of the armed forces.
The mmeograph states that the Revenue ct of 1945 e cudes from
gross ncome a ctve servce pay receved by members of the armed
forces of the Unted States beow the grade of commssoned offcer or
commssoned warrant offcer tacs supped , durng ta abe years
begnnng on or after anuary 1,1941, unt the present war
s decared termnated by the Presdent.
The mmeograph aso states, n effect, that commssoned warrant
offcers are entted ony to an e cuson of the frst 1,500 of actve
servce pay, the same as for commssoned offcers.
These references to commssoned warrant offcers have resuted
n numerous nqures as to the dstncton between such offcers and
other warrant offcers. The purpose of ths mmeograph s to carfy
ths dstncton.
The facts are as foows:
1. In the rmy, the owest rank of commssoned offcer s second
eutenant. Therefore, a ower rmy ranks (ncudng chef warrant
offcers, warrant offcers, |unor grade, fght offcers, sergeants, etc.)
are treated for edera ncome ta purposes the same as ensted men.
2. In the Navy and Coast Guard, nowever, chef warrant offcers are
commssoned (. e., treated as offcers) but other warrant offcers are
not commssoned (. e., treated as ensted men). Ttes of the two
groups are dentca e cept that commssoned warrant offcers have the
desgnaton chef precedng ther ttes. Thus, when not comms-
soned, the warrant offcers of these servces are desgnated boatswans,
gunners, carpenters, sa-makers, pharmacsts, machnsts, pay cerks,
eectrcans, rado eectrcans, torpedomen, shps cerks, aerograph-
ers, and photographers. When commssoned, they are desgnated
chef boatswans, chef gunners, chef carpenters, chef sa makers,
chef pharmacsts, chef machnsts, chef pay cerks, chef eectrcans,
chef rado eectrcans, chef torpedomen, chef shps cerks, chef
aerographers, and chef photographers. ower ranks of these
servces, ncudng chef petty offcers, are treated the same as ensted
men.
3. In the Marne Corps, aso, chef warrant offcers are commssoned
(. e., treated as offcers), but other warrant offcers are not comms-
soned (. e., treated as ensted men). Ttes of the two groups are
dentca e cept that commssoned warrant offcers have the desgna-
ton chef precedng ther ttes. Thus, when not commssoned,
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29.22(b)(14)- .
50
the warrant offcers of ths servce are desgnated marne gunner, quar-
termaster cerk, and pay cerk. When commssoned, they are desg-
nated chef marne gunner, chef quartermaster cerk, and chef pay
cerk.
Correspondence reatve to the contents of ths mmeograph shoud
refer to ts number and to the symbos C: Co.
oseph D. Nunan, r.,
Commsso n er.
Secton 29.22(b) (13)-1: Compensaton of mtary
and nava forces.
INT RN L R NU COD .
Lump-sum payments receved by r Corps Reserve offcers under
the ct of une 16,1936, as amended. (See I. T. 3790, beow.)
Secton 29.22(b) (13)-1: Compensaton of mtary
and nava forces.
INT RN L R NU COD .
Income from sources wthn a possesson of the Unted States.
(See. T. 3791, page 14 .)
Secton 29.22(b) (13)-1: Compensaton of members of
mtary and nava forces.
INT RN L R NU COD .
Lump-sum payment receved by wdow or other benefcary of a
deceased commssoned nava offcer. (See I. T. 3 01, page 109.)
Secton 29.22(b) (14)-1: Musterng-out pay- 1946-7-12276
ments of mtary and nava forces. I. T. 3790
( so Secton 29.22(b) (13)-1.)
nterna revenue code.
Lump-sum payments receved by r Corps Reserve offcers under
the ct of une 16, 1936 (49 Stat., 1524), as amended, are not mus-
terng-out payments whch are e cudbe from gross ncome under
secton 22(b) (14) of the Interna Revenue Code. Such ump-sum
payments receved by r Corps Reserve offcers as members of the
mtary forces for actve servce n such forces are e cudbe from
gross ncome to the e tent provded n secton 22(b) (13) of the
Code, as amended.
dvce s requested whether ump-sum payments receved by r
Corps Reserve offcers under the ct of une 16.1936 (49 Stat., 1524),
as amended, are musterng-out payments whch are e cudbe from
gross ncome under secton 22(b) (14) of the Interna Revenue Code.
Secton 2 of the ct of une 16, 1936, as amended, provdes as
foows:
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51
29.22(b) (14)-1.
Seo. 2. Whenever any r Corps Reserve offcer who has not been seected for
commsson n the Reguar rmy Is reeased from actve duty that has been
contnuous for one or more years, he sha be pad a ump sum of 500 for each
compete year of actve servce as such offcer- and If reeased from actve duty
otherwse than upon hsown request, or as a resut of Ineffcent or unsatsfactory
servce as determned by the Secretary of War, such ump-sum payment sha be
prorated for fractona parts of each year of such actve servce. The ump-sum
payments heren authorzed sha be n addton to any pay, aowances, com-
pensaton, or benefts whch such offcers may otherwse be entted to receve.
(Sec. 300a, tte 10, T . S. C. .)
Secton 22 (b) (14) of the Interna Revenue Code provdes as foows:
(b) cusons from Gross Income. The foowng tems sha not be n-
cuded n gross Income and sha be e empt from ta aton under ths chapter
Chapter 1 of the Code :

(14) MUST RINO-OUT P YM NTS OR MILIT RY ND N L P RSONN L.
mounts receved durng the ta abe year as musterng-out payments wth
respect to servce n the mtary or nava forces of the Unted States.
The aw reatng to the payment of a ump sum to an r Corps
Reserve offcer s based upon and has a drect reaton to the number
of years or fractona part of a year of actve servce n the r Corps
Reserve, and payments made thereunder represent addtona compen-
saton. The aw n queston contans no provson for e emptng
such payments from edera ncome ta aton, whereas musterng-out
payments were specfcay e empted from such ta aton by the pro-
vsons of the Musterng-Out Payment ct of 1944 (5 Stat., ), nfra,
and by secton 22(b) (14) of the Interna Revenue Code. or the
purposes of the e cuson from gross ncome under secton 22(b) (14)
of the Code, musterng-out payments are payments made to any recp-
ents pursuant to the provsons of the Musterng-Out Payment ct of
1944. (See secton 29.22(b) (14)-1 of Reguatons 111.) The Mus-
terng-Out Payment ct of 1944 provdes n part as foows:
(b) No musterng-out payment sha be made to
.
(4) any r Corps Reserve offcer who s entted to receve a ump-sum
payment under secton 2, as amended (55 Stat. 240), of the ct of une 10,
1036
In vew of the foregong, t s hed that ump-sum payments receved
by r Corps Reserve offcers under the ct of une 16,1936, as amend-
ed, supra, are not musterng-out payments whch are e cudbe from
oss ncome under secton 22(b) (14) of the Interna Revenue Code,
owever, such ump-sum payments receved by r Corps Reserve
offcers as members of the mtary forces for actve servce n such
forces are e cudbe from gross ncome to the e tent provded n sec-
ton 22(b) (13) of the Code, as amended.
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29.22(d)-2.
52
S CTION 22(d). G OSS INCOM : IN NTORI S-
L CTI M T OD .
Secton 29.22(d)-2: Requrements ncdent to 1946-7-12277
adopton and use of eectve method. T. D. 5504
TITL 2(5 INT RN L R NU . C PT R I, SU C PT R , P RT 29.
INCOM T T L Y RS GINNING T R D C M R 31, 1941.
Reguatons 111 amended wth respect to eectve nventory com-
putatons.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Paragraph 1. Secton 29.22(d)-2 of Reguatons 111 Part 29, Tte
26, Code of edera Reguatons, Cum. Sup. s amended as foows:
( ) y revsng that porton thereof precedng the numbered para-
graphs to read:
Sec. 29.22(d)-2. Requrements Incdent to dopton and Use op ectve
Method. cept as otherwse provded n secton 29.22(d)- wth respect to
raw matera computatons, the adopton and use of the eectve nventory method
s, by secton 22 (d) and the reguatons thereunder, made sub|ect to the foowng
requrements:
( ) y strkng that porton of paragraph (4) precedng the et-
tered subparagraphs, and by nsertng n eu thereof the foowng:
(4) Goods of the specfed type on hand as of the cose of the ta abe year In
e cess of what were on hand as of the begnnng of the ta abe year sha be In-
cuded n the cosng nventory, regardess of dentfcaton wth specfc nvoces
nnd regardess of specfc cost accountng records, nt costs determned pursuant
to the provsons of rue ( ) or rue ( ) hereof, dependent upon the character
of the transactons n whch the ta payer s engaged
Rue ( ). In the case of a ta payer engaged n the purchase and sae of
merchandse, such as a reta grocer or druggst, or engaged In the nta
producton of merchandse and Its sae wthout processng, such as a mner
seng hs ore output wthout smetng or Yefnng, such costs sha be deter-
mned
(C) y nsertng n paragraph (4) mmedatey precedng e ampe
(1) the foowng:
The appcaton of rue ( ) may be ustrated by the foowng e ampes:
(D) y revsng e ampe (2) n paragraph (4) to read as foows:
ampe (2). Suppose that the ta payer s cosng nventory for 1943, the year
foowng that nvoved n e ampe (1), refects an nventory decrease for the
year, ard not an ncrease suppose that there s, accordngy, a 1943 cosng nven-
tory of 13 unts. Inasmuch as the decreased cosng nventory w be determned
whoy by reference to the 15 unts refected n the openng nventory for the
year, and w be taken n the order of acquston pursuant to secton
22(d) (1) ( ), and nasmuch as the character of the ta payer s openng nventory
for the year w be dependent upon ts method of vaung ts 5-unt nventory n-
crease for the precedng year, the cosng nventory for 1943 w (e computed as
foows:
(a) In case the Increase for the precedng ta abe year was taken by reference
to the most recent purchases
10 at 10 (from 1941) 100
1 at 1,3 ( uy 1942) 13
2 at 14 (October 1942) 2
Totas: 13 141
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53
5 19.23(a)- .
(6) In ease the Increase for the precedng ta abe year was taken In the order
of acquston
10 at 10 (from 1941) 100
1 at 11 ( anuary 1942) 11
2 at 12 ( pr 1942) 24
Totas: 13
or
(c) In case the ncrease for the precedng ta abe year was taken on the bass
of an average
10at 10 (from 1941) 100
3 at 13 (from 1942) 39
Totas: 13 139
( ) y nsertng n paragraph (4) mmedatey after e ampe (2)
the foowng:
Rue (U). In the case of a ta payer engaged n manufacturng, fabrcatng,
processng, or otherwse producng merchandse, such costs sha be determned
(a) In the case of raw materas purchased or ntay produced by the
ta payer, n the manner eected by the ta payer under rue ( ) to the same
e tent as f the ta payer were engaged n purchase and sae transactons
and
(6) In the case of goods n process, regardess of the stage to whch the
manufacture, fabrcatng, or processng may have advanced, and n the
case of fnshed goods, pursuant to any proper method whch, n the opnon
of the Commssoner, ceary refects ncome.
R GUL TIONS 103.
Par. 2. The above amendments to Reguatons 111, whch regua-
tons cover ta abe years begnnng after December 31,19.41, are hereby
made appcabe to any ta abe year begnnng after December 31,
193 , and pror to anuary 1,1942, such years beng covered by Regu-
atons 103.
(Ths Treasury Decson s ssued under the authorty contaned n
sectons 62 and 22(d) of the Interna Revenue Code (53 Stat, 32, 77:
26 U. S. C, 1940 ed., 62, 22(d)).)
oseph D. Nunan, r.,
Commssoner of Interna Revenue.
pproved March 20,194G.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster March 21, 1946, 4.2 p. m.)
S CTION 23(a). D DUCTIONS ROM GROSS
INCOM : P NS S.
Secton 19.23(a)-: usness e penses. 1946-5-12249
Ct. D. 1665
ncome ta nterna revenue code decson of court.
1. Gross Income Deductons Ordnary and Necessabt usness
penses Compromse of Sun Penates.
mounts pad by ta payer corporatons n 1930 n compromse
of a sut brought aganst them by the State of Te as for aeged
135
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19.23(a)- .
54
voatons of the anttrust aws of the State were payments made
as penates for voatons of such aws, and are not deductbe as or-
dnary and necessary busness e penses under secton 23(a) (1) ( )
of the Interna Revenue Code, as amended.
2. Decson Reversed.
Decson of The Ta Court of the Unted States ( T. C, 310)
reversed.
3. Cebtokak Dened.
Petton for certorar dened on October , 1945 ( 66 S. Ct, 33).
Unted States Crcut Court or ppeas foe the fth Crcut.
Commssoner of Interna Revenue, pettoner, v. Longhorn Portand Cement
, Co., respondent.
Commssoner of Interna Revenue, pettoner, v. an ntono Portand Cement
Co., respondent.
14 ed. (2d), 276.
Pettons for revew of decsons of The Ta Court of the Unted States.
efore utcheson, omes, and MoCord, Crcut udges.
March 27, 1945.
OPINION.
Domes, Crcut udge: Respondents are Te as corporatons engaged In the
manufacture and sae of cement. The State of Te as, aegng that these cor-
poratons had voated the anttrust aws of the State, fed a sut aganst them
to recover statutory penates and other affrmatve reef. ach corporaton
pad the sum of 50,000 to the State n 1939 In compromse of the sut, and an
agreed |udgment was entered whch rected that sad payments were In fu sats-
facton of a cams of the State for penates for the aeged voatons of aw,
but that the defendants dd not thereby admt, or estop themseves to deny, the
truth of the aegatons of the petton aganst them. The queston for decson
s whether the sums so pad were deductbe by the corporatons n ther Income
ta returns for 1939 as ordnary and necessary busness e penses.
The Ta Court, fndng that the corporatons dd not admt ther gut and
were not proven guty, and that the compromse settement was made by them
because they beeved a defense of the sut woud be more e pensve than the
settement even f the verdct was favorabe, hed that the compromse pay-
ments were not pena n nature and were deductbe as ordnary and necessary
busness e penses.1 The Commssoner Inssts that the payments were made as
penates for voatons of a State aw, and Invokes the doctrne that ta deduc-
tons may not be aowed when ther effect s to frustrate the pubc pocy of
a State. We deem t unnecessary to dscuss the factua consderatons that
persuaded The Ta Court to ts decson favorng the ta payers for, concedng
the truth of every fact found, the ssue Is controed by prncpes other than
those apped by t.
The sense of the rue that statutory penates are not deductbe from gross
ncome Is that the penaty s a punshment nfcted by the State upon those who
commt acts voatve of the f ed pubc pocy of the soveregn, wherefore to
permt the voator to gan a ta advantage through deductng the amount of the
penaty as a busness e pense, and thus to mtgate the degree of hs punshment,
woud frustrate the purpose and effectveness of that pubc pocy.
The test unversay empoyed to determne the appcabty of the doctrne
to any such camed deducton Is whether the sums camed were pad as pena-
tes. Thus a e penses Incurred n the successfu defense of a sut to mpose a
O . ., O U. .
Great Northern Ity. Co. v. Commssoner (40 ed. (2d), 372) urroughs dg. tateruu
Co. . Commssoner (47 ed. (2d), 17 Ct. D. 207, C. . -. 97 (1931) ) ntt
States v. affray (97 ed. (2d). 4 ) : Standard O Co. . Commssoner (129 ed. (2d).
363) everng v. Superor Wnes Lquors (134 ed. (2d), 7 ). Cf. Commssoner
v. ennger (320 D. ., 467 Ct. D. 1596, C. . 1944, 4 4 ).
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55
29.23(a)- .
fne or penaty aganst a busness are deductbe. ven e penses Incurred In
unsuccessfuy resstng the Issuance of a fraud order, whch woud destroy one s
busness, are not requred to be dened as a matter of aw If deducton for such
e penses Is to be dened, t must be because aowance woud frustrate sharpy
defned pubc poces.4
Though the souton of such ssues usuay turns upon the ta payer s gut or
Innocence of a crme, the utmate determnatve nqury upon ths appea Is
whether the deducton camed was pad as a penaty. Ths s ustrated by cases
where, due to a compromse settement, the queston of gut or Innocence was not
estabshed, yet the deducton camed was dsaowed to the e tent that It rep-
resented a payment made to e tngush a cause of acton to Impose a penaty.
The sut of the State of Te as aganst these defendants for voatons of the
anttrust aws was a sut to mpose a persona penaty upon the defendants.
The sums now camed as busness e penses were pad n fu satsfacton of
a cams of the State of Te as for penates for the aeged voatons of aw.
In accordance wth the prncpes dscussed and the authortes cted, we hod
that the deductons camed shoud not have been aowed.
The decsons of The Ta Court are reversed, and the causes remanded for
further proceedngs not nconsstent wth ths opnon.
ttorneys fees pad by a ta payer In connecton wth the defense
of a sut brought by the Prce dmnstrator under secton 205(e)
of the mergency Prce Contro ct of 1942 ( 56 Stat., 23) for a
voaton of reguatons estabshng ceng prces are deductbe as
ordnary and necessary busness e penses for edera ncome ta
purposes.
n opnon s requested whether attorneys fees pad by a ta payer
n connecton wth the defense of a sut brought by the Prce dmn-
strator under secton 205(e) of the mergency Prce Contro ct of
1942 (56 Stat., 23) for a voaton of reguatons estabshng ceng
prces are deductbe as ordnary and necessary busness e penses for
edera ncome ta purposes.
In G. C. M. 24377 (C. . 1944, 93) t was hed that ega e penses -
ncurred n defense of a sut for voaton of the Sherman nt-Trust
ct, n whch sut the defendant was found guty of the voaton,
are deductbe for edera ncome ta purposes as ordnary and nec-
essary busness e penses. That opnon was based on Commssoner v.
S. . ennger (320 U. S., 467, Ct. D. 1596, C. . 1944, 4S4) and the
parta acquescence (C. . 1944, 1 ) n Langhorn Portand Cement
Co. et a. v. Commssoner (3 T. C, 310). Subsequent to those dec-
sons, The Ta Court rendered a decson n Greene Motor Co. v.
Commssoner (5 T. C, 314, acquescence, C. . 1945, 3), hodng
that certan ega fees ncurred n connecton wth a compromse of
ncome ta defcences, penates, and crmna abty are deductbe
as ordnary and necessary busness e penses. The offer n compromse
was made to secure reease of the ta payer from abty for makng
fase and frauduent ncome ta returns, evason of payment of ta ,
together wth penaty and nterest, and for any crmna abty
ncdent thereto.
ornhauaer v. Unted States (276 T . ., 145 T. D. 4222, C. . II-2, 267 (102 ) ):
mms oner v. Peope -Pttaburg Trust Co. (CO ed. (2d), 1 7).
Commsnfoncr v. ennger (320 U. S., 467).
Secton -29.23 (a)-: usness e penses.
1946-5-12250
G. C. M. 24 10
INT RN L R NU COD .
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29.23(a)- .
56
In vew of the foregong, t s the opnon of ths offce that attorneys
fees pad by a ta payer n connecton wth the defense of a sut brought
by the Prce dmnstrator under secton 205(e) of the mergency
Prce Contro ct of 1942, supra, for voaton of reguatons estab-
shng ceng prces are deductbe as ordnary and necessary busness
e penses for edera ncome ta purposes.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
Secton 29.23(a)-: usness e penses. 1946-1O-12307
I. T. 3799
INT RN L R NU COD .
mounts pad to the Unted States on account of actons nsttuted
or proposed to be nsttuted by the Prce dmnstrator under secton
205(e) of the mergency Prce Contro ct of 1042 (56 Stat., 23, 34),
as amended by secton 10 (b) of the Stabzaton tenson ct of
1044 ( 5 Stat., 632. 640), upon faure of buyers of commodtes sod
In voaton of a reguaton, order, or prce schedue of the Offce of
Prce dmnstraton to nsttute actons pursuant to such aw, are
not deductbe from gross ncome for edera ncome ta purposes.
dvce s requested whether payments made on account of actons
nsttuted or proposed to be nsttuted by the Prce dmnstrator
under secton 205(e) of the mergency Prce Contro ct of 1942
(56 Stat., 23, 34), as amended by secton 10 (b) of the Stabzaton
tenson ct of 1944 (5 Stat., 632, 640) , upon faure of buyers of
commodtes sod n voaton of a reguaton, order, or prce schedue
of the Offce of Prce dmnstraton prescrbng a ma mum prce or
ma mum prces to nsttute actons pursuant to such aw, are deduct-
be from gross ncome for edera ncome ta purposes.
Secton 205(e) of the mergency Prce Contro ct of 1942, as
amended, supra, provdes n part as foows:
(e) If any person seng a commodty voates a reguaton, order, or prce
schedue prescrbng a ma mum prce or ma mum prces, the person who buys
such commodty for use or consumpton other than In the course of trade or bus-
ness may, wthn one year from the date of the occurrence of the voa-
ton, brng an acton aganst the seer on account of the overcharge.
If any person seng a commodty voates a reguaton, order, or
prce schedue prescrbng a ma mum prce or ma mum prces, and the buyer
ether fas to nsttute an acton under ths subsecton wthn 30 days from the
date of the occurrence of the voaton or s not entted for any reason to brug
the acton, the dmnstrator may nsttute such acton on behaf of the Unted
States wthn such one-year perod.
The acton whch the Prce dmnstrator s authorzed to nsttute
whenever a buyer havng a cause of acton (under secton 205(e) of
the mergency Prce Contro ct of 1942, as amended, supra) fas to
nsttute such acton s smar to the acton whch may be brought by
the dmnstrator where the buyer has no cause of acton. It has
been hed n cases n whch the buyer s not entted to brng a sut
that amounts pad n satsfacton of a |udgment as the resut of a
sut brought by the Prce dmnstrator (other than as the utmate
consumer or essee), under secton 205(e) of the mergency Prce
Contro ct of 1942, or amounts pad by way of compromse or sette-
ment of such a sut or contempated sut, are not deductbe for ed-
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57
19.23(a)-2.
era ncome ta purposes. (See I. T. 3627, C. . 1943, 111, and I. T.
3630, C. . 1943,113.)
In vew of the foregong, t s hed that amounts pad to the Unted
States on account of actons nsttuted or proposed to be nsttuted by
the Prce dmnstrator under secton 205(e) of the mergency Prce
Contro ct of 1942, as amended, supra, upon faure of buyers of
commodtes sod n voaton of a reguaton order, or prce schedue
of the Offce of Prce dmnstraton to nsttute actons pursuant to
such aw, are not deductbe from gross ncome for edera ncome ta
purposes. It s mmatera that the voatons were not wfu or the
resut of faure to take practcabe precautons to prevent ther
occurrence.
Secton 29.23(a)-: usness e penses.
INT RN L R NU COD .
Payment n compromse of sut for escheat of rea property n
Caforna. (See G. C, M. 24742, page 79.)
Secton 19.23(a)-2: Traveng e penses. 1946-3-12225
( so Secton 24, Secton 19.24-1.) Ct. D. 1659
ncome ta nterna revenue code decson of supreme court.
1. Gross Income Deductons Traveng penses.
The ta payer, who has resded wth hs famy n ackson, Mss.,
snce 1903, became n 1906 an empoyee of a raroad whch had ts
man offce n Mobe, a. n arrangement wth the raroad per-
mtted hm to determne for hmsef the amount of tme spent n
each of the two ctes. Ta payer s prncpa post of busness was at
the man offce, but durng the ta abe years 1939 and 1940 he spent
most of hs tme n ackson. e made 33 trps n 1939 and 40 trps
n 1940 between the two ctes, and deducted n hs edera ncome
ta returns traveng e penses from ackson to Mobe and vng
e penses whe n Mobe. ed: The ta payer s not entted to a
deducton for traveng and vng e penses whe away from home
n the pursut of a trade or busness under the provsons of secton
23(a) (1) ( ) of the Interna Revenue Code. s e penses were n-
curred soey as the resut of hs desre to mantan a home n ackson.
Traveng e penses n pursut of busness, wthn the meanng of the
secton, coud arse ony when the raroad s busness forced the ta -
payer to trave and to ve temporary at some pace other than
Mobe, thereby advancng the nterests of the raroad. The e gen-
ces of busness rather than the persona convenences and neces-
stes of the traveer must be the motvatng factors.
Note. The Court found t unnecessary to decde the meanng of
the word home as used n secton 23(a)(1)( ) of the Code.
2. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, fth Cr-
cut (14 ed. (2d), 1G3), reversng memorandum opnon of The
Ta Court, reversed.
Supreme Court of the Unted States.
Commssoner of Interna Revenue, pettoner, v. . N. owers.
On wrt of certorar to the Unted States Crcut Court of ppeas for the fth Crcut.
anuary 2, 1946.
opnon.
Mr. ustce Mekphy devered the opnon of the Court.
703672 46 5
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19.23(a)-2.
5S
Ths case presents a probem as to the meanng and appcaton of the pro-
vson of secton 23(a) (1) ( ) of the Interna Revenue Code1 aowng a deduc-
ton for ncome ta purposes of traveng e penses (Incudng the entre amount
e pended for meas and odgng) whe away from home n the pursut of a trade
or busness.
The ta payer, a awyer, has resded wth hs famy n ackson, Mss., snce
1903. There he has pad ta es, voted, schooed hs chdren and estabshed
soca and regous connectons. e but a house n ackson neary 30 years ago
and at a tmes has mantaned t for hmsef and hs famy. e has been
connected wth severa aw frms n ackson, one of whch he formed and whch
has borne hs name snce 1022.
In 1906 the ta payer began to represent the predecessor of the Guf, Mobe
Oho Raroad, hs present empoyer. e acted as tra counse for the raroad
throughout Msssspp. rom 191 unt 1927 he acted as speca counse for
the raroad n Msssspp. e was eected genera soctor n 1927 and con-
tnued to be eected to that poston each year unt 1930, when he was eected
genera counse. Thereafter he was annuay eected genera counse unt
September, 1910, when the propertes of the predecessor company and another
raroad were merged and he was eected vce presdent and genera counse of
the newy formed Guf, Mobe Oho Raroad.
The man offce of the Guf, Mobe Oho Raroad s n Mobe, a., as was
aso the man offce of ts predecessor. When offered the poston of genera
soctor n 1927, the ta payer was unwng to accept t f t requred hm to
move from ackson to Mobe. e had estabshed hmsef In ackson both
professonay and personay and was not desrous of movng away. s a
resut, an arrangement was made between hm and the raroad whereby he coud
accept the poston and contnue to resde n ackson on condton that he pay
hs traveng e penses between Mobe and ackson and pay hs vng e penses
n both paces. Ths arrangement permtted the ta payer to determne for
hmsef the amount of tme he woud spend n each of the two ctes and was
n effect durng 1939 and 1940, the ta abe years In queston.
The raroad company provded an offce for the ta payer n Mobe but not
n ackson. When he worked n ackson hs aw frm provded hm wth offce
space, athough he no onger partcpated n the frm s busness or shared n ts
profts. e used hs own offce furnture and f tures at ths offce. The raroad,
however, furnshed teephone servce and a typewrter and desk for hs secretary.
It aso pad the secretary s e penses whe n ackson. Most of the ega bus-
ness of the raroad was centered n or conducted from ackson, but ths busness
was handed by oca counse for the raroad. The ta payer s partcpaton was
advsory ony and was no dfferent from hs partcpaton n the raroad s ega
busness n other areas.
The ta payer s prncpa post of busness was at the man offce n Mobe.
owever, durng the ta abe years of 1939 and 1940, he devoted neary a of
hs tme to matters reatng to the merger of the raroads. Snce t was eft to
hm where he woud do hs work, he spent most of hs tme n ackson durng
ths perod. In connecton wth the merger, one of the companes was nvoved
In certan tgaton In the edera court In ackson and the ta payer partc-
pated n that tgaton.
Durng 1939 he spent 203 days n ackson and 66 n Mobe, makng 33 trps
between the two ctes. Durng 1940 he spent 16 days n ackson and 102 In
Mobe, makng 40 trps between the two ctes. The raroad pad a of hs
traveng e penses when he went on busness trps to ponts other than ackson
or Mobe. ut t pad none of hs e penses In traveng between these two
ponts or whe he wns at ether of them.
The ta payer deducted 900 n hs 1930 Income ta return and 1,620 In hs
1940 return as traveng e penses Incurred n makng trps from ackson to
20 U. S. C, secton 23(a) (1) ( ), as amended (56 Stat, 19).
S C. 23. D DUCTIONS ROM GROSS INCOM .
In computng net Income there tsha be aowed as deductons:
(a) penses.
(1) Trade or busness e penses.
( ) In Genera. the ordnary and necessary e penses pad or ncurred
durng the ta abe year In carryng on any trade or busness. Incudng a reason-
abe aowance for saares or other compensaton for persona servces actuay
rendered 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: and
rentas or other payments requred to be made as a condton to the contnued
use or possesson, for purposes of the trade or busness, of property to whch
the ta payer has not taken or s not takng tte or n whch he has no equty.
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59
19.23 (a)-2.
Mobe and as e pendtures for meas and hote accommodatons whe n
Mobe. The Commssoner dsaowed the deductons, whch acton was sus-
taned by The Ta Court. ut the fth Crcut Court of ppeas reversed The
Ta Court s |udgment (14S ed. (2d), 103), and we granted certorar because
of a confct between the decson beow and that reac ed by the ourth Crcut
Court of ppeas n arnh v. Commssoner (14 ed. (2d), 913 LCt. D. 1040,
C. . 1945,96 ).
The porton of secton 23(a)(1)( ) authorzng the deducton of 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 s one of the specfc
e ampes gven by Congress n that secton of ordnary and necessary e penses
pad or ncurred durng the ta abe year n carryng on any trade or busness.
It s to be contrasted wth the provson of secton 24(a)(1) of the Interna
Revenue Code dsaowng any deductons for persona, vng, or famy e -
penses. nd t s to be read n ght of the nterpretaton gven t by secton
19.23(a)-2 of Treasury Reguatons 103, promugated under the Interna Revenue
Code. Ths nterpretaton, whch s precsey the same as that gven to dentca
traveng e pense deductons authorzed by pror and successve Revenue cts,
s deemed to possess mped egsatve approva and to have the effect of aw.
( cvcrng v. Wnm, 305 U. S., 79 Ct. D. 1305, C. . 193 -2, 212 oehm v.
Commssoner, 323 U. S., Ct. D. 1052, C. . 1945, 353 .) In pertnent
part, ths nterpretaton states that Traveng e penses, as ordnary under-
stood, ncude raroad fares and meas and odgng. If the trp s undertaken
for other than busness purposes, the raroad fares are persona e penses and
the meas and odgng are vng e penses. If the trp s soey on busness, the
reasonabe and necessary traveng e penses, ncudng raroad fares, meas, and
odgng, are busness e penses. Ony such e penses as are reasonabe
and necessary n the conduct of the busness and drecty attrbutabe to t may
be deducted. Commuters fares are not consdered as busness e penses
and are not deductbe.
Three condtons must thus be satsfed before a traveng e pense deducton
may be made under secton 23(a) (1) ( ):
(1) The e pense must be a reasonabe and necessary traveng e pense, as
that term s generay understood. Ths ncudes such tems as transportaton
fares and food and odgng e penses ncurred whe traveng.
(2) The e pense must be ncurred whe away from home.
(3) The e pense must be ncurred n pursut of busness. Ths means that
there must be a drect connecton between the e pendture and the carryng on
of the trade or busness of the ta payer or of hs empoyer. Moreover, such an
e pendture must be necessary or approprate to the deveopment and pursut
of the busness or trade.
Whether partcuar e pendtures fuf these three condtons so as to entte
a ta payer to a deducton s purey a queston of fact n most nstances. (See
Commssoner v. ennger, 320 U. S., 467, 475 Ct. D. 1596, C. . 1944, 4S4I.)
nd The Ta Court s nferences and concusons on such a factua matter, under
estabshed prncpes, shoud not be dsturbed by an appeate court. Com-
mssoner v. Scottsh mercan Co., 323 U. S., 119 Ct. D. 1019, C. . 1944, 340
Dobson v. Commssoner, 320 U. S., 4 9 Ct. D. 1597, C. . .:44, 56 .)
In ths nstance, The Ta Court wthout detaed eaboraton concuded that
The stuaton presented n ths proceedng s, n prncpe, no dfferent from
that n whch a ta payer s pace of empoyment s n one cty and for reasons
satsfactory to hmsef he resdes n another. It accordngy dsaowed the
deductons on the ground that they represent vng and persona e penses rather
than traveng e penses ncurred whe away from home n the pursut of busness.
The court b ow accepted The Ta Court s fndngs of fact hut reversed ts |udg-
ment on the bass that t had mpropery construed the word home as used
n the second condton precedent to a traveng e pense deducton under secton
23(a)(1)( ). The Ta Court, t was sad, erroneousy construed the word to
mean the post, staton or pace of busness where the ta payer was empoyed n
ths nstance, Mobe and thus erred n concudng that the e pendtures n ssue
No cam for deducton was made by the ta payer for the amounts sncnt In traveng
y0r Mobe to ackson. e aso took trps durng the ta abe years to Washngton, New
opk. New Oreans, aton Rouge, Memphs, and ackson (Tenn.), whch were apparenty
rf atur busness trps for whch the ta payer presumaby was remburs|d by the
raroad. No cam was made In regard to them.
,. rtce 23(a)-2 of Reguatons 101. 4, 0: artce 122 of Reguatons 77 and 74 ar-
tce 102 of Reguatons 69 and 65 artce 101 (a) of Reguaton 62.
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19.23(a)-2.
60
were not Incurred whe away from home. The court beow fet that the word
was to be gven no such unusua or e traordnary meanng In ths statute,
that t smpy meant that pace where one In fact resdes or the prncpa
pace of abode of one who has the ntenton to ve there permanenty. (14 ed.
(2d), at 164.) Snce the ta payer here admttedy had hs home, as thus denned,
n ackson and snce the e penses were ncurred whe he was away from
ackson, the deducton was permssbe.
The meanng of the word home n secton 23(a)(1)( ) wth reference
to a ta payer resdng n one cty and workng In another has engendered much
dffcuty and tgaton. (4 Mertens, Law of edera Income Ta aton (1942),
secton 25. 2.) The Ta Court and the admnstratve rungs have consst-
enty defned It as the equvaent of the ta payer s pace of busness. (See
amh v. Commssoner, supra (C. C. . 4).) On the other hand, the decson
beow and Waace v. Commssoner (144 ed. (2d), 407 (C. C. . 9)), have
faty re|ected that vew and have confned the term to the ta payer s actua
resdence. (See aso Coburn v. Commssoner, 13 ed. (2d), 763 (C. C. 2).)
We deem t unnecessary here to enter nto or to decde ths confct. The Ta
Court s opnon, as we read It, was grounded nether soey nor prmary upon
that agency s concepton of the word home. Its dscusson was drected many
toward the reaton of the e pendtures to the raroad s busness, a reatonshp
requred by the thrd condton of the deducton. Thus even f The Ta Court s
defnton of the word home was mpct n Its decson and even f that
defnton was erroneous, ts |udgment must be sustaned here f t propery con-
cuded that the necessary reatonshp between the e pendtures and the raroad s
busness was ackng. aure to satsfy any one of the three condtons destroys
the traveng e pense deducton.
Turnng our attenton to the thrd condton, ths case s dsposed of qucky.
There s no cam that The Ta Court msconstrued ths condton or used m-
proper standards n appyng t. nd t s ready apparent from the facts that
ts nferences were supported by evdence and that ts concuson that the e -
pendtures n Issue were nondeductbe vng and persona e penses was fuy
|ustfed.
The facts demonstrate ceary that the e penses were not ncurred n the pur-
sut of the busness of the ta payer s empoyer, the raroad. ackson was hs
reguar home. ad hs post of duty been n that cty the cost of mantanng hs
home there and of commutng or drvng to work concededy woud be nonde-
ductbe vng and persona e penses ackng the necessary drect reaton to the
prosecuton of the busness. The character of such e penses s unatered by the
crcumstance that the ta payer s post of duty was n Mobe, thereby ncreasng
the costs of transportaton, food and odgng. Whether he mantaned one abode
or two, whether he traveed 3 bocks or 300 mes to work, the nature of these
e pendtures remaned the same.
The added costs n ssue, moreover, were as unnecessary and- Inapproprate to
the deveopment of the raroad s busness as were hs persona and vng costs n
ackson. They were ncurred soey as the resut of the ta payer s desre to
mantan a home n ackson whe workng n Mobe, a factor rreevant to the
mantenance and prosecuton of the raroad s ega busness. The raroad dd
not requre hm to trave on busness from ackson to Mobe or to mantan vng
quarters n both ctes. Nor dd t compe hm, save n one nstance, to perform
tasks for It n ackson. It smpy asked hm to be at hs prncpa post n Mobe
as busness demanded and as hs persona convenence was served, aowng hm
to dvde hs busness tme between Mobe and ackson as he saw ft cept for
the edera court tgaton, a of the ta payer s work n ackson woud normay
have been performed n the headquarters at Mobe. The fact that he traveed
frequenty between the two ctes and Incurred e tra vng e penses In Mobe,
4 er v. Commssoner (5 . T. ., 11 1) : Oresemer v. Commssoner (10 . T. .,
3 6) rown v. Commssoner (13 . T. ., 32) Duncan v. Commssoner (17 . T. .,
10 ) Peters v. Commssoner (19 . T. ., 901) Lndsay v. Commssoner (34 . T. ,
40) Potcc v. Commssoner (34 . T. .. 655) Tract/ v. Commssoner (39 . T. ., 5( ),
Prddy v. ommasoner (43 . T. .. 1 ) Schnrer . Commssoner (3 T. C, 544)
Oust at son v. Commssoner (3 T. C, 99 ). ,
Secton 19.23(n)-2 of Treasury Reguatons 103 does not attempt to defne the
home athough the Commssoner argues that the statement theren contaned to toe
effect that commuters fares are not busness e penses and are not deductbe necessary
rests on the premse that home for ta purposes s at the ocaty of the ta payer
busness headquarters. Other admnstratve rungs have been more e pct In f
the statutory home as the abode at the ta payer s reguar post of duty. (See. e. g-. o
1021, C. . 5. 174 (1921 1 : I. T. 1264, C. . 1-1, 122 f922) I. T. 3314, C. . 1939-2,15-.
. C. M. 23672, C. . 1943, 66.)
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61
23.23(a)-15.
whe dong much of hs work In ackson, was occasoned soey by hs persona
propenstes. The raroad ganed nothng from ths arrangement e cept the
persona satsfacton of the ta payer.
Trave e penses n pursut of busness wthn the meanng of secton
23(a)(1)( ) coud arse ony when the raroad s busness forced the ta payer
to trave and to ve temporary at some pace other than Mobe, thereby advanc-
ng the nterests of the raroad. usness trps are to be dentfed n reaton
to busness demands and the traveer s busness headquarters. The e gences
of busness rather than the persona convenences and necesstes of the traveer
must be the motvatng factors. Such was not the case here.
It foows that the court beow erred n reversng the udgment of The Ta
Court
Mr. ustce ackson took no part n the consderaton or decson of ths case.
Dssentng opnon by Mr. ustce Rutedge.
Secton 29.23(a)-C: Compensaton for persona servces.
INT RN L R NU COD .
Opton granted to empoyee to purchase stock of the empoyer
corporaton or an affate of the empoyer corporaton. (See I. T.
3795, page 15.)
Secton 29.23(a)-15: Nontrade or nonbusness
e penses.
( so Secton 19.23 (a)-15, Reguatons 103
Secton 24, Secton 29.24-2, Reguatons 111,
Secton 19.24-2, Reguatons 103.)
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RT 19 ND
P RT 29.
Reguatons 111 and pror reguatons amended wth respect to
deducton of certan nontrade or nonbusness e penses.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Coectors of Interna Revenue and Others Concerned:
R GUL TIONS 111 ND 103.
Paragraph 1. Secton 29.23(a)-15(6) of Reguatons 111 Part 29,
Tte 26, Code of edera Reguatons, Cum. Sup. , as amended by
Treasury Decson 5331, approved ebruary 9, 1944 C. . 1944, 9
and secton 19.23(a)-15(), as added to Reguatons 103 Part 19,
Tte 26, Code of edera Reguatons, 1940 Sup. by Treasury Dec-
son 519G, approved December , 1942 C. . 1942-2, 96 , and amended
by Treasury Decson 5331, approved ebruary 9, 1944, are each fur-
ther amencfed as foows:
( ) y strkng the s th, seventh, eghth, and tenth paragraphs
thereof and nsertng after the ffth paragraph the foowng:
Reasonabe amounts pad or Incurred by the fducary of an estate or trust
on account of admnstraton e penses, ncudng fducares fees and e penses
of tgaton, whch are ordnary and necessary n connecton wth the perform-
ance of the dutes of admnstraton are deductbe under ths secton, notwth-
standng that the estate or trust s not engaged n a trade or busness, e cept
to the e tent that such e penses are aocabe to the producton or coecton
1946-11-12317
T. D.5513
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29.23(a)-15.
62
of ta -e empt ncome. ut see secton 29.162-1 for dsaowance of such deduc-
tons to an estate where such tems are camed as a deducton under secton
12(b) n computng the net estate sub|ect to the estate ta .
( ) y strkng from the eeventh paragraph thereof the ast sen-
tence begnnng wth the words pendtures ncurred for the pur-
pose of preparng ta returns and nsertng n eu thereof the
foowng:
penses pad or ncurred by an Indvdua n the determnaton of abty for
ta es upon hs ncome are deductbe. If property s hed by an ndvdua for
the producton of ncome, amounts e pended In determnng a property ta m-
posed wth respect to such property durng the perod when so hed are deductbe.
penses pad or ncurred by an Indvdua n determnng or contestng any
abty asserted aganst hm do not become deductbe, however, by reason of
the fact that property hed by hm for the producton of ncome may be requred
to be used or sod for the purpose of satsfyng such abty. Thus, e penses
pad or ncurred by an ndvdua In the determnaton of gft ta abty, e cept
to the e tent that such e penses are aocabe to Interest on a refund of gft
ta es, are not deductbe, even though property hed by hm for the producton
of ncome must be sod to satsfy an assessment for such ta abty or even
though, n. the event of a cam for refund, the amount receved w be hed by
hm for the producton of Income.
Par. 2. Secton 29.24-2 of Reguatons 111 Part 29, Tte 26, Code
of edera Reguatons, Cum. Sup. and secton 19.24-2 of Reguatons
103 Part 19, Tte 26,. Code of edera Reguatons, 1940 Sup. , as
amended by Treasury Decson 5166, approved ugust 17,1942 C. .
1942-2, 7 , are each amended by strkng the eghth sentence whch
reads as foows:
penses of the admnstraton of an estate, such as court costs, attorneys fees,
and e ecutors commssons, are chargeabe aganst the corpus of the estate and
are not aowabe deductons.
PRIOR INCOM T R GUL TIONS.
Par. 3. Subsecton (e) of secton 121 of the Revenue ct of 1942
(56 Stat., 19) provdes as foows:
(e) Retroactve mendment to Pror Revenue cts. or the pur-
poses of the Revenue ct of 193 or any pror revenue ct the amend-
ments mnde to the Interna Revenue Code by ths secton sha be
effectve as f they were a part of such revenue ct on the date of ts
enactment.
Pursuant to the above provsons of aw, the amendment to Regu-
atons 103 (coverng ta abe years begnnng after December 31,
193 ) set forth n ths Treasury Decson s hereby made appcabe to
ta abe years begnnng pror to anuary 1, 1939 (such years beng
covered by Reguatons 101, 94, 6, 77, 74, 69, 65, 62, 45, and 33).
(Ths Treasury Decson s ssued under the authorty contaned n
secton 62 of the Interna Revenue Code (53 Stat., 32 26 U. S. C, 1940
ed., 62), correspondng provsons of pror revenue aws, and secton
121 of the Revenue ct of 1942 (56 Stat, 19 26 U. S. C, Sup.,
23(a)(2)).)
oseph D. Nun an, r.,
Commssoner of Interna Revenue
pproved May 14, 1946.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster May 15, 1946,10.5 a. m.)
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63 29.23(c)-.
S CTION 23(b). D DUCTIONS ROM GROSS
INCOM : INT R ST.
Secton 19.23 (b)-: Interest.
INT RN L R NU COD .
Payments made by corporaton to hoders of corporate obgatons.
(See Ct. D. 1660, page 191.)
Secton 29.23(b)-: Interest.
INT RN L R NU COD .
Interest on mortgage pad by husband on property n Mnnesota
hed by hm and hs wfe as |ont tenants. (Sec I. T. 37 5, page 9 .)
S CTION 23(c). D DUCTIONS ROM GROSS
INCOM : T S G N R LLY.
Secton 29.23(c)-: Ta es. 1946-2-12212
I. T. 3777
INT RN L R NU COD ND R NU CTS OP 192 , 1932, ND 1934.
Rea property ta es n the State of Mssour do not accrue unt
the date upon whch they are eved, . e., the date upon whch the
en for such ta es attaches. No date can ho f ed as the date cf evy
of rea property ta es throughout the State, but they are not actuay
eved unt the year for whch they are mposed.
I. T. 2 5 (C. . I -1, C4 (1935)) modfed.
Reconsderaton has been gven to I. T. 2 5 (C. . T -1, 64
(1935)) whch hods n part that rea property ta es n the State of
Mssour accrue, for edera ncome ta purposes, on the 1st day of
une of each year.
Under sectons 15747 to 15762, ncusve, of the Mssour Revsed
Statutes nnotated, contanng speca provsons for the assessment of
property n the cty of St. Lous (smar to the Mssour statutes ap-
pcabe to the baance of the State), a property s assessed by the
assessor and hs deputes, commencng on une 1 annuay, and assess-
ment must be competed on or before the 1st cay of anuary ne t fo-
owng. The assessor competes the books from the deputy s reports,
statements fed, and best nformaton obtanabe, on or before the
thrd Monday n March annuay. When the assessment books are
competed, the assessor must gve two weeks notce n at east two day
newspapers that the books are open for nspecton. quazaton and
hearng of ndvdua compants then foow. fter the assessment
books have been corrected, the assessor makes an abstract thereof and
certfes to the mayor and the State audtor as to the correctness of the
abstract on or before the fourth Monday n May, and e tends State,
schoo, and cty ta es n the books. The assessor then prepares ta
bs whch are devered to the comptroer who checks them and turns
them over to the coector.
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29.23(c)- .
64
In Unted States v. Certan Land n Cty of St. Lous, Mo., et a.
(29 ed. Supp., 92), the Unted States had condemned certan ands
n the cty of St. Lous, and on une 16,1939, had pad nto the regstry
of the Unted States dstrct court an amount ntended to represent
|ust compensaton. On the same date t obtaned a |udgment vestng
fee smpe tte to the property n the Unted States. The cty of St.
Lous fed cam for dstrbuton to t, out of the fund n the regstry
of the court, of certan amounts as cty, State, and schoo ta es. The
court hed that the fund on depost n the regstry of the court stood
n the pace of the rea estate condemned and was sub|ect to the cam
of a en hoders for the payment of the amounts of ther ens -whch
had attached to the rea estate at the tme of the appropraton of the
property by the Government. The court referred to the opnon of
the Supreme Court of Mssour n Mc nay v. Ltte Rver Dranage
Dstrct et a. (325 Mo., 34 2 S. W. (2d), 650), n whch t was hed
that the en does not accrue and become a f ed encumbrance unt the
amount of the ta s determned by an annua assessment of the and
and annua evy of the ta . The court accordngy concuded that rea
estate ta es do not become a en unt the evy s made and the amount
of the ta defntey determned. It ponted out that n the cty of
St. Lous the cty authortes must evy the ta pror to or on the fourth
Monday, of May. of the year for whch the ta es are assessed. It
therefore concuded that snce the en for the 1940 ta es had not
attached on une 16, 1939, the date the property was acqured by the
edera Government, the cty was not entted to have dstrbuted to t
any part of the funds n the regstry of the court on account of the
ta es for 1940. The court further hed that even though the en for
ta es for the year 1939 had attached to the and, the cty of St. Lous
was, nevertheess, not entted to recover out of the .fund the fu
amount of the ta es for the year 1939, but ony the porton of such
ta es propery aocabe to the tme durng that year that the property
was n prvate ownershp.
It s beeved that nherent n the decson n Unted States v.
Certan Land n Cty of St. Lous, Mo., et a., supra, s the determna-
ton that nether the property owner nor the and s charged wth
a abty for the rea property ta pror to the date upon whch
the en attaches for such ta , whch s the date of the evy of
the ta . ccordngy, t s hed that rea property ta es n the
State of Mssour do not accrue unt the date upon whch they are
eved, . e., the date upon whch the en for such ta es attaches.
No date can be f ed as the date of evy of rea property ta es
throughout the State, but they are not actuay eved unt the year
for whch they are mposed.
I. T. 2 5, supra, s hereby modfed to conform to the above-stated
. concusons.
Secton 29.23(c)-: Ta es.
INT RN L R NU COD .
Ta es pad by husband on property n Mnnesota hed by hm and
hs wfe as |ont tenants. (See I. T. 37 5, page 9 .)
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65
19.23(e)- .
S CTION 23 (e) . D DUCTIONS ROM GROSS INCOM :
LOSS S Y INDI IDU LS.
Secton 19.23 (e)-: Losses by ndvduas. 1946-1-12203
I. T. 3776
INT RN L R NU COD .
oss upon the sae of a resdence nherted n 1935 sub|ect to a
fe estate and sod n 1940 after the death of the fe tenant, whch
property was not used as a resdence by the ta payer but was mne-
.datey sted for sae after the fe tenant s death, s deductbe as
a oss sustaned n a transacton entered nto for proft wthn the
meanng of secton 23(e) (2) of the Interna Revenue Code.
I. T. 3594 (C. . 1942-2, 106) revoked.
s a resut of recent decsons of The Ta Court of the Unted States
n stee G. Mar v. Commssoner (5 T. 0,173, acquescence, page 3
of ths uetn) and n N. Stuart Campbe et u . v. Commssoner
(5 T. C, 272, acquescence, page 1 of ths uetn), further consdera-
ton has been gven to I. T. 3594 (C. . 1942-2, 106) whch hods, n
effect, that a oss sustaned upon the sae of a resdence nherted n
1935 sub|ect to a fe estate and sod n 1940 after the death of the fe
tenant, whch property was not used as a resdence by the ta payer but
was mmedatey sted for sae after the fe tenant s death, was not
sustaned n a transacton entered nto for proft wthn the meanng
of secton 23(e) (2) of the Interna Revenue Code.
In stee G. Mar v. Commssoner, supra, the oss arose from the
sae n 1939 of a yacht nherted by the pettoner n 193 , mme-
datey offered for sae, and never used by her. In N. Stuart Camp-
be et u . v. Commssoner supra, the oss arose from the sae n
1941 of a prvate resdence nherted n 1934 by N. Stuart Campbe
and hs sster, whch resdence was offered for sae or rent and at no
tme was used or ntended to be used by them as a resdence. In each
of those cases The Ta Court hed that the oss was sustaned n a
transacton entered nto for proft wthn the meanng of secton
23(e) (2) of the Interna Revenue Code. (See aso ppea of Robert
W. Wams, ecutor, 1 . T. ., 1101, acquescence, C. . I -2,
5 (1925).)
Whether a oss s.ncurred n a transacton entered nto for proft
s a queston of fact to be determned from the evdence n each case.
Ths was stated as eary as 1919 when the dvsory Ta oard, n
T. . R. 35 (C. . 1, 122 (1919)), hed that a oss deductbe from
gross ncome under secton 214(a) (5) of the Revenue ct of 191 s
sustaned upon the sae of property acqured by gft, bequest, devse,
or descent, whenever property so acqured s, as a matter of fact,
acqured for purposes of proft, and that ordnary nvestment prop-
erty so acqured s to be treated as havng been acqured for purposes
of proft uness the conduct of the recpent furnshes evdence to the
contrary.
In the Mar and Campbe cases, supra, there was no evdence to
show that the ta payer had any ntenton of convertng the nherted
property to prvate or persona use. On the contrary, the property
n each case was mmedatey sted for sae. In I. T. 3594 the ta payer
never used or ntended to use the property as hs resdence, and as soon
as the fe estate n hs father had ended, he mmedatey sted the
property for sae and sod t Under the crcumstances, there s no
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29.23(m)-.
06
vad bass for makng a dstncton between the factua stuaton n the
Campbe case and that nvoved n I. T. 3594, supra.
In vew of the foregong, t s hed that a oss upon the sae of a
resdence nherted n 1935 sub|ect to a fe estate and sod n 1940
after the death of the fe tenant, whch property was not used as a
resdence by the ta payer but was mmedatey sted for sae after
the fe tenant s death, s deductbe as a oss sustaned n a trans-
acton entered nto for proft wthn the meanng of secton 23(e) (2)
of the Interna Revenue Code. I. T. 3594, supra, s hereby revoked.
Secton 29.23(e)-: Losses by ndvduas.
INT RN L R NU COD .
Lapse of opton receved by empoyee to purchase stock of the
empover corporaton or an affate of the empoyer corporaton.
(See I. T. 3795, page 15.)
S CTION 23 (m). D DUCTIONS ROM GROSS
INCOM : D PL TION.
Secton 29.23 (m) -1: Depeton of mnes, o 1946-5-12251
and gas wes, other natura deposts, and G. C. M. 24 49
tmber deprecaton of mprovements.
INT RN L R NU COD .
Consderaton receved for the assgnment of a short-ved In-o
payment rght carved out of any type of depetabe nterest n o
and gas n pace s ordnary ncome sub|ect to the depeton aow-
ance where such consderaton s not pedged for use n further
deveopment.
n opnon s requested wth respect to the status, for edera
ncome ta purposes, of cash payments to owners of depetabe eco-
nomc nterests n o and gas n pace as consderaton for assgnments
of n-o payment rghts carved out of the economc nterests hed by
them. Such rghts entte the assgnee to o or gas produced, or the
proceeds derved from an agreed share of producton f, as, and when
produced, unt a f ed or determnabe amount of o or gas, or an
ascertanabe sum of money, has been receved. Such rghts ordnary
pay out and e pre wthn one or two years.
G. C. M. 22730 (C. . 1941-1, 214) deas wth the ssue ony to the
e tent of dstngushng the case n whch an operator assgns an
n-o payment rght n return for cash whch he s pedged to use n
the deveopment of the property (n whch event such cash payment
s not ncome to the assgnor and ts use for the pedged purpose s
not regarded as an e pendture by the assgnor) from the nstant case
whch nvoves an outrght purchase of an n-o payment rght for
cash wheren there s no such pedge to nvest the proceeds n deve-
opment and the buyer s capta nvestment woud repace the essee s
capta nvestment aocabe to the nterest sod. Ths statement,
made parenthetcay n G. C. M. 22730, supra, at page 222, was not en-
arged upon there. Consderaton must now be gven to the edera
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67
29.23(m)-.
ncome ta effect, n the case of the assgnor, of a transacton wheren
he receves unquafedy a cash payment for an n-o payment rght.
Is such cash payment ordnary ncome or proceeds from the sae of a
capta asset If t s the atter, the capta gan s measured hy the
cash payment ess the aocabe part of the bass of the assgnor-oper-
ator n the o and gas n pace, pus the estmated cost to hm of
producng the o nvoved n the o payment rght an obgaton
e assumes wthout further cost to the assgnee.
G. C. M. 22730, supra, recognzes that the hoder of an n-o pay-
ment rght, however acqured, has a depetabe economc nterest n
the o and gas n pace, whch s potentay a capta asset n hs
hands, provded the condtons of that cassfcaton under secton 117
of the Interna Revenue Code are met. Such concusons as to the
status of the n-o payment rght n the hands of- the grantee are not
determnatve of the nature of the transacton n the case of the
grantor. s ponted out n the cted opnon, the controng decsons
hod that a andowner who grants a ease, or a essee who subeases or
assgns hs ease, n consderaton of a cash bonus payment and an
agreement to pay stpuated royates s ta abe on a such payments
as ordnary ncome. In such a case, the cash bonus payment s re-
garded as an advance royaty payment sub|ect to the depeton aow-
ance as respects the essor or subessor, though t represents a capta
nvestment by the essee or subessee n o and gas n pace, returnabe
ta -free to hm by way of depeton deductons spread over the pro-
ductve fe of the ease asset n hs hands. That concuson rests on
the anaogy between the recept of such advance royaty payments
and substanta cash payments receved by the essor upon the e ecu-
ton of an ordnary ease, whch payments are regarded as advance
renta payments ta abe as ordnary ncome. Thus, n connecton
wth the nstant ssue, as n the cted opnon, the fact that the assgnee
acqures an asset whch potentay quafes as a capta asset n hs
hands does not requre the concuson that the assgnor parted wth
such an asset.
In-o payment rghts, royaty rghtS| and operatng rghts are
anaogous n that they are essentay rghts to producton ncome
characterzed as ordnary ncome when reazed. are regarded
as depetabe economc nterests n o and gas n pace enttng the
owner to ta -free return of hs nvestment through the depeton
aowance. In-o payment rghts are dstngushabe from royaty
nterests and operatng rghts n that the atter nterests, by defn-
ton, e tend to the entre o and gas resource content of the and and,
as such, represent forms of fractona property rghts nto whch the
property nterests n o and gas n pace are commony dvded,
whereas an n-o payment rght s a rght to ncome for a mted
tme or amount. Ths dfference s emphaszed by the fact that an
n-o payment rght may be carved out of ether of the specfed prop-
erty nterests n o and gas n pace, but the reverse s not true. Thus,
saes of royaty rghts or operatng rghts are saes of property rghts,
whereas assgnments of n-o payment rghts carved out of such prop-
erty rghts, are, wth respect to the assgnor, essentay mere assgn-
ments of e pected ncome from such property rghts for a f ed or
determnabe perod of tme.
The ssue presented by such assgnments of e pected ncome between
strangers n nterest, presumptvey at ther present worth, shoud not
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5 23.23 (m)-.
6
be confused wth the queston presented n such cases as Lucas v. ar
( 2 1 U. S., I), everng v. orst (311 U. S., 112, Ct. D. 1472,
C. . 1940-2, 206), and everng v. ubank (311 U. S., 122, Ct D.
1473, C. . 1940-2, 209), nvovng donatve assgnments of ncome
by the earner thereof n an attempt to dvde hs ncome between
hmsef and members of hs famy. There the earner-assgnor s
attempt s to avod reazaton of e pected ncome. ere the assgnor
e pedtes such reazaton. See erman M. Rhodes v. Commssoner
(43 . T. ., 7 0, affrmed, 131 ed. (2d), 50), wheren thn Unted
States oard of Ta ppeas (now The Ta Court of the Unted
States) hed that a stockhoder s e ercse of hs power to se or
assgn hs rght to receve the decared dvdend consttuted a reaza-
ton of ncome by pettoner stockhoder ta abe to hm as ordnary
ncome.
In prncpe the assgnment of a rght to a dvdend seems ndstn-
gushabe from assgnments of other rghts to e pected ncome. s-
sgnments of ncome rghts by the earner for cash or property, meas-
ured by the then worth of such rghts, may not be dsregarded, and
as respects such earner-assgnor, he has eected to antcpate norma
reazaton by assgnng or dscountng such rght. Consderaton
receved by hm represents ordnary ncome reazed by hm upon the
antcpatory assgnment of hs rght to ncome. Once such rghts to
ncome from property or for servces are separated from the earner
by hs act of assgnment, they become property rghts owned by the
purchaser or assgnee wth a bass n hs hands measured by the con-
sderaton pad. Thus, any dscountng of the face vaue of the ncome
rght or cam by the earner thereof upon the assgnment w resut
n ncome to the assgnee when such dscount s reazed by hm.
The stated genera rue wth respect to antcpatory assgnments of
ncome for cash or property seems equay appcabe to assgnments
of ncome arsng from royaty or operatng property rghts n o
and gas n pace. s noted above, tre characterzaton of a trans-
acton as a purchase n the case of the assgnee s not nconsstent wth
treatng t as a mere antcpatory reazaton of ordnary ncome to
the earner. That s true under the genera rue pertanng to such
assgnments as we as to cases of grants of depetabe nterests n
o and gas n pace for advance royaty payments made to obtan such
grants under o and gas eases. Smary, t s mmatera that the
assgnment of ncome vests a depetabe rght n the assgnee. The
rght to depeton, as such, s not transferred. The assgnor, on
recept of the antcpated ncome thereby reazed, s entted to the
depeton aowance whch s desgned to compensate hm for the
dmnuton n hs nterests sustaned by the converson of capta
nto ordnary ncome thereby effected. Thus, quafcaton of the
assgned rght as a depetabe rght n the hands of the assgnee
sprngs from the character of the rght rather than from the transfer.
To the e tent that there s a shft of depetabe nterest, t s anaogous
to the correspondng shft resutng from a cash bonus or an advance
royaty payment made to obtan an o and gas ease. In both n-
stances, the assgnor or grantor s entted to a depeton aowance
whch attends the ncome thereby reazed by hm, and the assgnee,
n both nstances, acqures a depetabe economc nterest n o and
gas n pace.
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69
19.23ta)-10.
or the reasons stated, t s the opnon of ths offce that consder-
aton (not pedged for deveopment) receved for the assgnment of
a short-ved n-o payment rght carved out of any type of depetabo
nterest n o-and gas n pace (ncudng a arger n-o payment
rght) s ordnary ncome sub|ect to the depeton aowance n the
assgnor s hands. No opnon s e pressed wth respect to the status
of n-o payment rghts e tendng over a substanta porton of the
fe of the depetabe economc nterests from whch such rghts are
carved.
. P. We che,
Chef Counse, ureau of Interna Revenue.
Secton 19.23 (m) -10: Depeton d| ustments of 1946-4-12236
accounts based on bonus or advanced royaty. Ct. D. 1664
INCOM T INT RN L R NU COD D CISION O SUPR M COURT.
1. Gross Income Deductons Percentage Depeton On. and Gas
Leases Royates and onuses Net Profts rom O -
tracted.
The ta payers, who owned nterests n fee n certan ands whch
they eased for the producton of o, gas, and other mneras n
consderaton of cash bonuses, royates n the usua form, and add-
tona payments from the net profts of the operatons, had an
economc nterest n the o suffcent to entte them to deductons
for depeton, under sectons 23(m) and 114(b) (3) of the Interna
Revenue Code, not ony on the royates and bonuses, but aso on
ther share of net profts receved from o e tracted from the
eased ands.
2. Decsons Reversed and ffrmed.
Decson of the Unted States Crcut Court of ppeas, fth
Crcut (14 ed. (2d), 0), reversng decson of The Ta Court
of the Unted States (2 T. C, 125 ), reversed decson of the
Unted States Crcut Court of ppeas, Nnth Crcut (14 ed.
(2d), 776), affrmng memorandum opnon of The Ta Court,
affrmed.
Supreme Court of the Unted States.
56. rby Petroeum Co., pettoner, v. Commssoner of Interna Revenue.
On wrt of certorar to the Unted States Crcut Court of ppeas for the fth Crcut.
197. Commssoner of Interna Revenue, pettoner, v. nna ckers Crawford.
On wrt of certorar to the Unted States Court of ppeas for the Nnth Crcut.
anuary 2 , 1046.
OPINION.
Mr. ustce Reed devered the opnon of the Court.
The wrt of certorar n rby Petroeum Co. v. Commssoner brngs here
for revew the |udgment of the Crcut Court of ppeas for the fth Crcut
(14 ed. (2d), 0) reversng the decson of The Ta Court (2 T. C, 125 ),
whch had sustaned the ta payer s poston. The narrow ssue a the deduct-
bty under sectons 23(m) and 114(b)(3)1 of the Interna Revenue Code of
1 Interna Revenue Code:
S C. 23. D DUCTIONS ROM GROSS INCOM .
In computng net ncome there sha be aowed as deductons:

(m) Depeton. In the case of mnes, o and gns wes, other natura deposts, and
tmber, a reasonabe aowance for depeton and for deprecaton of Improvements, accord-
ng to the pecuar condtons n each case such reasonabe aowance n a cases to be
made under rues and reguatons to be prescrbed by the Commssoner, wth the approva
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I 19.23(m)-10.
70
the depeton aowance of 27 per cent of gross Income from the property
durng the ta abe year, permtted by those sectons from the ta payer s gross
ncome for 1040 from certan o eases.
The ta payer owned the fee smpe tte to certan Te as ands, e cept for a
mnor mnera nterest whch s not here nvoved. It eased the ands to two
companes for the producton of o, gas and other mneras for a cash bonus,
a royaty n the usua form and an agreement, e ecuted contemporaneousy
wth the ease and as part consderaton therefor, that the ta payer shoud
receve 20 per cent of the net money profts reazed by the essees from ther
operatons under the ease.
The same narrow ssue s n Commssoner v. Crawford. In ths atter case, the
ta payer owned an nterest n fee In certan rea estate n Caforna. She,
together wth her coowners, entered nto severa eases for portons of the property
for the producton of o, gas and other mneras. or an understandng of
the ssues here presented, t s unnecessary to anayze the eases further than
to say that they were gven In consderaton of bonuses, royates n the usua
form and addtona payments from the net profts of the operaton. The Com-
mssoner assessed a defcency because of the dena of a camed depeton
aowance for 193 , 1930 and 1010. The Ta Court supported the ta payer s
poston. The Crcut Court of ppeas affrmed. (14 ed. (2d), 776.)
In both cases, the Commssoner concedes that the depeton aowance of
sectons 23(m) and 114(b) (3) Is appcabe to the bonuses and royates. The
statutory provsons are dentca for a years. The 271/.. per centum of secton
114(b) (3) was therefore propery deducted by the ta payers from these bonuses
and royates. In each of these years there was aso ncome to these ta payers
from the ease provsons for the essors to share n the net profts from the
o e tracted from the eased ands. The ta payers cam the rght to deduct the
27 per cent depeton from these recepts aso. These are the deductons whch
the Commssoner dsaowed. On account of the confctng decsons of the
crcuts In these cases on the pont, certorar was granted by us. ( U. S.,
- u. s., .)
The present provsons for depeton aowances have been worked out so as
to gve the hoder of an economc Interest n the o or other natura resource
an aowance for depeton. Whe there are ncome Incdents to the utzaton
of natura resources, there s aso an obvous e hauston of the capta used
to produce the ncome. In theory the aggregate sum aowed for depeton woud
equa the vaue of the natura resource at the tme of ts acquston by the
ta payer, so that at the e hauston of the resource the ta payer woud have
of the Secretary. In the case of eases the deductons sha be equtaby appor-
toned between the essor and essee.
S C. 114. SIS OR D PR CI TION ND D PL TION.

(b) ass fob Depeton.

(3) Percentage depeton for o and cas wes. In the case of o and gas wes
the aowance for depeton under secton 23(m) sha be 27 fa 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 the ta payer n respect
of the property.
The foowng cause of one ease w ustrate the type of arrangement whch pro-
duced the addtona payments:
When, and as soon as the Income Credts of sad account sha e ceed the Operatng
Charges of the Lessee, the Lessor sha be entted to a secondary and addtona royaty,
the amount thereof to be one-haf of such dfference between the Operatng Charges
and Income Credts of sad account.
The eases denned methods of computaton.
urnet v. arme (2 7 D. S.. 103. I Ct. D. 611, C. . I-2. 210 (1932)1) : Pamer
. ender (2S7 U. S., 551, 557 ICt. D. 641, C. . II-1, 235 (1933) ). (See nderson v.
everng. 310 U. S., 404. 409 Ct. D. 1456. C. . 1940-1. 10 ).)
Treasury Reguatons 103, secton 19.23(m)-, as amended by Treasury Decson 5413,
C. . 1944, 124, 129:
Under such provsons, the owner of an economc nterest n mnera deposts or stand-
ng tmber s aowed annua depeton deductons. n economc nterest s possessed In
every case In whch the ta payer has acqured, hy Investment, any nterest n mnera In
pace or standng tmber and secures, by any form of ega reatonshp, ncome derved
from the severance and sae of the mnera or tmber, to whch he must ook for a return
of hs capta. ut a person who has no capta nvestment n the mnera depost or
standng tmber does not possess an economc nterest merey because, through a con-
tractua reaton to the owner, he possesses a mere economc advantage derved from pro-
ducton. Thus, an agreement between the owner of an economc nterest and another
enttng the atter to purchase the product upon producton or to share n the net ncome
derved from the nterest of such owner does not convey a depetabe economc nterest.
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71
19.23(m)-10.
recovered through depeton e acty hs Investment The admnstratve dff-
cutes n ta aton of o and gas producton n vew of the uncertantes of
quanttes and tme of acquston, that s at the purchase of the property or at
the dscovery of o or gas, fnay have brought Congress to the arbtrary aow-
ance of 27 per cent now emboded In secton 114(b) (3). Thus, the 27 per
cent s approprated by the statute to the restoraton of the ta payer s capta
and the rest of the proceeds of the natura asset becomes gross ncome
( nderson v. Uevcrng, 310 U. S., 404, 407 0 Ct. D. 1450, C. . 1940-1,
10 .) It foows from ths theory that ony a ta payer wth an economc
nterest n the asset, here the o, s entted to the depeton. (Pamer v. ender,
2 7 U. S., 551, 557 Ct. D. 041, C. . II-1, 235 (1933) Thomas v. Perkns, 301
U. S., 655, 659 Ct. D. 1237, C. . 1937-1, 162 .) y ths s meant ony that
under hs contract he must ook to the o n pace as the source of the return
of hs capta nvestment. The technca tte to the o n pace s not mportant.
Tte n a case of a ease may depend upon the aw of the State n whch the
depost es. ( urnet v. fannc, 2 7 U. S., 103,109-110 Ct. D. 611, C. . I-2, 210
(1932) .) The test of the rght to depeton s whether the ta payer has a
capta nvestment n the o n pace whch s necessary reduced as the o s
e tracted. (See nderson v. cverng, 310 U. S., 401, 407.)
The ta payers here nvoved were essors. Under the eases and our prevous
decsons, these ta payers had an economc nterest, a capta nvestment, In so
much of the e tracted o as was used by the essee to pay to the ta payers the
royates and bonuses. See note 3, supra. The ta payer essors were entted
to the depeton aowance on these royates and bonuses whether they were pad
to them n o or cash, the proceeds of the o. ( evcrng v. Twn e O Synd-
cate, 293 U. S., 312, 321 Ct. D. 05, C. . I -1, 253 (1935) .)
If the addtona payment n these eases had been a porton of the gross recepts
from the sae of the o e tracted by the essees Instead of a porton of the net
profts, there woud have been no doubt as to the economc Interest of the essors
n such o. Ths woud be an o royaty. The essors economc nterest n the
o s no ess when ther rght s to share a net proft. s In Thomas v. Perkns
(301 U. S., 655), ther ony source of payment s from the net proft whch the o
produces. In both stuatons the essors possbty of return depends upon o
e tracton and ends wth the e hauston of the suppy. conomc nterest does
not mean tte to the o In pace but the possbty of proft from that economc
nterest dependent soey upon the e tracton and sae of the o.
The depeton aowance, n the aggregate, s aways the same amount, 27 per
cent of the gross ncome from the property. In the case of eases the
deductons sha be equtaby apportoned between the essor and essee. (Secton
23(m).) n equtabe apportonment Is obtaned by e cudng from the essee s
gross ncome from o or gas produced from the property ( cverng v. Twn e
OU Syndcate, supra, 321), an amount equa to any rents or royates pad or
ncurred by the ta payer n respect of the property. (Secton 114(b)(3).)
Such deductons become the gross ncome of the essor. We thnk these ta payers
had an economc nterest n the o, suffcent to support depeton on the sums
receved as net proft.
If we assume that the ony payment for the prvege of o e tracton made
to the ta payer essors by the essees was the porton of net Income pad under
the eases, It woud be cear that such payment of net Income woud ta wse
be rent or royaty pad by the essees for the prvege of e tracton. Snce secton
114(b) (3) woud requre the essees to deduct ths rent or royaty from ther
gross ncomes from the sae of o from the property before takng the essees ,
depeton, a gross recept from o sod, equa to the amount of the net ncome
pad to the ta payer essors, woud not be sub|ect to depeton, uness the ta payer
essors are permtted to appy depeton to ths payment. Ths woud be contrary
to the purpose of the depcton statute, whch Is to aow to the essor and essee
together a depeton of 27 per cent of the gross sae prce of the o. On the
other hand f depeton on the net Income payments s aowed to the essors,
the essees are aowed depeton on the gross ncome from o saes ess the net
or the background of the present provsons, see cverng v. Twn e O Syndcate
(293 U. ., 312 ret. P. 905, C. . I -1. 253 (1935) ).
Whe the reservaton of rovntes shows an economc nterest n the o necessary for
the satsfacton of the royates, such reservaton woud not show an economc nterest n
o not necessary for the parment of the royates. ut see state o| ophet (3 T. C, 6).
Secton 114(b)(3). The gross ncome refers ony to o and rus. ( evcrng v. Twn
e O Syndcate, 293 U. .. 312. 320-321 nderson v. evcrng, 310 U. S., 404, 40 )
Ihcerng . Twn e O Syndcate (293 U. S., 312, 322).
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29.23(p)-.
72
ncome payment and the entre aowabe depeton s aocated between the essors
and essees.
Reference s made to a sentence In nderson v. everng (310 U. S., 404, 409),
as ndcatng that ths Court had determned that net proft payments were not
sub|ect to depeton. It reads as foows:
share n the net profts derved from deveopment and operaton, on the
contrary, does not entte the hoder of such nterest to a depeton aowance
even though contnued producton s essenta to the reazaton of such profts.
The nderson case Invoved the ta abty to the o operator of the gross proceeds
of the o, whch hs contract for the purchase of the o property requred hm
to turn over to the seer as a means of satsfyng a deferred payment for the
property. s the deferred payment aso had to be satsfed out of any sae of
the fee smpe tte to the and, we hed the operator abe as a purchaser because
the seer was not entrey dependent upon the o producton for hs purchase
prce. Ths gave the operator the beneft of the appcabe depeton. (Page 413.)
Ony the reservaton of an nterest n the fee dfferentated the nderson case
from Thomas v. Perkns (301 U. S., 655), where deferred payment n o or ts
proceeds, payabe ony from producton, was hed sub|ect to depeton when pad
to the assgnors.
Te part |ust quoted from the nderson case occurs In settng out the seres
of cases deang wth depeton. No net ncome was Invoved n the nderson
case. The statement was supported by the ctaton of everng v. O Donne
(303 U. S., 370 Ct. D. 1324, C. . 103 -1, 337 ) and everng v. oe O Land
Deveopment Co. (303 U. S., 372 TCt. D. 1322, O. . 193 -1, 293 ). In the O Don-
ne case, the ta payer, who receved the net ncome from an o operaton was
a stranger to the ease, who had contracted for a share of ts net profts as consd-
eraton for hs stock n a corporaton whch was the owner of the ease. The
queston s whether respondent had an Interest, that s, a capta Investment, n
the o and gas In pace . s a mere owner of shares n the San Gabre
Co., respondent had no such nterest. (Page 371.) In the be O Land case,
there was a specfc provson that consderaton other than the net proft pay-
ment shoud resut n fu ownershp to the buyer. The transacton whch
ncuded the cause for net proft was a sae of a the rght, tte and nterest
n the property, whch conssted of tangbe personaty and drng permts,
agreements, and eases. Ths Court sad the addtona payment of a share of net
profts dd not quafy n any way the effect of the transacton as an absoute
sae. (Page 375.) Thus the nderson case correcty stated that a share In net
profts dsassocated from an economc nterest, does not entte the hoder to a
depeton aowance. The facts of each transacton must be apprased to deter-
mne whether the transferor has made an absoute sae or has retaned an eco-
nomc nterest a capta Investment.
In our vew, the net proft payments In these cases fow drecty from the
ta payers economc nterest In the o and partake of the quaty of rent rather
than of a sae prce. Therefore, the capta Investment of the essors s reduced
by the e tracton of the o and the essors shoud have depeton.
No. 5f s reversed.
No. 1 7 s affrmed.
Mr. ustce ackson took no part n the consderaton or decson of these cases.
Mr. ustce Dougas dssents.
S CTION 23(p). D DUCTIONS ROM GROSS INCOM :
CONTRI UTIONS O N MPLOY R TO N MPLOY-
S TRUST OR NNUITY PL N ND COMP NS TION
UND R D RR D-P YM NT PL N.
Secton 29.23 (p)-: Contrbutons of an em- 1946-6-12261
poyer to an empoyees trust or annuty Mm. 59 5
pan and compensaton under a deferred
payment pan In genera.
Contrbutons to an empoyees trust, to consttute aowabe de-
ductons, must be made pursuant to a pan n effect and to a vad
e stng trust whch s recognzed as such under the oca aw. Ths
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73
29.23(p)-.
requrement w be deemed to have been comped wth for ta abe
years endng on or before ebruary 2 , 1946, n the case of a ta payer
on the accrua bass f a requstes have been met on or before the
ast day of the year of accrua e cept the furnshng of the trust
corpus, whch must be supped wthn 60 days after the cose of such
ta abe year of accrua.
Treasury Department,
Offce of Commssoner of Interna evenue,
Washngton 25, D. C, ebruary 21,1946.
Coectors of Interna Revenue, Interna Revenue gents n Charge,
eads of ed Dvsons, Technca Staff, and Others Concerned:
1. Secton 23(p)() ( ) and (C) of the Interna Revenue Code
provdes for deductons or contrbutons pad nto a trust whch s
e empt under secton 165(a) of the Code. trust s e empt under
the atter secton upon compance wth certan requrements, one of
whch s that t be part of a stock bonus, penson, or proft-sharng
pan. Thus, the pan must be n effect before the trust s entted to
e empton under that secton. urther there must be a vad and
e stng trust to whch the contrbuton s made. If an essenta ee-
ment of a trust s ackng, there s, n effect, no trust. Thus, f the
trust corpus s ackng, t can not be sad that a trust s n e stence.
The coroary, therefore, s that e empton under secton 165 (a) appes
to an e stng trust, compete n a respects, ncusve of possesson
of the corpus.
2. Secton 23(p) (1) ( ) of the Code provdes that a ta payer on
the accrua bass sha be deemed to have made a payment, for the
purposes of subparagraphs ( ), ( ), and (C), on the ast day of
the year of accrua f the payment s on account of such ta abe year
and s made wthn 60 days after the cose of the ta abe year of accrua.
Subparagraph ( ) pertans to a penson trust and subparagraph (C)
to a stock bonus or proft-sharng trust. Thus, f there s a trust, the
ta payer on the accrua bass s permtted to make hs contrbuton
thereto wthn 60 days after the cose of the year of accrua. Subpara-
graph ( ), however, does not create a trust or reate a trust back to
a perod when n fact t had no e stence.
3. The effect of the aforesad requrements s that contrbutons to
an empoyees trust, to consttute aowabe deductons, must be made
pursuant to a pan n effect and to a vad e stng trust whch s
recognzed as such under the aw prevang n the |ursdcton to
whch the trust s sub|ect.
4. Under the authorty of secton 3791(b) of the Interna Revenue
Code, the aforesad rue w be deemed to have been comped wth
for ta abe years endng on or before ebruary 2 , 1946. n the case
of a ta payer on the accrua bass-, f a requstes have been met on
or before the ast day of the year of accrua e cept the furnshng of
the trust corpus, whch must be supped wthn 60 days after the
cose of such ta abe year of accrua.
5. Correspondence from the foowng regardng ths mmeograph
shoud refer to the number hereof and to the symbos ndcated: Co-
ectors of nterna revenue, C: Co nterna revenue agents n
703672 40 6
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29.23(p)-9. 74
charge, IT: PS heads of fed dvsons of the Technca Staff,
TS: RM.
oseph D. Nunan, r.,
Commssoner.
pproved ebruary 21, 1946.
oseph . O Conne , r.,
ctng Secretary of the Treasury.
Secton 29.23(p)-9: Contrbutons of an em- 1946-12-12327
poyer toward the purchase of retrement Mm. 6020
annutes (secton 23(p) (1) ( )).
or the purpose of secton 23(p) (1) ( ) of the Interna Revenue
Code, contrbutons must be pad under a pan n effect, as evdenced
by an e ecuted contract or e ecuted contracts. Ths requrement w
be deemed to have been comped wth for ta abe years endng on or
before May 31, 1940, f certan other condtons evdencng a pan
In effect e sted before the cose of the ta abe year.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C, May 27,19tf.
Coectors of Interna Revenue, Interna Revenue gents n Charge,
eads of ed Dvsons, Technca Staff, and Others Concerned:
1. Deductons for contrbutons pad toward the purchase of retre-
ment annutes are governed by secton 23(p) (1) ( ) of the Interna
Revenue Code. mong the condtons prescrbed under that secton
for the aowance of a deducton are:
(a) contrbutons must be pad toward the purchase of retre-
ment annutes, and
() under a pan whch meets the requrements of secton 165
(a)(3), (4), (5k and (6) of the Code.
Wth respect to (a) above, t shoud be noted that a contrbuton s
not pad f a or any part of t s recoverabe at the request of the
empoyer. When any porton of a recoverabe remttance on account
of a premum becomes rrecoverabe under an e ecuted contract, how-
ever, such porton then becomes a contrbuton pad. Wth respect
to ( ) above, there must be a pan n effect. pan whch s repre-
sented by a group annuty contract or by annuty contracts s not n
effect before such contract s, or contracts are, e ecuted and ssued.
2. Under the authorty of secton 3791 (b) of the Interna Revenue
Code, for a ta abe year endng on or before May 31,1946, an annuty
pan w be deemed n effect f t s evdenced by the competon of the
foowng steps by the cose of the ta abe year:
(a) a resouton by the board of drectors (or e ecuton of an
acknowedgment n the case of an unncorporated empoyer)
settng forth a defnte pan for the purchase of retrement an-
nutes under a group annuty contract or annuty contracts,
(b) an appcaton for such contract or contracts,
(c) an acceptance of the appcaton by an nsurance company
statng that t w ssue the contract or contracts (sub|ect to any
necessary approva by a State authorty),
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29.23( )-.
(d) preparaton of the contract or contracts, or of compete
abstracts thereof, n suffcent deta to defne a the terms of the
contract or contracts to be ssued, and
(e) remttance on account of the premums n accordance wth
the terms set forth thereunder,
provded that, wthn a reasonabe tme thereafter, the contract s, or
contracts are, e ecuted and ssued, and, n such cases, remttances n
the ta abe year on account of premums for the year n accordance
wth the pan and the contract or contracts w be deemed contrbu-
tons pad for the purpose of secton 23(p) (1) ( ).
3. The foregong s aso appcabe to amendments to annuty pans
and the contract or contracts thereunder.
4. Correspondence from the foowng regardng ths mmeograph
shoud refer to the number hereof and to the symbos ndcated:
Coectors of nterna revenue, C: Co nterna revenue agents n
charge, IT: PS heads of fed dvsons of the Technca Staff,
TS: RM.
oseth D. Nunan, r.,
Commssoner of Interna Revenue.
pproved May 24, 1946.
oseph . O Conne., r.,
ctng Secretary of the Treasury.
S CTION 23( ). D DUCTIONS ROM GROSS INCOM :
M DIC L, D NT L, TC., P NS S.
Secton 29.23 ( )-1: Medca, denta, etc., 1946-5-12252
e penses. I. T. 37 6
INT RN L R NU COD .
Traveng e penses (Incudng e penses of meas and odgng)
Incurred on behaf of a mnor chd, In order to obtan medca care
for the aevaton of a physca defect or ness, are deductbe for
edera ncome ta purposes as medca e penses under secton 23( )
of the Interna Revenue Code. If It s necessary for one of the par-
ents to accompany the chd because of ts physca condton and
mmaturty, reasonabe e penses ncurred for trave (ncudng e -
penses of meas and odgng) of the parent are aso deductbe as
medca e penses.
dvce s requested whether traveng e penses ncurred on behaf
of a mnor chd, n order to obtan medca care for the aevaton
of a physca defect or ness, are deductbe for edera ncome ta
purposes as medca e penses under secton 23( ) of the Interna Reve-
nue Code. dvce s aso requested whether, n the event t s neces-
sary for one of the parents to accompany the chd because of ts
physca condton and mmaturty, e penses of trave of the parent
are deductbe as medca e penses.
Secton 23( ) of the Interna Revenue Code provdes n part as
foows:
Seo. 23. In computng net ncome there sha be aowed as deductons:

( ) Medca, Denta, tc., penses. penses pad durng the ta abe year,
not compensated for by nsurance or otherwse, for medca care of the ta payer,
hs spouse, or a dependent specfed n secton 25(b) (3), to the e tent that such
e penses e ceed 5 per centum of the ad|usted gross ncome. The term
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29.23(aa)-.
76
medca care , as used In ths subsecton, sha Incude amounts pad for the
dagnoss, cure, mtgaton, treatment, or preventon of dsease, or for the purpose
of affectng any structure or functon of the body (Incudng amounts pad for
accdent or heath nsurance).
Secton 29.23 ( )- of Reguatons 111 provdes n part as foows:
owabe deductons under secton 23 ( ) w be confned strcty to
e penses ncurred prmary for the preventon or aevaton of a physca or
menta defect or ness. Thus, payments for e penses for hospta, nursng
and for ambuance hre and trave prmary for and essenta to the
rendton of the medca servces or to the preventon or aevaton of a physca
or menta defect or ness, are deductbe. Itacs supped.
The trave e penses aowabe as medca e pense deductons under
secton 23( ) of the Code, supra, and secton 29.23( )- of Reguatons
111, supra, ncude e penses of transportaton, meas, and odgng, and
reasonabe traveng e penses are aowabe n ther entrety f the
trave whch gves rse to such e penses s prmary for and essenta
to the rendton of the medca servces or to the preventon or aeva-
ton of a physca or menta defect or ness.
In vew of the foregong, t s hed that traveng e penses (ncud-
ng e penses of meas and odgng) ncurred on behaf of a mnor chd,
n order to obtan medca care for the aevaton of a physca de-
fect or ness, are deductbe for edera ncome ta purposes as med-
ca e penses under secton 23 ( ) of the Interna Revenue Code. If t
s necessary for one of the parents to accompany the chd because of
ts physca condton and mmaturty, reasonabe e penses ncurred
for trave (ncudng e penses of meas and odgng) of the parent
are aso deductbe as medca e penses.
S CTION 23(aa). D DUCTIONS ROM GROSS
INCOM : OPTION L ST ND RD D DUC-
. TION OR INDI IDU LS.
Secton 29.23(aa)-: Standard deducton. 1946-1-12202
I. T. 3775
INT RN L R NU COD .
n Indvdua who fes a edera Income ta return for the
caendar year 1945 and cams the beneft of the standard deduc-
ton prescrbed by secton 23(aa) of the Interna Revenue Code may,
on or before March 15, 1940, fe an amended return temzng hs
deductons whch are aowabe under other provsons of secton 23
of the Code. fter March 15, 1946, hs eecton to take the standard
deducton w be Irrevocabe.
dvce s requested whether an ndvdua who fes a edera ncome
ta return for the caendar year 1945 and cams the beneft of the
standard deducton prescrbed by secton 23 (aa) of the Interna Reve-
nue Code may, on or before March 15,1946 (the due date of the return),
fe an amended return temzng hs deductons whch are aowabe
under other provsons of secton 23 of the Code.
Secton 23(aa) of the Interna Revenue Code, supra, reads n part
as foows:
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77
29.23(aa)-.
S C. 23. D DUCTIONS ROM GROSS INCOM .
In computng net ncome there sha be aowed as deductons:

(aa) Optona Standard Deducton for Indvduas.
(1) owance. In the case of an ndvdua, at hs eecton a standard
deducton as foows:
( ) d|usted Gross Income 5,000 or More. If hs ad|usted gross
ncome s 5,000. or more, the standard deducton sha be 500.
( ) d|usted Gross Income Less Than 5,000. If hs ad|usted gross
ncome s ess than 5,000, the standard deducton sha be an amount
equa to 10 per centum of the ad|usted gross ncome upon the bass of
whch the ta appcabe to the ad|usted gross ncome of the ta payer
s determned under the ta tabe provded n secton 400.

1 Method and effect of eecton.
( ) If the ad|usted gross ncome shown on the return s 5,000 or
more, the standard deducton sha be aowed ony f the ta payer so
eects n hs return, and the Commssoner, wth the approva of the
Secretary, sha by reguatons prescrbe the manner of sgnfyng such
eecton n the return.
( ) If the ad|usted gross Income shown on the return s ess than
5,000, the standard deducton sha be aowed ony f the ta payer
eects, n the manner provded n Suppement T, to pay the ta Imposed
by such suppement.
(C) If the ta payer does not sgnfy, n the manner provded by
subparagraph ( ) or ( ), hs eecton to take the standard deducton,
t sha not be aowed. If he does so sgnfy, such eecton sha be
Irrevocabe.
If a ta payer whose ad|usted gross ncome s ess than 5,000 eects
to have hs ta for 1945 determned under Suppement T, Chapter 1
of the Code, he aso eects to receve the beneft of the standard deduc-
ton of 10 per cent of hs ad|usted gross ncome as provded by secton
23(aa) (1) ( ) of the Code, supra, whch s taken nto consderaton
n the basc tabe set forth n secton 400 of Suppement T, Chapter 1
of the Code. In the case of a ta payer whose ad|usted gross ncome s
5,000 or more, the eecton to take the standard deducton s made by
camng 500 as a deducton on ne 2, page 3 of orm 1040. The
specfc queston presented s whether a ta payer, havng camed the
standard deducton permtted by secton 23 (aa) of the Code for the
ta abe year 1945, ether by determnng hs ta under Suppement T
or by camng 500 as a deducton on orm 1040, may, after such eec-
ton, fe an amended return on or before March 15,1946, temzng hs
deductons and camng them under the other paragraphs enumerated
n secton 23 of the Code. The queston arses by vrtue of secton
23(aa) (3) (C) of the Code, supra, whch states n effect that f a ta -
payer sgnfes hs eecton to take the standard deducton, such eec-
ton sha be rrevocabe. Dffcuty w arse, for e ampe, n the
case where a ta payer, on ebruary 1,1946, fes an ndvdua return,
orm 1040, camng the standard deducton of 500 and thereafter, on
or before March 15, 1946, desres to fe an amended return temzng
bs deductons aggregatng 00 and receve the beneft of the atter
amount n computng hs ncome ta abty or n the case where a
ta payer fes a return usng the ta tabe n secton 400 of Suppe-
ment T and on or before March 15, 1946, desres to fe an amended
return temzng hs deductons.
The queston of eecton wth respect to the fng of ndvdua n-
come ta returns was consdered n Grant v. Rose (24 ed. (2d), 115).
Under the statute nvoved, secton 223 of the evenue ct of 1921, a
husband and wfe vng together had a rght to make separate returns
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29.23(aa)-.
7
or ncude the ncome of each n a snge |ont return, and n the atter
case the ta was computed on the aggregate ncome. The court ponted
out that the statute made no provson for the amendment of returns,
but, n order to correct mstakes and prevent nequtes and n|ustces,
amended returns ought manfesty to be, and are, freey aowed. It
stated, however, that there was nothng n the ct to e tend the rght
of choce beyond the tme for makng the returns. The court hed that
the statutory rght of choce s e hausted at the e praton of the
tme for makng a return, and stated that t s not unreasonabe to
cam a rght to substtute one form of return for the other up to the
ast day for makng returns, but after that, and especay after the
returns have been revewed and assessments made, there are strong
admnstratve reasons for not permttng the upsettng of the whoe
bass of cacuaton. The decson was affrmed n Rose v. Grant (39
ed. (2d), 340). oowng these decsons, the ureau hed n I. T.
2535 (C. . I -1, 125 (1930)) that where a husband and wfe fed
a |ont return on ebruary 4, 1929, for the caendar year 192 . and
separate returns were subsequenty fed by the husband and wfe on
ebruary 20,1929, such separate returns shoud be accepted as subst-
tutes for the |ont return prevousy fed. Thus the ureau adopted
the rue ad down n the Grant case that where a ta payer had an eec-
ton wth respect to fng hs ndvdua return and the method of
computng the ta , the rght of eecton was not e hausted unt the
ast dnv on whch the return was requred to be fed.
In Uaggar Company v. Teverng (30 U. S., 3 9, Ct. D. 1433, C. .
1940-1, 237), the queston nvoved was the ad|usted decared vaue of
capta stock for the purpose of the capta stock ta and e cess-profts
ta mposed by sectons 215 and 210, respectvey, of the Natona
Industra Recovery ct. Secton 215(f) of that ct provded for
an ad|usted decared vaue of the capta stock as decared by the
corporaton n ts frst return under ths secton (whch decaraton of
vaue can not be amended), as of the cose of ts ast ncome-ta ta -
abe year. The Supreme Court of the Unted States ponted out that
the ct nowhere mentoned the words amended return and stated
that the frst return thus means a return for the frst year n whch
the ta payer e ercses the prvege of f ng ts capta stock vaue for
ta purposes, and ncudes a tmey amended return for that year.
The Court further stated that a tmey amended return s as much a
frst return for the purpose of f ng the capta stock vaue, n
contradstncton to returns for subsequent years, as s a snge return
fed by the ta payer for the frst ta year. The Court concuded that
secton 215(f) of the Natona Industra Recovery ct dd not pre-
cude a change of the decaraton of vaue n a tmey amended return.
On the other hand, the Supreme Court has hed that the decared vaue
of the capta stock coud not be changed after the due date of the
return. (See Scafe Co. v. Commssoner, 314 U. S., 459, Ct. D. 1535,
C. . 1942-1, 207, and eherng v. Lemer Stores Corporaton (Md.),
314 U. S., 4G3, Ct. D. 1536, C. . 1942-1, 209.)
In vew of the foregong, t s hed that an ndvdua who fes a
edera ncome ta return for the caendar year 1945 and cams the
beneft of the standard deducton prescrbed by secton 23 (aa) of the
Interna Revenue Code may, on or before March 15, 1940, fe an
amended return temzng hs deductons whch are aowabe under
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19.24-2.
other provsons of secton 23 of the Code. fter March 15,1946, hs
eecton to take the standard deducton w be rrevocabe.
S CTION 24. IT MS NOT D DUCTI L .
Secton 19.24-1: Persona and famy e penses.
INT RN L R NU COD .
Traveng and vng e penses not ncurred n the pursut of trade or
busness. (See Ct. D. 1659, page 57.)
Secton 29.24-2: Capta e pendtures. 1946-6-12262
( so Secton 23(a), Secton 29.23 (a)-.) G. C. M. 24742
INT RN L R NU COD .
payment made by a Caforna corporaton, some of the stock-
hoders, drectors, offcers, and empoyees of whch were aeged
apanese aens, to the State of Caforna n compromse of a sut
Insttuted by the State for escheat of rea property acqured In voa-
ton of the Caforna en Property Intatve ct of 1020, as
amended, does not consttute an ordnary and necessary busness
e pense whch Is deductbe for edera ncome ta purposes. Such
payment, however, consttutes a capta e pendture whch may be
added to the cost or other bass of the property.
n opnon s requested reatve to the proper treatment, for edera
ncome ta purposes, of a payment made by a Caforna corporaton
to the State of Caforna n compromse of a sut nsttuted by the
State for escheat of rea property acqured n voaton of the Ca-
forna en Property Intatve ct of 1920, as amended.
In the nstant case, the escheat proceedngs were nsttuted on the
ground that apanese aens were ncuded among the stockhoders,
drectors, offcers, and empoyees of the corporaton. Whe such pro-
ceedngs were pendng, a compromse settement was entered nto by
the partes whch provded for the sae and conveyance of the property
by the corporaton to a thrd party, and the payment by the corpora-
ton out of the proceeds of the sae of a stpuated sum to the State
n fu and compete reease and dscharge of a of the State s cams
to such property.
Secton 7 of the Caforna en Property Intatve ct of 1920, as
amended, under whch the escheat proceedngs were brought, provdes
n part as foows:
7. scheat of property acqured n fee: grcutura and. ny rea property
hereafter acqured n fee n voaton of the provsons of ths net by any aen
mentoned n secton 2 of ths act, or by any company, assocaton or corporaton
mentoned n secton 3 of ths act, sha escheat as of the date of such acqurng,
to, and become nnd reman the property of the State of Caforna. The attorney
genera or dstrct attorney of the proper county sha nsttute proceedngs to
have the escheat of such rea property ad|udged and enforced n the manner pro-
vded by secton 474 of the Potcn Code and tte , part 3 of the Code of Cv
Procedure. Upon the entry of fna |udgment n such proceedngs, the tte to
such rea property sha pass to the State of Caforna, as of the date of such
acquston n voaton of the provsons of ths act. Deerng s Genera
Laws of Caforna, 1031, voume 1, page 107.
Secton 1 of the Caforna en Property Intatve ct, as
amended, provdes that a aens egbe to ctzenshp under the aws
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29.24-2.
0
of the Unted States may acqure, possess, en|oy, use, cutvate, occupy,
transfer, transmt, and nhert rea property or any nterest theren.
Secton 2 of the act provdes that those aens not capabe of becomng
Unted States ctzens may acqure reaty n the State ony n the man-
ner and to the e tent prescrbed bv a treaty e stng between the Unted
States and the aen s country. Secton 3 makes smar provsons, as
do sectons 1 and 2, wth respect to corporatons of whch a ma|orty
of the members are aens or a ma|orty of the stock of whch s owned
by aens. Secton 9 provdes n part as foows:
9. Conveyance to prevent escheat. very transfer of rea property, or of
an nterest theren, though coorabe In form, sha be vod as to the State and
the nterest thereby conveyed or sought to be conveyed sha escheat to the State
as of the date of such transfer, f the property nterest nvoved s of such a
character that an aen mentoned n secton 2 hereof s nhbted from acqurng,
possessng, en|oyng, usng, cutvatng, occupyng, transferrng, transmttng or
nhertng t, and f the conveyance s made wth ntent to prevent, evade or avod
escheat as provded for heren. Deerng s Genera Laws of Caforna, 1931,
voume 1, page 10 .
It s we setted that amounts e pended n defendng or perfectng
tte to property are capta e pendtures consttutng a part of the
cost of the property and are not deductbe as ordnary and necessary
busness e penses. (See secton 29.24-2 of Reguatons 111 Murphy
O Co. v. urnet, 2 7 U. S., 299, Ct. D. 619, C. . -1, 231 (1933)
Morgan ones state v. Commssoner, 127 ed. (2d), 231 R. D.
armer et a., Trustees, v. Commssoner, 126 ed. (2d), 542 North
mercan O Consodated v. Commssoner, 2 6 U. S., 417, Ct. D. 499,
C. . I-1, 293 (1932).) It has been hed that payments made to the
en Property Custodan to procure the reease of property are not
an aowabe busness e pense but a capta e pendture to be added
to the cost of the property. (See . R. R. 231 , C. . II-, 2 (1923),
and ce P. achofen von cht v. Commssoner, 21 . T. ., 702.)
In . . ott Co. v. Commssoner (45 . T. ., 2), the ta payer
had purchased certan assets from another corporaton whch went
nto bankruptcy and the bankruptcy trustee brought sut to set asde
the transfer on the ground that the transfer was frauduent. It was
hed that the payment of 4,000 by the ta payer n compromse sette-
ment of the sut was a capta e pendture to protect the ta payer s
nvestment n the assets purchased, and not deductbe as an ordnary
and necessary busness e pense.
In the nstant case, the corporaton hed agrcutura and under
coor of tte. The escheat proceedngs were a coud on that tte snce,
f the ta payer had been unsuccessfu n those proceedngs, the and
woud have escheated to the State. s a resut of the compromse
payment n fu settement of the State s cams, the coud on the tte
was removed and the ta payer was abe to convey good tte to a thrd
party. It s not matera that provson was made for payment of the
compromse amount out of the proceeds of the sae.
In vew of the foregong, t s the opnon of ths offce that the
ayment n queston does not consttute an ordnary and necessary
msness e pense whch s deductbe for edera ncome ta purposes.
Such payment, however, consttutes a capta e pendture whch may
be added to the cost or other bass of the property.
. P. We che,
Chef Counse, ureau of Interna Revenue.
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1
29.42-2.
Secton 29.24-2: Capta e pendtures.
( so Secton 19.24-2, eguatons 103.)
INT RN L R NU COD .
eguatons 103 and 111 amended. (See T. D. 5513, page 61.)
P 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.
Secton 29.42-2: Income not reduced to 1946-11-1231
possesson. I. T. 3 02
INT RN L R NU COD .
The retrement pay of a Unted States rmy offcer for the perod
darng whch he was hed a prsoner of war n the Phppnes was
constructvey receved by hm as t accrued and s sub|ect to edera
ncome ta for the years n whch t was so receved.
dvce s requested whether the retrement pay of a Unted States
rmy offcer for the perod durng whch he was hed a prsoner of
war m the Phppnes s sub|ect to edera ncome ta for the year
n whch such pay accrued or for the year n whch t was actuay
receved.
In the nstant case, the ta payer, havng served the necessary
perod of tme n the Unted States rmy, was retred as a non-
commssoned offcer n 1929. e made hs home n the Phppne
Isands unt 1942, when he was taken a prsoner of war and nterned
there by the apanese. Upon hs reease n 1945, he returned to the
Unted States, where he receved the amount of hs retrement pay
whch had accumuated durng the perod of hs nternment.
Secton 42(a) of the Interna Revenue Code provdes n part as
foows:
(a) Genera Rue. The amount of a tems of gross ncome sha be
ncuded n the gross ncome for the ta abe year n whch receved by the
ta payer, uness, under methods of accountng permtted under secton 41, any
such amounts are to be propery accounted for as of a dfferent perod.
Secton 29.42-2 of Reguatons 111 provdes n part as foows:
Sec. 29.42-2. Income Not Reduced to Possesson. Income whch s credted
to the account of or set apart for a ta payer and whch may be drawn upon by
hm at any tme s sub|ect to ta for the year durng whch so credted or set
apart, athough not then actuay reduced to possesson. To consttute recept
n such a case the ncome must be credted or set apart to the ta payer wthout
any substanta mtaton or restrcton as to the tme or manner of payment
or condton upon whch payment s to be made, and must be made avaabe
to hm so that t may be drawn at any tme, and Its recept brought wthn hs
own contro and dsposton.
Secton 2 of Pubc Law 490, Seventy-seventh Congress, second
sesson (56 Stat, 143), approved March 7, 1942 (known as the
Mssng Persons ct), provdes n part as foows:
ny person who s n actve servce and s offcay reported as
captured by an enemy sha, whe so absent, be entted to receve or to have
credted to hs account the same pay and aowances to whch such person was
entted at the tme of the begnnng of the absence or may become entted to
thereafter
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f 29.43-2.
2
mounts thus made avaabe to the use of an ndvdua are
constructvey receved by hm at the tme they are credted to hs
account, and represent ncome for the year n whch such constructve
recept occurs rather than for the year of actua recept. though
secton 2 of Pubc Law 490, supra, does not cover the pay of retred
personne of the Unted States rmy who were prsoners of war,
settement of the retred pay accounts of such ndvduas was accom-
pshed, accordng to advce receved from the War Department,
after ther reease from enemy contro n the same manner as n
the case of pay accounts of ndvduas n actve servce covered by
secton 2 of Pubc Law 490.
In vew of the foregong, t s hed that the retrement pay of a
Unted States rmy offcer for the perod durng whch he was hed
a prsoner of war n the Phppnes was constructvey receved by
hm as t accrued and s sub|ect to edera ncome ta for the year
n whch t was so receved.
S CTION 43. P RIOD OR W IC D DUCTIONS
ND CR DITS T N.
Secton 29.43-2: When charges deductbe. 1946-10-12303
I. T. 3 00
INT RN L R NU COD .
Tme of accrua for edera Income ta purposes of certan pay-
ments (whch are deductbe for edera ncome ta purposes) made
by voators of a reguaton, order, or prce schedue of the Offce of
Prce dmnstraton n settement of actons nsttuted or proposed
to be nsttuted under the authorty of secton 205(e) of the mer-
gency Prce Contro ct of 1942 (56 Stat., 23, 34).
dvce s requested as to the tme of accrua for edera ncome ta
purposes pf (1) the abty wth respect to amounts pad pursuant to
|udgments n favor of consumers or users (other than the Unted
States) n consumer actons under secton 205(e) of the mergency
Prce Contro ct of 1942 (56 Stat, 23, 34) and of amounts pad n
compromse of pendng or contempated tgaton n such cases (2)
vountary payments made to the Unted States on account of prce
ceng voatons durng the 6-month perod anuary 31. 1942, the
day after the date on whch the mergency Prce Contro ct of 1942
was approved, to uy 30, 1942, the day precedng the date on whch
secton 205(e) of such ct became effectve, both dates ncusve and
(3) amounts pad to the Unted States on account of overcharges
wth respect to saes made on or after uy 31, 1942, to consumers or
users (other than the Unted States) who have a rght of acton aganst
the seers under secton 205(e) of the mergency Prce Contro ct
of 1942 pror to the amendment of that secton n 1944. The pay-
ments n queston were hed to be deductbe for edera ncome ta
purposes n I. T. 3G27 (C. . 1943, 111) and I. T. 3630 (C. . 1943,113).
The rue as to the tme when deductons may be taken for edera
ncome ta purposes by a ta payer who keeps accounts and fes re-
turns on the accrua bass for amounts pad to consumers or to the
Unted States n settement of causes of acton arsng from voatons
of prce cengs estabshed by the Offce of Prce dmnstraton s
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29.43-2.
the same as n the case of any other abty whch s pad by a ta payer
who keeps accounts and fes returns on the accrua bass. The ta -
abe year n whch a the events occur f ng the abty to make pay-
ment s the proper tme of accrua. The abty to make payment
must be defnte and certan and not contngent or contested. (See
D e-Pne Products Co. v. Commssoner, 320 U. S., 516, Ct. D. 159 ,
C. . 1914, 509, and cases cted theren.)
It s hed that the abty wth respect to amounts pad pursuant
to |udgments n favor of consumers or users (other than the Unted
States) n consumer actons under secton 205(e) of the mergency
Prce Contro ct of 1942 accrues on the date the |udgments become
fna, and the abty wth respect to amounts pad n compromse of
pendng or contempated tgaton n such cases accrues on the date
abty to make such payments becomes f ed and certan.
The abty wth respect to vountary payments made to the
Unted States on account of prce ceng voatons durng the above-
mentoned 6-month perod anuary 31, 1942, to uy 30, 1942, whch
payments are not made under statutory compuson, accrues at the
tme payment s made or at such earer tme when, by agreement or
otherwse, the abty to make such payments becomes f ed and
certan.
Secton 205(e) of the mergency Prce Contro ct of 1942, as
amended by secton 10 (b) of the Stabzaton tenson ct of 1944
(5 Stat., 632, 640), authorzes the Prce dmnstrator to nsttute
a cv acton n any case n whch a buyer havng a cause of acton
aganst a seer on account of a prce ceng voaton fas to nsttute
an acton wth respect thereto wthn 30 days from the date of occur-
rence of the voaton. s provded n secton 10 (c) of the Stab-
zaton tenson ct of 1944, the amendment made by secton 10 (b)
of that ct s appcabe ony wth respect to voatons occurrng after
the date of enactment of such ct ( une 30,1944). Where the acton
s nsttuted, or proposed to be nsttuted, by the Prce dmnstrator
under secton 205(e) of the mergency Prce Contro ct of 1942,
as amended, amounts pad to the Unted States are not deductbe for
edera ncome ta purposes. (See I. T. 3799, page 56, ths uetn.)
efore amendment of secton 205(e) of the mergency Prce Contro
ct of 1942 by secton 10 (b) of the Stabzaton tenson ct of
1944, the Prce dmnstrator had no authorty to nsttute cv ac-
tons on account of overcharges wth respect to saes made to con-
sumers or users (other than the Unted States) who had rghts of
acton aganst the seers, and t s for that reason that payments
made to the Unted States on account of such overcharges were hed
n I. T. 3630, supra, to be deductbe. Therefore, the rung made n
I. T. 3630, supra, reatng to the deductbty of such payments, s
appcabe ony wth respect to payments to the Unted States on ac-
count of overcharges on saes made on or after uy 31, 1942, and
before uy 1, 1944.. In accordance wth the above-stated rde of
accrua, the abty wth respect to such payments accrues, for ed-
era ncome ta purposes, at the tme payment s made or at such
earer tme when, by agreement or otherwse, the abty to make the
payment becomes f ed and certan.
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29.51-1.
4
P RT . R TURNS ND P YM NT O T .
S CTION 51. INDI IDU L R TURNS.
Secton 29.51-1: Indvdua returns. 1946- -12237
I. T. 37 2
INT RN L R NU COD .
husband and wfe domced n Okahoma are entted to In-
cude n ther separate edera ncome ta returns one-haf of ther
communty ncome receved or accrued on and after uy 26, 194. ,
the effectve date of the 1945 Okahoma Communty Property ct.
dvce s requested whether a husband and wfe who are dom-
ced n the State of Okahoma may each report n separate edera
ncome ta returns one-haf of ther communty ncome receved or
accrued after the effectve date of the 1945 Okahoma Communty
Property ct.
The ureau recognzes that the 1945 Okahoma Communty Prop-
erty ct, approved pr 2 , 1945 ( . . 21 , twenteth reguar
sesson, Okahoma Legsature), estabshes a communty property
system whch, for edera ncome ta purposes, satsfes the test
prescrbed by the Supreme Court of the Unted States n Poe v. Sea-
bom (2 2 U . S., 101, Ct. D. 259, C. . I -2, 202 (19:50)) and Com-
mssoner v. armon (323 U. S., 44, Ct. D. 1616, C. . 1944, 166).
owever, secton 1 of the act, whch attempts to vadate the 1939
Okahoma Communty Property ct retroactvey, w not be recog-
nzed for edera ncome ta purposes.
In vew of the foregong, t s hed that a husband and wfe who
are domced n the State of Okahoma are entted to ncude n
ther separate edera ncome ta returns one-haf of ther com-
munty ncome receved or accrued on and after uy 26, 1945, the
effectve date of the 1945 Okahoma Communty Property ct.
Secton 29.51-1: Indvdua returns. 1946-1-1223
I. T. 37 3
nterna revenue code.
usband and wfe hodng property as tenants by the entrety
In the State of onnsyvana may each report one-haf of the ncome
from such property n ther separate edera ncome ta returns.
dvce s requested as to the proper treatment for edera ncome
ta purposes of ncome from property hed by husband and wfe as
tenants by the entrety n the State of Pennsyvana.
Secton 31, chapter 2, tte 4 of Purdon s Pennsyvana Statutes
nnotated (Permanent dton) provdes as foows:
Sec. 31. Marred women to have same property rghts as unmarred persons
e ceptons
ereafter a marred woman sha have the same rght and power as an un-
marred person to acqure, own, possess, contro, use, ease, se, or otherwse
dspose of any property of any knd, rea, persona or m ed, and ether n pos-
sesson or e pectancy, and may e ercse the sad rght and power n the same
manner and to the same e tent as an unmarred person, but she may not mort-
gage or convey her rea property, uness her husband |on n such mortgage or
conveyance.
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5
29.51-1.
In O MaUeyv. O Maey (272 Pa., 52 116 t., 500) the Supreme
Court of Pennsyvana stated that before the passage of the varous
Pennsyvana statutes reatng to the property of marred women,
a husband who hed wth hs wfe an estate by the entretes n the
State of Pennsyvana had absoute contro of t and ts ncome, .e -
acty as f he were the owner n fee that he coud aen t, and the
purchaser woud obtan an estate for the fe of the husband and an
absoute estate n remander f the husband survved hs wfe. The
court ponted out that a ths was changed, however, by the Marred
Women s Property cts, whch gave marred women the same prop-
erty rghts as unmarred persons, wth certan e ceptons. Those
acts dd not abosh estates by entretes but, due to the changes made,
nether husband nor wfe coud se even the e pectancy of survvor-
shp n such an estate wthout the |onder of the other, nor coud a
vad tte to the mmedate nterest or e pectancy be obtaned by a
sherff s sae or under proceedngs n bankruptcy. The court sad n
effect that ncome accrung wth respect to such property whe the
grantees ve beongs to each of the two and not to one e cusvey.
In vew of the foregong, t s hed that husband and wfe hodng
property as tenants by the entrety n the State of Pennsyvana may
each report one-haf of the ncome from such property n ther sepa-
rate edera ncome ta returns. (See George . rennen v. Com-
mssoner, 4 T. C, 1200, acquescence, C. . 1945, 2, and I. T. 3743,
C. . 1945,142.)
Secton 29.51-1: Indvdua returns. 1946-4-12239
I. T. 37 4
INT RN L R NU COD .
husband and wfe who are domced In the Terrtory of awa
are entted to Incude In ther separate edera ncome ta returns
one-haf of ther communty Income receved or accrued on and after
une 1, 1045, the effectve date of Chapter 301 of Tte 32 of the
Revsed Laws of awa, 1945, reatng to communty property
( . . No. 474, approved March 30,1945).
dvce s requested whether a husband and wfe who are domced
n the Terrtory of awa may each report n separate edera n-
come ta returns one-haf of ther communty ncome receved or ac-
crued after the effectve date of Chapter 301 , Tte 32, Revsed Laws
of awa, 1945, reatng to communty property ( . . No. 474,
approved March 30, 1945).
Under the above-mentoned awaan statute a present vested one-
haf nterest n the communty property, as denned n the statute, s
gven to the husband and a ke nterest to the wfe. There s no eec-
tve or consensua provson n the statute, and t s appcabe to a
husbands and wves domced n awa as an ncdent of marrage.
The ndvdua powers of management, contro, and dsposton of the
communty property gven to the husband and wfe are specfcay
restrcted n favor of the communty n severa mportant respects.
The ureau recognzes that the awaan statute n queston satsfes
the requrements of a communtv property system, as ad down by
the Supreme Court of the Unted States n Poe v. Seaborn (2 2 U. S.,
101, Ct. D. 259, C. . I -2,202 (1930)) and Commssoner v. armon
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29.51-1.
6
(323 U. S., 44, Ct. D. 1616, C. . 1944,166), so as to permt a husband
and wfe, domced n awa, to ncude n ther separate edera
ncome ta returns one-haf of ther communty ncome.
In vew of the foregong, t s hed that a husband and wfe who are
domced n the Terrtory of awa are entted to ncude n ther
separate edera ncome ta returns one-haf of ther communty n-
come receved or accrued on and after une 1, 1945, the effectve date
of Chapter 301 of Tte 32 of the Revsed Laws of awa, 1945.
Secton 29.51-1: Indvdua returns. 1946- -122 9
I. T. 3792
INT RN L R NU COD .
Treatment for edera ncome ta purposes of varous types of
ncome under the awaan communty property aw (Chapter 301 ,
Tte 32, Revsed Laws of awa, 1945).
I. T. 37S4 (page 5, ths uetn) apped and ampfed.
dvce s requested wth respect to the treatment for edera ncome
ta purposes of varous types of ncome under the awaan commu-
nty property aw (Chapter 301 . Tte 32, Revsed Laws of awa.
1945) n connecton wth the appcaton of I. T. 37 4 (page 5, ths
uetn). That rung hods that a husband and wfe who are dom-
ced n the Terrtory of awa are entted to ncude n ther separate
edera ncome ta returns one-haf of ther communty ncome re-
ceved or accrued on and after une 1, 1945, the effectve date of the
awaan communty property aw. The types of ncome wth
respect to whch nqury s made are as foows:
1. Compensaton receved on or after une 1,1945, the effectve date
of the awaan communty property aw, for servces rendered pror
to that date n the case of a husband and wfe domced n the Terr-
tory of awa who fe caendar year returns on the cash recepts and
dsbursements bass.
2. Income receved from partnershp net earnngs for perods ended
pror to une 1,1945, and for perods begnnng on or after that date
where the partnershp keeps accounts and fes edera ncome ta
returns on the caendar year and the cash recepts and dsbursements
bass.
3. Communty ncome receved on or after une 1,1945, n the case
of a husband and wfe domced n the Terrtory of awa who have
heretofore fed separate edera ncome ta returns and desre, to
contnue such practce, each reportng ony hs or her actua ncome
and dsregardng the communty ncome.
The poston of the ureau wth respect to the three stuatons pre-
sented s as foows:
1. In the case of a husband and wfe domced n the Terrtory of
awa who fe caendar year returns on the cash recepts and ds-
bursements bass, compensaton for servces rendered pror to une 1,
1945, the effectve date of the awaan communty property aw,
consttutes separate ncome for edera ncome ta purposes, even
though such compensaton s receved on or after that date. (See
Wrghtsman v. Commssoner, 111 ed. (2d), 227.)
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7
5 29.51-1.
2. In the case of a partnershp whch keeps accounts and fes ed-
era ncome ta returns on a caendar year and cash recepts and ds-
bursements bass, ncome representng partnershp net earnngs for
perods ended pror to une 1945, consttutes separate ncome, but
ncome representng partnershp net earnngs for perods begnnng on
or after une 1, 1945, consttutes communty ncome. (See Wrghts-
man v. Commssoner, supra I. T. 1576, C. . II-, 144 (1923) bert
. ouston v. Commssoner, 31 . T. ., 1 Unted States v.
Covby, 251 ed., 9 2, T. D. 2 5 , C. . 1, 166 (1919), affrmed, 25
ed., 27.)
3. The ssue here s whether n awa a husband and wfe may by
agreement eect out of the communty property system, partcuary
as to future ncome from persona servces and property. Secton
12366 of the Revsed Laws of awa, 1945, provdes as foows:
Contracts. marred woman may make contracts, ora and wrtten, seaed
and unseaed, n the same manner as f sue were soe, e cept that she sha not
contract wth her husband provded, however, that any deed or assgnment
e ecuted by ether husband or wfe to or n favor of the other, and any agree-
ment e ecuted by husband and wfe settng ther respectve rghts In property
owned by them or ether of them when such agreement s made n contempaton
of dvorce or |udca separaton, sha be vad to the same e tent as bettcecn
other persons. Itacs supped.
Secton 7 of the awaan communty property aw provdes as fo-
ows:
Sec. 7. Transfers usband to wfe and wfe to husband. The husband may
gve, grant, bargan, se or convey drecty to hs wfe, and the wfe may gve,
grant, bargan, se or convey drecty to her husband, hs or her communty
rght, tte, Interest, or estate n a or any communty property, rea or persona.
very such transfer made from the husband to the wfe or from the wfe to the
husband sha operate to dvest the property theren descrbed of every cam
or demand as communty property, and sha vest the same n the transferee as
the separate property of the transferee provded, however, that no such transfer
sha affect any equty n favor of credtors at the tme of such transfer.
Where a husband and wfe domced n the Terrtory of awa
fe separate edera ncome ta returns, the husband s requred to
ncude hs share of communty ncome n the gross ncome reported
n hs separate return, and the wfe must ncude her share of the com-
munty ncome n her separate return. owever, n vew of the pro-
vsons of secton 12366 of the Revsed Laws of awa, 1945, supra,
and secton 7 of the awaan communty property aw, supra, an
agreement between such a husband and wfe whch provdes that the
earnngs of ether, or the ncome from the separate property of ether,
sha be the separate ncome of the spouse whose abor or property
produced the ncome w be recognzed for- edera ncome ta pur-
poses. (See G. C. M. 1 4, C. . 1937-2, 5 everng v. ckman,
70 ed. (2d) , 9 5, Ct. D. 66, C. . III-2, 274 (1934) an ven/ v.
Commssoner, 10 ed. (2d), 650, certorar dened, 309 U. S., 6 9
and Sparkman v. Commssoner, 112 ed. (2d), 774.) The cted cases
nvove the aw of Caforna whch s smar to the aw of awa
n so far as t reates to assgnments of communty property nterests
between husband and wfe.
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55.
S
Secton 29.51-1: Indvdua returns. 1946-9-12299
I. T. 3796
INT RN L R NU COD .
usband and wfe hodng property as tenants by the entrety
n the Dstrct of Coumba may each report one-haf of the ncome
from such property n ther separate edera ncome ta returns.
dvce s requested as to the proper treatment for edera ncome
ta purposes of ncome from property hed by husband and wfe as
tenants by the entrety n the Dstrct of Coumba.
Tenances by the entrety are recognzed n the Dstrct of Co-
umba. (See Loughran v. Lemmon, 19 pp. D. C, 141: Sette v.
Sette, ed. (2d), 911, 56 pp. D. C, 50 erb v. Gerstem, 41 ed.
Supp., 634.) In arcaw v. orrest (130 ed. (2d), 29, 76 U. S.
pp. D. C, 197), whch nvoved an estate by the entrety, the Unted
States Court of ppeas for the Dstrct of Coumba stated, nter
aa, that the effect of the marred woman s property aw (16 Stat.,
45) has been to change the common-aw prncpe of marta unty
so that the husband can not assert an e cusve rght to the rents
and profts of hs wfe s property, or dvest hs wfe of her share
drecty by conveyance or ndrecty by e ecuton. In effect, the
court stated that, wth respect to an estate by the entrety, each spouse
s entted to the en|oyment and benefts of the whoe and nether has
a separate estate theren whch may be sub|ected to a conveyance or
e ecuton. (See mercan Whoesae Corporaton v. ronsten, 10
ed. (2d), 991, 56 pp. D. C, 126.)
The aws of the States of Pennsyvana and Oregon whch reate
to tenances by the entrety are not materay dfferent from the
aw of the Dstrct of Coumba, and t has been hed that husbands
and wves hodng property n those States as tenants by the entrety
may each report one-haf of the ncome from such property n ther
separate edera ncome ta returns. (See I. T. 37 3, page 4, ths
uetn, and I. T. 3743, C. . 1945,142, respectvey.)
In vew of the foregong, t s hed that husband and wfe hodng
property as tenants by the entrety n the Dstrct of Coumba may
each report one-haf of the ncome from such property n ther sep-
arate edera ncome ta returns.
S CTION 55. PU LICITY O R TURNS.
1946-4-12247
T. D. 5493
TITL 20 INT RN L R NU . C PT R I, SU C PT R , P RT 45 .
INSP CTION O R TURNS.
Reguatons governng the nspecton of ncome, e cess-profts,
and decared vaue e cess-profts ta returns by the War Contracts
Prce d|ustment oard.
Treasury Department,
Washngton 25, D. C.
To Coectors of Interna Revenue and Others Concerned:
Pursuant to the provsons of sectons 55(a), 50 , 603, and 729(a)
of the Interna Revenue Code, ncome, e cess-profts, and decared
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9
55.
vaue e cess-profts ta returns made under the Interna Revenue
Code, as amended, for the year 1939 and subsequent 37ears, sha be
open to nspecton by the War Contracts Prce d|ustment oard.
The nspecton of such returns heren authorzed may be made by
any offcer or empoyee of such oard duy authorzed by the Char-
man of the oard to make such nspecton. Upon wrtten notce by
the Charman to the Secretary of the Treasury statng the casses
of returns whch t s desred to nspect, the Secretary of the Treasury
and any offcer or empoyee of the Treasury Department, wth the
approva of the Secretary of the Treasury, may furnsh the oard
wth any data on such returns or make the returns, or any of them,
avaabe n the offce of the Commssoner of Interna Revenue for
nspecton, and takng of such data as the Charman may desgnate.
The nformaton so obtaned may be pubshed or dscosed n stats-
tca form, provded such pubcaton does not dscose, drecty or
ndrecty, the name or address of any ta paver.
( . O. 9694, ebruary 6, 1946, and sectons 55(a), 50 , 603, and
729(a), 53 Stat., 1, 29, 111 54 Stat., 974, 9 9 26 U. S. C, 1940 ed.,
55(a), 50 ,603, and 729 (a).)
red M. nson,
Secretary of the Treasury.
pproved ebruary 6, 1946.
arry S. Truman,
The Whte ouse.
( ed wth the Dvson of the edera Regster ebruary 6, 1946, 11.06 a. m.)
e ecutve: order nspecton of ncome, e cess-profts, and decared
vaue e cess-profts ta returns by the war contracts trce
ad|ustment board.
y vrtue of the authorty vested n me by sectons 55(a), 50 , 603,
and 729(a) of the Interna Revenue Code (53 Stat., 1, 29, 111 54
Stat., 974, 9 9), t s hereby ordered that ncome, e cess-profts, and
decared vaue e cess-profts ta returns made under the Interna
Revenue Code for the year 1939 and subsequent years, sha be open
to nspecton by the War Contracts Prce d|ustment oard, sub|ect
to the condtons stated n the Treasury decson reatng to the n-
specton of such returns by such oard approved by me ths date.
Ths Order sha be pubshed n the edera Regster.
arry S. Truman,
The Whte ouse.
ebruary 6,1946.
( ed wth the Dvson of the edera Regster ebruary 6, 1046, 11.06 a. m.)
703672 46 7
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10 .
go
SU C PT R C SUPPL M NT L PRO ISIONS.
SUPPL M NT R T S O T .
S CTION 10 . ISC L Y R T P Y RS.
1946- -12240
Mm. 59 0
Computaton of corporaton ncome ta provded by secton 10 of
the Interna Revenue Code, as amended by secton 131(a) of the
Revenue ct of 1945, and e cess profts ta as provded by secton
710(a) of the Interna Revenue Code, as amended by secton 131(b)
of the Revenue ct of 1945, wth respect to fsca year ta payers.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C, anuary 31, 1946.
Coectors of Interna Revenue, Interna Revenue gents n Charge,
and Others Concerned:
1. The Revenue ct of 1945 contans a speca provson for deter-
mnng the effect of the ta reducton provded n such ct n the case
of a corporaton makng a return on the bass of a ta abe year
begnnng n 1945 and endng n 1946. New return forms w not be
prnted tor the computaton of ncome ta , decared vaue e cess-
profts ta , or e cess profts ta by a corporaton computng ts ncome
and makng ts return on a fsca year bass. owever, such a cor-
poraton may use the appcabe corporaton forms and nstructons
for 1945, currenty avaabe, suppemented by the nstructons con-
taned heren, to determne ts ta abty by gvng effect to the
appcabe provsons of aw contaned n the Interna Revenue Code,
as amended by the Revenue ct of 1945.
2. Secton 131 of the Revenue ct of 1945 (Pubc Law 214, Seventy-
nnth Congress, frst sesson) amends secton 10 of the Interna
Revenue Code by addng a new subsecton desgnated (c). Secton
10 (c) of the Code provdes, wth respect to a corporaton, that n the
case of a ta abe year begnnng n 1945 and endng n 1946, the ta
mposed by sectons 13, 14, and 15 of the Code sha be an amount
equa to the sum of
(1) that porton of a tentatve ta , computed as f the aw ap-
pcabe to ta abe years begnnng on anuary 1, 1945, were ap-
pcabe to such ta abe 37ear, whch the number of days n such
ta abe year pror to anuary 1, 1940, bears to the tota number
of days n such ta abe year, pus
(2) that porton of a tentatve ta , computed as f the aw
appcabe to years begnnng on anuary 1,194G, were appcabe
to such ta abe year, whch the number of days n such ta abe
year after December 31,1945, bears to the tota number of days n
such ta abe year.
3. The speca rue prescrbed n secton 10 (c) of the Code for the
computaton of the ta mposed by sectons 13, 14, and 15 of the
Code n the case of a ta abe year begnnng n 1945 and endng n
1946 s to be apped to ascertan
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10 .
(a) the frst tentatve norma ta and surta , computed as f
the aw appcabe to ta abe years begnnng on anuary 1,1945,
were appcabe to such ta abe | ear,
(6) the second tentatve norma ta and surta , computed as
f the aw appcabe to years begnnng on anuary 1, 1946, were
appcabe to such ta abe year,
(c) that porton of the frst tentatve norma ta and surta ,
computed as set forth n (a) above, whch the number of days n
such ta abe 3 ear pror to anuary 1, 194G, bears to the tota
number of days n such ta abe year,
(d) that porton of the second tentatve norma ta and surta ,
computed as set forth n (b) above, whch the number of days
after December 31,1945, bears to the tota number of days n such
ta abe year, and
(e) the amount equa to the sum of (c) and (d).
4. Computaton of frst tentatve norma ta and surta . Corpora-
ton Income and Decared aue cess-Profts Ta Return, orm
1120 for 1945, shoud be used as a gude to compute the frst tentatve
norma ta and surta specfed n secton 10 (c) ) of the Code.
Wth respect to the computaton of such ta , the tems, nes, and
schedues appearng on orm 1120 for 1945 may be used wthout
change n the numberng or arrangement of such tems, nes, and
schedues. Lkewse, the nstructons reatng to each tem, ne, and
schedue may be apped wth respect to the computaton of such ta .
The frst tentatve norma ta and surta w correspond wth an
amount whch otherwse woud be entered on ne 27, page 2 of such
form. In cases n whch an aternatve ta s computed under the
provsons of secton 117(c) of the Code, see paragraph 7 for further
nstructons.
5. Computaton of second tentatve norma ta and surta . The
Revenue ct of 1945 contans certan provsons whch must be taken
nto consderaton before computng the second tentatve norma ta
and surta for the reason that such ta must be computed as f the
aw appcabe to a year begnnng on anuarv 1,1946, were appcabe
to a ta abe year begnnng n 1945 and endng n 1946. Therefore,
certan changes must be made on orm 1120 for 1945 to gve effect to
the provsons of the Revenue ct of 1945 whch are appcabe to a
ta abe year begnnng on anuary 1, 1946. Such changes are set
forth beow:
Page 1:
Strke out tem 39. d|usted e cess profts net ncome from
orm 1121. (See nstructon on page .)
Strke out mnus tem 39 appearng n tem 40..
Page 2:
Strke out ne 1 . d|usted e cess profts net ncome (tem
39, page 1).
Strke out mnus 1 appearng n ne 19.
mend the foowng numbered nes to read
Per cent.
Lne 22. Porton of ne 21 (not In e cess of 25,000) and ta at 6 per
cent (or per cent In the case of a consodated return) 6
Lne 26. Surta (14 per cent of ne 25) (or 10 per cent n the case of a
consodated return) 14
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10 .
92
orm 1120 for 1945, amended n accordance wth the changes set
forth above, may be used to compute the second tentatve norma ta
and surta specfed n secton 10 (c)(2) of the Code. The nstruc-
tons reatng to each tem, ne, and schedue, e cept as affected by the
provsons of ths mmeograph, are appcabe wth respect to the com-
putaton of such ta . The second tentatve ta as so computed w
correspond wth an amount whch otherwse woud be entered on ne
27, page 2 of such form. In cases n whch an aternatve ta s com-
puted under the provsons of secton 117(c) of the Code, see paragraph
7 for further nstructons.
6. Computaton of norma ta and surta . The norma ta and sur-
ta for a ta abe year begnnng n 1945 and endng n 194G w be the
sum of the foowng
(a) that porton of the frst tentatve norma ta and surta ,
computed as set forth n paragraph 4, whch s obtaned by mut-
pyng the amount of such tentatve ta by the number of days n
the ta abe year pror to anuary 1, 1946, and dvdng the resut
thus obtaned by the number of days n such ta abe year, and
(b) that porton of the second tentatve norma ta and surta
computed as set forth n paragraph 5, whch s obtaned by mut-
pyng the amount of such tentatve ta by the number of days n
the ta abe year after December 31,1945, and by dvdng the resut
thus obtaned by the number of days n the ta abe year.
The sum of the respectve portons of the frst and second tentatve
norma ta es and surta es w correspond wt an amount whch other-
wse woud be entered on ne 2 , page 2 of orm 1120 for 1945, n cases
n whch the aternatve ta under secton 117(c) of the Code s not
appcabe.
7. Computaton of aternatve ta on Schedue C orm 1120). (a)
In genera. In any case n whch a corporaton has a net ong-term
capta gan, or an e cess of net ong-term capta gans over net short-
term capta osses, the aternatve ta under secton 117(c) of the Code
for a ta abe year begnnng n 1945 and endng n 1946 w be an
amount equa to the sum ot the porton of the tentatve ta es deter-
mned under the speca rue prescrbed n secton 10 (c) of the Code
by computng each such tentatve ta n accordance wth the aterna-
tve ta computaton provded n secton 117(c) of the Code,, regardess
of whether ether tentatve ta so computed on the aternatve bass s
arger or smaer than the aternatve ta computed wthout regard to
secton 117(c) of the Code.
(b) Computaton of frst tentatve ta on aternatve bass. Sched-
ue C ( orm 1120) for 1945 may be used to compute the frst tentatve
ta on the. aternatve bass under secton 117(c) of the Code. The
frst tentatve ta so computed on the aternatve bass w correspond
wth an amount whch otherwse woud be entered on ne 29, Schedue
C ( orm 1120) for 1945.
(c) Computaton of second tentatve ta on aternatve bass.
Schedue C ( orm 1120) for 1945, changed to refect the appcaton of
the provsons of the Revenue ct of 1945, may be used for the pur-
pose of computng the second tentatve ta pursuant to the aternatve
computaton provded n secton 117(c) of the Code. The foowng
changes shoud be made, n Schedue C ( orm 1120) for 1945:
Lne 6: Strke out Income sub|ect to e cess profts ta (tem 39,
page 1, orm 1120).
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93
10 .
Lne 7: Strke out mnus tem 39.
Lne 1 : Strke out Income sub|ect to e cess profts ta .
Lne 19: Strke out mnus ne 1 .
mend the foowng numbered nes to read
Per cent.
Lne 22. Porton of ne 21 (not In e cess of 25,000) and ta at 0 per cent
(or per cent In the case of a consodated return) 6
Lne 26. Surta (14 per cent of ne 25) (or 16 per cent In the case of a
consodated return) 14
The second tentatve ta so computed on the aternatve bass w
correspond wth an amount whch otherwse woud be entered on ne
29 of Schedue C ( orm 1120) for 1945.
(d) Determnaton of aternatve ta . The aternatve ta (ne 29,
Schedue C ( orm 1120)) for a ta abe year begnnng n 1945 and
endng n 1946, w be the sum of the foowng:
() that porton of the frst tentatve ta on the aternatve
bass, computed as set forth n (b) above, whch s obtaned by
mutpyng the amount of such tentatve ta by the number of
days n the ta abe year pror to anuary 1, 194C, and dvdng
the resut thus obtaned by the number of days n the ta abe
year and
() that porton of the second tentatve ta on the aternatve
bass, computed as set forth n (c) above, whch s obtaned by
mutpyng the amount of such tentatve ta by the number of
days n the ta abe year after December 31,1945, and by dvdng
the resut thus obtaned by the number of days n the ta abe year.
(e) Determnaton of ta abty. The ta abty for a ta abe
year begnnng n 1945 and endng n 1946 n the case of a ta payer
havng a. net ong-term capta gan, or an e cess of net ong-term
capta gans over net short-term capta osses, w be the tota norma
ta and surta as determned under paragraph 6, or the aternatve
ta as determned under subparagraph (d). above, whchever s the
esser. Such ta w be an amount whch otherwse woud be entered
on ne 31, Schedue G ( orm 1120), and on ne 2 , page 2 of orm
1120 for 1945.
. Tota ncome ta . The tota ncome ta as determned under
paragraph 6, or paragraph 7(e), as the case may be, w correspond
to an amount whch otherwse woud be entered as tem 42, page 1
of orm 1120 for 1945.
9. ppcaton of credt for ncome ta es pad to a foregn country
or Unted States possesson. The credt for ta es n the case of a cor-
poraton sub|ect to the provsons of secton 10 (c) of the Code sha
be deducted from, and any mtatons contaned n such credt sha
be based upon, the tota ncome ta as determned under paragraph .
10. Decared vaue e cess-profts ta computaton. The provsons
of secton 10 (c) of the Code are not appcabe wth respect to the
computaton of the decared vaue e cess-profts ta . owever, sec-
ton 201 of the Revenue ct of 1945 repeaed Chapter 6 (mposng
the capta stock ta ), effectve wth respect to years endng after
une 30, 1945, and secton 202 of the Revenue ct of 1945 repeaed
Subchapter of Chapter 2 (mposng the decared vaue e cess-profts
ta ), effectve wth respect to ncome-ta ta abe years endng after
une 30,1946. ccordngy, the decared vaue e cess-profts ta com-
putaton schedue on page 2, contanng nes 1 to , ncusve, s not
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10 .
94
appcabe n the case of an ncome-ta ta abe year endng after
une 30,1946.
Wth respect to the computaton of the decared vaue e cess-profts
ta for an ncome-ta ta abe year endng after une 30, 1945, and
before uy 1, 1946, secton 203 of the Revenue ct of 1945 amends
secton 600 of the Code by addng a new subsecton, desgnated (b),
to provde for an aternatve decared vaue e cess-profts ta com-
putaton n a case n whch the net ncome for the purposes of the
, decared vaue e cess-profts ta ncudes any amount on account of
war oss recoveres under secton 127(c) of the Code.
The aternatve decared vaue e cess-profts ta computed under
secton 600(b) of the Code s n eu of the decared vaue e cess-
profts ta mposed by secton 600(a) of the Code and shoud be
computed f the net ncome for the ta abe year ncudes any amount
wth respect to war oss recoveres. or any such ncome-ta ta abe
year, ths aternatve decared vaue e cess-profts ta s an amount
computed under secton 600(a) of the Code (see nes 1 to , ncusve,
page 2 of orm 1120 for 1945) after e cuson from net ncome of
the amount of the war oss recoveres, pus the esser of the foowng
amounts
(a) I per cent of the amount of the war oss recoveres n-
cuded n the net ncome, or
(b) 11/4 per cent of such porton of the net ncome whch
woud be sub|ect to ta under secton 600(a) of the Code com-
puted wthout regard to secton 600(b) of the Code.
In those cases n whch the aternatve decared vaue e cess-profts
ta s appcabe, the amount of such ta shoud be entered on ne ,
page 2 of orm 1120 for 1945.
11. Preparaton of returns on orm 1120. Corporaton Income
and Decared aue cess-Profts Ta Return, orm 1120 for 1945,
shoud be used for the purpose of makng and fng a return for a
ta abe year begnnng n 1945 and endng n 1946. fter gvng
effect to the rues set forth n the precedng paragraphs, the form to be
fed wth the coector of nterna revenue shoud contan
(a) The computaton of the norma-ta net ncome (tems 1 to
41, ncusve, page 1) whch may be made by fng n a app-
cabe tems and schedues.
(b) On nes 9 to 2 , ncusve, page 2, the computaton of the
frst tentatve ta . owever, ne 2 shoud be amended by n-
sertng rst Tentatve Ta after the descrpton of the tem.
(c) The amounts wth respect to the computaton of the tota
ncome and decared vaue e cess-profts ta es, tems 42 to 46,
ncusve, page 1.
(d) nswers to questons, and data wth respect to Schedues
L, M, and N. owever, the nformaton reatng to Schedue N
shoud be supped ony n nstances n whch the nstructon
stated beow s appcabe rather than the nstructon stated n
tem (d) under the headng cess Profts Ta on page 4 of
orm 1120 for 1945. Such tem shoud read as foows:
(d) If an e cess proft ta return s not beng fed for the reason that It
Is camed that the e cess profts net ncome computed under the nvested
capta method s not greater than 10,000, the foowng schedue shoud
be fed n. The competon of Schedue N does not consttute the fng of
an e cess profts ta return.
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10 .
There shoud be attached to and made a part of such return app-
cabe schedues showng the computaton of
( ) Second tentatve norma ta and surta n accordance wth
nstructons contaned n paragraph 5,
( ) Norma ta and surta n accordance wth nstructons
contaned n paragraph 6,.
(C) rst tentatve ta on aternatve bass on Schedue C
( orm 1120) n accordance wth nstructons contaned n para-
graph 7(6),
(D) Second tentatve ta on aternatve bass n accordance
wth nstructons contaned n paragraph 7(c),
( ) ternatve ta n accordance wth nstructons contaned
n paragraph 7(d), and
( ) ternatve decared vaue e cess-profts ta n cases n
whch war oss recoveres are ncuded n net ncome. (See para-
graph 10.)
12. Computaton of e cess profts ta . Secton 122(a) of the Rev-
enue ct of 1945 provdes that Subchapter of Chapter 2 of the
Code, reatng to the e cess profts ta , sha not be appcabe wth
respect to any ta abe year begnnng after December 31, 1945. Sec-
ton 131(b) of the Revenue ct of 1945 added a new paragraph, des-
gnated (7), to secton 710(a) of the Code to provde for the compu-
taton of the e cess profts ta for ta abe years begnnng n 1945
and endng n 1946. In such cases, the ta w be an amount equa
to that porton of a tentatve ta , computed as f the aw appcabe
to ta abe years begnnng on anuary 1, 1945, were appcabe to
such ta abe year, whch the number of days n such ta abe year
pror to anuary 1, 1946, bears to the tota number of days n such
ta abe year.
Corporaton cess Profts Ta Return, orm 1121 for 1945, shoud
be used for the purpose of makng and fng an e cess profts ta
return for a ta abe year begnnng n 1945 and endng n 1946.
Wth respect to the computaton of such ta , the tems, nes, and
schedues appearng on orm 1121 for 1945 mav be used wthout
change n the numberng or arrangement of such tems, nes, and
schedues.
In any case n whch a deferment under secton 710(a) (5) of the
Code s camed, the tentatve e cess profts ta determned under
secton 710(a) (7) of the Code, whch s to be prorated n the determ-
naton of the e cess profts ta under such secton, w be the e cess
rofts ta after deducton of the ta deferment provded n secton
10(a)(5) of the Code. In determnng the appcabty of secton
710(a)(5) of the Code wth respect to the tentatve e cess profts,
ta computaton, the ad|usted e cess profts net ncome w be the
ad|usted e cess profts net ncome computed under secton 710(a) (7)
of the Code, and the norma-ta net ncome w be the norma-ta net
ncome computed under secton 10 (c) (1) of the Code. The amount
by whch the tentatve ta may be reduced w be an amount equa
to 33 per cent of the amount by whch the tentatve e cess profts ta
computed wthout the benefts of secton 722 of the Code e ceeds the
amount of such tentatve e cess profts ta computed by usng the
e cess profts credt based upon a constructve average base perod net
ncome camed by the ta payer under secton 722 of the Code n eu
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29.112(0-1.
of the actua credt. In such cases the return form w refect n tem
16, page 1, the amount of the tentatve e cess profts ta computed
wthout regard to the amount deferred by reason of the appcaton
of secton 710(a) (5) of the Code. The amount of the ta deferment
under such secton, computed as ndcated above, shoud be entered as
tem 17, page 1.
The amount of e cess profts ta whch shoud be entered as tem
1 (a), page 1, w not n any case be the dfference between tem 3
and tem 17, as stated on the return form, but w be an amount de-
termned by subtractng tem 17 from tem 16, mutpyng the df-
ference by the number of days n such ta abe year pror to anuary 1,
1946, and dvdng the resut by the number of days n the ta abe
year. The basc fgures enterng nto such computaton shoud be n-
serted n the space foowng the descrpton of tem 1 (a), page 1.
appcabe tems on page 1 appearng beow tem 1 (6) shoud
be computed as drected and the amounts entered n the approprate
spaces.
In cases n whch a schedue s submtted under queston (g), pago
2 of orm 1121, the amount of e cess profts ta whch otherwse woud
be entered as tem 1 (6), page 1, shoud be mutped by the number
of days n the ta abe year pror to anuary 1, 1946, and dvded by
the number of days n the ta abe year. The amount so computed
shoud be entered as tem 1 (6), page 1, and a appcabe tems on
page 1 foowng tem 1 (6) shoud be computed as drected and the
amounts entered n the approprate spaces.
13. Correspondence reatng to the provsons of ths mmeograph
shoud refer to ts number and the symbos IT: C .
oseph D. Nunan, r.,
S CTION 112(f). R COGNITION O G IN OR LOSS:
IN OLUNT RY CON RSIONS.
Where money receved by a essee as an award for damages from
condemnaton of the eased property by the Unted States s nvested
n the constructon of a budng upon and owned by the ta payer
(essee), and such budng s to be devoted to the same busness
whch was formery conducted on the condemned property, the n-
vestment consttutes an acquston of property smar or reated n
servce or use to the property condemned wthn the meanng of
secton 112(f) of the Interna Revenue Code, and any gan resutng
from the condemnaton w not be recognzed for edera ncome
ta purposes. Where the award money s Invested n machnery or
equpment, the nvestment does not consttute an acquston of prop-
erty smar or reated n servce or use to the property condemned,
and any gan resutng from the condemnaton w be recognzed for
edera ncome ta purposes.
dvce s requested whether gan w be recognzed under secton
112(f) of the Interna Revenue Code f money receved by a essee as
SUPPL M NT . COMPUT TION OP N T INCOM .
Secton 29.112(f)-: Renvestment of proceeds
of nvountary converson.
1946-S-12290
I. T. 3793
INT RN L R NU COD .
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5 29.112(0-1.
an award for damages from condemnaton of the eased property by
the Unted States s nvested (1) n the constructon of a budng
upon and owned by the ta payer (essee), such budng to be devoted
to the same busness whch was formery conducted on the condemned
property, or (2) n machnery or equpment.
In 193 the ta payer eased certan property for a term of years,
nstaed machnery and other equpment theren, and used the prem-
ses for the manufacture of paperboard bo es unt 1942, when the
Unted States condemned the property for use as a muntons pant.
fter e tended tgaton, the ta payer was awarded a substanta
sum representng damages, nterest, and costs, the amount of whch
has been kept n a separate account. Snce the condemnaton, the
ta payer has operated a temporary pant as a wartme e pedent and
pans to dscontnue such operatons as soon as materas for repace-
ment become avaabe.
Secton 112(f) of the Code provdes n part as foows:
(f) Invountary Conversons. If property (as a resut of Its destructon n
whoe or In part, theft or sezure, or an e ercse of the power of requston or
condemnaton, or the threat or Immnence thereof) s compusory or nvoun-
tary converted Into property smar or reated n servce or use to the property
so converted, or nto money whch s forthwth n good fath, under reguatons
prescrbed by the Commssoner wth the approva of the Secretary, e pended
n the acquston of other property smar or reated n servce or use to the
property so converted, or n the acquston of contro of a corporaton ownng
such other property, or n the estabshment of a repacement fund, no gan
sha be recognzed, but oss sha be recognzed. Itacs supped.
Secton 29.112(f)- of Reguatons 111 provdes n part as foows:
In order to ava hmsef of the benefts of secton 112(f) t Is not suffcent for
the ta payer to show that subsequent to the recept of money from a condemna-
ton award he purchased other property smar or reated n use. The ta payer
must trace the proceeds of the award Into the payments for the property so
purchased. It s not necessary that the proceeds ba earmarked, but the ta -
payer must be abe to prove that the same were actuay renvested n such other
property smar or reated n use to the property converted. The benefts of sec-
ton 112(f) can not be e tended to a ta payer who does not purchase other prop-
erty smar or reated In servce or use, notwthstandng the fact that there was
no other such property avaabe for purchase.
The oard of Ta ppeas (now The Ta Court of the Unted
States) hed n Davs Reguator Co. v. Commssoner (36 . T. .,
437, acquescence, C. . 1937-2, 7) that where the pettoner sod ts
easehod under threat of condemnaton, and used the award money to
construct a budng thereafter used to carry on the busness conducted
on ts former premses, the converson was an nvountary converson
wthn the meanng of secton 112(f) of the Revenue ct of 192 (cor-
respondng to secton 112 (f) of the Code), and gan s not to be recog-
nzed on the porton of the amount receved whch vas e pended n
the constructon of the new budng.
In vew of the foregong, t s hed that where money receved by a
essee as an award for damages from condemnaton of the eased
property by the Unted States s nvested n the constructon of a
budng upon and owned by the ta payer (essee), and such bud-
ng s to be devoted to the same busness whch was formery con-
ducted on the condemned property, the nvestment consttutes an
acquston of property smar or reated n servce or use to the prop-
erty condemned wthn the meanng of secton 112(f) of the Code, and
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29.113(a)-2.
9
any gan resutng from the condemnaton w not be recognzed for
edera ncome ta purposes. Where the award money s nvested n
machnery or equpment, the nvestment does not consttute an acqus
ston of property smar or reated n servce or use to the property
condemned, and any gan resutng from the condemnaton w be
recognzed for edera ncome ta purposes.
S CTION 113(a). D UST D SIS OR D T RMINING
G IN OR LOSS: SIS (UN D UST D) O PROP RTY.
The bass to be used by |ont tenants, or by a survvng |ont tenant,
In computng gan or oss from the sae of property stuated n the
State of Mnnesota s ts cost, as provded by secton 113(a) of the
Interna Revenue Code, ad|usted n accordance wth the provsons
of secton 113(b) of the Code.
Where property stuated u the State of Mnnesota s hed by a
husband and wfe as |ont tenants and the husband pays ta es
thereon and nterest on a mortgage wth respect thereto, he may
deduct the fu amount of such ta es and nterest n hs separate
edera ncome ta return, provded no deducton therefor s camed
by the wfe.
dvce s requested reatve to the bass to be used by |ont tenants,
or by a survvng |ont tenant, n computng gan or oss from the sae
of property stuated n the State of Mnnesota, and the deductbty of
ta es and nterest whch were pad by the husband wth respect to
property stuated n the State of Mnnesota and hed by hm and hs
wfe as |ont tenants.
Sectons 073 and 074 of Mason s Mnnesota Statutes, 1927 (reat-
ng to estates n rea property), provde as foows:
073. Severa and ont states, tc. states, n respect to the number
and connecton of ther owners, are dvded nto estates n severaty, n |ont
tenancy, and n common the nature and propertes of whch, respectvey, sha
contnue to be such as are now estabshed by aw, e cept so far as the same
may be modfed by the provsons of ths chapter.
074. states n Common. grants and devces of ands, made to two or
more persons, sha be construed to create estates n common, and not n |ont
tenancy, uness e pressy decared to be n |ont tenancy. Ths sectou sha not
appy to mortgages, nor to devses or grants made n trust, or to e ecutors.
In G. C. M. 6G77 (C. . IIL-2, 172 (1929)) t was hed that the
bass for the determnaton of gan or oss upon the sae by the survv-
ng spouse of property stuated n Inos, and hed by the husband
and wfe as |ont tenants, s the cost of such property. That concu-
son was reached on the bass that under the common aw each |ont
tenant s consdered as beng sezed of the entre estate, that upon the
death of one |ont tenant hs nterest does not pass to the survvor but
ceases, and that the entre estate contnues n the survvng |ont
tenant by rght of survvorshp. (See een G. Carpenter v. Com-
mssoner, 27 . T. ., 2 2.)
Under the provsons of secton 073 of Mason s Mnnesota Statutes,
supra, a |ont tenancy between husband and wfe s recognzed as an
Secton 29.113(a)-2: Genera rue.
( so Secton 23(b), Secton 29.23(b)- Sec-
ton 23(c), Secton 29.23(c)- .)
1946-4-12241
I. T. 37 5
INT RN L R NU COD .
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99
29 116 1.
estate n rea property. Snce, under such |ont tenancy, the survvor
contnues as the owner of the property and does not succeed to the
nterest of the deceased |ont tenant by reason of death, the rue
e pressed n G. C. M. 6677, supra, s appcabe to property stuated n
the State of Mnnesota and hed by a husband and wfe as |ont tenants.
It s hed, therefore, that the bass to be used by |ont tenants, or by
a survvng |ont tenant, n computng gan or oss from the sae of
property stuated n the State of Mnnesota s ts cost, as provded by
secton 3(a) of the Interna Revenue Code, ad|usted n accordance
wth secton 113(b) of the Code.
Wth respect to the treatment of amounts whch the husband pad as
ta es and as nterest on a mortgage n connecton wth property st-
uated n the State of Mnnesota and hed by hm and hs wfe as |ont
tenants, G. C. M. 15530 (C. . I -2,107 (1935)) hods that n. a case
n whch property s hed by husband and wfe as tenants by the en-
tretes, ether spouse may deduct n hs or her separate edera ncome
ta return the amount of ta es and nterest pad by such spouse durng
the ta abe year n connecton wth such property, f no part thereof
s deducted as an accrued tem by ether spouse n any ta abe year.
Snce n a tenancy by entretes and n a |ont tenancy each spouse s the
owner of an undvded nterest n the entre estate, the rue pressed n
G. C. M. 15530, supra, s aso appcabe to property hed n |ont
tenancy.
ccordngy, t s hed that where property stuated n the State of
Mnnesota s hed by a husband and wfe as |ont tenants and the hus-
band pays ta es thereon and nterest on a mortgage wth respect
thereto, he may deduct the fu amount of such ta es and nterest n
hs separate edera ncome ta return, provded no deducton therefor
s camed by the wfe.
S CTION 115. DISTRI UTIONS Y CORPOR TIONS.
Secton 19.115-1: Dvdends.
Payments made by corporaton to hoders of corporate obgatons.
(See a. D. 1660, page 191.)
S CTION 116. CLUSIONS ROM GROSS INCOM .
Ctzens of the Unted States who are bona rde resdents of a
foregn country wthn the meanng of secton 116(a)(1) of the
Interna Revenue Code do not ose that status by reason of absence
from the foregn country whe servng n the armed forces of the
Unted States, and f, upon termnaton of such servce, resdence n
the foregn country s resumed and contnued for the remander of
the ta abe year, the earned ncome of such ctzens from onrces
wthout the Unted States for the ta abe year durng whch such
resdence s resumed s e cudbe from gross Income for edera n-
come ta purposes.
INT RN L R NU COD .
Secton 29.116-1: arned ncome from sources
wthout the Unted States.
1946-9-12300
I. T. 3797
INT RN L R NU COD .
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29.116-2.1
100
dvce s requested wth respect to the ta abty of earned ncome
from sources wthout the Unted States n cases where the bona fde
resdence of ctzens of the Unted States n a foregn country s
nterrupted by servce n the armed forces of the Unted States.
It appears that numerous Unted States ctzens performng serv-
ces and statoned abroad for domestc companes nave, as a resut
of such empoyment, acqured the status of bona fde resdents of a
foregn country for edera ncome ta purposes, and have served
for varyng perods of tme n the armed forces of the Unted States
durng the present war. Upon dscharge from mtary servce, such
ctzens returned to the foregn country and resumed ther empoy-
ment there.
Under secton 116(a) (1) of the Interna Revenue Code, a ctzen of
the Unted States who estabshes that he s a bona fde resdent of
a foregn country or countres durng the entre ta abe year s en-
tted to e cude from hs gross ncome amounts receved from sources
wthout the Unted States whch consttute earned ncome, e cept
amounts pad by the Unted States or any agency thereof. though
a ctzen of the Unted States takng up resdence n a foregn country
durng the course of a ta abe year s not entted to the Denefts of
secton 116(a) (1) for such ta abe year, nevertheess, once bona fde
foregn resdence has been estabshed, temporary absence therefrom
n the Unted States on vacaton or busness trps w not necessary
deprve such ctzen of hs status as a bona fde resdent of a foregn
country. (See secton 29.116-1, Reguatons 111.)
There s no specfc provson n the reguatons permttng reten-
ton of the status of bona fde resdent of a foregn country by a
ctzen of the Unted States n the event of hs absence from the foregn
country whe servng n the armed forces of the Unted States. ow-
ever, when such an ndvdua who s so absent returns to the foregn
country upon beng dscharged from the armed forces for the purpose
of resumng hs resdence there, hs absence from the foregn country
s deemed to have been temporary, and such absence does not serve to
termnate the ndvdua s status as a bona fde resdent of a foregn
country for ncome ta purposes.
In vew of the foregong, t s hed that ctzens of the Unted States
who are bona fde resdents of a foregn country wthn the meanng of
secton 116(a) (1) of the Interna Revenue Code do not ose that status
by reason of absence from the foregn country whe servng n the
armed forces of the Unted States, and f, upon termnaton of such
servce, resdence n the foregn country s resumed and contnued
for the remander of the ta abe year, the earned ncome of such
ctzens from sources wthout the Unted States for the ta abe year
durng whch such resdence s resumed s e cudbe from gross n-
come for edera ncome ta purposes.
Secton 29.116-2: Income of foregn governments, 1946-6-12263
ambassadors, and consus. L T. 37 9
INT RN L R NU COD ND R NU CT O 101 .
ven though the stock of a corporaton may be whoy owned by a
foregn government, the ncome of such a corporaton s not e empt
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101
29.117-1.
from edera ta aton under secton 110(c) of the Interna Revenue
Code.
O. D. 62 (C. . 3,124 (1920)) revoked.
Reconsderaton has been gven to the queston of edera ta aton
of ncome of a corporaton a of the stock of whch s owned by a
foregn government. Such reconsderaton ncudes O. D. 62 (C. . 3,
124 (1920)), reatng to the edera ncome ta status of the Common-
weath ank of ustraa under secton 213(b)(5) of the Revenue
ct of 191 . That secton of the Revenue ct of 191 corresponds
cosey to secton 116(c) of the Interna Revenue Code, as amended,
whch provdes as foows:
S C. 116. CLUSIONS ROM GROSS INCOM .
In addton to the Items specfed n secton 22(b), the foowng Items sha
not be ncuded In gross ncome and sha be e empt from ta aton under ths
chapter:

(c) Income of oregn Governments and of Internatona Organzatons.
The Income of foregn governments receved from nvestments n the
Unted States n stocks, bonds, or other domestc securtes, owned by such
foregn governments , or from nterest on deposts n banks n the
Unted States of moneys beongng to such foregn governments , or
from any other source wthn the Unted States.
In- O. D. 62 , supra, t was hed that the Commonweath ank of
ustraa s a governmenta agency of the Commonweath of ustraa
and e empt from ncome ta under secton 213(b) (5) of the Revenue
ct of 191 . It was hed further that nterest credted to the account
of the bank by a domestc corporaton s not sub|ect to the wthhodng
provsons of secton 237 of that ct.
It s now the poston of the ureau that the benefts of secton
116(c) of the Interna Revenue Code, supra, can not be e tended to a
corporaton whch s whoy owned by a foregn government nasmuch
as a corporaton s an entty separate and dstnct from ts soe stock-
hoder. Therefore, the ncome of such a corporaton s not e empt
from edera ta aton under secton 116(c) of the Code. O. D. 62 ,
supra, s hereby revoked.
Pursuant to authorty contaned n secton 3791(b) of the Interna
Revenue Code, ths rung and the revocaton of O. D. 62 , supra, w
be apped wthout retroactve effect from and after pr 1, 1946,
sub|ect to the condton that no refund w be made of any ncome,
e cess profts, and decared vaue e cess-profts ta es whch may have
been pad.
ose h D. Nun an, r.,
Commssoner of Interna Revenue.
pproved March 6,1946.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
S CTION 117. C PIT L G INS ND LOSS S.
Secton 29.117-1: Meanng of terms. 1946-11-12319
G. C. M. 24910
INT RN L R NU COD ND R NU CTS O 1934 ND 1936.
bank, mortgage fnance company, budng and oan assocaton,
or an nsurance company (other than a fe nsurance company)
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29.117-1.
102
whch s offerng for sae parces of rea estate on whch t has been
compeed to forecose, or persona property taken over n satsfac-
ton of debts, s not hodng property prmary for sae to customers
n the ordnary course of trade or busness wthn the
provsons of secton 117(a)(1) of the Interna Revenue Code and
correspondng provsons of pror revenue aws. Gans or osses
ncurred n such saes are to be treated as capta gans or osses and
not as ordnary gans or osses.
G. C. M. 21407 (C. . 1939-2, 1 7) revoked. Recommended that
I. T. 3336 (C. . 1939-2, 1 9) and I. T. 3600 (C. . 1943, 369) be
revoked.
In vew of the decson n The anavkn aey ank v. Comms-
soner (4 T. C, 252, acquescence, page 3, ths uetn), G. C. M. 21497
(C. . 1939-2,1 7) has been reconsdered. That G. C. M. hods that a
bank, mortgage fnance company, or a budng and oan assocaton
whch s offerng for sae parces of rea estate on whch t has been
compeed to forecose s hodng property prmary for sae to cus-
tomers n the ordnary course of trade or busness wthn
the provsons of sectons 117(b) of the Revenue cts of 1934 and 1936,
and that gans or osses ncurred n such saes are to be treated as
ordnary gans or osses and not as capta gans or osses.
In connecton wth reconsderaton of G. C. M. 21497, t was aso
necessary to reconsder I. T. 3336 (C. . 1939-2, 1 9), whch hods
that G. C. M. 21497 s appcabe under smar crcumstances to nsur-
ance companes other than fe nsurance companes, and I. T. 3600
(C. . 1943. 369), whch hods, n effect, that the prncpe of G. C. M.
21497 s appcabe to gans or osses n connecton wth saes of per-
sona property taken over (by the desgnated nsttutons) n satsfac-
ton of debts.
Two of the questons nvoved n The amaoha aey ank v. Com-
mssoner, supra, were whether three parces of rea estate acqured
by the ta payer (pettoner) n forecosure proceedngs and fve shares
of stock taken over as coatera for a oan were capta assets wthn
the purvew of secton 117(a)(1) of the Interna Revenue Code, as
orgnay enacted.
In the anawha aey ank case, the ta payer was a corporaton
engaged n the bankng busness and organzed under the aws of the
State of West rgna. In compance wth a requrement of State
aw that rea estate acqured n satsfacton of debts shoud be ds-
posed of as qucky as practcabe, the ta payer had estabshed the
practce of mmedatey stng for sae any rea estate to whch t
took tte as a resut of efforts to coect upon ts oans. In decdng
that the three parces of rea estate sod by the ta payer were capta
assets under secton 117(a) (1) of the Interna Revenue Code, as org-
nay enacted, the court stated that t was unreasonabe to concude
that the ta payer, forbdden by State aw from carryng on a rea
estate busness, was actuay engaged n that busness and seng rea
estate to customers n the reguar course thereof, merey because t had
acqured and sod three parces of rea estate over a perod of two years
as an ncdent to the coecton or recovery of money oaned by t n
the transacton of ts reguar bankng busness. or the reasons stated
by The Ta Court wth respect to acquston and sae of the rea es-
tate, the court aso hed that the shares of stock taken over as coatera
for a oan were capta assets.
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103
29.124 10.
s ndcated above, acquescence n the decson of The Ta Court
n the anawha aey ank case has been announced. ccordngy,
t s now the opnon o,f ths offce that a bank, mortgage fnance com-
pany, budng and oan assocaton, or an nsurance company (other
than a fe nsurance company) whch s offerng for sae parces of
rea estate on whch t has been compeed to forecose, or persona
property taken over n satsfacton of debts, s not hodng property
prmary for sae to customers n the ordnary course of
trade or busness wthn the provsons of secton 117(a) (1) of the
Interna Revenue Code and correspondng provsons of pror revenue
aws. Gans or osses ncurred n such saes are to be treated as capta
gans or osses and not as ordnary gans or osses.
G. C M. 21497, supra, I. T. 3336, supra, and I. T. 3600, supra, are
n confct wth the decson of The Ta Court n The anawha a-
ey ank v. Commssoner, supra, and the concuson reached heren.
ccordngy, G. C. M. 21497 s revoked, and t s recommended that
L T. 3336 and L T. 3G00 be revoked.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
Secton 29.117-1: Meanng of terms. 1946-11-12320
I. T. 3 03
INT RN L R NU COD ND R NU CTS O 1934 ND 1930.
I. T. 3336 (C. . 1939-2, 1 9) and I. T. 3600 (C. . 1943, 369) are
revoked n vew of the recommendaton n G. C. M. 24910, page 101,
ths uetn.
S CTION 124. MORTIZ TION D DUCTION.
Secton 29.124-10: ppcaton for tentatve 1946-7-1227
ad|ustments. T. D. 5500
( so Secton 19.124-10, Reguatons 103.)
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RT 19 ND
P RT 29.
Reguatons 103 and 111 amended to conform to secton 7 of the
Ta d|ustment ct of 1945, reatng to tentatve ad|ustments
wth respect to amortzaton deductons.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 103 Part 19, Tte 26, Code of
edera Reguatons, 1940 Sup. and Reguatons 111 Part 29, Tte
26, Code of edera Reguatons, Cum. Sup. to secton 7 of the Ta
d|ustment ct of 1945 (Pubc Law 172, Seventy-nnth Congress),
approved uy 31,1945, such reguatons are amended as foows:
Paragraph 1. There s nserted mmedatey precedng secton
19.124-0 of Reguatons 103 and secton 29.124-0 of Reguatons 111
the foowng:
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S 29.124-10.
104
S C. 7. T NT TI D USTM NTS WIT R SP CT TO MOR-
TIZ TION D DUCTIONS. (T D USTM NT CT O 1945.)
Secton 124 of the Interna Revenue Code Is amended by nsertng at
the end thereof te foowng new subsectons:
(|) ppcaton fob Tentatve d|ustment. ny ta payer who
has fed a statement of eecton as prescrbed n paragraph (4) of sub-
secton (d) may, wthn nnety days from the date such statement s
fed, or wthn nnety days from the date of enactment of ths ct,
whchever s the ater, fe an appcaton for tentatve ad|ustment
wth respect to the ta es for ta abe years pror to the ta abe year n
whch such appcaton Is fed whch are to be computed as requred by
paragraph (4) of subsecton (d) as the resut of such eecton. Such
appcaton sha be verfed n the manner prescrbed by secton 51 or
secton 52 n the case of a return of such ta payer and sha be made n
such manner and form as sha be requred by reguatons prescrbed by
the Commssoner wth the approva of the Secretary, and sha set forth,
n such deta and wth such supportng data and e panaton as such
reguatons sha requre, the recomputaton of such ta es requred by
paragraph (4) of subsecton (d) e cept that the ta for each ta abe
year to be recomputed sha be the ta for such year prevousy deter-
mned, ascertaned n accordance wth the method prescrbed n secton
3 01(d). If an appcaton under secton 37 0(a) for tentatve carry-
back ad|ustment has been prevousy fed, but such ad|ustment has not
been prevousy determned, then for the purpose of subsecton (|) and
(k), the assessments, appcatons, credts, and refunds provded n
secton 3 o0(b) sha be consdered as havng been prevousy made
upon the bass of such appcaton under secton 37 0(a). Such recom-
putaton of ta sha be made on the bass of the tems on the bass
of whch the ta to be recomputed was determned. Such appcaton
sha aso set forth the unpad amount of each ta recomputed and such
other nformaton for the purpose of carryng out the provsons of
subsectons (|) and (k) as may be requred by such reguatons. n
appcaton under ths subsecton sha not consttute a cam for credt
or refund.
(k) owance of d|ustment. Wthn a perod of nnety days
from the fng of an appcaton under subsecton (|), the Commssoner
sha make, to the e tent he deems practca n such perod, a mted
e amnaton of the appcaton for omssons and errors of computaton,
and sha determne the amount of the ncrease or decrease n each ta
to whch such appcaton reates, on the bass of the appcaton and
the e amnaton, e cept that the Commssoner may dsaow, wthout
further acton, any appcaton whch he fnds contans matera oms-
sons, or errors of computaton whch he deems cannot be corrected by
hm wthn such nnety-day perod. ach ncrease sha be deemed
determned as a defcency and assessed, wthout regard to the restrc-
tons on assessment In secton 272. ach decrease sha be apped
aganst any unpad amount of the ta decreased, and any remander
sha be credted aganst the defcences (and nterest or addtons to
the ta ) assessed under ths subsecton, and any remander sha,
wthn such nnety-day perod, be ether credted aganst any other
ncome, war profts, or e cess profts ta , or Instament thereof, due
from the ta payer, or refunded to the ta payer. The appcaton, credt,
or refund of a decrease determned under ths subsecton sha be deemed
a credt or refund of an overpayment wthn the meanng of secton
7 1(b).
Par. 2. There s nserted n eguatons 103 mmedatey foowng
secton 19.124-9 a new secton desgnated Sec. 19.124- ) . ppca-
ton for Tentatve d|ustments. , and n Reguatons 111 mme-
datey foowng secton 29.124-9 a new secton desgnated Sec.
29.124-10. ppcaton for Tentatve d|ustments. , to read n
each case as foows:
(a) In genera. ny ta payer who has fed wth the Commssoner a state-
ment of eecton to termnate the amortzaton perod, as prescrbed n secton
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105
29.124-10.
124(d) (4), may fe an appcaton for a tentatve ad|ustment wth respect to the
ta es for a ta abe years pror to the ta abe year n whch the appcaton Is
fed, but not ncudng any ta abe year pror to the ta abe year n whch the
amortzaton perod began, whch are affected by the revson of the amortza-
ton deducton or any reated ad|ustments. ta payer who s a member of a
partnershp whch has fed a statement of eecton to termnate the amortzaton
perod may fe an appcaton for a tentatve ad|ustment wth respect to hs own
ta es whch resuts from the ncrease or decrease n hs dstrbutve share of
the partnershp net ncome attrbutabe to the revson of the amortzaton deduc-
ton or any reated ad|ustments. The ad|ustment wth respect to such ta es s
to be computed as requred by secton 124(d) (4). The ta for each ta abe year
whch Is to be recomputed, however, sha be the ta prevousy determned as
ascertaned n accordance wth the.method prescrbed n secton 3 (d). The
amount of the ad|ustment wth respect to each ta Is mted to the ncrease or
decrease n such ta as prevousy determned whch resuts from the revson of
the amortzaton deducton and the effect of such revsed deducton upon any
tems taken nto account In computng the ta prevousy determned.
The appcaton for a tentatve ad|ustment must be f .ed wthn 00 days from
the date the statement of eecton provded n secton 124(d)(4) Is fed. If,
however, such 9- day perod e pred before October 29, 1945, the appcaton s
tmey f t was f ed on or before October 29, 194, . The appcaton s to be fed
wth the coector where the ta was pad or the assessment was made.
(6) Contents of appcaton. The appcaton for a tentatve ad|ustment wth
respect to amortzaton deductons n the case of a corporaton s to be fed on
orm 1140, and n the case of ta payers other than corporatons on orm 1040.
The appcatons are to be fed out n accordance wth the nstructons accom-
panyng such forms, and a nformaton requred by the forms and the accom-
panyng nstructons must e furnshed by the ta payer. The appcaton n the
ease of a corporaton s to be sworn to n the manner provded n secton 52 n
the case of a corporaton ncome ta return. The appcaton n the case of a
ta payer other than a corporaton s to be verfed n the manner provded n
sectons 51 and 142 n the case of an ncome ta return of such ta payer.
n appcaton for a tentatve ad|ustment wt respect to amortzaton deduc-
tons does not consttute a cam for credt or refund. If such appcaton s ds-
aowed by the Commssoner n whoe or n part, no sut mny be mantaned n
any court for the recovery of any ta based on such appcaton. The tn payer,
however, may fe a reguar cam for credt or refund under secton 121(d) (5)
or under secton 322 at any tme pror to the e praton of the appcabe perod
of mtaton, and may mantan sut based on such cam f t s dsaowed or If
the Commssoner does not act on the cam wthn s months from the date
t s fed. Such reguar cam may be f ed before, smutaneousy wth, or nfter
the fng of the appcaton for a tentatve ad|ustment wth respect to amortza-
ton deductons. The fMng of an appcaton for a tentatve ad|ustment wn not
consttute the fng of a cam for credt or refund wthn the meanng of secton
121(d)(5) or 322(b) for purposes of determnng whether a cam for credt or
refund was fed pro| to the e praton of the appcabe perod of mtaton.
The fng of such an appcaton, however, w consttute the fng of a cam
for credt or refund wthn the meanng of secton 121(d) (5) for purposes of
determnng whether an ad|ustment may be made n any case n whch such
ad|ustment s prevented by the operaton of any provson of aw other than
secton 124(d) (5) tsef or secton 3701, reatng to compromses. reguar cam
for credt or refund fed under secton 124(d) (5) or secton 322 nfter the fng
of an appcaton for a tentatve ad|ustment wth respect to amortzaton deduc-
tons s not to be consdered an amendment of such appcaton, but s to be con-
sdered a now cam. Such reguar cam, however, In proper cases may consttute
an amendment to a pror reguar cam.
(c) Computaton of ncrease or decrease n tarc affected by the revsed
amortzaton deducton. The ta payer s to determne the amount of ncrease or
decrease, attrbutabe to the revsed amortzaton deducton or any reated
ad|ustments, n each ta prevousy determned, whch s affected by such re-
vsed amortzaton deducton or reated ad|ustments, for each ta abe year pror
t the ta abe year n whch the appcaton for a tentatve ad|ustment s fed.
The ta prevousy determned s to br ascertaned n accordance wth the method
prescrbed n secton 3 01(d). In genera, therefore, the ta prevousy deter-
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I 29.124-10.
106
mned w be the ta shown on the return as fed, ncreased by any amounts
assessed (or coected wthout assessment) as defcences pror to the tate of
fng the appcaton for a tentatve ad|ustment wth respect to amortzaton
deductons, and decreased by any amounts abated, credted, refunded, or other-
wse repad pror to such date. ny tems as to whch the Commssoner and
the ta payer are n dsagreement at the tme of the fng of the appcaton
sha be taken nto account n ascertanng the ta prevousy determned ony,
and to the e tent that, they were reported n the return, or were refected n
any amount assessed (or coected wthout assessment) as defcences, or n
any amounts abated, credted, refunded, or otherwse repad, pror to the date
of fng the appcaton. The ta prevousy determned w refect the foregn
ta credt, the credt for ta wthhed at source provded n secton 32, the credt
for debt retrement provded n secton 7 3,. and the 10 per cent credt aganst
e cess profts ta provded n secton 7 4, but w not refect the postwar credt
provded In secton 7 0. In the case of any ta abe year begnnng n 1944 for
whch the credt provded n secton 7 4 s not camed on the return, the ta shown
on the return, for purposes of ths subsecton, sha be the ta shown on the return
as fed reduced by the e cess of (1) the credt under secton 7 4 to the e tent that
an amount has not been abated, credted, refunded, or otherwse repad n respect
of such credt pror to the date of fng the appcaton, over (2) any amount
camed on the return as a credt for debt retrement under secton 7 3. In the case
of any ta abe year begnnng pror to anuary 1, 1944, any amount abated,
credted, refunded, or otherwse repad pror to the date of fng the appca-
ton, n connecton wth the postwar credt provded n secton 7 0, and the amount
of any bonds ssued as provded n sectons 7 0 and 7 1 n connecton wth the
e cess profts ta for such ta abe year, whether or not such bonds have been
redeemed, sha be consdered an amount abated, credted, refunded, or otherwse
repad, n respect of the e cess profts ta for such ta abe year, pror to the
date of fng the appcaton.
The Increase or decrease n each ta prevousy determned whch s affected
by the revson of the amortzaton deducton or any reated ad|ustments s to
be determned, e cept for such revsed amortzaton deducton and reated ad-
|ustments, on the bass of the tems whch entered nto the computaton of such
ta as prevousy determned the ta prevousy determned beng ascertaned
n the manner descrbed n ths subsecton. In determnng any such ncrease
or decrease, accordngy, tems sha be taken nto account ony to the e tent
that they were reported In the return, or were refected n amounts assessed (or
coected wthout assessment) as defcences, or In amounts abated, credted,
refunded, or otherwse repad, pror to the date of fng the appcaton for a
tentatve ad|ustment wth respect to amortzaton deductons. If the Com-
mssoner and the ta payer are n dsagreement as to the proper treatment of
any tem, t sha be consdered for purposes of determnng the ncrease or
decrease n the ta prevousy determned that such tem was correcty reported
by the ta payer uness, and to the e tent that, the dsagreement has resuted
n the assessment of a defcency (or the coecton of an amount wthout assess-
ment), or the aowng or makng of an abatement, credt, refund, or other re-
payment, pror to the date of fng the appcaton. Thus, f the ta payer camed
a deducton on ts return of 50,000 for saares pad ts offcers but the Comms-
soner asserts that such deducton shoud not e ceed 20,000, and the Comms-
soner and the ta payer have not agreed on the amount propery deductbe
pror to the date the appcaton for a tentatve ad|ustment wth respect to amor-
tzaton deductons s fed, 50,000 sha be consdered as the amount propery
deductbe for purposes of determnng the ncrease or decrease n each fa
prevousy determned n respect of the appcaton for a tentatve ad|ustment.
In determnng the ncrease or decrease n any ta prevousy determned, any
tems whch are affected by the revson of the amortzaton deducton must be
ad|usted to refect such revsed deducton. Thus, any deducton mted, for
e ampe, by net ncome or ad|usted gross Income, such as the deducton for char-
tabe contrbutons, s to be recomputed on the bass of the net ncome or ad|usted
gross ncome as affected by the revson of the amortzaton deducton. Smary,
any deducton for deprecaton whch s affected by the revson of the amortza-
ton deducton must be ad|usted to refect such revsed amortzaton deducton-
No ncrease or-decrease n ta , attrbutabe to a net operatng oss carry-back
or to an unused e cess profts credt carry-back, for a ta abe year pror to the
ta abe year n whch the amortzaton perod began, may be assessed or aowed
pursuant to an appcaton for a tentatve ad|ustment wth respect to the amort-
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107
29.124-10.
zaton deducton even though the net operatng oss or the unused e cess profts
credt resutng n such carry-back s affected by the revsed amortzaton deduc-
ton. In determnng the decrease n e cess profts ta for any ta nbe year
begnnng pror to anuary 1, 1944, the ta as recomputed by takng nto account
the revsed amortzaton deducton and any reated ad|ustments s to be decreased
by any amount whch has been abated, credted, refunded, or otherwse repad,
pror to the date of fng the appcaton. In connecton wth the postwar credt
under secton 7 0, and by the amount of any bonds, whether or not such bonds
have been redeemed, ssued ns provded n sectons 7 0 and 7 1 n connecton
wth the e cess profts ta for such ta abe year, to the e tent that such amounts
are propery aocabe to such ta as recomputed.
In determnng the ncrease or decrease n any ta prevousy determned
whch s affected by the revson of the amortzaton deducton or any reated
ad|ustments, the ta prevousy determned s to be ncreased or decreased by
the amount of any ncrease or decrease n such ta shown on an appcaton fed
under secton 37 0, reatng to tentatve carry-back ad|ustments, to the e tent
that such Increase or decrease shown In the appcaton fed under secton 37 0
has not been assessed or aowed pror to the date of fng the appcaton for a
tentatve ad|ustment wth respect to amortzaton deductons. The tems whch
enter nto the computaton of the ta prevousy determned are to be ad|usted
n conformty was such ncrease or decrease shown n the appcaton fed under
secton 37 0 for a tentatve carry-back ad|ustment. The provsons of ths para-
graph are not to appy n any case n whch the Commssoner has dsaowed the
appcaton for a tentatve carry-back ad|ustment pror to the date the appcaton
for a tentatve ad|ustment wth respect to amortzaton deductons s fed.
d) owance of ad|ustments. ny appcaton for a tentatve ad|ustment
wth respect to the amortzaton deducton s to be acted upon wthn a perod
of 90 days from the date such appcaton s fed. The Commssoner Is to make,
to the e tent he deems practcabe n such 90-day perod, an e amnaton of the
appcaton to dscover omssons and errors of computaton and s to determne
wthn such 90-day perod the ncrease or decrease n any ta prevousy deter-
mned, whch s affected by the revson of the amortzaton deducton or any
reated ad|ustments, upon the bass of the appcaton and such e amnaton.
Such ncreases and decreases are to be determned n the same manner as that
provded n secton 124(|) for the determnaton by the ta payer of the ncreases
and decreases n ta es prevousy determned whch must be set forth n the
appcaton for a tentatve ad|ustment wth respect to the amortzaton deducton.
The Commssoner, however, may correct any errors of computaton or omssons
he dscovers upon whatever e amnaton of the appcaton he makes. In deter-
mnng the Increase or decrease n each ta prevousy determned whch s
affected by the revson of the amortzaton deducton or any reated ad|ustments,
the Commssoner accordngy may correct any mathematca error appearng
on the appcaton and he kewse may make any other ad|ustments to, or correc-
tons n, the computatons of the ta payer whch he deems are proper and whch
fa wthn the scope of the prescrbed bass of the computaton. If a requred
ad|ustment has not been made by the ta payer and the Commssoner has ava-
abe the neces ary nformaton to make such ad|ustment wthn the above 93-day
perod, he may, n hs dscreton, make such ad|ustment. In determnng the
ncreases and decreases, however, the Commssoner w not, for e ampe, change
the amount camed n the return as a deducton for ordnnry and necessary bus-
ness e penses because he beeves that the ta payer has camed an e cessve
amount kewse, the Commssoner w not ncude n gross ncome any amount
not so ncuded by the ta payer even though he beeves that such amount s
sub|ect to ta and propery shoud be ncuded n gross ncome.
If the Commssoner fnds that an appcaton for a tentatve ad|ustment wth
respect to the amortzaton deducton contans matera omssons or errors of
computaton, he may dsaow such appcaton n whoe or In part wthout fur-
ther acton. If, however, he deems that any error of computaton can be cor-
rected by hm wthn the abo -e 90-day perod, he may do so and aow the app-
caton n whoe or n part. The Commssoner s determnaton as to whether
be can correct any error of computaton wthn the above 90-day perod sha be
concusve. Smary, hs acton In dsaowng, n whoe or n part, any app-
caton for a tentatve ad|ustment wth respect to the amortzaton deducton
w be fna and may not be chaenged n any proceedng. The ta payer n such
rase, however, may te a reguar cam for credt or refund under secton
124(d) (5) or secton 322, and may mantan a sut based ou tch cam f t s
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129.124-10.
10S
dsaowed or If the Commssoner does not act upon the cam wthn s months
from the date t s fed.
In the case of any appcaton for a tentatve ad|ustment wth respect to the
amortzaton deducton whch Is aowed n whoe or n part, any ncrease deter-
mned n any ta prevousy determned whch s affected by the revson of the
amortzaton deducton or any reated ad|ustments sha be deemed to have
been determned as a defcency and sha be assessed wthout regard to the
restrctons on assessment provded In secton 272. Such ncrease, for e ampe,
may be assessed wthout regard to whether a notce of defcency In respect of
such ncrease s sent to the ta payer and wthout regard to whether a pror
notce of defcency has been maed to the ta payer. The ta payer w not
have a rght to contest the assessment before The Ta Court of the Unted States
whether or not he s sent a notce n respect of such ncrease. notce In respect
of an ncrease determned In respect of an appcaton for a tentatve ad|ustment
wth respect to the amortzaton deducton, however, w consttute a notce ot
defcency wthn the meanng of secton 124(d) (5).
ach decrease determned n any ta prevousy determned whch s affected
by the revson of the amortzaton deducton or any reated ad|ustments sha
frst be apped aganst any unpad amount of the ta wth respect to whch such
decrease was determned. Such unpad amount of ta may Incude one or more
of the foowng:
(1) n amount wth respect to whch the ta payer Is denquent
(2) n amount (ncudng an amount the tme for payment of whch has
been e tended under secton 56(c), but not ncudng an amount the tme
for payment of whch has been e tended under secton 3779) whch s due
and payabe on or after the date on whch the decrease Is aowed and
(3) n amount the tme for payment of whch has been e tended under
secton 3779 whch s due and payabe on or after the date on whch the
decrease s aowed.
In case the unpad amount of ta ncudes more than one of such amounts, the
Commssoner, In hs dscreton, sha determne aganst whch amount or amounts,
and n what proporton, the decrease Is to be apped. In genera, however, the
decrease w be apped aganst any amounts descrbed n causes (1), (2), and
(3) of ths paragraph n the order named. If there are severa amounts of the
type descrbed n cause (2), any amount of the decrease whch s to be apped
aganst such amounts w be apped by assumng that the ta prevousy deter-
mned mnus the amount of the decrease to be so apped s the ta and the
ta payer had eected to pay such ta n four equa Instaments. The unpad
amount of ta aganst whch a decrease may be apped may not ncude any
amount of ta for any ta abe year other than the year of the decrease. The
provsons of ths paragraph may be ustrated by the foowng e ampe:
ampe. Corporaton , whch keeps Its books and makes ts Income ta
returns on the caendar year bass, fed ts ncome ta return for 944, showng
a ta of 100,000, on March 15, 1945, and pad two nstaments of 25,000 each
on March 15, 1945, and une 15, 1945, respectvey. The corporaton fed an
appcaton for a tentatve ad|ustment wth respect to the amortzaton deduc-
ton on September 1, 1945. The appcaton, whch showed that the corporaton s
ncome ta for 1944 as prevousy determned was 100,000 and that the decrease
n such ta due to the revson of the amortzaton deducton and a reated
ad|ustments was 30,000, was aowed In fu on November 30, 1945. The corpo-
raton secured an e tenson of tme under secton 56(c) for the payment of the
September 15th nstament, n the amount of 25,000, of ts 1944 ncome ta .
The 30,000 decrease n the corporaton s ncome ta for 1944 w be apped
aganst the unpad nstaments of such ta as f 70,000 (. e., the ta prevousy
determned mnus the decrease n such ta 100,000 mnus 30,000) were the ta
for 1944 and the corporaton had eected to pay such ta n four equa nsta-
ments. ach of the nstaments accordngy woud be 17,500. Snce the cor-
poraton pad 25,000 on March 15, 1945, and 25,000 on une c, 1945, t n
effect prepad ts September 15th Instament n the amount of 15,000. The
corporaton therefore must pay 2,500 ( 17,500 mnus 15,C00) upon the termna-
ton of the e tenson whch It secured under secton 56fc) wth respect to such
nstament, and It must pay 17,500 on December 15, 1945. The corporaton w
be abe for nterest on the 25,C00 the tme for payment of whch was e tended
under secton 50(c) as foows: Interest w be payabe on 2,500 from September
15,1945, unt the date such amount s pad and nterest w be payabe on 22
from September 15, 1945, unt the date the decrease n ts ncome ta for 19
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109
29.12G-1.
s aowed by the Commssoner n connecton wth the appcaton for a tentatve
ad|ustment wth respect to the amortzaton deducton.
fter appyng the decrease aganst any unpad amount of the ta decreased,
the Commssoner w credt any remander of the decrease aganst any ncrease
(ncudng nterest and addtons to the ta ) determned In any ta as prevousy
determned whch s attrbutabe to the revson of the amortzaton deducton or
tny reated ad|ustments and whch has been assessed under secton 124(k).
ny remander of the decrease after such appcaton and credts may, wthn
the above 00-day perod, be credted aganst any ncome, war profts, or e cess
profts ta , or nstaments thereof, then due from the ta payer, and, f not so
credted, s to be refunded to the ta payer wthn such O-day perod.
The appcaton, credt, or refund of a decrease n ta determned under secton
124(k) sha consttute a credt or refund of an overpayment wthn the meanng
of secton 7 1(b), reatng to postwar credts or postwar bonds n the case of
credts or refunds.
Ths Treasury Decson s ssued under the authorty contaned n
secton 62 of the Interna Revenue Code (53 Stat., 32 2(5 U. S. C, 1940
ed., 62) and secton 7 of the Ta d|ustment ct of 1945 (Pubc Law
172, Seventy-nnth Congress).)
oseph D. Nttnan, r.,
Commssoner of Interna Revenue.
pproved March 11, 1946.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster March 12, 1946, 11.21 a. m.)
S CTION 126. INCOM IN R SP CT
O D C D NTS.
Secton 29.126-1: Incuson n gross ncome 1946-10-12309
of ncome n respect of a decedent. I. T. 3 01
( so Secton 22(b), Secton 29.22(b) (13)-1.)
INT RN L R NU COD .
The ump-sum pnyment receved pror to termnaton of the present
war by the wdow or other benefcary of a deceased commssoned
nava offcer pursuant to secton 12 of the Nava vaton Cadet ct
of 1942 (56 Stat., 737), as amended by Pubc Law 169, Seventy-
eghth Congress, frst sesson (57 Stat, 574), retans the same char-
acter, 1. e., compensaton receved for actve servce as a comms-
soned offcer n the mtary or nava forces of the Unted States
durng the present war, whch t woud have had n the hands of
the decedent had he ved and receved such amount. So much of
such compensaton receved by the wdow or benefcary as does not
e ceed 1,500 s e cudbe from gross ncome under secton
22(b) (13) ( ) of the Code.
dvce s requested whether a ump-sum payment receved pror
to termnaton of the present war by the wdow or other benefcary
of a deceased commssoned nava offcer pursuant to secton 12 of the
Nava vaton Cadet ct of 1942 (56 Stat., 737), as amended by
Pubc Law 169, Seventy-eghth Congress, frst sesson (57 Stat., 574),
s ncudbe n the gross ncome of the recpent under secton 126(a)
of the Interna Revenue Code, and whether secton 22(b) (13) ( ) of
the Code, reatng to the addtona aowance for mtary and nava
personne, s appcabe to such payment.
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29.126-1.
110
Secton 12 of the Nava vaton Cadet ct of 1942, as amended by
Pubc Law 169, supra, provdes as foows:
Sec. 12. When offcers commssoned pursuant to ths ct or to the Nava
vaton Reserve ct of 1030 ( 53 Stat. 19) are reeased from actve duty that
has been contnuous for one or more years, they, or n the event of the death of
such offcers after contnuous actve duty for one or more years, the benefcares
specay desgnated n the manner prescrbed by the Secretary of the Navy, or,
f no benefcary has been specay desgnated, the wdow of such offcer, and f
there be no wdow, hs chd or chdren, and f there be nether wdow nor
chd, the representatve of the offcer s estate, sha be pad a ump sum of 300
for each compete year of contnuous commssoned actve servce,
Secton 126(a) of the Interna Revenue Code provdes n part as
foows:
(1) Genera rue. The amount of a Items of gross ncome n respect of
a decedent whch are not propery ncudbe n respect of the ta abe perod
n whch fas the date of hs death or a pror perod sha be ncuded n the
gross ncome, for the ta abe year when receved, of:
( ) the estate of the decedent, f the rght to receve the amount s ac-
qured by the decedent s estate from the decedent
( ) the person who, by reason of the death of the decedent, acqures
the rght to receve the amount, f the rght to receve the amount s not
acqured by the decedent s estate from the decedent

(3) Character of ncome determned by reference to decedent. The
rght, descrbed n paragraph (1), to receve an amount sha be treated, n
the hands of the estate of the decedent or any person who acqured such rght
by reason of the death of the decedent, as f t had been acqured
by the estate or such person n the transacton by whch the decedent acqured
such rght and the amount ncudbe n gross ncome under paragraph
(1) sha be consdered n the hands of the estate or such person to
have the character whch t woud have had n the hands of the decedent f
the decedent had ved and receved such amount
Secton 22(b) (13) ( ) of the Code, as amended, provdes n part as
foows:
(b) cusons from Gross Income. The foowng tems sha not be n-
cuded n gross ncome and sha be e empt from ta aton under ths chapter
Chapter 1 of the Code :

(13) ddtona aowance for mtary and nava personne.
( ) In the case of compensaton receved durng any ta abe year
and before the termnaton of the present war as procamed by the
Presdent, for actve servce as a commssoned offcer n the
mtary or nava forces of the Unted States durng such war,
so much of such compensaton as does not e ceed 1,500.
It s hed that the ump-sum payment receved pror to the termna-
ton of the present war by the wdow or other benefcary of a deceased
commssoned nava offcer pursuant to secton 12 of the Nava va-
ton Cadet ct of 1942, as amended, supra, retans the same character,
. e., compensaton receved for actve servce as a commssoned offcer
n the mtary or nava forces of the Unted States durng the pres-
ent war, whch t woud have had n the hands of the decedent had
he ved and receved such amount. So much of such compensaton
receved by the wdow or benefcary as does not e ceed 1,500 s e -
cudbe from gross ncome under secton 22(b) (13) ( ) of the Code,
supra.
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I
29.131-1.
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 29.131-1: nayss of credt for 1946-2-12213
ta es. I. T. 377
INT RN L R NU COD .
The ta of 1 per cent of net profts Imposed by artce 37 of
cuadoran Decree No. 1179, dated uy 14, 1942, Is an Income
ta , and a domestc corporaton whch Is requred to pay such
ta to the Repubc of cuador s entted, under secton 131(a) (1)
of the Interna Revenue Code, to credt such ta aganst Unted
States ncome ta , sub|ect to the mtatons contaned n secton
131(b) of the Code.
dvce s requested whether the ta of 1 per cent of net profts
mposed by artce 37 of cuadoran Decree No. 1179, dated uy
14, 1942, s an ncome ta , and whether a domestc corporaton whch
s requred to pay such ta to the Repubc of cuador s entted
to a credt, under secton 131(a)(1) of the Interna Revenue Code,
aganst Unted States ncome ta .
y cuadoran Decree No. 1179, supra, the Repubc of cuador
promugated a soca securty aw to provde certan benefts for
affated persons and ther fames. rtce 37 of such decree
provdes n part as foows:
rt. 37. State contrbutons to Prvate mpoyees and Workmen s Soca
Securty und sha be the foowng:

(c) The foowng ta es, suppementary to those mposed on ncome:

I . oregn companes, whether they are domced enttes
or permanenty estabshed agences, sha pay 1 tota net
profts obtaned n the country. Dvdends decared and pad n
the country sha be deducted from net profts for the purpose of
assessment to ths ta .
Secton 131(a) (1) of the Interna Revenue Code provdes n part
that n the case of a ctzen of the Unted States and of a domestc
corporaton, f the ta payer chooses to have the benefts of secton
131 of the Code, the ta mposed by Chapter 1 (ncome ta ) sha
be credted wth the amount of any ncome, war-profts, and e cess-
profts ta es pad or accrued durng the ta abe year to any foregn
country.
The term ncome ta es, as used n the foregn ta credt prov-
sons of the Code and correspondng provsons of pror revenue aws,
means a ta on ncome (G. C. M. C042, C. . III-1.1 4 (1929)), and
a ta on net profts s a ta on ncome (G. C. M. 7629, C. . I -1,146
(1930)).
Inasmuch as the ta mposed by artce 37 of cuadoran Decree
No. 1179 s based on a percentage of tota net profts and s sup-
pementa to the reguar ncome ta , t s hed that the ta n queston
s an ncome ta . ccordngy, a domestc corporaton whch s re-
qured to pay such ta to the Repubc of cuador s entted, under
secton 131(a)(1) of the Code, to credt such ta aganst Unted
States ncome ta , sub|ect to the mtatons contaned n secton
131(b) of the Code.
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141.
112
SUPPL M NT D. R TURNS ND P YM NT O T .
S CTION 141. CONSOLID T D R TURNS.
Reguatons 104, Secton- 23.11: Consodated 1946-3-12-226
returns for subsequent years. I. T. 3779
( so Secton 33.11, Reguatons 110.)
INT RN L R NU COD .
ecton wth respect to fng separate edera ncome and e cess
profts ta returns for fsca years endng n 1946 by affated cor-
poratons whch fed consodated edera ncome and e cess profts
ta returns for fsca years ended n 1943.
dvce s requested whether affated corporatons whch fed con-
sodated edera ncome and e cess profts ta returns for fsca years
ended n 1945 may eect to fe separate edera ncome and e cess
profts ta returns for fsca years endng n 1946.
Secton 141(a) of the Interna Revenue Code, as amended, provdes
n part as foows:
(a) Prvege to e Consodated Income and cess-Profts-Ta Re-
turns. rfhe makng of consodated returns sha be upon the cond-
ton that the affated group sha make both a consodated ncome-ta return
and a consodated e cess-profts-ta return for the ta abe year, and that a
corporatons whch at any tme durng the ta abe year have been members of
the affated group makng a consodated ncome-ta return consent to a the
consodated ncome- and e cess-profts-ta reguatons prescrbed under sub-
secton (b) pror to the ast day prescrbed by aw for the fng of such return.

Secton 23.11 (a) of Reguatons 104, as amended by Treasury De-
cson 50 7 (C. . 1941-2, 141), reatng to consodated ncome ta
returns of affated corporatons, provdes n part as foows:
(a) Conso|dated Returns Requred fob Subsequent eaes. If a conso-
dated return s made under these reguatons for any ta abe year, a consodated
return must be made for each subsequent ta abe year durng whch the affated
group remans n e stence uness (2) Chapter 1 of the Code to the
e tent appcabe to corporatons, or these reguatons whch have been con-
sented to, have been amended and any such amendment s of a character whch
makes ess advantageous to affated groups ns a cass the contnued fng of
consodated returns, . Itacs supped.
Secton 33.11(a) of Reguatons 110, as amended by Treasury De-
cson 50 7, supra, reatng to consodated e cess profts ta returns
of affated corporatons, provdes n part as foows:
(a) Consodated Returns Requred for Subsequent Years. If a conso-
dated return s made under these reguatons for any ta abe year, a consodated
return must be made for each subsequent ta abe year durng whch the affated
group remans n e stence uness (2) Chapter 1 of the Code to the
e tent appcabe to corporatons, or Subchapter of Chapter 2 of the Code,
or these reguatons whch have been consented to. have been amended and any
such amendment s of a character whch makes ess advantageous to affated
groups as a cass the contnued fng of consodated returns, . Itacs
supped.
It s hed that Chapter 1 and Subchapter of Chapter 2 of the
Interna Revenue Code have been so amended by the Revenue ct of
1945 as to make ess advantageous to affated groups as a cass the
contnued fng of consodated edera ncome and e cess profts ta
returns for ta abe years endng after December 31, 1945. ccord-
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113
( 141.
ngy, affated corporatons whch fed consodated ncome and e -
cess profts ta returns for fsca years ended n 1945 may, notwth-
standng the fng of such returns, fe separate ncome and e cess
profts ta returns for fsca years endng n 194G.
Reguatons 104, Secton 23.11: Consodated 194(3-3-12227
returns for subsequent years. L T. 37 0
( so Secton 33.11, Reguatons 110.)
INT RN L R NU COD .
ecton wth respect to fng separate edera Income and e cess
profts ta returns for the caendar year 11)45 by affated corpora-
tons whch fed consodated edera ncome and e cess profts ta
returns for the caendar year 1944.
dvce s requested whether affated corporatons whch fed con-
sodated edera ncome and e cess profts ta returns for the caendar
year 1944 may eect to fe separate edera ncome and e cess profts
ta returns for the caendar | ear 1945.
Secton 141(a) of the Interna Revenue Code, as amended, provdes
n part as foows:
(a) Prvege to e Conko|date| Income and cess- bofts-Ta Re-
turns. The makng of consodated returns sha be upon the cond-
ton that the affated group sha make both a consodated Income-ta return
and a consodated e cesrs proftR-ta return for the ta abe year, and that a
corporatons whch at any tme durng the ta abe year have been members of
the affated group makng a consodated ncome-ta return consent to a the
consodated ncome- and e cess-prots-ta reguatons prescrbed under subsec-
ton (b) pror to the ast day prescrbed by aw for the fng of such return.

Secton 23.11(a) of Reguatons 104, as amended by Treasury Dec-
son 50 7 (C. . 1941-2, 141), reatng to consodated ncome ta
returns of affated corporatons, provdes as foows:
(o) Consodated Returns Requred tor Subsequent Years. If a conso-
dated return s made under these reguatons for any ta abe year, a con-
sodated return must be made for each subsequent ta abe year durng whch
the affated grcup remans n e stence uness (1) a corporaton (other than a
corporaton created or organzed, drecty or ndrecty, by a member of the
group) has become a member of the group durng such subsequent ta abe year,
or (2) Chapter 1 of the Code to the e tent appcabe to corporatons, or
these reguatons whch have been consented to, have been amended and any
such amendment s of a character whch makes ess advantageous to affated
groups as a cass the contnued fng of consodated returns, or (3) the Comms-
soner, pror to the tme of makng the return, upon appcaton made by the
common parent corporaton and for good cause shown, grants permsson to
change.
Secton 33.11(a) of Reguatons 110, as amended by Treasury Dec-
son 50 7, supra, reatng to consodated e cess profts ta returns of
affated corporatons, provdes as foows:
(a) Consodated Returns Requred for Subsequent Years. If a conso-
dated return s made under these reguatons for any ta abe year, a con-
sodated return must be made for each subsequent ta abe year durng whch
the affated group remans n e stence uness (1) a corporaton (other than a
corporaton created or organzed, drecty or ndrecty, by a member of the
group) has become a member of the group durng such subsequent ta abe year,
or (2) Chapter 1 of the Code to the e tent appcabe to corporatons, or
Subchapter of Chapter 2 of the Code, or these reguatons whch have been
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I 141-1
114
consented to, have been amended and any such amendment s of a character
whch makes ess advantageous to affated groups as a cass the contnued fng
of consodated returns, or (3) the Commssoner, pror to the tme of makng
the return, upon appcaton made by the common parent corporaton and for
good cause shown, grants permsson to change.
It s hed that the amendments to the Interna Revenue Code by
the Ta d|ustment ct of 1945 and the Revenue ct of 1945, and
the amendments to Reguatons 104 and to Reguatons 110 by
Treasury Decson 5476 (C. . 1945, 226) are not of a character
whch makes ess advantageous to affated groups as a cass the
contnued fng of consodated edera ncome and e cess profts
ta returns for the caendar year 1945. (The Revenue ct of 1945
made no changes affectng the computaton of corporaton ncome
and e cess profts ta es for the caendar year 1945.) ccordngy,
affated corporatons whch fed consodated ncome and e cess
rofts ta returns for the caendar year 1944 w not be permtted to
e separate ncome and e cess profts ta returns for the caendar
year 1945, uness one of the other condtons provded n secton
23.11(a) of Reguatons 104, supra, and secton 33.11(a) of Regua-
tons 110, supra, s met or uness the aw or reguatons wth respect
to the caendar year 1945 are ater amended so as to make ess advan-
tageous the contnued fng of consodated returns. (Cf. I. T. 3769,
C. . 1945, 225.)
Reguatons 104, Secton 23.11: Consodated 1946- -12291
returns for subsequent years. I. T. 3794
INT RN L R NU COD .
ecton wth respect to fng separate edera ncome ta re-
turns for the caendar year 1940 by affated corporatons whch fed
consodated edera Income and e cess profts ta returns for the
caendar year 1945.
dvce s requested whether affated corporatons whch fed con-
sodated edera ncome and e cess profts ta returns for the caendar
year 1945 may eect to fe separate edera ncome ta returns for
the caendar year 1946.
Secton 141 (a) of the Interna Revenue Code, as amended, provdes
n part as foows:
(a) Prvege To e Consodated Income and cess-Profts-Ta Re-
turns. he makng of consodated returns sha be upon the cond-
ton that the affated group sna make both a consodated ncome-ta return and
a consodated e cess-profts-ta return for the ta abe year, and that a corpo-
ratons whch at any tme durng the ta abe year have been members of the
affated group makng a consodated ncome-ta return consent to a the con-
sodated ncome- and e cess-profts-ta reguatons prescrbed under subsecton
(b) pror to the ast day prescrbed by aw for the fng of such return.
Secton 23.11(a) of Reguatons 104, as amended by Treasury De-
cson 50 7 (C. . 1941-2, 141), reatng to consodated ncome ta
returns of affated corporatons, provdes n part as foows:
(a) Consodated Returns Requred tor Subsequent Years. If a consodated
return s made under these reguatons for any ta abe year, a consodated return
must be made for each subsequent ta abe year durng whch the affated group
remans n e stence uness (2) Chapter 1 of the Code to the e tent ap-
pcabe to corporatons, or these reguatons whch have been consented to, have
been amended and any such amendment s of a character whch makes ess ad-
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115
1 1.
vantageous to affated groups as a cass the contnued fng of consodated
returns. tacs supped.
It s hed that Chapter 1 of the Interna Revenue Code has been so
amended by the Revenue ct of 1945 as to make ess advantageous to
affated groups as a cass the contnued fng of consodated edera
ncome ta returns for the caendar year 1946. ccordngy, affated
corporatons whch fed consodated ncome and e cess profts ta
returns for the caendar year 1945 may, notwthstandng the fng of
such returns, fe separate ncome ta returns for the caendar year
1946. (See I. T. 3779, page 112, ths uetn, and cf. L T. 37 0, page
113, ths uetn.)
Reguatons 110, Secton 33.11: Consodated returns
for subsequent years.
INT RN L R NU COD .
ecton to fe separate returns for fsca years endng n 194G
where nn affated group fed consodated returns for fsca years
ended n 1945. (See I. T. 3779, page 112.)
Reguatons 110, Secton 33.11: Consodated
returns for subsequent years.
INT RN L R NU COD .
ecton to fe separate returns for caendar year 1945 where an
affated group fed consodated returns for caendar year 1944.
(See. T. 37 0, page 113.)
Reguatons 104, Secton 23.19: Proceedngs 1946-1-12242
under Ta d|ustment ct of 1945. T. D. 5491
( so Sectons 33.19 and 33.31, Reguatons 110.)
TITL 2G INT RN L R NU . C PT R I, SU C PT R , P RT 23 ND
P RT 33.
Reguatons 104, reatng to consodated ncome ta returns of
affated corporatons, and Reguatons 110, reatng to consodated
e cess profts ta returns of affated corporatons, amended to con-
form to the Ta d|ustment ct of 1045.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 104 Part 23, Tte 26, Code of
edera Reguatons, Cum. Sup. and Reguatons 110 Part 33, Tte
26, Code of edera Reguatons, Cum. Sup. to the provsons of the
Ta d|ustment ct of 1945 (Pubc Law 172, Seventy-nnth Con-
gress), approved uy 31, 1945, such reguatons are amended as
foows:
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141.
116
Paragraph 1. There s nserted n Reguatons 104 mmedatey pre-
cedng secton 23.0, and n Reguatons 110 mmedatey precedng
secton 33.0, the foowng:
S C. 2. INCR S IN C SS-PRO ITS T SP CI IC MP-
TION. (T D USTM NT CT O 1945.)

0c) Consodated Retubnb. Secton 141(c) of the Interna Revenue
Code s amended by strkng out of 10,000 and nsertng In eu thereof
as .
(d) Ta abe Years to Whch ppcabe, The amendments made by
ths secton sha be appcabe to ta abe years begnnng after December
31,1945, and to ta abe years begnnng n 1945 and endng n 1946.
S C. 4. T NSIONS O TIM OR P YM NT O T S Y
CORPOR TIONS P CTING C RRY- C S, ND T NT TI
C RRY- C D USTM NTS. (T D USTM NT CT O
1945.)
(a) Chapter 37 of the Interna Revenue Code s amended by addng at
the end thereof the foowng new sectons:

S C. 37 1. T NSION O TIM ND T NT TI C RRY-
C ND MORTIZ TION D USTM NTS IN T C S O
CONSOLID T D R TURNS.
If the corporaton seekng an e tenson of tme under secton 3779, a
tentatve carry-back ad|ustment under secton 37 0, or a tentatve ad|ust-
ment wth respect to an amortzaton deducton under secton 124 ( )
and (k), made or was requred to make a consodated return, ether for
the ta abe year wthn whch the net operatng oss or the unused e cess
profts credt arses or wthn whch the eecton s made to termnate the
amortzaton perod, or for a precedng ta abe year affected by such oss,
credt, or eecton, the provsons of such sectons sha appy ony to such
e tent and sub|ect to such condtons, mtatons, and e ceptons as the
Commssoner, wth the approva of the Secretary, may by reguatons
prescrbe.

Par. 2. There s nserted n Reguatons 104 mmedatey after sec-
ton 23.1 a ne.w secton desgnated Sec. 23.19. Proceedngs U der
Ta d|ustment ct of 1945, and n Reguatons 110 mmedatey
after secton 33.1 a new secton desgnated Sec. 33.19. Proceedngs
Under Ta d|ustment ct of 1945, to read n each case as foows:
(a) Genera Rue.
In the case of an affated group the membershp of whch remans unchanged
and for whch consodated returns are made or requred for the severa ta abe
years nvoved, any statement fed under secton 3779 of the Code wth respect to
an e pected carry-back, any appcaton for a tentatve carry-back ad|ustment fed
under secton 37 0, and any appcaton for tentatve ad|ustments wth respect to
amortzaton deductons ted under secton 124( |) sha be fed by the common
parent corporaton and sha dscose a matera facts and crcumstances reatng
to the group as a whoe. Such statement or appcaton sha be fed on the
approprate form prescrbed for such purpose, orm 113 , orm 1139, or orm
1140, as the case may be. ny refunds aowabe under any such appcaton w
be made drecty to and n the name of the common parent. The makng of any
such refund w dscharge any abty of the Government n respect thereof to
the severa affated corporatons. The common parent corporaton and ts severa
subsdares sha be severay abe for any amounts assessed pursuant to secton
37S0 (b) or (c), 294(e), or 124(k), together wth any nterest or penaty assessed
n connecton therewth.
(6) Groups Wth Changng Membershp Cases Invovng Separate Return
Perods.
The membershp of an affated group may change durng a ta abe year for
whch a net operatng oss or an unused e cess profts credt arses or durng
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117
11 141.
a ta abe year In whch an eecton s e ercsed to termnate the amortzaton
perod pursuant to secton 124(d) of the Code or n pror ta abe years affected
by such net oss, unused credt, or eecton. Or an affated group makng a
consodated return for the year of such net oss, unused credt, or eecton
may have made separate returns for one or more of such pror years or a group
makng separate returns for the year of the net oss, unused credt, or eecton
may have made a consodated return for one or more of the pror years. In any
such case, the statement provded for n secton 3779(b) of the Code and the
appcaton for the tentatve carry back ad|ustment provded for n secton 37 0(a)
and the appcaton for the tentatve ad|ustment wth respect to amortzaton
deductons provded for n secton 124(|) sha he a |ont statement or appca-
ton concurred n and e ecuted by each corporaton whch was a member of the
group at any tme durng any of the severa ta abe years nvoved n the de-
ferment or ad|ustment sought. The tme for the payment of ta es sha be e -
tended under secton 3779 and the ad|ustments provded for In sectons 37S0 and
124(k) sha be made ony n accordance wth an agreement of the severa
corporatons nvoved to ba made a part of such statement or appcaton. ny
refund aowabe under any such appcaton wth respect to a consodated re-
turn perod w be made drecty to and n the name of the common parent
corporaton, and the makng of any such refund w dscharge any abty
of the Government n respect thereof to the severa affated corporatons. The
common parent corporaton and ts severa subsdares sha be severay abe
for any amounts assessed pursuant to secton 37S0 (b) or (c), 204(e), or 124(k),
together wth any nterest or penaty assessed n connecton therewth.
In the absence of nn agreement between the severn corporatons, or n the
event of ther faure to set forth the provsons of such an agreement as a part
of ther statement or appcaton, no e tenson of tme for the payment of any
ta under the provsons of secton 3779 sha be granted, and no tentatve ad-
|ustments sha be made under ether secton 37S0 or secton 124 (|) and (k).
Notwthstandng any agreement between the severa affated corporatons, no
tentatve ad|ustment sha he made wth respect to ether a consodated or a
separate return perod n dsregard of the severa abty of the severa cor-
poratons wth respect to any ta abe year for whch a consodated return
was made or was requred.
Par. 3. Secton 33.31 ( ) (24) () of Reguatons 110, as amended by
Treasury Decson 5441, approved ebruary 2 , 1945 C. . 1945,
214 , s further amended to read as foows:
() specfc e empton as provded n secton 710(b) (1),
(Ths Treasury Decson s ssued under the authorty contaned
n secton 141 (b) of the Interna Revenue Code (53 Stat., 5 , 5G Stat.,
5 26 U. S. C, 1940 ed. and Sup., 141(b)) and secton 4 of the Ta
d|ustment ct of 1945 (Pubc Law 1(2, Seventy-nnth Congress),
approved uy 31, 1945.)
War. T. Sherwood,
ctng Commssoner of Interna Revenue.
pproved anuary 25,1946.
oseph . O Co e, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster anuary 2 , 1946, 2.43 p. m.)
Reguatons 110, Secton 33.19: Proceedngs under
Ta d|ustment ct of 1945.
INT RN L R NU COD .
Reguatons 110 amended. (See T. D. 5491, page 115.)
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141.
11
Reguatons 104, Secton 23.31: ases of ta 1946-10-12310
computaton. T. D. 5510
( so Secton 33.31, Reguatons 110.)
TITL 2G INT RN L R NU . Cn rT I, SU C PT R , P RT 23 D
P RT 33.
Reguatons 104, reatng to consodated ncome ta returns of
affated corporatons, and Reguatons 110, reatng to consodated
e cess profts ta returns of affated corporatons, amended to con-
form to the Revenue ct of 1945.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 104 Part 23, Tte 26, Code of
edera Reguatons. Cum. Sup. and Reguatons 110 Part 33, Tde
26, Code of edera Reguatons, Cum. Sup. to the provsons of the
Revenue ct of 1945 (Pubc Law 214, Sevent -nnth Congress),
approved November ,1945, such reguatons are amended as foows:
Paragraph 1. There s nserted n Reguatons 104 mmedatey
precedng secton 23.0, and n Reguatons 110 mmedatey precedng
secton 33.0, the foowng:
S C. 122. R P L O C SS RO ITS T IN 1946. (R -
NU CT O 1945.)

(d) ffated Groups. Subsecton (b) reatng to carry-backs from
years after 1945, etc. sha be apped n the case of corporatons makng
or requred to make a consodated return under chapter 1 for any ta abe
year begnnng after December 31, 1945, and n the case of a corpora-
ton makng a separate return for any such ta abe year whch was a
member of a group whch made or was requred to make a consodated
return for any pror ta abe year, n such manner as may be prescrbed
In reguatons prescrbed by the Commssoner wth the approva of
the Secretary pror to the ast day prescrbed by aw for the makng
of the return for the year begnnng after December 31, 1945.

Par. 2. There s nserted n secton 23.31 of Reguatons 104 the
foowng new paragraph:
(h) Carry- acks rom Ta abe Years egnnng fter December SI, 1945.
To the e tent that It may become necessary under secton 122(b) of the
Revenue ct of 1945 to determne a net operatng oss for a ta abe year begn-
nng after December 31, 1945, or to determne .an unused e cess profts credt
for any such year, for the purpose of the e cess profts ta provsons of Sub-
chapter of Chapter 2, any such determnaton n the case of an affated group
sha be made n a respects as f a consodated return for such year, sub|ect to
the provsons of Reguatons 110, were made or were requred, f a consodated
ncome ta return for such year s made or Is requred under the provsons of
these reguatons. If separate ncome ta returns are propery fed for any
such year, the requred e cess profts ta determnatons sha be made as f
separate e cess profts ta returns were propery fed for such year, regardess
of the fact that consodated returns may have been fed for ta abe years
begnnng pror to anuary 1, 1946.
Par. 3. There s nserted n secton 33.31 of Reguatons 110 the
foowng new paragraph:
(7) Carry- acks rom Ta abe Years egnnng fter December 31,1945.
To the e tent that t may become necessary under secton 122(b) of the Rev-
enue ct of 1945 to determne a net operatng oss for a ta abe year begnnng
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119
29.143-2.
after December 31, 1945, or to determne an unused e cess profts credt for any
such year, for the purpose of these reguatons, any such determnaton n the case
of an affated group sha be made In a respects as f a consodated e cess profts
ta return for such year were made or were requred, If a consodated ncome
ta return for such year s made or s requred sub|ect to the provsons of Reg-
uatons 104. If separate ncome ta returns are propery fed for any such
year, the requred e cess profts ta determnatons sha be made as If separate
e cess profts ta returns were propery fed for such year, regardess of the fact
that consodated returns may have been fed for ta abe years begnnng pror
to anuary 1, 194G.
(Ths Treasury Decson s ssued under the authorty contaned n
secton 141(b) of the Interna Revenue Code (53 Stat., 5 . 56 Stat.,
5 26 U. S. C, 1940 ed., and Sup., 141(b)) and secton 122(d) of the
Revenue ct of 1945 (Pubc Law 214, Seventy-nnth Congress),
approved November ,1945.)
os ra D. Nunan, r.,
Commssoner of Interna Revenue.
pproved pr 23,1946.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster pr 24, 1946, 11.13 a. m.)
Reguatons 110, Secton 33.31: ases of ta computaton.
INT RN L R NU COD .
Reguatons 110 amended. (See T. D. 5491, page 115.)
Reguatons 110, Secton 33.31: ases of ta
computaton.
nterna revenue code.
Reguatons 110 amended. (See T. D. 5510, page 11 .)
S CTION 143. WIT OLDING O T T SOURC .
Secton 29.143-2: ed or determnabe annua 1946-3-1222
or perodca ncome. I. T. 37 1
nterna revenue code.
mounts dstrbuted pursuant to a pan of reorganzaton whch
are ta abe as dvdends by reason of secton 112(c)(2) of the
Interna Revenue Code do not consttute dvdends or other f ed
or determnabe annua or perodca ncome wthn the meanng of
secton 143(b) of the Code, and such amounts are not sub|ect to wth-
hodng of ta at the source when dstrbuted to nonresdent aen
stockhoders.
dvce s requested whether ncome ta s requred to be wthhed
at the source under secton 143(b) of the Interna Revenue Code
wth respect to corporate dstrbutons whch quafy as dvdends
under secton 112(c)(2) of the Code, when such dstrbutons are
made to nonresdent aen stockhoders.
In the case under consderaton, nvovng a reorganzaton as
defned n secton 112(g) of the Code, the cumuatve preferred stock
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29.143-2.
120
and the no-par common stock of the reorganzed company were con-
verted nto new cumuatve convertbe preferred stock and new par
vaue common stock, respectvey. The dvdends on the od preferred
stock had not been pad for severa years pror to reorganzaton.
Pursuant to the pan of reorganzaton, each snare of the od preferred
stock was to be repaced wth one share of the new preferred stock,
eght shares of the new common stock, and a sma cash payment.
ccumuated earnngs and profts of the reorganzed company e -
ceeded the cash to be pad.
The cash payments w make avaabe to stockhoders a porton of
the accumuated earnngs and profts of the reorganzed company and
thus w have the effect of a dstrbuton of a ta abe dvdend. In
accordance wth the provsons of secton 112(c) (2) of the Code, the
payments are ta abe as dvdends. It does not foow, however, that
the payments are dentca wth ordnary dvdends (Commssoners.
George 0. ob, 100 ed. (2d), 920), or, f dentca, that thev are sub-
|ect to wthhodng of ta at the source under secton 143(b) of the
Code. That secton does not requre wthhodng of ta at the source
wth respect to a corporate dstrbutons. Under the wordng of
the statute and the anguage of secton 29.143-2 of Reguatons 111,
ony f ed or determnabe annua or perodca ncome s sub|ect to
wthhodng.
It s hed that amounts dstrbuted pursuant to a pan of reorganza-
ton, whch amounts are ta abe as dvdends by reason of secton
112(c) (2) of the Interna Revenue Code, do not consttute dvdends
or other f ed or determnabe annua or perodca ncome wthn the
meanng of secton 143(b) of the Code, and such amounts are not sub-
|ect to wthhodng of ta at the source when dstrbuted to nonres-
dent aen stockhoders. (See generay L. O. 1024, C. . 2, 1 9
(1920), and G. C. M. 21575, C. . 1939-2, 172.)
Secton 29.143-2: ed or determnabe 1946-12-1232
annua or perodca ncome. I. T. 3 05
( so Secton 144, Secton 29.144-1 Secton 362,
Secton 29.362-5.)
INT RN L R NU COD .
Dvdends whch are desgnated by a. reguated nvestment com-
pany as capta gan dvdends, n accordance wth the provsons of
secton 362(b)(7) of the Interna Revenue Code, do not consttute
f ed or determnabe annua or perodca ncome wthn the mean-
ng of secton 143(b) of the Code, and such dvdends are not sub|ect
to wthhodng of ta at the source under sectons 143(b) and 144
of the Code when pad to nonresdent aen ndvduas and nonres-
dent foregn corporatons.
dvce s requested whether ncome ta s requred to be wthhed
at the source under sectons 143(b) and 144 of the Interna Revenue
Code wth respect to dvdends whch are desgnated by a reguated
nvestment company as capta gan dvdends, n accordance wth the
provsons of secton 362(b) (7) of the Code, when such dvdends are
pad to nonresdent aen ndvduas and nonresdent foregn cor-
poratons.
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121
29.143-2.
Secton 143(b) of the Interna Revenue Code-provdes n part as
foows:
(b) Nonrksdent ens. persons, In whatever capacty actng,
havng the contro, recept, custody, dsposa, or payment of nterest
dvdends, rent, saares, wages, premums, annutes, compensatons, remunera-
tons, emouments, or other f ed or determnabe nnnua or perodca gans,
profts, and Income (but ony to the e tent that any of the above tems consttutes
gross ncome from sources wthn the Unted States), of any nonresdent aen
ndvdua sha deduct and wthhod from such annua or
perodca gans, profts, and ncome a ta equa to 30 per centum thereof
Secton 14-1 of the Code provdes n part as foows:
In the case of foregn corporatons sub|ect to ta aton under ths chapter
Chapter 1 of the Code not engaged n trade or busness wthn the Unted
States, there sha be deducted and wthhed at the source In the same manner
and upon the same tems of ncome as s provded n secton 14M a ta equa to
30 per centum thereof
Secton 3G2(b) of Suppement , Chapter 1 of the Code, provdes n
part as foows:
(b) Method of Ta aton of Companes and Sn t OLD .RS. In the case of a
reguated nvestment company whch dstrbutes durng the ta abe year to ts
sharehoders as ta abe dvdends other than capta gan dvdends an amount
not ess than )0 per centum of ts net ncome for the ta abe year computed wth-
out regard to net ong-term and net short-term capta gans, and compes for
such year wth a rues and reguatons prescrbed by the Commssoner, wth
the approva of the Secretary, for the purpose of ascertanng the actua owner-
shp of ts outstandng stock:

(6) capta gan dvdend sha be treated by the sharehoders as gans
from the sae or e change of capta assets hed for more than 6 months.
(7) capta gan dvdend means any dvdend or part thereof whch s
desgnated by the company as a capta gan dvdend n a wrtten notce
maed to ts sharehoders at any tme pror to the e praton of thrty days
after the cose of ts ta abe year.
Pror to the Revenue ct of 1942, the effect of Suppement of
Chapter 1 of the Code was to aow an nvestment company to earn
and dstrbute ncome wthout tsef ncurrng ncome ta abty,
the purpose beng to equaze the ta effect on nvestors whether they
nvested capta drecty by ther own purchase of securtes, or
whether they nvested capta through an nvestment company. Ths
has been referred to as the condut prncpe. The conference
report on the revenue b of 1942 (C. . 1942-2, 701, 715) states
that the Senate amendment (amendment No. 230) e tends the
recognton of the condut prncpe to capta gans, thus ta ng
dstrbuted portons of such gans as capta gans n the hands of the
sharehoders. It woud seem, therefore, that Congress has e pressed
an ntent to further equaze the ta effect on nvestors whether they
nvest capta drecty or through an nvestment company. Gvng
effect to such ntent, n vew of secton 302(b) (0) of the Code, an n-
vestor w not be ta ed dfferenty because hs ncome derved from
capta gans has been channeed through such an nvestment com-
pany. quazaton of ta effect s acheved ony by treatng such
dvdends as assumng the character of capta gans upon
dstrbuton.
In vew of the foregong, t s hed that dvdends whch are des-
gnated by a reguated nvestment company as capta gan dvdends,
703672 40 -9
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19.145-1.
122
n accordance wth the provsons of secton 362(b) (7) of the Interna
Revenue Code, do not consttute f ed or determnabe annua or per-
odca ncome wthn the meanng of secton 143(b) of the Code, and
such dvdends are not sub|ect to wthhodng of ta at the source
under sectons 143(b) and 144 of the Code when pad to nonresdent
aen ndvduas and nonresdent foregn corporatons.
S CTION 144. P YM NT O CORPOR TION
INCOM T T SOURC .
Secton 29.144-1: Wthhodng n the case of
nonresdent foregn corporatons.
INT RN L R NU COD .
Capta gan dvdends pad by a reguated nvestment company.
(See. T. 3 05, page 120.)
S CTION 145. P N LTI S.
Secton 19.145-1: Penates. 1946-5-12255
Ct. D. 1666
INCOM T INT RN L R NU COD UDICI L COD D CISION O
supreme court.
1. ursdcton of Crcut Court of ppeas Motons foe New
Tra Convcton fob Wfuy ttemptng to Defeat and
vade Ta and fob Consprng, dng and bettng.
The Crcut Court of ppeas reversed a convcton aganst one re-
spondent for wfuy attemptng to defeat and evade ncome ta es
and for consprng to do so, and aganst the other respondents for
consprng wth and adng and abettng hm. The Supreme Court re-
versed and remanded to the crcut court, whch, upon ta payers
request, remanded to the tra court, and a moton for new tra
was fed on the ground of newy dscovered evdence. Moton was
dened and the crcut court affrmed. second petton for cer-
torar was dsmssed, and the ta payers, after obtanng a second
remand from the crcut court, fed an amended moton for new tra.
The tra court concuded that the basc ground for the moton was
wthout foundaton. Upon appea, the crcut court reversed. ed:
The crcut court of appeas may not revew orders denyng motons
for a new tra of crmna prosecutons for wfuy attemptng
to defeat and evade Income ta es and for conspracy to do su
when such revew s sought on the aeged ground that the tra
court made erroneous fndngs of fact and t does not ceary appear
that the fndngs are not supported by any evdence. Under rue I
of the Crmna ppeas Rues the crcut court of appeas on ts own
moton shoud have dsmssed the appea as frvoous.
2. Decson Reversed and Cause Remanded.
Decson of the Unted States Crcut Court of ppeas, Seventh
Crcut (142 ed. (2d), 5 S), reversed and cause remanded to the
dstrct court to enforce |udgment aganst pettoners.
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123
19.145-1.
Supreme Court of thb Unted States.
The Unted States of merca, pettoner, v. Wam R. ohnson.
The Unted States of merca, pettoner, v. ack ommers, ames . artgan,
Wam P. ey and Stuart Soomon rown.
On wrts of certorar to the Unted States Court of ppeas for the Seventh Crcut
ebruary 4, 194 .
OPINION.
Sr. ustce ack devered the opnon of the Court
On October 12, 1940, after a edera dstrct court tra astng more than
s weeks, a |ury found respondent ohnson guty of wfuy attemptng to
defeat and evade a arge part of hs ncome ta es for the caendar years 1936-19 9
and of consprng to do so the other respondents were convcted and sentenced
for consprng wth and adng and abettng hm.1 rom the tme of these con-
vctons unt now, enforcement of the sentences was deayed by persstent efforts
to obtan a new tra. Though there has been no second tra the case s here for
the thrd tme.
September 21, 1941, was the date when the crcut court of appeas frst reversed
the convcton, one |udge dssentng. (123 ed. (2d), 111.) une 7, 1043, we
reversed and remanded the case to the crcut court of appeas (319 U. S., 503).
Respondents then asked that court to remand the case to the tra court to permt
a moton for a new tra on the ground of newy dscovered evdence. The cr-
cut court actng pursuant to rue 11(3) of the Crmna ppeas Rues remanded
the case and on October 29, 1943, respondents, wth eave of the tra court, fed
a moton for a new tra. The respondents aeged that the newy dscovered
evdence proved that Godsten, a Government wtness at the tra, was un-
worthy of beef and had commtted per|ury n testfyng that certan propertes
were purchased by hm on behaf of ohnson and wth money supped by ohn-
son. To support ther charges aganst Godsten respondents offered numerous
affdavts. The Government fed an answer to the moton and a number of
counter-affdavts. nd among the papers before the court were affdavts by
Godsten reaffrmng hs testmony at the tra. The tra |udge n a carefuy
prepared opnon coverng 56 pages of the record, gave thoughtfu consderaton
to each affdavt, reached the concuson that none of them showed that Godsten
had per|ured hmsef, and found both from the new affdavts and hs own
knowedge of the orgna 6-weeks tra, that Godsten s testmony was true.
The moton for a new tra was consequenty dened.
The crcut court of appeas affrmed. (142 ed. (2d), 5 .) It unanmousy
hed that t coud not substtute ts |udgment on the facts for that of the tra
|udge that t dd not have power to try these facts de novo that It coud revew
the record for errors of aw, to determne, among other thngs, whether the tra
|udge had abused hs dscreton that a revew of the new evdence n the record
dd not ncvt:)y ead to the concuson that Godsten had testfed fasey that
the tra |udge had not reached hs concuson arbtrary, caprcousy, or n
the msappcaton of any rue of aw and hence had not abused hs dscreton.
The respondents thereupon fed a second petton for certorar In ths Court
Whe ths petton was pendng, respondents presented papers nformng us that
they hart dscovered st more new evdence tendng to dscredt Godsten s
orgna testmony. We deferred consderaton of ther case, whch we ater
dsmssed (323 v . S., 06), and they, after obtanng a second remand from the
1 The respondent rown was found guty ony on the conspracy count and counts
a d 4, the substantve counts for 193 1939.
1 Prevousy respondents had apped to Mr. ustce rankfurter for a stay of mandate
r ndnc petton for rehearng. Mr. ustce rankfurter s dena of the moton specfcay
stated that t wns to be wthout pre|udce, however, to the consderaton and dsposton
t 7 the Unted States Crcut Court of ppeas for the Seventh Crcut of any moton fed
tnder rue 11(3) of the Crmna ppeas Uues (R. ).
T. Motont.

(3) moton for a new tra soey upon the ground of newy-dscovered evdence may
made -wthn s ty (60) days after fna |udgment, wthout regard to the e praton of
the term at whch |udgment was rendered, uness an appea has been taken and In that
event the tra court may entertan the moton ony on remand of the case by the appeate
court for that purpose, and such remand may be made at any tme after fna |udgment.
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19.145-1.
124
crcut court of appeas, fed an amended moton for new tra In the dstrct
court. The tra court agan wrote an opnon anayzng each new affdavt
In deta. These addtona affdavts contaned statements whch had they
been offered as testmony at the orgna tra woud have been admssbe and
reevant to dscredt Godsten s and buttress ohnson s testmony. t east
some of the facts set out n the affdavts had not been dscovered unt shorty
before the amended moton was made. ut the tra court concuded that the
new affdavts faed to prove that Godsten had commtted per|ury, and that
consequenty the basc ground for the moton that there was new evdence
showng that Godsten had per|ured hmsef was wthout foundaton. That
court found agan that the new and od evdence taken together affrmatvey
showed that Godsten had been a truthfu wtness. Ths tme, however, tbe
crcut court of appeas reversed wth one |udge dssentng. (149 ed. (2d).
1.) The reversa rested bascay on the court s beef that the tra |udge had
erroneousy found that Godsten dd not commt per|ury. The ma|orty of
the court revewed parts of the affdavts and concuded from them that the tra
|udge s fndng that Godsten dd not commt per|ury was ogca and unreason-
abe. The ma|orty substtuted Its own fndng that Godsten s orgna test-
mony was unerrngy fase and hed that the tra |udge s contrary concu-
son amounted to an abuse of dscreton. Snce we thnk t mportant for the
ordery admnstraton of crmna |ustce that fndngs on confctng evdence
by tra courts on motons for new tra based on newy dscovered evdence
reman undsturbed e cept for most e traordnary crcumstances, we granted
certorar.
In our opnon the crcut court of appeas erred. The appea to that court
was so devod of mert that t shoud have been dsmssed. The cruca ques-
ton before the tra court was one of fact: Dd the new evdence show that
Godsten s orgna testmony was fase. The tra |udge after carefuy
studyng a the evdence found that there was nothng to show per|ury on
the part of Godsten, that Godsten had n fact tod the truth, and concuded
that a new tra was not warranted. The tra court thus answered the above
queston n the negatve. Two |udges of the crcut court of appeas thought
that the evdence compeed an affrmatve answer. ut t s not the provnce
of ths Court or the crcut court of appeas to revew orders grantng or deny-
ng motons for a new tra when such revew s sought on the aeged ground
that the tra court made erroneous fndngs of fact. ( omgren v. Unted
States, 217 U. S., 5C9 ot v. Unted States, 21 T . S., 245 armount Cass
Works v. Coa Co., 2 7 U. S., 474, 4 1.) Whe the appeate court mght nter-
vene when the fndngs of fact are whoy unsupported by evdence (cf. Unted
States v. Socony- acuum O Co., 310 U. S., 150, 247 Gasscr v. Unted Sates,
315 U. S., 60, 7), t shoud never do so where t does not ceary appear that
the fndngs are not supported by any evdence.
The tra |udge s fndngs were supported by evdence. e had conducted
the orgna tra and had watched the case aganst ohnson and the other
respondents unfod from day to day. Consequenty the tra udge was e -
ceptonay quafed to pass on the affdavts. The record of both the orgna
tra and the proceedngs on the motons for a new tra shows ceary that the
tra |udge gave the numerous eements of the controversy carefu and honest
consderaton. We thnk that even a casua perusa of ths record shoud have
reveaed to the crcut court of appeas that here nothng more was nvoved
than an effort to upset a tra court s fndngs of fact.
Determnaton of gut or nnocence as a resut of a far tra, and prompt
enforcement of sentences n the event of convcton, are ob|ectves of crmna
4 n aternatve ground for the court s dena of the moton need not be consdered
here. or as w be seen we thnk that the tra court s fndngs that the so-caed nc
evdence faed to show Godsten s per|ury shoud not have been upset. Tbe aterant
. ground was that a the o-caed newy dscovered evdence was ether not newy ds-
covered, or merey cumuatve or Impeachng, and In any event woud probaby not pro-
duce a dfferent resut. In ths aspect of the case, tbe tra court, as dd the crcut coort
of appeas In Its frst opnon, reed on the frequenty quoted and foowed rue announced
In erry v. Georga (10 Georga, 511).
In addton to questons Invovng the merey mpeachng or cumuatve effect of tbe
evdence, whch we have aready Indcated need not be consdered here (see note 2.
supra), we aso need not consder what crtera shoud have guded the court n passn
on the moton, had respondents actuay shown that Godsten recanted hs testmony or
that he commtted per|ury. Compare Larrson v. Unted States (24 ed (2d). 2) wt
erry v. Georga, upra, note 2. or as ater appears we consder the dstrct court I
fndng, that Godsten s testmony was not shown to have been fase, not revewabe.
That was suffcent to warrant a dena of the moton.
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125
29.162-1.
aw. In the Interest of promptness, rue 11(2) of the Crmna ppeas Rues
requres that motons for new tra generay must be made wthn three (ays
after verdct or fndng of gut, and rue III requres appeas to be token
wthn fve days. ut motons for new tra on the ground of newy dscovered
evdence have been more beray treated. They can, under rue 11(3) be
made at any tme wthn 60 days after udgment, and n the event of an
appea, at any tme before fna dsposton by the appeate court. Ths e -
traordnary ength of tme wthn whch ths type of moton can be made
Is desgned to afford reef where despte the far conduct of the tra, It
ater ceary appears to the tra |udge that because of facts unknown at
the tme of tra, substanta |ustce was not done. It s obvous, however,
that ths prvege mght end tsef for use as a method of deayng enforce-
ment of |ust sentences. specay s ths true where deay s e tended by
appeas ackng n mert. Ths case we ustrates ths possbty. Whe
a defendant shoud be afforded the fu beneft of ths type of rectfyng moton,
courts shoud be on the aert to see that the prvege of ts use Is not abused.
Oue of the most effectve methods of preventng ths abuse Is for appeate
courts to refran from revewng fndngs of fact whch have evdence to
support them. The crcut court of appeas was rght n the frst nstance,
when t decared that t dd not st to try de novo motons for a new tra.
It was wrong In the second nstance when t dd revew the facts de novo and
order the |udgment set asde.
The appea to the crcut court of appeas was nsttuted by notce of appea
under rue III of the Crmna ppeas Rues. Rue I gves the crcut court of
appeas power to supervse and contro a proceedngs on the appea and to
e pedte such proceedngs by, among other thngs, entertanng motons to ds-
mss. Ry v. Unted States, 301 U. S., 15 , 164 Mortensen v. Unted States,
322 U. S., 3G9.) Under that rue the crcut court of appeas here, after studyng
the Issues rased, and upon determnng that the ony ob|ecton was to the tra
court s fndngs on confctng evdence, shoud have decded that ths does not
present a revewabe ssue of aw and on Its own moton have dsmssed the
appea as frvoous.
The |udgment of the crcut court of appeas s reversed, and the cause Is
remanded to the dstrct court to enforce the |udgments aganst the pettoners.
It s so ordered.
Mr. ustce ackson and Mr. ustce Murphy took no part In the consderaton
or decson of ths case.
SUPPL M NT . ST T S ND TRUSTS.
S CTION 161. IMPOSITION O T .
Secton 29.161-1: Imposton of the ta .
INT RN L R NU COD .
Reguatons 111 amended. (See T. D. 54 , page 19.)
S CTION 1C2. N T INCOM .
Secton 29.162-1: Income of estates and trusts.
INT RN L R NU COD .
Reguatons 111 amended. (See T. D. 54 , page 19.)
. bert v. C7n(c State (21 ed. (2d). OCR) Corrgan v. Rurtcy (271 . S., 2 ,
329) vent . Unted States (201 U. S., 127. 131) Sunarman . Unted State (249 U. S.,
1 2 1 4) : Zucht v. ng (200 U. S.. 174, 17tt : Campbe v. Oney (202 U. S.. 332):
Seaboard rne y. Co. v. Wat ton (2 7 U. S., 6. 90. 92) : Sanger v. Unted States (272
U. ., 542, 544) ryder v. Indana (305 U. S., 570) fadp v. Georga (323 U. S., 676).
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19.1 1-1. 126
S CTION 1G6. R OC L TRUSTS.
Secton 29.166-1: Trusts wth respect to the corpus
of whch the grantor s regarded as remanng.n
substance the owner ta abe years begnnng pror
to anuary 1,1946.
INT RN L R NU COD .
Reguatons 111 amended. (See T. D. 54 , page 19.)
Secton 29.166-2: Trusts wth power to revest corpus
n the grantor ta abe years begnnng after
December 31,1945.
INT RN L R NU COD .
Reguatons 111 amended. (See T. D.-54 , page 19.)
S CTION 167. INCOM OR N IT O GR NTOR.
Secton 29.167-1: Trusts n the ncome of whch
the grantor retans an nterest.
nterna revenue code.
Reguatons 111 amended. (See T. D. 54 , page 19.)
Secton 29.167-2: Dscretonary trusts for mante-
nance or support of certan benefcares.
INT RN L R NU COD .
Reguatons 111 amended. (See T. D. 54 , page 19.)
SUPPL M NT . P RTN RS IPS.
S CTION 1 1. P RTN RS IP NOT T L .
Secton 19.1 1-1: Partnershps.
INT RN L R NU COD .
Pennsyvana husband and wfe partnershp created for ta -
savng purposes. (See Ct. D. 1669, page 9.)
Secton 19.1 1-1: Partnershps.
INT RN L R NU COD .
Mchgan husband and wfe partnershp created for ta -savng
purposes. (Sec Ct. D. 1670, page 11.)
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127
29.204-2.
SUPPL M NT G. INSUR NC COMP NI S.
S CTION 202. D UST D NORM L-T
N T INCOM .
Secton 29.202-1: Reserve and other pocy 1946-1-12205
abty credt for ad|usted norma-ta net T. D. 54 6
ncome.
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RT 29. INCOM
T T L Y RS GINNING T R D C M R 31, 1941.
gure to be used n determnng reserve and other pocy abty
credt for fe nsurance companes.
Treasukt Department,
Offce of the Secretary of the Treasury,
Washngton, D. C, December SI, 1945.
To Offcers and mpoyees of the Treasury Department and Others
Concerned:
y vrtue of the authorty vested n me by secton 202(b) of the
Interna Revenue Code (53 Stat., 71), as amended by secton 1C3 of
the Revenue ct of 1942 ( 56 Stat., 70: 26 U. S. C., 1940 ed., and
Sup., 202(b)), t s hereby determned that the fgure to be used n
computng the reserve and other pocy abty credt of fe
nsurance companes for the ta abe year 1945 sha be .9539.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster December 26, 1945, 11.30 a. m.)
S CTION 204. INSUR NC COMP NI S OT R
T N LI OR MUTU L.
Secton 29.204-2: Gross ncome. 1946-9-12301
I. T. 379
INT RN L R NU COD .
The portons of orgna premums estabshed and segregated as a
rensurance reserve by a tte Insurance company on and after une 1,
1945, under secton 434 1. b. of the New York State Insurance Law,
as amended, may be treated as unearned premums under secton
204(b) (5) of the Interna Revenue Code. The portons of orgna
premums estabshed and segregated as a rensurance reserve by a
tte nsurance company from une 1, 193 , to May 31, 1945, under
secton 434 1. a. of the New York State Insurance Law may not be
treated as unearned premums under secton 204(b) (5) of the Code.
dvce s requested reatve to the appcaton of secton 204(b) (5)
of the Interna Revenue Code to portons of the orgna premums es-
tabshed and segregated as a rensurance reserve by a tte nsurance
company (1) on and after une 1,1945, under secton 434 1. b. of the
New York State Insurance Law, as amended by secton 1, chapter 635,
of the aws of the State of New York for 1945, and (2) from une 1,
193 , to May 31, 1945, under secton 434 1. a. of that aw pror to
amendment.
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29.204-2.
12
Secton 204(b) of the Interna Revenue Code, reatng to the defn-
ton of ncome n the case of nsurance companes sub|ect to the ta
mposed by secton 204 of the Code, provdes n part as foows:
(1) Gboss ncome. Gross Income means the sum of ( ) the combned
gross amount earned durng the ta abe year, from nvestment ncome and
from underwrtng ncome as provded n ths subsecton,

(4) Underwrtng ncome. Underwrtng ncome means the premums
earned on Insurance contracts durng the ta abe year ess osses ncurred
and e penses Incurred
(5) Premums earned. Premums earned on nsurance contracts durng
the ta abe year means an amount computed as foows:
rom the amount of gross premums wrtten-on nsurance contracts durng
the ta abe year, deduct return premums and premums pad for rensurance.
To the resut so obtaned add unearned premums on outstandng busness
at the end of the precedng ta abe year and deduct unearned premums on
outstandng busness at the end of the ta abe year.
The poston of the ureau regardng the determnaton of unearned
premums n the case of tte nsurance companes s set forth n I. T.
19 1 (C. . n-1,311 (1924)), whch hods n part that the provsons
of the Revenue ct of 1921 wth respect to the dvson of premums
receved by nsurance companes nto earned and unearned premums
are not appcabe to tte nsurance companes whose premums are
earned n fu at the tme ther servces are rendered. That poston
was sustaned n mercan, Tte Co. v. Commssoner (76 ed. (2d),
32, Ct. D. 992, C. . I -2,254 (1935)) n connecton wth the reserve
fund of a Pennsyvana tte nsurance company, the estabshment of
whch fund was requred by the aws of the State of Pennsyvana.
In that State a tte nsurance company s requred to accumuate a
reserve fund of 250,000 ether by settng asde 10 per cent of the
premums on the poces ssued or, wth the approva of the State
authortes, a greater amount. The fund remans constant after the
sum of 250,000. has been accumuated, and there s no provson for
the reease of any porton of such fund to the company s free assets.
In the mercan Tte Co. case, the court hed that the premums for
tte nsurance were earned when receved, and that no part was
deductbe as unearned premums for edera ncome ta purposes.
In ary v. Lawyers Tte Insurance Corporaton (132 ed. (2d),
42), the court stated that the genera poston of the ureau as set
forth n I. T. 19 1, supra, was not appcabe to that case n vew of
the fact that a statute of the State of rgna requred tte nsurance
companes to set asde n a reserve fund 10 per cent of the premums
coected, to be hed ntact for perods or tme varyng wth the
dfferent types of poces. The rgna statute provded that the
sums so requred to be reserved sha at a tmes and for a purposes
be consdered and consttute unearned portons of the orgna pre-
mums. In the ast-cted case, the court hed that the amounts re-
served consttuted unearned premums under the provsons of the
rgna statute, takng the poston that because of such statutory
provsons the amounts were wthdrawn from the contro of the com-
pany and were hed n trust for the contract hoder durng the por-
ton of the perod of rsk whch the statute, prescrbed. The court
stated that ordnary a premum pad for tte nsurance s to be
treated as fuy earned when receved, ctng mercan Tte Co. v.
Commssoner, supra, and uebner, Property Insurance (1929), page
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129
29.204-2.
493, and that n the absence of the rgna statute t woud fee con-
straned to hod that no part of the premums receved coud be
treated as unearned wthn the meanng of the revenue aws. The
court agreed that a statute of a State coud not be gven the effect of
wthdrawng from ta aton what s n fact an earned premum by the
mere devce of cang t unearned. The court was of the opnon that
the rgna statute gves to the amounts reserved a the attrbutes
that pertan to unearned premums, . e., t wthdraws them from the
power of the company to use them for ts genera purposes and m-
presses them wth a trust n favor of contract hoders unt the rsk
sha have been carred for the perod that the statute prescrbes.
It was stated that If the company shoud n the meantme become
nsovent, they woud be avaabe as unearned premums for re-
nsurance of the contracts, or f not used for that purpose woud be-
ong to the contract hoders. The court specfcay dstngushed
the case of mercan Tte Co. v. Commssoner, supra, on the ground
that the Pennsyvana statute there nvoved created merey a sovency
reserve.
Secton 434 of the New York State Insurance Law, as amended by
secton 1, chapter 635, of the aws of the State of New York for
1945, provdes n part as foows:
Reserves. 1. very tte Insurance corporaton organzed and dong nn n-
surance busness under ths artce sha estabsh, segregate and mantan a
rensurance reserve durng the perod and for the uses and purposes herenafter
provded whch sha nt a tmes and for a purposes be deemed and sha con-
sttute unearned portons of the orgna premums and sha be charged as a
reserve abty of such corporaton n determnng ts fnanca condton
such reserve sha be cumuatve and sha be estabshed and sha consst of
the foowng:
a. the reserve requred to be estabshed by such corporatons up to May
thrty-frst, nneteen hundred forty-fve pursuant to paragraph (a) of subsecton
one of secton four hundred thrty-four of chapter twenty-eght of the conso-
dated aws as enacted by chapter eght hundred eghty-two of the aws of nne-
teen hundred thrty-nne and,
b. begnnng une frst nneteen hundred forty-fve (1) one doar ffty cents
for each rsk assumed under a bnder or pocy of nsurance or any certfcate or
agreement ssued under ether of them, pus one-eghteth of one per cent of the
face amount of nsurance effected thereby and (2) three per cent of the gross
fees and premums receved by t for guaranteed certfcates of tte, guaranteed
searches and guaranteed abstracts of tte not ncuded n (1) of ths paragraph.
The statutory provsons mentoned n secton 434 .a., supra, are as
foows:
(a) Durng the frst ten years of ts dong busness after une frst, nneteen
hundred thrty-eght, t sha set up, accumuate and mantan a reserve at the
end of each caendar month at east equa to three per cent of the tota gross fees
and premums receved by t durng the ne t precedng caendar month for
tte nsurance, e amnatons or searches of tte, and for abstracts of tte wrt-
ten, ssued or performed, as the case may he, after une frst, nneteen hundred
thrty-eght and at the end of every such caendar month the amount so re-
qured to be accumuated sha be charged as a reserve abty of such corpora-
ton n determnng ts fnanca condton.
Secton 434 .b. of the New York State Insurance Law, supra,
gves to the portons of the premums whch t requres to be paced
n the reserve a the attrbutes that pertan to unearned premums,
. e., t wthdraws them from the power of the company to use them
for ts genera purposes and mpresses them wth a trust n favor of
the contract hoders unt the rsk sha have been carred for the
perod that the statute prescrbes. In that respect t s smar
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29.207-1.
130
to the provsons of the rgna statute nvoved n ary v. Lawyers
Tte Insurance Corf oraton, supra. owever, the provsons of
secton 434 .a. of the aws of New York, supra, and ts counterpart,
secton 434 .(a) of chapter 2 of the consodated aws as enacted
by chapter 2 of the aws of 1939, supra, are smar to the Pennsy-
vana statutory provsons whch were nvoved n mercan Tte Co.
v. Commssoner, supra. They merey provde for a sovency reserve,
and, unke the provsons of the rgna statute nvoved n ary
v. Lawyers Tte Insurance Corporaton, supra, they do not mpress
the reserve funds wth a trust n favor of the contract hoders.
In vew of the foregong, t s hed that the portons of orgna
premums estabshed and segregated as a rensurance reserve by a
tte nsurance company on and after une 1, 1945, under secton
434 .b. of the New York State Insurance Law, supra, may be treated
as unearned premums under secton 204(b) (5) of the Interna Rev-
enue Code. The portons of orgna premums estabshed and segre-
fated as a rensurance reserve by a tte nsurance company from
une 1,193 , to May 31,1945, under secton 434 .a. of the New York
State Insurance Law, supra, may not be treated as unearned premums
under secton 204(b) (5) of the Code. (See Cty Tte Insurance Co. v.
Commssoner, 152 ed. (2d), 59, as to the atter concuson.)
S CTION 207. MUTU L INSUR NC COMP NI S
OT R T N LI OR M RIN .
Secton 29.207-1: Ta on mutua nsurance com- 1946-6-12264
panes other than fe or marne or fre nsur- T. D. 5497
ance companes sub|ect to the ta mposed by
secton 204.
TITL 2 INT RN L R NU . C PT R I, SU C PT R , P RT 29.
INCOM T T L T RS GINNING T R D C M R 31, 1041.
mendng Reguatons 111 to conform to secton 121 (b) and (d)
and secton 122(g) (7) of the Revenue. ct of 1945, reatng to nsur-
ance companes.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 111 Part 29, Tte 26, Code of
edera Reguatons, Cum. Sup. to secton 121 (b) and (d) and
secton 122(g)(7) of the Revenue ct of 1945 (Pubc Law 214,
Seventy-nnth Congress), enacted November ,1945 C. . 1945, 540 ,
such reguatons are amended as foows:
Paragraph 1. There s nserted mmedatey precedng secton
29.204-1 the foowng:
S C. 122. R P L O C SS PRO ITS T IN 1946. (R -
NU CT O 1945. TITL I.)

(g) Technca mekdments. ffectve wth respect to ta abe
years begnnng after December 1, 1945
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131
29.207-1.
(7) Secton 204(a)(2) (reatng to foregn mutua Insurance
companes other than fe or marne) s amended to read as foows:
(2) Norma-ta and corporaton surta net ncome of foregn
nsurance companes other than fe or mutua and foregn
mutua marne. In the case of a foregn nsurance company (other
than a fe or mutua nsurance company) and a foregn mutua
marne nsurance company and a foregn mutua fre nsurance
company descrbed n paragraph (1) of ths subsecton, the norma
ta net ncome sha be the net ncome from sources wthn the
Unted States mnus the credt provded n secton 26(a) and the
credt provded n secton 26(b), and the corporaton surta net
ncome sha be the net ncome from sources wthn the Unted States
mnus the credt provded In secton 26(b).

Par. 2. There s nserted mmedatey precedng secton 29.207-1
the foowng:
S C. 121. D CR S IN CORPOR TION SURT . (R NU
CT O 1945, TITL I.)

(b) Mutua Insurance Companes Other Than Lfe or Marne.
(1) Secton 207(a)(1)( ) (reatng to surta on mutua nsur-
ance companes, other than fe or marne) s amended to read as
foows:
( ) Surta . surta on the corporaton surta net ncome,
computed at the rates provded n secton 15(b), e cept that
f the corporaton surta net Income s not more than . 6,000
the surta sha be 12 per centum of the amount by whch the
corporaton surta net ncome e ceeds 3,000.
(2) Secton 207(a)(3)( ) (reatng to surta on Internsurers
or recproca underwrters) s amended by strkng out 32 per
centum and nsertng n eu thereof 2 per centum .

(d) Ta abe Years to Whch ppcabe. The amendments made
by ts secton sha be appcabe wth respect to ta abe years begnnng
after December 31, 1945.
Par. 3. Secton 29.207-1, as amended by Treasury Decson 5369,
approved May 11,1944 C. . 1944, 333 , s amended as foows:
( ) y nsertng mmedatey after the headng thereof the foow-
ng: (a) Genera: 1
( ) y strkng out the ffth paragraph and nsertng n eu
thereof the foowng:
Mutua Insurance companes sub|ect to the ta mposed by secton 207, e cept
nternsurers or recproca underwrters, wth corporaton surta net ncomes
of over 3,C00 or wth gross amounts of ncome from nterest, dvdends, rents, and
net premums, mnus dvdends to pocyhoders, mnus whoy ta -e empt nterest
of over 75,000, are sub|ect to a ta computed under secton 207(a) (1) or secton
207(a)(2) whchever s the greater. Internsurers and recproca underwrters
wth corporaton surta net ncomes of over 50,000 are sub|ect to a ta computed
under secton 207(a) (3).
(C) y strkng out the s th and seventh paragraphs and nsertng
n eu thereof the foowng:
(6) Ta abe years begnnng pror to anuary 1, IO- G. or any ta abe year
begnnng pror to anuary 1,1940, the ta under secton 207(a) (1) and 207(a) (3),
e cept as herenafter ndcated, s computed upon norma-ta net Income and
corporaton surta net ncome at the rates provded n secton 13 or secton
14(b) and n secton 15(b) appcabe to such year. The ta under secton
207(a) (2), e cept as herenafter ndcated, s a ta equa to the e cess of 1 per
cent of the gross amount of ncome from nterest, dvdends, rents, and net
premums, mnus dvdends to pocyhoders, mnus whoy ta -e empt nterest,
over the amount of the ta mposed under Subchapter of Chapter 2.
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29.207-1.
132
Under secton 207(a) (1), companes wth norma-ta net ncomes of between
3,000 and 6,153. 6, and wth corporaton surta net Incomes of between 3,000
and ,000, pay a norma ta , at the rate of 30 per cent, and a surta , at the rate
of 20 per cent, on that porton of the norma-ta net ncome and the corporaton
surta net ncome, respectvey, n e cess of 3,000. Under secton 207(a) (2),
companes wth gross amounts of ncome from nterest, dvdends, rents, and
net premums, mnus dvdends to pocyhoders, mnus whoy ta -e empt nterest,
of between 75,000 and 150,0 0, pay a ta equa to the e cess of 2 per cent
of that porton n e cess of 75,000, over the amount of the ta mposed under
Subchapter of Chapter 2. Under secton 207(a) (3) nternsurers and recproca
underwrters wth norma-ta net Incomes and corporaton surtr net ncomes
of between 50,000 and 100,000 pay a norma ta , at the rate of 4 per cent, and
a surt : , at the rate of 32 per cent, on that porton of the norma-ta net ncome
and the corporaton surta net ncome, respectvey, n e cess of 50,000.
(D) y nsertng mmedatey after e ampe (4) the foowng:
(c) Ta abe years begnnng after December SI, 1 )I5.- or any ta abe year
begnnng after December 31, 1945, the ta under secton 207(a) (1) and 207(a) (3).
e cept as herenafter ndcated, s computed upon norma-ta net ncome and
corporaton surta net ncome at the-rates provded n secton 13 or secton M))
and n secton 15(b) appcabe to such year. The ta under secton 207(a)(2),
e cept as herenafter ndcated, s 1 per cent of the gross amount of ncome from
nterest, dvdends, rents, nnd net premums, mnus dvdends to pocyhoders,
mnus whoy ta -e empt nterest.
Under secton 207(a)(1) companes wth norma-ta net Incomes of between
3,000 and 6,153. 6 and wth corporaton surta net ncomes of between 3,000
and 0,000, pay a norma ta , at the rate of 30 per cent, and a surta , at the
rate of 12 per cent, on that porton of the norma-ta net ncome and the corpora-
ton surta net ncome, respectvey, n e cess of 3,0t 0. Under secton 237(a)(2),
companes wth gross amounts of ncome from nterest, dvdends, rents, and
net premums, mnus dvdends to pocyhoders, mnus whoy ta -e empt nterest,
of between 75,000 and 150,000, pay a ta equa to the e cess of 2 per cent of
that porton In e cess of 75,000. Under secton 207(a)(3) nternsurers and
recproca underwrters wth norma-ta net ncomes and corporaton surta
net ncomes of between . 0,000 and 100,000 pay a norma ta , at the rate of 4
per cent, and a surta , at the rate of 2 per cent, on that porton of the norma-
ta net ncome and the corporaton surta net ncome, respectvey, n e cess of
50,000.
Secton 207(a) (4) provdes for an ad|ustment of the amount computed under
secton 207(a)(1), secton 207(a)(2)( ), and secton 207(a)(3) where the
gross amount receved durng the ta abe year from nterest, dvdends, rents,
and premums (ncudng deposts and assessments) s over 75,000 and ess thaa
125,000. The ad|ustment reduces the ta otherwse computed under those sec-
tons to an amount whch bears the same proporton to such ta as the e cess
over 75,000 bears to 50,000.
The appcaton of secton 2.07(a) (1), (2), (3), and (4) may be ustrated
by the foowng e ampes:
ampe (1). The Company, a mutua casuaty nsurance company, for the
ta abe year 1946 has a corporaton surta net ncome of 3,500 and cue to par-
tay ta -e empt nterest of 600, a norma-ta net ncome of 2,900. The gross
amount of ncome of the Company from nterest, dvdends, rents, net pre-
mums, mnus dvdends to pocyhoders, mnus whoy ta -e empt nterest
Is 150,000. It s not sub|ect to norma ta under secton 207(a)(1) for the
ta abe year 1946 as ts norma-ta net ncome does not e ceed 3,000. Its sur-
ta s 12 per cent of 500 ( 3,500 3,000) or 00, snce ts surta net ncome s
not more than 6,000. It has no norma ta and, therefore, ts tota ta nndor
secton 207(a)(1) s the surta of 00. The ta under secton 207(a)(2) s
per cent of 150,000, or 1,500. Snce the ta under secton 207(a) (2) e ceeds
the ta under secton 207(a) (1), the ta under secton 207(a) s 1,500, namey,
that mposed by secton 207(a) (2).
ampe (2). If n the above e ampe the norma-ta net ncome and the
corporaton surta net ncome were each ess than 2,900, the gross amount
receved from nterest, dvdends, rents, and premums (ncudng deposts and
assessments) was 90,000 and the gross amount of ncome from nterest, dv-
dends, rents, and net premums, mnus dvdends to pocyhoders, mnus whoy
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133
29.207-1.
ta -e empt nterest was 70,000, the Company woud be requred to fe an
ncome ta return but due to secton 207(a) no ncome ta woud be mposed.
ampe (3). The Y Company, a mutua fre nsurance company sub|ect to
the ta mposed by secton 207, for the ta abe year 1946 has a norma-ta net
ncome of 6,000 and a corporaton surta net ncome of 7,000. The gross amount
receved from nterest, dvdends, rents, and premums (ncudng deposts and
assessments) s 120,000 and the gross amount of ncome from nterest, dvdends,
rents, and net premums, mnus dvdends to pocyhoders, mnus whoy ta -
e empt nterest s 100,000. Under secton 207(a)(1), wthout appcaton of
secton 207(a) (4), the norma ta woud be 30 per cent of 3,000, or 900, snce
ths s ess than 020, the ta computed at the rates provded n secton 14(b)
and the surta woud be 6 per cent of 7,000, or 420, the rate provded n secton
15(b) (1), snce ts surta net ncome e ceeds 6,000 but does not e ceed 25,000.
The combned ta of 1,320 woud then be reduced by appyng secton 207(a) (4),
snce the gross recepts are between 75,000 and 125,000. The ta under secton
207(a) (1), as thus ad|usted, woud be 90 per cent of 1,320, or 1,1 , snce
45,000 (the e cess of 120,000 over 75,000) s 90 per cent of 50,000. Under
secton 207(a) (2) ( ), wthout reference to secton 207(a) (4), the ta s 2 per
cent of 25,000 (the e cess of 100,000 over 75,000), or 500, snce ths s ess
than 1,000, 1 per cent of 100,000. ppyng secton 207(a) (4) reduces ths to
450, or 90 per cent of 500. Snce 1,1 , the ta under secton 207(a) (1), as
ad|usted, e ceeds 450, the ta under secton 207(a)(2), as ad|usted, the ta
under secton 207(a)(1), as ad|usted, s appcabe. The Y Company woud
accordngy pay a combned norma ta and surta of 1,1 .
ampe (4). The Z change, an nternsurer, for the ta abe year 1946 has a
corporaton surta net ncome of 60,000 and, due to partay ta -e empt nterest
of 12,000, a norma-ta net ncome of 4 ,000. The gross amount receved from
nterest, dvdends, rents, and premums (ncudng deposts and assessments)
s 2,700,000. The Z change s not sub|ect to norma ta under secton
207(a) (3) for the ta abe year 1946 as ts norma-ta net ncome s ess than
50,000. Its surta s 2 per cent of 10,000 ( 60,000 50,000) or 2, 00, snce
that amount s ess than ,400, the surta computed at the rate provded n secton
15(b). Snce t has no norma ta and s not sub|ect to the ta mposed by secton
207(a) (2) nor entted to the ad|ustment provded n secton 207(a) (4), ts tota
ta under secton 207(a) s 2,SO0.
(Ths Treasury Decson s ssued under the authorty contaned n
sectons 121 and 122 of the Revenue ct of 1915 (Pubc Law 214,
Seventy-nnth Congress), enacted November , 1945, and secton G2
of the Interna Revenue Code (53 Stat., 32 26 U. S. C, 1940 ed., and
Sup., 62).)
oseph D. Nuna , r.,
Commssoner of Interna Revenue.
pproved ebruary 27, 1946.
oseph . O Co e , r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster March 1,1946,9.59 a. m.)
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29.211-7. 134
SUPPL M NT . NONR SID NT LI N INDI IDU LS.
S CTION 211. T ON NONR SID NT LI N
INDI IDU LS.
Secton 29.211-7: Ta aton of nonresdent 1946-6-12265
aen ndvduas. T. D. 5499
( so Secton 231, Secton 29.231-1.)
TITL 26 INT RN L R NU C PT R I, SU C PT R , P RT 7
T TION PURSU NT TO TR TI S. SU P RT R NC . ( CTI
NU RY 1, 1945.)
Reguatons affectng the ta aton of nonresdent aens, resdents
of rance, and rench corporatons and other enttes under the
ta conventon between the Unted States and rance, procamed by
the Presdent of the Unted States on anuary 5, 1945, effectve
anuary 1, 1945.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Tabe op Contents.
Secton.
7.410. Introductory.
7.411. ppcabe provsons of Interna Revenue Code.
7.412. Scope of the conventon.
7.413. Defntons.
7.414. Scope of conventon wth respect to Industra and commerca profts.
7.415. Contro of domestc enterprse by a rench enterprse.
7.416. Income from operaton of shps or arcraft.
7.417. Income from rea property, ncudng mnera royates.
7.41 . Patent and copyrght royates.
7.419. Government wages, saares, and smar compensaton, pensons and fe
annutes.
7.420. Compensaton for abor or persona servces.
7.421. Stocks, securtes, and commodtes.
7.422. Remttances to students.
7.423. Credt aganst Unted States ta abty for ncome ta pad to rance.
7.424. d|ustment of ta abty of resdents of rance and rench corporatons.
7.42 eeproca admnstratve assstance.
7.420. Recproca reguatons.
Secton 7.410. Introductory. The ta conventon and protoco
between the Unted States and rance (herenafter referred to as the
conventon) procamed by the Presdent of the Unted States on
anuary 5, 1945, and effectve anuary 1, 1945, provde n part as
foows:
TITL I. DOU L T TION.
rtce 1.
The ta es referred to In ths conventon are:
( ) In the case of the Unted States of merca: The edera Income ta es,
Incudng surta es and e cess-profts ta es
(h) In the case of rance:
(1) The rea estate tu
(2) The ndustra and commerca profts ta
(3) The annua ta on undstrbuted profts
(4) The agrcutura profts ta
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135
29.211-7.
(5) The ta on saares, aowances and emouments, wages, pensons and
annutes
(6) The professona profts ta
(7) The ta on ncome from securtes and movabe capta
( ) The genera ncome ta .
rtce 2.
Income from rea property, ncudng ncome from agrcutura undertakngs,
sha be ta abe ony n the State n whch such rea property s stuated.
rtce 3.
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.
No account sha be taken, n determnng the ta n one of the contractng
States, of the purchase of merchandse effected theren by an enterprse of the
other State for the purpose of suppyng estabshments mantaned by such
enterprse n the atter State.
The competent authortes of the two contractng States may ay down rues by
agreement for the apportonment of ndustra and commerca profts.
The term ndustra and commerca profts sha not ncude the foowng:
(a) Income from rea property
(6) Income from mortgages, from pubc funds, securtes (Incudng mortgage
bonds), oans, deposts and current accounts
(c) Dvdends and other ncome from shares n a corporaton
d) Rentas or royates arsng from easng persona property or from any
nterest n such property, ncudng rentas or royates for the use of, or for the
prvege of usng, patents, copyrghts, secret processes and formuae, good
w, trade-marks, trade-brands, franchses, and other ke property
(c) Proft or oss from the sae or e change of capta assets.
Sub|ect to the provsons of ths conventon the ncome referred to n paragraphs
( ). ( ), ( ). ( ), and (e) sha be ta ed separatey or together wth ndustra
and commerca profts n accordance wth the aws of the contractng States.
rtce 4.
mercan enterprses havng permanent estabshments In rance are requred
to submt to the rench fsca admnstraton the same decaratons and the same
|ustfcatons, wth respect to such estabshments, as rench enterprses.
The rench fsca admnstraton has the rght, wthn the provsons of ts
natona egsaton and sub|ect to the measures of appea provded n such egs-
aton, to make such correctons n the decaraton of profts reazed In rance as
may be necessary to show the e act amount of such profts.
The same prncpe appes mutats mutands to rench enterprses havng
permanent estabshments n the Unted States.
rtce 5.
When an mercan enterprse, by reason of ts partcpaton In the manage-
ment or capta of a rench enterprse, makes or Imposes on the atter, n ther
commerca or fnanca reatons, condtons dfferent from those whch woud
be made wth a thrd enterprse, any profts whch shoud normay have ap-
peared In the baance sheet of the rench enterprse, but whch have been n
ths manner, dverted to the mercan enterprse, are, sub|ect to the measures
of appea appcabe n the case of the ta on ndustra and commerca profts,
ncorporated n the ta abe profts of the rench enterprse.
The same prncpe appes mutats mutands, n the event that profts are
dverted from an mercan enterprse to a rench enterprse.
rtce 6.
Income derved by navgaton enterprses of one of the contractng States
from the operaton of shps documented under the aws of that State sha con-
tnue to beneft n the other State by the recproca ta e emptons accorded by
the e change of notes of une 11 and uy , 1927, between the Unted States
of merca and rance.
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.29.211-7.
136
Income whch an enterprse of one of the contractng States derves from
the operaton of arcraft regstered n that State sha be e empt from ta aton
n the other State.
rtce 7.
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.
Royates 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 formuae, trade-
marks and other anaogous rghts sha be e empt from ta aton n the former
State, provded such resdent, corporaton or other entty does not have a
permanent estabshment there.
rtce S.
Wages, saares and smar compensaton and pensons pad by one of the
contractng States or by a potca subdvson thereof to Indvduas 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 contract-
ng States and pad to Indvduas resdng n the other contractng State sha
be e empt from ta aton n the former State.
rtce 0.
Income from abor or persona servces sha be ta abe ony In the State n
whch the ta payer carres on hs persona actvty.
Ths provson does not appy to the ncome referred to n artce .
rtce 10.
Income from the e ercse of a bera professon sha be ta abe ony n the
State n whch the professona actvty s e ercsed.
There s the e ercse of a bera professon n one of the two contractng
States ony when the professona actvty has a f ed center n that country.
rtce 11.
Gans derved n one of the contractng States from the sae or e change of
stocks, securtes or commodtes by a resdent or a corporaton or other entty
of the other contractng State sha be e empt from ta aton n the former State,
provded such resdent or corporaton or other entty has no permanent estab-
shment n the former State.
rtce 12.
Students from one of the contractng States resdng In the other contractng
State e cusvey for the purpose of study sha not be ta abe by the atter
State n respect of remttances receved from wthn the former State for the
purpose of ther mantenance or studes.
rtce 13.
In the cacuaton of ta es estabshed n one of the contractng States on the
use of property or ncrement of property of an enterprse of the other State,
account, sn be taken ony of that porton of the capta stuated or empoyed and
aocabe to a permanent estabshment wthn the former State.
The foregong provson sha appy to the rench patent ta and the
Unted States capta stock ta even though these two ta es have not been
referred to n artce 1 of the present conventon.
In the appcaton of the present artce navgaton enterprses of one of the
contractng States, en|oyng In the other State the benefts of artce 6 of the
present conventon, sha not be consdered as havng a permanent estabshment
In the atter State n so far as shppng actvtes are concerned.
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137
29.211-7.
rtce 14.
It Is agreed that doube ta aton sha be avoded In the foowng manner:
. s regards the Unted States of merca:
Notwthstandng any other provson of ths conventon, the Unted States of
merca n determnng the Income and e cess-profts ta es, ncudng a sur-
ta es, of ts ctzens, or resdents, or corporatons, may ncude n the bass upon
whch such ta es are mposed, a tems of Income ta abe under the revenue
aws of the Unted States of merca, as though ths conventon had not come
Into effect. The Unted States of merca sha, however, deduct from the ta es
thus computed the amount of rench ncome ta pad. Ths deducton sha be
made n accordance wth the benefts and mtatons of secton 131 of the Unted
States Interna Revenue Code reatng to credt for foregn ta es.
. s regards rance:
(o) Schcduar ta es. Income from securtes, debts and trusts havng Its
source n the Unted States of merca sha be sub|ect In rance to the ta on
ncome from securtes but ths ta sha be reduced by the amount of the ta
aready pad n the Unted States of merca on the same ncome. In consd-
eraton of the fsca regme to whch the egsaton of the Unted States of
merca sub|ects the Income of nonresdent aens and foregn corporatons or
other enttes, the deducton of the ta pad n the Unted States of merca
sha he effected n a ump sum through a reducton of 12 n the rate of the ta
estabshed by the rench aw.
The ncome other than that ndcated In the precedng paragraph sha not be
sub|ect to any scheduar ta n rance when, accordng to ths conventon, t Is
ta abe n the Unted States of merca.
(6) Genera ta on revenue. Notwthstandng any other provson of the
present conventon, the genera ncome ta can be determned accordng- to a
the eements of ta abe ncome as mposed by rench fsca egsaton.
owever, the provsons of the frst paragraph of artce 114 of the rench
Code on drect ta aton reatve to the ta aton of aens domced or resdent
n rance sha contnue to be apped.
rtce 15.
In derogaton of artce 3 of the decree of December 6, 1 72, mercan cor-
poratons whch mantan In rance permanent estabshments sha be abe
to the ta on Income from securtes on three-fourths of the profts actuay
derved from such estabshments, the ndustra and commerca profts beng
determned n accordance wth artces 3 and 4 of ths conventon.
The remanng one-fourth sha, n a cases, be taken as the bass of the annua
ta on undstrbuted profts appcabe to the same corporatons.
btc.b 1G.
n mercan corporaton sha not be sub|ect to the obgatons prescrbed
by artce 3 of the decree of December 6, 1 72, by reason of any partcpaton In
the management or In the capta of, or any other reatons wth, a rench cor-
poraton. In such case, the ta on ncome from securtes contnues to be eved,
n conformty wth rench egsaton, on the dvdends, nterest and a other
dstrbutons made by the rench enterprse but t s moreover coectbe, f
the occason arses, and sub|ect to the measures of appea appcabe In the
case of the ta on Income from securtes, wth respect to the profts whch the
mercan corporaton derves from the rench corporaton under the condtons
prescrbed n artce 5.
rttch 17.
The mercan corporatons sub|ect to the provsons of artce 3 of the decree
of December 6, 1 72, who were not paced under the speca regme estabshed
by artces 5 and C of the conventon for the avodance of doube ncome ta aton
between the Unted States of merca and rance, sgned pr 27, 1932 C. .
I -2, 535 (1935) , may, durng a new perod of s months from the date of
the entry nto force of the present conventon, e ercse wth reference to past
years, the opton provded In those two artces under the condtons whch they
prescrbe.
103672 46 10
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529.211-7.
13
Moreover, the mercan corporatons contempated In the thrd paragraph of
artce 10 of the conventon of pr 27, 1932, may be admtted to beneft from
the provsons of that paragraph, when the ta has not yet been pad, If the
atter was not found to be payabe, pror to May 1, 1930, by a defntve |udca
decson.or f such decson has been the sub|ect of an appea In cassaton.
htce 1 .
ny Unted States Income ta abty remanng unpad as at the effectve
date of ths conventon for years begnnng pror to anuary 1, 19 6. of any
Indvdua resdent of rance (other than a ctzen of the Unted States of
merca) or of a rench corporaton may be ad|usted by the Commssoner of
Interna Revenue of the Unted States of merca, on the bass of the provson
of the Unted States Revenue ct of 1936. owever, no ad|ustment w be made
more than two years subsequent to the effectve date of ths conventon uness
the ta payer fes a request wth the Commssoner of Interna Revenue pror
to such date.
rtc b 19.
Notwthstandng any other provson of ths conventon, In order to avod doube
ta aton on pubc servants, empoyees of one of the contractng States beng ct-
zens of that State and remunerated by It, who have been receved by the other
State to perform servces In such State sha be e empt n ther prncpa pace
of resdence from drect and persona ta es whether Natona, State or oca.
Such empoyees who own rea property In the State n whch they perform
servces sha not beneft from the above e emptons wth respect to the ta es
eved on such rea property. mpoyees who engage n any prvate ganfu
occupaton In such State sha not be entted to any e empton under ths
artce.
TITL II. ISC L SSIST NC .
rtce 20.
Wth a vew to the more effectve Imposton of the ta es to whch the present
conventon reates, the contractng States undertake, on condton of recprocty,
to furnsh nformaton of a fsca nature whch the authortes of each State
concerned have at ther dsposa, or are n a poston to obtan under ther own
aws, that may be of use to the authortes of the other State n the assessment
of the sad tn es.
Such nformaton sha be e changed between the competent authortes of the
contractng States In the ordnary course or on request.
btce 21.
In accordance wth the precedng artce, the competent authortes of the
Unted States of merca w transmt to the competent authortes of rance,
as regards any person, corporaton or other entty (other than a ctzen, corpora-
ton or other entty of the Unted States of merca) havng an address In rance
and dervng from sources wthn the Unted States of merca rents, dvdends,
nterest, royates, ncome from trusts, wages, saares, pensons, annutes, or
other f ed or determnabe perodca ncome, the name and address of such
person, corporaton or other entty as we as the amount of such ncome.
The competent authortes of rance w transmt to the competent authortes
of the U e States of merca, as regards any person, corporaton or other
entty (other than a ctzen, corporaton or other entty of rance) havng an
address In the Unted States of merca and dervng from sources wthn rance
rents, dvdends, nterest, royates, Income from trusts, wages, saares, pensons,
annutes, or other f ed or determnabe perodca Income, the name and address
of such person, corporaton or other entty as we as the amount of such Income.
The Informaton reatng to each year w be transmtted as soon as possbe
after December 31.
rtce 22.
The competent authortes of each of the contractng States sha be entted
to obtan, through dpomatc channes, from the competent authortes of the
other contractng State, e cept wth respect to ctzens, corporatons or enttes of
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139
29.211-7.
the State to whch appcaton s made, partcuars In concrete cases necessary for
the estabshment of the ta es to whch the present conventon reates.
owever, the competent authortes of each State sha not be prevented from
transmttng to the competent authortes of the other State nformaton reatng
to ther own natonas (ctzens, corporatons or other enttes) f they deem t
opportune for the preventon of fsca evason.
rtce 23.
ach contractng State undertakes to end assstance and support n the coec-
ton of the ta es to whch the present conventon reates, together wth nterest,
costs, and addtons to the ta es and fnes not beng of a pena character accordng
to the aws of the State requested, n the cases where the ta es are defntvey due
accordng to the aws of the State makng the appcaton.
In the case of an appcaton 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 State to whch appcaton s made and coected n that
State n accordance wth the aws appcabe to the enforcement and coecton of
Its own ta es.
The appcaton 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, appca-
ton s made may, at the request of the State makng the appcaton, take such
measures of conservancy as are authorzed by the aws of the former State for
the enforcement of ts own ta es.
The assstance provded for n ths artce sha not be accorded wth respect
to the ctzens, corporatons or other enttes of the State to whch appcaton s
made.
rtce 24.
In no case sha the provsons of artce 22 reatng to partcuars n concrete
cases, or of artce 23 reatng to mutua assstance In the coecton of ta es, be
construed so as to mpose upon ether of the contractng States the obgaton to
carry out admnstratve measures at varance wth the reguatons and practce
of ether contractng State, or to suppy partcuars whch are not procurabe
under the aw of the State to whch appcaton s made, or that of the State
makng appcaton.
The State to whch appcaton s made for nformaton or assstance sha com-
py 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, Industra or trade secret. In such case t
sha nform, as soon as possbe, the State makng the appcaton.
rtce 25.
ny ta payer who shows proof that the acton of the revenue authortes of the
contractng States has resuted n doube ta aton n hs case In respect of any of
the ta es to whch the present conventon reates, sha be entted to odge a
cam wth the State of whch he s n ctzen or, f the ta payer s n corpora urn or
other entty, wth the State n whch t Is 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.
rtce 20.
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 ts conventon reatng to e change of nformaton and
mutua assstance n the coecton of ta es, such authortes may, by common
agreement, prescrbe rues concernng matters of procedure, forms of appcaton
and repes thereto, rates of converson of currences, transfer of sums coected,
mnmum amounts sub|ect to coecton, payment of costs of coecton, and
reated matters.
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5 29.211-7.
140
TITL III. G N R L PRO ISIONS.
rtce 27.
The present conventon sha be ratfed, In the case of the Unted States of
merca by the Presdent, by and wth the advce and consent of the Senate, and
In the case of rance, by the Presdent of the rench Repubc wth the consent
of the Parament.
Ths conventon sha become effectve on the 1st day of anuary foowng the
e change of the Instruments of ratfcaton.
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 s months pror notce of
termnaton has been gven, the termnaton to become effectve on the 1st day
of anuary foowng the e praton of the 6-month perod.
Upon the comng nto effect of ths conventon, the conventon for the avod-
ance of doube ncome ta aton between the Unted States of merca and
rance, sgned pr 27, 1932, sha termnate.
Done at Pars, n dupcate, n the ngsh and rench anguages, ths 25th
day of uy, 1939.
sea Wam C. utt,
sea Geo roes onnet.
PROTOCOL.
t the moment of sgnng the present conventon for the avodance of doube
ta aton and the estabshment of rues of recproca admnstratve assstance
In the case of ncome and other ta es, the undersgned penpotentares have
agreed that the foowng provsons sha form an ntegra part of the con-
venton:
L
The present conventon s concuded wth reference to mercan and rench
aw n force on the day of ts sgnature.
ccordngy, f these aws are apprecaby modfed the competent authortes
of the two States w consut together.
II.
The Income from rea property referred to n artce 2 of the present conventon
Sha ncude profts from the sae or e change of the sad property, but sha
not Incude nterest on mortgages or obgatons secured by the sad property.
III.
s used n ths conventon:
(a) The term permanent estabshment ncudes branches, mnes and o
wes, pantatons, factores, workshops, stores, purchasng and seng and other
offces, agences, warehouses, and other f ed paces of busness but does not
ncude a subsdary 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 negotate and concude contracts or has a stock of merchan-
dse from whch he reguary fs orders whch he receves, ths enterprse sha
be deemed to have a permanent estabshment n the atter State. ut the
fact that an enterprse of one of the contractng States has busness deangs n
the other State through a bona fde commsson agent or broker sha not be
hed to mean that such enterprse has a permanent estabshment In the atter
State.
Insurance enterprses sha be consdered as havng a permanent estabshment
In one of the States as soon as they receve premums from or nsure rsks In
the terrtory of that State.
(6) The term enterprse Incudes 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 be, Unted States enterprse or rench enterprse.
((/) 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 corporaton or other entty means a partnershp,
corporaton or other entty created or organzed n the Unted States of merca
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141
29.211-7.
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 rench enterprse s defned In the same manner, mutats
mutands, as the term Unted States enterprse.
I .
The term fe annutes referred to In artce of ths conventon means a
stated sum payabe perodcay at stated tmes durng fe, or durng a specfed
number of years to the person who has pad the premums or a gross sum for
such an obgaton.
.
Ctzens and corporatons or other enttes of one of the contractng States
wthn the other contractng State sha not be sub|ected as regards the ta es
referred to n the present conventon, to the payment of hgher ta es than are
mposed upon the ctzens or corporatons or other enttes of such atter State.
I.
The provsons of the present conventon sha not be construed to restrct n
any manner any e empton, deducton, credt, aowance, or other advantage
accorded by the aws of one of the contractng States n the determnaton of the
ta mposed by such State.
II.
Documents and 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 or nformaton.
III.
s used n ths conventon the terms 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 rance, the Mnster of nance.
I .
The term Unted States of merca as used n ths conventon n a geographc
sense ncudes ony the States, the Terrtores of aska and awa, and the
Dstrct of Coumba.
.
The term rance, when used n a geographc sense, ndcates contnenta
rance, e cusve of gera and the Coones.
I.
Shoud nny dffcuty or doubt arse as to the Interpretaton or appcaton of
the present conventon, or ts reatonshp to conventons between one of the
contractng States and any other State, the competent authortes of the con-
tractng States may sette the queston by mutua agreement.
Done n dupcate at Pars, ths 25th day of uy, 1939.
Wam C. utt.
Georges onnet.
Sec. 7.411. ppcabe Provsons of the Interna Revenue
Code. The Interna Revenue Code provdes n part as foows:
S C. 22. GROSS INCOM .

(b) cusons rom 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 e empt under treaty. Income of nny knd, to the
e tent requred by any treaty obgaton of the Unted States

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29.211-7.
142
S C. 02. RUL S ND R GUL TIONS.
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 62 of the Interna Revenue Code, artce 26 of
the conventon, and other provsons of the nterna revenue aws, the
foowng reguatons are hereby prescrbed and a reguatons n-
consstent herewth sre modfed accordngy.
Sec. 7.412. Scope of the Conventon. The prmary purposes of the conventon
are to avod doube ta aton upon certan casses of Income, and to naugurate
fsca cooperaton between the two States wt respect to recproca dscosure
of nformaton and to the coecton of the ta es enumerated n artce 1 of the
conventon.
The specfc casses of ncome from sources wthn the Unted States e empt
under the conventon from Unted States ncome ta es are:
(n) Industra and commerca profts of a rench enterprse havng no
permanent estabshment n the Unted States (artce 3)
(6) Income derved by a rench enterprse from the operaton of shps docu-
mented under the aws of, or arcraft regstered n, rance (artce 6)
(c) Royates derved by a nonresdent aen who s a resdent of rance or
by a rench corporaton or other rench entty (havng no permanent estab-
stment wthn the Unted States), for the rght to use copyrghts, patents,
secret processes and formuae, trade-marks, and other anaogous rghts
(artce 7)
(d) Compensaton and pensons pad by rance or h| a potca subdvson
of rance to ndvduas (other than ctzens of the Utted States) for servces
rendered to rance whether wthn or wthout the Unted States (artce )
(c) Prvate pensons and fe annutes derved from wthn the Unted States
and pad to nonresdent aen ndvduas (whether or not such ndvduas are
ctzens of rance) resdng n rance durng the year n whch such amounts are
pad (artce )
(/) arned ncome of a doctor, awyer, engneer, or other member of a bera
professon who s a nonresdent aen ndvdua and s a resdent of rance and
does not mantan wthn the Unted States an offce, estabshment, Instaaton,
or other f ed center reated to the practce of hs professon wthn the Unted
States (artce 10)
(g) Cans from sources wthn the Unted States arsng from the sae or
e change of stocks, securtes, or commodtes by a resdent of rance (other
than a ctzen of the Unted States) or a rench corporaton or other rench
entty uness such resdent, corporaton, or other entty has, at any tme durng
the ta abe year n whch such sae takes pace, a permanent estabshment
wthn the Unted States (artce 11).
cept as e pressy provded by the conventon, the ta abty of nonresdent
aens who are resdents of rance or of rench corporatons or other rench
enttes s determned n accordance wth the provsons of the aws and of the
reguatons thereunder appcabe generay to nonresdent aen ndvduas and
to foregn corporatons.
The conventon sha not be construed to affect the abty to Unted States
ncome ta aton of ctzens of rance who are resdent n the Unted States
e cept to the e tent that such ndvduas are entted to the benefts of artces
, 14 , and 19 and to paragraph of the protoco of the conventon. The ta
abty of a Unted States ctzen or a resdent of the Unted States, a member
of a rench partnershp carryng on a rench enterprse, s not affected by artce
3 of the conventon. Such ctzen or resdent Is sub|ect to Unted States ncome
ta upon hs dstrbutve share of the net ncome of such partnershp even though
the other members of such partnershp are not sub|ect to ta upon ther share
of the partnershp s ndustra and commerca profts from sources wthn the
Unted States where the enterprse has no permanent estabshment wthn the
Unted States. The conventon sha not be construed to affect the abty to
Unted States ncome ta aton of ctzens of the Unted States or resdents of
the Unted States who are not ctzens of rance.
The conventon has no reference to rates of ta aton mposed by the respectve
States but s concerned wth the e emptng of ncome arsng In one of the
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143
5 29.211-7.
contractng States when such Income Is derved from sources wthn such con-
tractng State by a resdent or corporaton or other entty of the other con-
tractng State and meets the condtons upon whch such e empton depends
as prescrbed In the conventon. These reguatons are not concerned wth the
provsons of artces 14 , 15, 16, and 17 of the conventon snce such artces
affect ony the aowance aganst the ta es mposed by rance of ncome and
e cess profts ta es pad to the Unted States or the appcaton of rench revenue
aws and decrees.
Sec. 7.413. 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 In such conventon. ny word or term used n these reguatons whch s
not defned n the conventon but s defned n the Interna Revenue Co e sha
be gven the defnton contaned theren.
s used n these reguatons:
(o) The term permanent estabshment ncudes branches, mnes and o
wes, pantatons, factores, workshops, stores, purchasng and seng and other
offces, agences, warehouses, and other f ed paces of busness. rench parent
corporaton havng a domestc or foregn subsdary corporaton n the Unted
States sha not be deemed by reason of such fact to have a permanent estabsh-
ment n the Unted States. The mere fact that a foregn subsdary corporaton of
a rench parent corporaton has a permanent estabshment n the Unted States
does not mean that such rench parent corporaton has a permanent estabshment
n the Unted States. The fact that a rench enterprse carres on busness
deangs n the Unted States through a bona fde commsson agent or broker
sha not be hed to mean that such enterprse has a permanent estabshment n
the Unted States. If, however, a rench enterprse carres on busness In the
Unted States through an empoyee or agent estabshed there who has genera
authorty to negotate and concude contracts or has a stock of merchandse from
whch he reguary fs orders, such enterprse sha be deemed to have a per-
manent estabshment n the Unted States. Thus, f a rench enterprse has
a fu tme empoyee or fu tme agent who for such enterprse mantans n
the Unted States a stock of merchandse from whch orders are fed, such enter-
prse has a permanent estabshment n the Unted States even though such
empoyee or ngent has no genera authorty to negotate and concude contracts
on behaf of such enterprse. owever, the mere fact that a commsson agent
or broker through whom a rench enterprse cnrres on busness n the Unted
States mantans a sma stock of goods n the Unted States from whch occa-
sona orders are fed sha not be construed as meanng that such enterprse
has a permanent estabshment n the Unted States. The mere fact that saes-
men, empoyees of a rench enterprse, promote the sae of ts products In the
Unted States does not mean that such enterprse has a permanent estabshment
theren. owever, a rench nsurance enterprse whch nsures rsks wthn
the Unted States or receves premums from sources wthn the Unted States
s deemed to have a permanent estabshment wthn the Unted States.
(6) The term enterprse means any commerca or Industra undertakng,
whether conducted by an ndvdua, partnershp, corporaton, or other entty.
It ncudes such actvtes as manufacturng, merchandsng, mnng, bankng,
and nsurance. It does not Incude the operaton of, or the tradng n, rea
property ocated n the Unted States. It does not ncude the rendton of
persona servces. ence, a nonresdent aen ndvdua who s a resdent of
rance, 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 Unted States ncome ta s unaffected by artce
3 of the conventon.
(c) The term rench enterprse means an enterprse carred on n rance
by a nonresdent aen ndvdua resdent of rance or by n rench corpora-
ton or other rench entty. Tha term corporaton or othar entty means
a partnershp, corporaton, or other entty created or organzed In rance or
tnder the aws of rance. or e ampe, an enterprse carred on whoy out-
sda rance by a rench corporaton s not a rench enterprse wthn the
meanng of the conventon. Whether a rench entty s a corporaton, a part-
nershp, or a trust s to be determned n accordance wth the prncpes of
Mstng aw reatng to the ta aton of nonresdent aens and foregn
corporatons.
(d) The term ndustra and commerca profts means the profts arsng
from the Industra, mercante, manufacturng, or ke actvtes of a rench
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29.211-7.
144
enterprse as defned In ths secton. Such term does not ncude Income from
rea property, nterest, dvdends, rentas and royates, gans from the sae
or e change of capta assets, or compensaton for abor or persona servces.
Such enumerated tems of Income are not governed by the provsons of artce
3 but, to the e tent covered by the conventon, are sub|ect to the rues ese-
where set forth theren and n these reguatons.
(e) The term Secretary means the Secretary of the Treasury and the
term Mnster means the Mnster of nance of rance
Sbo. 7.414. Scope of Conventon Wth Respect to Determnaton of In-
dustra and Commerca Profts of a Nonresdent en Indvdua Res-
dent of rance, or of a rench Corporaton or Other ntty Carryng on a
rench nterprse n the Unted States. (a) Genera. rtce 3 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 ndus-
tra and commerca profts uness It has a permanent estabshment n te
atter State. ence, a rench enterprse s sub|ect to Unted States ta upon
ts ndustra 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 Income ta aton, the artce has appcaton ony to a
rench enterprse and to the ndustra and commerca ncome thereof from
sources wthn the Unted States. It has no appcaton, for e ampe, to com-
pensaton for abor or persona servces performed n the Unted States, to
ncome derved from rea property ocated In the Unted States or any Interest
theren, ncudng rentas and royates, to gans from the sae or other ds-
poston of such rea property or nterest, to dvdends and Interest, to rentas
and royates arsng from easng persona property or any nterest n such
property, ncudng rentas and royates for the use of patents, copyrghts,
secret processes and formuae, good w, trade-marks, trade brands, franchses,
nnd other ke property, or to profts from the sae or e change of capta assets.
Such enumerated tems of ncome, to the e tent covered by the conventon,
are treated separatey esewhere In these reguatons and are sub|ect to the
rues ad down n the sectons havng specfc reference to the respectve tems
of ncome.
(6) No Unted States permanent estabshment. nonresdent aen ndvd-
ua who s a resdent of rance, or a rench corporaton or other rench entty
carryng on a rench enterprse, but havng no permanent estabshment n the
Unted States, s not sub|ect to Unted States ncome ta upon ndustra and
commerca profts from sources wthn the Unted States. or e ampe, f swh
rench corporaton ses stock n trade, such as wnes or perfumery or cheese,
through a bona fde commsson agent or broker n the Unted States, the resutng
proft s. under the terms of artce 3 of the conventon, e empt from Unted States
ncome ta . Such rench corporaton, however, remans sub|ect to ta upon n
other tems of ncome from sources wthn the Unted States whch are not
e pressy e empted from such ta under the conventon.
(c) Unted States permanent estabshment. nonresdent aen ndvdua
who Is a resdent of rance, or a rench corporaton or other entty, carryng on a
rench enterprse havng a permanent, estabshment n the Unted States Is
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
rance or rench corporaton or other entty from sources wthn the Unted
States, a ndustra and commerca profts from such sources sha be deemed to
be aocabe to the permanent estabshment wthn the Unted States. ence,
for e ampe, f a rench enterprse, havng a permanent estabshment In the
Unted States, ses drecty n the Unted States through a commsson agent or
broker theren goods produced n rance, the resutng profts derved from Unted
States sources from the atter transactons are aocabe to such permanent
estabshment. The net Income from sources wthn the Unted States, Incudng
the ndustra and commerca profts, sha be determned n accordance wth the
provsons of secton 119 of the Interna Revenue Code and the reguatons there-
under. In determnng Industra and commerca profts no account sha be
taken of the mere purchase of merchandse effected In the Unted States by such
rench-enterprse. nonresdent aen who s a resdent of rance, a member of
a rench partnershp havng a permanent estabshment wthn the Unted States,
sha by reason of such fact be deemed to have a permanent estabshment wthn
the Unted States.
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145 29.211-7.
Sec. 7.415. Contro of a Domestc nterprse bt a rench nterprse. rtce
6 of the conventon provdes that f a rench enterprse by reason of Its contro of
a domestc busness mposes condtons dfferent from those whch woud resut
from norma busness reatons between ndependent enterprses, the accounts
between the enterprses w be ad|usted so as to ascertan the true net ncome of
the domestc enterprse. The purpose s to pace the controed domestc enter-
prse 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 property and busness of the controed enterprse. The conventon contem-
pates that f the accountng records do not truy refect the net ncome from the
property and busness of such domestc enterprse the Commssoner of Interna
Revenue sha ntervene and, by makng such dstrbutons, apportonments, or
aocatons as he may deem necessary of gross ncome or deductons of any tem
or eement affectng net ncome as between such domestc enterprse and the
rench enterprse by whch t s controed or drected, determne the true net
ncome of the domestc enterprse. The provsons of secton 29.45-1, Reguatons
111 (Part 29, Tte 26, Code of edera Reguatons, Cum. Sup.), sha, n so far as
appcabe, be foowed n the determnaton of the net ncome of the domestc
busness.
Sec. 7.416. Income from Operaton of Shps or rcraft. The ncome derved
by a rench enterprse from the operaton of shps documented under the aws of
rance, or of arcraft regstered n rance, s under artce 6 of the conventon
e empt from Unted States Income ta . owever, the profts derved by such
enterprse from the operaton of shps or arcraft, f any, not so documented or
regstered are treated as are ndustra and commerca pn fts generay. See
artce 3 of the conventon and secton 7.414 of these reguatons.
Sec. 7.417. Income bom Rea Property, Incudng Mnera Roya.tus. In-
come of whatever nature derved by a nonresdent aen ndvdua who Is a
resdent of rance, or by a rench corporaton or other rench entty from rea
property stuated n the Unted States, ncudng gans derved from the sae
of such property and royates n respect of the operaton of mnes, quarres, or
other natura resources stuated n the Unted States, Is not e empted from ta a-
ton by the conventon. The treatment of such Income 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.
Sec. 7.41 . Patent and Copysoht Royates. Royates derved from sources
wthn the Unted States by a nonresdent aen ndvdua who s a resdent of
rance, or by a rench corporaton or other rench entty, as consderaton
for the rght to use copyrghts, patents, secret processes and formuae, trade-
marks and other anaogous rghts, are e empt from edera ncome ta under
artce 7 of the conventon, provded that such ndvdua, corporaton, or other
entty has no permanent estabshment wthn the Unted States at any tme
durng the ta abe year n whch such ncome s so derved. Thus, a nonresdent
aen who s a resdent of rance, renderng persona servces wthn the Unted
States, Is not sub|ect to ta wth respect to such royates even though he s
engaged n trade or busness In the Unted States by reason of rendton of such
servces so ong as he has no permanent estabshment In the Unted States.
To ohvnte wthhodng of ta at the source, the nonresdent aen ndvdua
resdent of rance or the corporaton or other entty organzed under the aws
of rance, as the case may be, sha notfy by etter the person payng such ncome
that the ncome s e empt from ta aton under the provsons of the appcabe
conventon and protoco. The etter of notfcaton from an ndvdua resdent
of rance sha contan hs address and a statement thnt he Is a resdent of
rance. The etter of notfcaton from a corporaton or other entty organzed
under the aws of rance sha contan the address of ts off e or pace of busness
and a statement that t s a corporaton or other entty organzsd under the aws
of rance, sha be sgned by an effcer of such corporaton or entty, and sha
set forth hs offca tte. In the case of royntes derved on or after anuary
1, 1945. the etter of notfcaton sha aso state that the ndvdua- resdent of
rance, or corporaton or other entty organzed under the aws of rance, as
the case may be, does not have a permanent estabshment In the Unted States
and w not have such estabshment n the Unted States at any tme durng
the caendar year n whch such royates are pad. The recpent of the etter
of notfcaton sha mmedatey forward such etter or a copy thereof to the
Commssoner of Interna Revenue, Wthhodng Returns Secton, Washngton
25, D. 0.
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29.211-7.
146
Sec. 7.419. Government Wages, Saabes, and Smar Compensaton, Pen-
sons, and Lfe nnutes. Under artce of the conventon, wages, saares,
and smar compensaton, and pensons pad by rance, or by a potca subd-
vson thereof, to ndvduas resdng In the Unted States are e empt from
edera ncome ta . owever, under the provsons of artce 14 of the conven-
ton, such e empton sha not be construed as appyng to recpents of such
Income who are ctzens of the Unted States or aen resdents who are not
ctzens of rance.
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 who are resdents of rance are e empt from edera ncome
ta . Such tems of ncome are therefore not sub|ect to the wthhodng provsons
of the Interna Revenue Code. See paragraph I of the protoco to the con-
venton as to what consttutes fe annutes. See, aso, secton 7.41 of these
reguatons wth respect to patent and copyrght royates as to the requrements
necessary to avod wthhodng of the ta at the source, whch requrements are
aso appcabe for the purposes of ths secton.
Sec. 7.420. Compensaton fob Labor or Pebsona Sebvtces. (o) Genera In
genera and sub|ect to the provsons of artce and artce 10 of the conven-
ton and subsecton (6) of ths secton, compensaton for abor or persona
servces derved from sources wthn the Unted States by a nonresdent aen
who s a resdent of rance, s sub|ect to ta n accordance wth the provsons
of the Interna Revenue Code appcabe generay to nonresdent aens. The
provsons of artce 9 do not dsturb ether the provsons of secton 119(a)(3)
of the Interna Revenue Code, reatng to source of compensaton for abor or
persona servces, or the provsons of the Interna Revenue Code reatng to the
ta aton of such compensaton In the hands of a nonresdent ndvdua who
s a resdent of rance.
(6) Professona earnngs. rtce 10 of the conventon provdes a speca
rue of ta aton wth respect to professona fees consttutng Income derved
from sources wthn the Unted States by a resdent of rance who s a non-
resdent aen. Under such rue, such nonresdent aen renderng professona
servces, such as medca, ega, engneerng, and scentfc servces, s not sub-
|ect to Unted States ta wth respect to such compensaton uness he has an
offce or other f ed pace stuated n the Unted States durng the ta abe year.
Thus, such aen present In the Unted States durng any part of the ta abe
year and renderng professona advce as a medca doctor or as a awyer or
as an engneer, s not sub|ect to edera ncome ta on fees derved by hm In
such ta abe year by reason of such servces uness he mantans at some tme
durng such ta abe year an offce or other f ed pace n the Unted States nc-
dent to the practce of hs professon. The e empton appes regardess of the
ength of tme spent wthn the Unted States durng the ta abe year and regard-
ess of the amount of the fees or professona charges resutng to such aen
from such servces. s to when an aen s regarded as a resdent of the Unted
States and hence outsde the scope of the e empton, see secton 29.211-2, Regu-
atons 111.
Seo. 7.421. Stocks, Securtes, and Commodtes. Under artce 11 of the con-
venton, gans derved from the sae or e change wthn the Unted States of
storks, securtes, or commodtes (f of a knd customary deat n on an organ-
zed commodty e change) by a nonresdent aen ndvdua resdent n rance,
or by a rench corporaton or other rench entty, s e empt from edera ncome
ta uness such ndvdua, corporaton, or other entty has a permanent estab-
shment n the Unted States. If. however, a permanent estabshment s man-
taned n the Unted States, such gans are not so e empt even though the saes
or e changes resutng n such gans were carred on drecty from the home
offce of the ta payer and not through the permanent estabshment n the Unted
States. s to what consttutes a permanent estabshment, see secton 7.413 of
these reguatons.
Sec. 7.422. Remttances to Students. Under artce 12 of the conventon, non-
resdent aen ndvduas who are resdents of rance and who are temporary
resdng n the Unted States for the purposes of studyng or for acqurng busness
e perence, are e empt from edera ncome ta upon amounts representng
remttances from rance for the purposes of ther mantenance and studes.
Sec. 7.423. Credt ganst Unted States Ta Labty fob Income Ta Pad
to rance. or the purpose of avodnnce of doube ta aton, artce 14 of the
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147
29.211-7
conventon provdes that, on the part of the Unted States, there sha be aowed
aganst the Unted States ncome and e cess profts ta abtes a credt for
any ncome, war-profts, or e cess profts ta es pad to rance by Unted States
ctzens or domestc corporatons. Such prncpe aso appes n the case of a
ctzen of rance resdng n the Unted States. Such credt, however, s sub|ect
to the mtatons provded n secton 131 of the Interna Revenue Code (reatng
to the credt for foregn ta es) and secton 729 of such Code (reatng to aws
ppcabe). See sectons 29.131-1 to 29.131- of Reguatons 111 and sectons
35.729-1 to 35.729-3 of Reguatons 112.
Sec. 7.424. d|ustment of Ta Labty of Resdents of rance and rench
Corporatons. rtce 1 of the conventon confers upon the Commssoner
authorty to ad|ust under the Revenue ct of 1936 the ta abty for ta abe
years begnnng pror to anuary 1, 1930, of nonresdent aen resdents of rance,
and rench corporatons, n any case n whch such ta abty remaned unpad
on anuary 1, 1945. Such provson, however , w not appy n any case uness
(1) The Commssoner s satsfed that the addtona ncome ta nvoved
dd not arse by reason of fraud wth ntent to evade the ta on the part of the
ta payer concerned and
(2) The ta payer fes, pror to anuary 1, 1947, wth the Commssoner a
sworn statement showng for each year nvoved and for such other years as
the Commssoner may requre, (a) by tems and casses of ncome the amounts
of nterest, dvdends, rents, saares, wages, premums, annutes, compensatons,
remuneratons, emouments, or other f ed or determnabe annua or perodca
ncome, gans, profts, and ncome derved from sources wthn the Unted
States (b) the busness transactons, f any, carred on n the Unted States
by or n behaf of the ta payer durng each of such years and (e) such further
nformaton as the Commssoner may requre n the partcuar case.
Sec 7.4 5. Recproca dmnstratve ssstance. (a) Genera. y artce
20 of the conventon, the Unted States and rance adopt the prncpe of e change
of nformaton for use n the determnaton and assessment of the ta es wth
whch the conventon s concerned. Pursuant to such prncpe, every Unted
States wthhodng agent sha make and fe wth the coector, n dupcate, an
nformaton return on orm 1042O for the caender year 1945 and each subsequent
caendar year, n addton to wthhodng return orm 1042, wth respect to
dvdends, Interest, royates, rents, saares, wages, pensons, and annutes, or
other f ed or determnabe annua or perodca ncome pad to persons whose
addresses are n rance whether or not ta has been wthhed wth respect to
such ncome. There sha be reported on orm 1042C not ony such tems of
ncome sted on orm 1042, but aso such tems of nterest sted on monthy
returns, orm 1012, and there sha be shown on such return tems of ncome pad
to such addressees even though such tems are e empt from ta under the conven-
ton, as, for e ampe, certan royates.
The nformaton and correspondence reatng to e change of nformaton may
be transmtted drect by the Secretary to the Mnster.
(6) Informaton to be furnshed n due course. In accordance wth the prov-
sons of artce 21 of the conventon, the Secretary sha forward to the Mnster
as soon as practcabe after the cose of the caendar year 1945 and of each caendar
year thereafter durng whch the conventon Is n effect, the names and addresses
of a persons whose addresses are wthn rance and who derve from sources
wthn the Unted States, dvdends, nterest, rents, royates, saares, wages,
Pensons, and annutes, or other f ed or determnabe annua or perodca profts
and ncome showng the amounts of such profts and ncome n the case of each
addressee. or these purposes, the transmsson to the Mnster of Informaton
returns, orm 1042C, as provded n subsecton (a) of ths secton for the caendar
year 1945 and subsequent caendar years sha consttute a compance wth the
provsons of artce 21 of the conventon and of these reguatons.
(c) Informaton n specfc cases. Under the provsons of artce 22 of the
conventon, the Secretary sha furnsh (If request therefor s made by the Mnster
through dpomatc channes) to the Mnster such nformaton, reatve to the ta
abty to rance of any person (other than a ctzen of the Unted States or a
Unted States domestc corporaton or other Unted States domestc entty), as s
avaabe to, or may be obtaned by, the Secretary under the revenue aws of the
Unted States.
Sec. 7.426. Recproca Reottatons. rtce 20 of the conventon provdes that
the Unted States and rance may prescrbe ( ) reguatons for the purpose of
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29.251-1. 14
carryng the conventon nto effect wthn the respectve countres and ( )
recproca rues reatng to the e change of nformaton.
Wm. T. Sherwood,
ctng Commssoner of Interna Revenue.
pproved ebruary 27, 1946.
oseph . O Connf., r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster March 1,1946, 9.59 a. m.)
SUPPL M NT I. OR IGN CORPOR TIONS.
S CTION 231. T ON OR IGN CORPOR TIONS.
Secton 29.231-1: Ta aton of foregn corporatons.
INT RN L R NU COD .
Reguatons affectng the ta aton of nonresdent aens, resdents of
rance, and rench corporatons and other enttes under the ta con-
venton between the Unted States and rance, procamed by the
Presdent of the Unted States on anuary 5, 1945, effectve anuary
1, 1945. (See T. D. 5499, page 131.)
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 29.251-1: Ctzens of the Unted . 1946-7-12279
States and domestc corporatons de- I. T. 3791
rvng ncome from sources wthn a
possesson of the Unted States.
( so Secton 22(b), Secton 29.22(b) (13)-1.)
nterna revenue code.
In the case of a commssoned offcer of the Unted States rmy,
a ctzen of the Unted States, whose ncome for a ta abe year n-
cudes both servce pay receved wthn a possesson of the Unted
States for servces rendered theren durng a part of the year and
servce pay receved wthn the Unted States for servces rendered
theren durng the remander of the year, the tota ncome receved
shoud be reduced by the amount of the addtona aowance for
mtary and nava personne to whch he s entted under secton
22(b) (13) ( ) of the Interna Revenue Code n determnng whether
he s entted to any e cuson under secton 251(a) of the Code. If
he s so entted, the amount to be e cuded under secton 251 (a) of
the Code s that part of the servce pay receved wthn the possesson
whch the amount of servce pay not e cuded under secton 22(b)
(13) ( ) of the Code bears to the tota amount of servce pay receved.
dvce s requested wth respect to the manner n whch the e cu-
sons from gross ncome under sectons 22(b) (13) ( ) and 251(a) of
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149
29.251-1.
the Interna Revenue Code shoud be determned n the case of a com-
mssoned offcer of the Unted States rmy, a ctzen of the Unted
States, whose ncome for the ta abe year 1945 ncuded both servce
pay receved wthn a possesson of the Unted States for servces
rendered theren durng a part of the year and servce pay receved
wthn the Unted States for servces rendered theren durng the re-
mander of the year.
In the nstant case, the ta payer, a commssoned offcer n the Unted
States rmy, commenced servce on Guam on anuary 1, 1945, where
he contnued to serve unt une 30,1945. On that date he returned to
the Unted States, where he served durng the remander of the vear.
e receved 2,000 servce pay whe on Guam for servces rendered
there and 2,500 whe n the Unted States for servces rendered n
the Unted States.
Secton 22(b) (13) ( ) of the Code, as amended by secton 141(a)
of the Revenue ct of 1945, provdes as foows:
(b) cusons rom Gross Income. The foowng tems sha not hp ncuded
n gross ncome and sha be e empt from ta aton under ths chapter Chapter 1
of the Code :

(13) ddtona aowance for mtary and nava personnf.
( ) In the case of compensaton receved durng any ta abe year
and before the termnaton of the present war as procamed by the
Presdent, for actve servce as a commssoned offcer (or a commssoned
warrant offcer) In the mtary or nava forces of the Unted States
durng such war, or, n the case of a ctzen or resdent of the Unted
States, as a member of the mtary or navn forces of any of the other
Unted Natons durng such war, so much of such compensaton as does
not e ceed 1,500.
Secton 251(a) of the Code provdes n part as foows:
(a) Genera Rue. In the case of ctzens of the Unted States
satsfyng the foowng condtons, gross ncome means ony gross ncome from
sources wthn the Unted States
(1) If 0 per centum or more of the gross ncome of such ctzen
(computed wthout the beneft of ths secton), for the three-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 app-
cabe) 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.
Secton 29.251-1 of Reguatons 111 provdes n part that the saary
or other compensaton pad by the Unted States to the members of ts
cv, mtary, or nava personne for servces rendered wthn a pos-
sesson of the Unted States represents ncome derved from the aotve
conduct of a trade or busness wthn a possesson of the Unted States.
y ts terms, secton 251(a) of the Code, supra, appes ony wth
respect to gross ncome. Consequenty, t s necessary to gve efect to
the e cuson from gross ncome provded by secton 22(b) (13) ( ) of
the Code before appyng the provsons of secton 251 (a) of the Code.
Secton 22(b) (13) ( ) of the Code provdes for the e cuson from
gross ncome of a certan amount of the entre servce pay receved
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29.251-1.
150
durng the ta abe year, no provson beng made for the e cuson of
a partcuar part of such pay. Therefore, n the nstant case, a part of
the pay whch s e cudbe under secton 22(b) (1 ) ( ) of the Code
must be consdered a part of the pay receved by the ta payer for
servces rendered wthn a possesson of the Unted States. That part
of the pay receved for servces rendered wthn a possesson of the
Unted States whch s e cudbe under secton 22(b) (13) ( ) of the
Code may not agan be e cuded under secton 251(a) of the Code.
The part of the pay whch s e cudbe under secton 251(a) of the
Code may be determned by mutpyng the amount of servce pay re-
ceved wthn a possesson of the Unted States by a fracton, the nu-
merator of whch s the tota amount of servce pay receved durng
the ta abe year ess the amount e cudbe under secton
22(b) (13) ( ) of the Code, and the denomnator of whch s the tota
servce pay receved durng the ta abe year. In the nstant case, the
eg 000
computaton s as foows: 2,000 1,333.33. Inasmuch as
the atter amount ( 1,333.33) was derved from sources wthn a pos-
sesson of the Unted States and s 100 per cent of the gross ncome of
the ta payer for the appcabe part of the 3-year perod mmedatey
precedng the cose of the ta abe year 1945, and n vew of the fact
that the servce pay consttutes ncome derved from the actve con-
duct of a trade or busness wthn a possesson of the Unted States,
the 0 per cent, and the 50 per cent tests prescrbed by secton 251(a)
(1) and (3) of the Code are met. The ta payer s. therefore, ta abe
on ony 1,666.67 of hs servce pay, representng the remander after
e cuson of 1,500 under secton 22(b) (13) ( ) of the Code and
1,333.33 under secton 251 (a) of the Code.
In vew of the foregong, t s hed that n the case of a comms-
soned offcer of the Unted States rmy, a ctzen of the Unted
States, whose ncome for a ta abe year ncudes both servce pay re-
ceved wthn a possesson of the Unted States for servces rendered
theren durng a part of the year and servce pay receved wthn
the Unted States for servces rendered theren durng the remander
of the year, the tota ncome receved shoud be reduced by the amount
of the addtona aowance for mtary and nava personne to
whch he s entted under secton 22(b) (13) ( ) of the Interna Reve-
nue Code n determnng whether he s entted to any e cuson under
secton 251(a) of the Code. If he s so entted, the amount to be
e cuded under secton 251(a) of the Code s that part of the servce
pay receved wthn the possesson whch the amount of servce pay
not e cuded under secton 22(b) (13) ( ) of the Code bears to the
tota amount of servce pay receved.
The appcaton of the provsons of secton 251 of the Code mght
n some cases resut n a detrment rather than n a beneft. owever,
t s not mandatory that a ta payer appy the provsons of secton
251 of the Code n determnng hs gross ncome f appcaton of that
secton resuts n no ta beneft. e may, f he desres, determne
hs gross ncome wthout regard to the provsons of secton 251 of
the Code. (See I. T. 3363, C. . 1940-1,92.)
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151
29.251-1.
Secton 29.251-1: Ctzens of the Unted
States and domestc corporatons dervng
ncome from sources wthn a possesson
of the Unted States.
( so Secton 29.251-2.)
INT RN L R NU COD .
ppcaton of secton 251 of the Interna Revenue Code, reatng
to ncome from sources wthn possessons of the Unted States, to
the retrement pay of a Unted States rmy offcer where such pay
accrued and was constructvey receved by hm whe he was hed a
prsoner of war, but was actuay receved by hm n the Unted
States upon hs return to ths country n 1945.
dvce s requested reatve to the treatment for edera ncome ta
purposes of the retrement pay of a Unted States rmy offcer where
such pay accrued whe he was hed a prsoner of war n the Phppnes.
In the nstant case, the ta payer s a retred commssoned offcer
of the Unted States rmy recevng retrement pay at the rate of
3,000 per year. s actua perod of servce n the rmy was 24
years, of whch 19 years were served n the Phppne Isands, 4
years were served n the Unted States, and 1 year was served n Cuba.
or purposes of retrement, under certan aws appcabe to the
retrement of rmy personne, he was credted wth doube tme for
hs servces n Cuba and for a porton of hs servces n the Phppnes.
ccordngy, for such purposes, he was credted wth a tota perod of
30 years servce, aocated as foows: 24 years n the Phppnes, 4
years n the Unted States, and 2 years n Cuba. Upon hs retrement,
he estabshed hs home n the Phppnes and remaned there unt
he was taken a prsoner of war by the apanese n 1942. e was
reeased n 1945 and then returned to the Unted States. Upon hs
return to the Unted States, he was pad the amount of retrement pay
whch had accrued durng the perod of hs nternment by the enemy.
Durng that perod, he dd not receve actuay or constructvey any
ncome from other sources.
Secton 251 of the Interna Revenue Code provdes n part as foows:
(a) Genera Rue, In the case of ctzens of the Unted States
satsfyng the foowng condtons, gross Income means ony gross Income from
sources wthn the Unted States
(1) If 0 per centum or more of the gross ncome of such ctzen
(computed wthout the beneft of ths secton), for the three-year perod
mmedatey precedng the cose of the ta nbe year (or for such part of such
perod mmedatey precedng the cose of such ta abe, year as may be app-
cabe) 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 Income n amounts receved by
such ctzens wthn the Unted States, whether derved from sources
wthn or wthout the Unted States.
Retrement pay whch s ta abe s earned ncome and consttutes
addtona compensaton for past servces. (See Mm. 32 3, C. . I -1,
14 (1925) and G. C. M. 14593, C. . I -1, 50 (1935).) or the
1946-11-12321
I. T. 3 04
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29.251-1.
152
purpose of determnng whether the earned ncome s from sources
wthn or wthout the Unted States, the pace where the servces are
performed and not where the compensaton s pad s controng.
See I. T. 143 , C. . 1-2, 229 (1922) and I. T. 22 6, C. . -, 52
1926).) Under the prncpe announced n I. T. 3 02 (page 1, ths
uetn), the ta payer s retrement pay for the perod durng whch
he was a prsoner of war was constructvey receved whe ne was
outsde the Unted States. In the case of constructve recept of
ncome, the pace of recept s the pace where the recpent was
physcay present at the tme the ncome was so receved. The
amounts of retrement pay whch accrued to the nstant ta payer are
deemed to have been receved by hm n the Phppne Isands, even
though actua payment was made to hm n 1945 n the Unted States.
Therefore, the mtatons of secton 251(b) of the Code, supra, do
not appy to the retrement pay n queston.
Secton 29.251-1 of Reguatons 111 provdes n part that the
saary or other compensaton pad by the Unted States to the mem-
bers of ts cv, mtary, or nava personne for servces rendered
wthn a possesson of the Unted States represents ncome derved
from the actve conduct of a trade or busness wthn a possesson of
the Unted States. Snce retrement pay whch s ta abe s earned
ncome and consttutes addtona compensaton for past servces, the
ta payer s retrement pay quafes as havng been derved from the
actve conduct of a trade or busness wthn a possesson of the Unted
States under secton 251(a) (3) of the Code, supra.
There remans for determnaton the appcaton of the percentage
requrements of secton 251(a) (1) and (3) of the Code, supra. To
satsfy those requrements, computatons must be made of the rato
whch the tota perod of the ta payer s servce n possessons of the
Unted States bears to the tota perod of hs entre servce n the
armed forces, and of the rato whch the tota perod of hs servce
outsde the Unted States bears to the tota perod of hs entre servce
n the amed forces. ccordngy, the porton of hs retrement pay
whch s consdered as derved from sources wthn a possesson of the
Unted States s an amount whch bears the same rato to hs tota
retrement, pay as the tota tme of hs servce n the Phppne Isands,
as ad|usted, bears to hs tota tme of servce n the armed forces, as
ad|usted. The porton of hs retrement pay whch s consdered as
derved from sources outsde the Unted States s an amount whch
bears the same rato to hs tota retrement pay as hs perod of servce
n both the Phppnes and Cuba, as ad|usted, bears to hs tota perod
of servce, as ad|usted, n the armed forces.
In the nstant case, of the tota perod of 30 years servce credted
to the ta payer for retrement purposes, 24 years were aocated to
servce n the Phppnes and 2 years were aocated to servce n
Cuba. The ratos appcabe to the ta payer are 24/30ths, or 0 per
cent, attrbutabe to servce n a possesson of the Unted States, and
26/30ths, or G per cent, attrbutabe to servce outsde the Unted
States. Inasmuch as the ta payer had no other ncome durng the
perod of hs nternment, the percentage requrements of secton 251
(a) (1) and (3) of the Code, supra, are met. ccordngy, the amount
of 2 GOO per year, whch represents the porton of the ta payer s re-
trement pay derved from sources outsde the Unted States, |nay be
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153
29.252-1.
e cuded from the ta payer s gross ncome for each year durng the
perod of hs nternment. The baance of 400 per year s consdered
to be ncome derved from sources wthn the Unted States and shoud
be ncuded n the ta payer s gross ncome for each year durng the
perod nvoved.
If the ta payer n the nstant case had receved other ta abe n-
come durng the years n queston, hs rght to the benefts of secton
251 of the Code woud be determned on the bass of hs tota nc-me,
hs retrement pay beng aocated n the same manner as heren e -
paned.
Secton 29.251-2: Income receved wthn the Unted States.
INT RN L R NU COD .
Retrement pay of a Unted States rmy offcer who was hed a
prsoner of war n a possesson of the Unted States. (See I. T. 3 04,
page 151.)
S CTION 252. CITIZ NS O POSS SSIONS
.O UNIT D ST T S.
Secton 29.252-1: Status of ctzens of , 1946-5-12254
Unted States possesson. I. T. 37
INT RN L R NU COD .
Ctzens of Puerto Rco who are ctzens of the Unted States ony
by reason of coectve naturazaton under the Organc ct of
Puerto Rco (39 Stat., 951), approved March 2, 1917, and suppe-
mentary cts, or by reason of ndvdua naturazaton pursuant to
orders of the Dstrct Court of the Unted States for Puerto Rco,
and who are not resdents of .the Unted States, are sub|ect to ed-
era ncome ta ony upon ncome derved from sources wthn the
Unted States, n the same manner and sub|ect to the same condtons
as nonresdent aens.
dvce s requested wth respect to the appcaton of secton 252(a)
of the Interna Revenue Code to ctzens of Puerto Rco who are not
resdents of the Unted States and who are ctzens of the Unted States
ony by reason of coectve naturazaton under the Organc ct of
Puerto Rco (39 Stat., 951), approved March 2, 1917, and suppe-
mentary cts, or by reason of ndvdua naturazaton pursuant to
orders of the Dstrct Court of the Unted States for Puerto Rco.
Secton 252(a) of the Interna Revenue Code provdes as foows:
(a) ny ndvdua who s a ctzen of any possesson of the Unted States
hut not otherwse a ctzen of the Unted States) and who s not a resdent of
the Unted States, sha be sub|ect to ta aton under ths chapter Chapter 1 of
the Code ony as to ncome derved from sources wthn the Unted States, and
n such case the ta sha be computed and pad n the same manner and sub|ect
to the same condtons as n the case of other persons who are ta abe ony as to
ncome derved from such sources. Itacs supped.
In short, the ndvduas descrbed n secton 252(a) of the Code are
ta ed n the same manner as nonresdent aens. The word other-
Wse n the parenthetca phrase has been consstenty construed as
causng ths secton to appy to the ctzens of a the possessons of the
703672 46 -11
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29.252-1.
154
Unted States, ncudng Puerto Rco, e cept ctzens of the rgn
Isands.
The Temporary Organc ct of Puerto Rco (31 Stat., 77), approved
pr 12,1900, provded that a nhabtants of Puerto Rco -who con-
tnued to resde theren, who were Spansh sub|ects on pr 11,1 99.
and then resded n Puerto Rco, and ther chdren born subsequent
thereto, shoud be deemed and hed to be ctzens of Puerto Rco and,
as such, entted to the protecton of the Unted States (e cept such
persons as had eected to preserve ther aegance to the Crown of
Span on or before pr 11,1900, n accordance wth the terms of the
Treaty of Pars) and they, together wth those ctzens of the Unted
States resdng n Puerto Rco, shoud consttute a body potc under
the name of The Peope of Puerto Rco. That ct merey conferred
Puerto Rcan ctzenshp upon the nhabtants of the sand and certan
ad|acent sands and dd not make them ctzens of the Unted States
(23 Op. tt. Gen. (U. S.), 370 Peope e re. uarbe v. oard, of
Inspectors, 67 N. Y. S., 236). owever, by the Organc ct of Puerto
co (39 Stat., 951 )r approved March 2, 1917, a ctzens of Puerto
Rco, as defned by the Temporary Organc ct, and a natves of
Puerto Rco who were temporary absent from the sand on pr 11,
1 99, who had snce returned and were permanenty resdng there and
who were not ctzens of any foregn country, were decared deemed,
and hed to be ctzens of the Unted States. ut ths provson was
not mandatory, and any ndvdua who wshed to preserve hs potca
status and not become a ctzen of the Unted States was permtted to
do so by makng a sutabe decaraton under oath, wthn s months
of the effectve date of the ct, before the dstrct court for the dstrct
wheren he resded. nother provson of the ct made t possbe
for a person born n Puerto Rco of an aen parent, and permanenty
resdng theren, to make a decaraton of aegance to the Unted
States before the Dstrct Court of the Unted States for Puerto Rco
wthn s months of the effectve date of the ct, f of fu age, or
wthn one year after reachng hs ma|orty, f a mnor, and mmed-
atey thereupon to become a ctzen of the Unted States. Ths ct
conferred Unted States ctzenshp upon most of the natves of Puerto
Rco by a process of coectve naturazaton, but wth respect to one
cass (those born of an aen parent) provded a speca form of nd-
vdua naturazaton by court order. The terms of ths ct were con-
frmed and e panded bv the provsons of the ct of March 4,1927
(44 Stat, 141 ), and the ct of une 27,1934 (4 Stat., 1245).
Secton I of the fourteenth amendment of the Consttuton of the
Unted States provdes that persons born or naturazed n the
Unted States, and sub|ect to the |ursdcton thereof, are ctzens of
the Unted States . Ths secton contempates two sources
of ctzenshp and two sources ony brth and naturazaton ( k v.
Wams, 112 U. S., 94). ut the Unted States ctzenshp conferred
upon Puerto Rcan natves by the Organc ct of Puerto Rco, as we
as by the cts of March 4,1927, and une 27,1934, was by a form of
naturazaton. Throughout the perod covered by those cts, other
natves of Puerto Rco, as we as aens resdent n Puerto Rco, were
obtanng Unted States ctzenshp by order of the Dstrct Court of
the Unted States for Puerto Rco under the genera naturazaton
aws. It was not unt the effectve date ( anuary 12, 1941) of the
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155 29.252-1.
Natonaty ct of 1940 (54 Stat., 1137), approved October 14, 1940,
that Unted States ctzenshp coud be acqured by brth n Puerto
Rco. Nevertheess, most, f not a, ctzens of Puerto Rco born pror
to the effectve date of the Natonaty ct of 1940 are ctzens of the
Unted States by reason of the coectve naturazaton provsons of
the Organc# ct of Puerto Rco and suppementary cts, or by reason
of naturazaton by order of the Dstrct Court of the Unted States
for Puerto Rco.
Secton 29.252-1 of Reguatons 111 provdes n part as foows:
or edera Income ta purposes a ctzen of a possesson of the Unted States
who s not otherwse a ctzen of the Unted States s a ctzen of a possesson of
the Unted States who has not become a ctzen of the Unted States by
naturazaton.
s has been stated, vrtuay a ctzens of Puerto Rco are ctzens of
the Unted States by naturazaton. owever, n accordance wth the
genera constructon accorded secton 252 (a) of the Code, t s hed that
the word naturazaton, as used n ths secton of the reguatons,
means ony naturazaton n the States or n ncorporated terrtory
of the Unted States.
Ths constructon of the aw and reguatons s, n genera, benefca
to those ctzens of Puerto Rco who are not resdents of the Unted
States. ew of them have any ncome from sources wthn the Unted
States other than nvestment ncome, and, snce t s possbe for an
ndvdua to choose hs nvestments, t es wthn hs power to avod
the ta aton to whch the ncome from such nvestments s sub|ect.
Whe the provsons of secton 251 of the Interna Revenue Code,
whch e empt from edera ncome ta aton ncome from sources
wthn possessons of the Unted States under certan condtons,
woud have accompshed a ke resut n most nstances, doubtessy
there are a number of Puerto Rcans who coud not quafy for e -
empton under that secton, nasmuch as ess than haf of ther gross
ncome s derved from the actve conduct of a trade or busness wthn
a possesson of the Unted States and, f not ta abe under secton
252(a) of the Code n the same manner as nonresdent aens, such
ndvduas woud be sub|ect to edera ta aton upon ther word
ncome. ut whatever may have been the orgna purpose of ta ng
Puerto Rcans on the same bass as nonresdent aens they have been
so ta ed under a of the revenue aws, begnnng wth the Revenue
ct of 191 . Under the aw as t s construed, aens who have acqured
Unted States ctzenshp by order of the Dstrct Court of the Unted
States for Puerto Rco can not consstenty be paced n a category
dfferng from that of other Puerto Rcans whose Unted States ct-
zenshp s granted by statute, another means of naturazaton.
In vew of the foregong, t s hed that ctzens of Puerto Rco
who are ctzens of the Unted States ony by reason of coectve
naturazaton under the Organc ct of Puerto Rco, approved March
2 1917, and suppementary cts, or by reason of ndvdua naturaza-
ton pursuant to orders of the Dstrct Court of the Unted States for
Puerto Rco, and who are not resdents of the Unted States, are sub-
|ect to edera ncome ta ony upon ncome derved from sources
wthn the Unted States, n the same manner and sub|ect to the same
condtons as nonresdent aens.
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29.272-1. 156
SUPPL M NT I SS SSM NT ND COLL CTION O D ICI NCI S-
S CTION 272. PROC DUR IN G N R L.
Secton 29.272-1: ssessment of a defcency. 1946-7-122 0
( so Secton 19.272-1, Reguatons 103 Sec- T.D.5503
ton 273, Secton 29.273-1, Reguatons 111,
Secton 19.273-1, Reguatons 103 Secton
322, Secton 29.322-7, Reguatons 111, Sec-
ton 19.322-7, Reguatons 103 Secton 732,
Secton 35.732-1, Reguatons 112, Secton
30.732-1, Reguatons 109 Sectons 1.73 and
1.93, Reguatons 105 and Sectons 6.39
and 6.43, Reguatons 10 .)
TITL 26 INT RN L R NU . C PT R I, SU C PT R INCOM D
C SS PRO ITS T S P RT 10, P RT 29, P RT 30, ND P RT 35. SU -
C PT R , P RT 1 ND P RT 6.
Reguatons 103, 105, 10 , 109, 111, and 112 amended to conform
to sectons 201, 202, and 203 of Pubc Law 291 (Seventy-nnth Con-
gress), such sectons reatng respectvey to tme for camng
refund wth respect to war osses, deducton of contrbutons to
penson trusts, and tme for fng petton wth The Ta Court of the
Unted States.
Treasury Department,
Offce of Commssoner of Interna Revenue,
y Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 103 Part 19, Tte 26, Code of
edera Reguatons, 1940 Sup. , Reguatons 105 Part 1, Tte 20,
Code of edera Reguatons, Cum. Sup. , Reguatons 10 Part 0,
Tte 26, Code of edera Reguatons, Cum. Sup. , Reguatons 109
Part 30, Tte 26, Code of edera Reguatons, 1941 Sup. , Regua-
tons 111 Part 29, Tte 26, Code of edera Reguatons, Cum. Sup. ,
and Reguatons 112 Part 35, Tte 26, Code of edera Reguatons,
Cum. Sup. to the provsons of sectons 201, 202, and 203 of Pubc
Law 291 (Seventy-nnth Congress), approved December 29, 1945,
such reguatons are amended as foows:
R GUL TIONS 103 ND 111.
Paragraph 1. There s nserted mmedatey precedng secton
29.23(p)-, Reguatons 111, the foowng:
S C. 202. CONTRI UTIONS TO P NSION TRUSTS. (PU LIC L W
291, S NTY-NINT CONGR SS, PPRO D D C M R 29,
1945.)
Ca) Deductons for the Ta abe Year 1942 Under Pror Income Ta
cts. Secton 23(p) (2) of the Interna Revenue Code s amended by
strkng out the words anuary 1, 1943 and Insertng n eu thereof
anuary 1, 1942 , and by strkng out the words December 31,1942
and nsertng n eu thereof December 31, 1941 .
(b) ffectve Date. The amendment made by ths secton sha be
appcabe as If t had been made as a part of secton 162(b) of the
Revenue ct of 1942.
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157
29.272-1.
Par. 2. There s nserted mmedatey precedng secton 19.272 1,
Reguatons 103, and secton 29.272-1, Reguatons 111, the foowng:
S C. 203. P TITION TO T T COURT O T UNIT D
ST T S. (PU LIC L W 291, S NTY-NINT CONGR SS,
PPRO D D C M R 29, 1945.)
(a) Tme fob h|no Petton. The secom sentences of sectons
272(a)(1), of the Interna Revenue Code are amended by
strkng out the parenthetca e presson appearng theren and nsert-
ng n eu thereof the foowng: (not countng Saturday, Sunday,
or a ega hoday n the Dstrct of Coumba as the nneteth day) .
(b) ffectve Date. The amendments made by ths secton sha
take effect as of September , 1945.
Par. 3. Secton 19.272-1, Reguatons 103, as amended by Treasury
Decson 5226, approved ebruary 10, 1943 C. . 1943, 375 , and sec-
ton 29.272-1, Reguatons 111, are amended by changng the s th
sentence of each such secton to read as foows:
In determnng such 90-day or 150-day perod, Saturday (on and after Septem-
ber , 1945), Sunday, or a ega hoday n the Dstrct of Coumba s not to be
counted as the nneteth or one hundred ffteth day.
Par. 4. Secton 19.273-1, Reguatons 103, as amended by Treasury
Decson 5226, and secton 29.273-1, Reguatons 111, are amended by
changng the cause foowng the parenthetca e presson appearng
n the thrd sentence of the second paragraph of each such secton to
read as foows:
not countng Saturday (on and after September , 1945), Sunday, or a ega
hoday n the Dstrct of Coumba as the nneteth or one hundred ffteth day.
Par. 5. There s nserted mmedatey precedng secton 19.322 1,
Reguatons 103, and secton 29.322-1, Reguatons 111, the foowng:
S C. 201. T NSION O TIM OR CL IMING CR DIT OR R -
UND WIT R SP CT TO W R LOSS S. (PU LIC L W
291, S NTY-NINT CONGR SS, PPRO D D C M R 29,
1915.)
If a cam for credt or refund under the Interna revenue aws re-
ates to an overpayment on account of the deductbty by the ta payer
of a oss n respect of property consdered destroyed or sezed under sec-
ton 127(a) of the Interna Revenue Code (reatng to war osses) for a
ta abe year begnnng n 1941 or 1942, the three-year perod of m-
taton prescrbed n secton 322(b) (1) of the Interna Revenue Code sha
n no event e pre pror to December 31,1946. In the case of such a cam
ted on or before December 31, 1946, the amount of the credt or refund
way e ceed the porton of the ta pad wthn the perod provded n sec-
ton 322(b) (2) or (3) of such code, whchever s appcabe, to the e -
tent of the amount of the overpayment attrbutabe to the deductbty
of the oss descrbed n ths secton.
Par. 6. Secton 19.322-7, Reguatons 103, as amended by Treasury
Decson 5436, approved ebruary 3, 1945 C. . 1945, 115 , and
secton 29.322-7, Reguatons 111, as amended by Treasury Decson
5447, approved March 21, 1945 C. . 1945, 251 are further
amended by changng the ast sentence of (a) of each such secton to
read as foows:
The provsons of ths subsecton are sub|ect to the e ceptons provded n sub-
sectons (6), (c), and (d) of ths secton and n secton 201 of Pubc Law 291
(Seventy-nnth Congress), approved December 29, 1945, e tendng to December
31, 1946, the tme for fng a cam for credt or refund based upon an over-
Payment of the ta as a resut of the faure to take a war oss deducton In
respect of property consdered destroyed or sezed under secton 127(a) of the
ae for a ta abe year begnnng n 1941 or 1942.
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29.272-1.
15
R GUL TIONS 109 ND 112.
Par. 7. There s nserted mmedatey precedng secton 30.732-1,
Reguatons 109, and secton 35.732-1, Reguatons 112, the foowng:
S C. 203. P TITION TO T T COURT O T UNIT D
ST T S. (PU LIC L W 291, S NTY-NINT CONGR SS,
PPRO D D C M R 29, 1945.)
(a) Tme foe nq Petton. The second sentences of sectons
732(a), of the Interna Revenue Code are amended
by strkng out the parenthetca e presson appearng theren and n-
sertng In eu thereof the foowng: (not countng Saturday, Sunday,
or a ega hoday n the Dstrct of Coumba as the nneteth day) .
(b) ffectve Date. The amendments made by ths secton sha
take effect as of September , 1945.
Par. . Secton 30.732-1, Reguatons 109, and secton 35.732-1,
Reguatons 112, both sectons as amended by Treasury Decson 5474,
approved ugust 21, 1945 C. . 1945, 2 0 , are further amended
by changng the parenthetca e presson appearng n the second
sentence of each such secton to read as foows:
(not countng Saturday (on and after September , 1943), Sunday, or a ega
hoday n the Dstrct of Coumba as the nneteth day)
R GUL TIONS 105 ND 10 .
Par. 9. There s nserted mmedatey precedng secton 1.73, Regu-
atons 105, and secton 6.39, Reguatons 10 , the foowng:
S C. 2a1 . P TITION TO T T COURT O T UNIT D
ST T S. (PU LIC L W 291, S NTY-NINT CONGR SS,
PPRO D D C M R 29, 1945.)
(a) Tme for no Petton. The second sentences of sectons
71(a) (1), and 1012(a) (1), respectvey, of the Interna Rev-
enue Code are amended by strkng out the parenthetca e pres-
son appearng theren and Insertng n eu thereof the foowng:
(not countng Saturday, Sunday, or a ega hoday n the Dstrct of
Coumba as the nneteth day) .
(b) ffectve Date. The amendments made by ths secton sha
take effect as of September ,1945.
Par. 10. Secton 1.73, Reguatons 105, as amended by Treasury
Decson 5239, approved March 10, 1943 C. . 1943, 10 1 , s further
amended by changng the two parenthetca e pressons n the fourth
paragraph to read as foows:
(not countng Saturday (on and after September , 1945), Sunday, or a ega
hoday n the Dstrct of Coumba as the ast day of the perod)
Par. 11. Secton 1.93, Reguatons 105, as amended by Treasury
Decson 5239, s further amended by changng the parenthetca e -
presson n the ffth sentence to read as foows:
(not countng Saturday (on and after September , 1945), Sunday, or a eg3
hoday n the Dstrct of Coumba as the ast day)
Par. 12. Secton 6.39, Reguatons 10 , s amended by changng the .
fourth sentence to read as foows:
In determnng such prescrbed perod, Saturday (on and after September ,
1945), Sunday, or a ega hoday n the Dstrct of Coumba s not to bs countea
as the ast day thereof.
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159
29.275-1.
Par. 13. Secton 6.43, Reguatons 10 , s amended by changng the
cause foowng the parenthetca e presson n the thrd sentence of
the second paragraph thereof to read as foows:
and In determnng such prescrbed perod Saturday (on and after September ,
1945), Sunday, or a ega hoday n the Dstrct of Coumba s not to be counted
as the ast day thereof.
(Ths Treasury Decson s ssued under the authorty contaned n
sectons 62, 1029, 3791, and 729(a) of the Interna Revenue Code (53
Stat., 32, 157, 467 54 Stat., 9 9 26 U. S. C, 1940 ed., 62, 1029, 3791,
729(a)) and sectons 201, 202, and 203 of Pubc Law 291 (Seventy-
nnth Congress), approved December 29, 1945.)
- . oseph D. Nuna , r.,
Commssoner of Interna Revenue.
pproved March 20,1946.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster March 21, 1946, 4.2S p. m.)
S CTION 273.- OP RDY SS SSM NTS.
Secton 29.273-1: eopardy assessments.
( so Secton 19.273-1, Reguatons 103.)
nterna revenue code.
Reguatons 103 and 111 amended. (See T. D. 5503, page 156.)
S CTION 275. P RIOD O LIMIT TION UPON
SS SSM NT ND COLL CTION.
Secton 29.275-1: Perod of mtaton upon 1946-12-12329
assessment of ta . T. D. 5516
( so Secton 322, Secton 29.322-7.)
TITL 26 INT RN L R NU . C PT R I, SU C PT R . P RT 29.
INCOM T T L Y RS GINNING T R D C M R 31, 1941.
Reguatons 111 amended to conform to sectons 5 and 6(a) of
the Ta d|ustment ct of 1045, reatng respectvey to the perod
of mtaton In case of carry-backs and to Interest n connecton
wth defcences resutng from carry-backs and reated matters,
and to secton 122 (e) and (f) of the Revenue ct of 1945, reatng
respectvey to cams for refund based on carry-backs and to def-
cences attrbutabe to carry-backs.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 111 Part 29, Code of edera Reg-
uatons, Cum. Sup. to sectons 5 and 6(a) of the Ta d|ustment
ct of 1945 (Pubc Law 172, Seventy-nnth Congress), approved
uy 31, 1945, and to secton 122 (e) and (f) of the Revenue ct of
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29.275-1.
160
1945 (Pubc Law 214, Seventy-nnth Congress), approved November
,1945, such reguatons are amended as foows:
Paragraph 1. There s nserted mmedatey precedng secton 293
the foowng:
S C. 6. INT R ST IN CONN CTION WIT C RRY- C S.
(T D USTM NT CT OP 1945.)
(a) Secton 292 of the Interna Revenue Code Is amended by addng
at the end thereof the foowng new subsecton:
(c) Defcency Resutng bom Cabby- ack and Reated Mat-
ters. If any part of a defcency s determned by the Commssoner to
be attrbutabe ( ) to a carry-back to whch an overpayment descrbed
n secton 3771(e), or a decrease determned under secton 37 0(b),
n any other ta s attrbutabe, or ( ) to an error n the amount or,
effect of a carry-back whch resuted n a credt or refund of an over-
payment wth Interest computed pursuant to secton 3771(e), or n a
decrease determned under secton 37 0(b), no nterest sha be as-
sessed or pad under subsecton (a) wth respect to such part of the
defcency for any perod durng whch nterest was not aowed wth
respect to such overpayment or for a perod pror to the appcaton of
such decrease.

Par. 2. There s nserted mmedatey precedng secton 29.275-1
the foowng:
S C. 5. P RIOD OP LIMIT TION IN C S OP C RRY- C S.
(T D USTM NT CT OP 1945.)

(e) Secton 276 of the Interna Revenue Code s amended by nsertng
Immedatey foowng subsecton (c) the foowng new subsecton:
(d) Net Operatng Loss Carby- acks and Unused cess Profts
Credt Carry- acks. defcency attrbutabe to the appcaton to
the ta payer of a net operatng oss carry-back or an unused e cess
profts credt carry-back, ncudng defcences whch may be assessed
pursuant to the provsons of secton 37 0 (b) and (c), may be assessed
at any tme pror to the e praton of the perod wthn whch a def-
cency may be assessed wth respect to the ta abe year of the camed
net operatng oss or unused e cess profts credt resutng n such
carry-back.
(f) ffectve Date. The amendments made by ths secton sha be
appcabe wth respect to a ta abe years begnnng after December
31, 1940, e cept that the amendment made by subsecton (d) sha not
be appcabe to any ta abe year wth respect to whch the ta payer
and the Commssoner have entered nto a cosng agreement under the
provsons of secton 3700, pror to the date of enactment of. ths ct,
n any case n whch t s e pressy provded n such cosng agreement
that the ta abty for such ta abe year s not to be affected by a
net operatng oss carry-back or by an unused e cess profts credt
carry-back.
S C. 122. R P L OP C SS PRO ITS T IN 1946. (R -
NU CT OP 1945.)

(f) Defcences ttrbutabe to Carby- acks.
(1) Secton 276(d) s amended to read as foows:
(d) Net Opebatno Loss Carry- acks and Unused cess Profts
Credt Carry- acks. In the case of a defcency attrbutabe to the
appcaton to the ta payer of a net operatng oss carry-back or an
unused e cess profts credt carry-back, ncudng defcences whch may
be assessed pursuant to the provsons of secton 37 0 (b) or (c), such
defcency may be assessed
(1) n case a return was requred under subchapter of chapter
2 for the ta abe year of the net operatng oss or unused e cess
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161
29.275-1.
profts credt resutng n the carry-back, at any tme before the
e praton of the perod wthn whch (under secton 275 or sub-
secton (a) or (b) of ths secton) a defcency (wth respect to
ta mposed ether by chapter 1 or by subchapter or of chapter
2) for such ta abe year (whchever s the onger perod) may be
assessed or
(2) n case a return was not requred under subchapter of
chapter 2 for the ta abe year of the net operatng oss or unused
e cess profts credt resutng n the carry-back, at any tme before
the e praton of the perod wthn whch (under secton 275 or
subsecton (a) or (b) of ths secton) a defcency (wth respect to
ta mposed ether by chapter 1 or by subchapter or of chapter
2) for such ta abe year (whchever s the onger perod) may be
assessed.
(2) ffectve Date. The amendment made by ths subsecton
sha be appcabe wth respect to a ta abe years begnnng after
Dec-ember 31, 1940. - k

Par. 3. Secton 29.275-1 s .amended bv nsertng mmedatey pre-
cedng the ast paragraph thereof the foowng:
(11) speca perod of mtaton s provded n secton 276(d) wthn whch
a defcency n any ta (ncudng a defcency whch may be assessed pursuant
to the provsons of secton 37 0 (b) or (c), reatng to tentatve carry-back
ad|ustments) whch s attrbutabe to the appcaton to the ta payer of a net
operatng oss carry-back or an unused e cess profts credt carry-back may be
assessed. The perod wthn whch such a defcency may be assessed depends,
n genera, on the perod wthn whch a defcency may be assessed wth respect
to the ta abe year of the net operatng oss or the unused e cess profts credt
whch resuted n the carry back. The perod wthn whch such a defcency
may be assessed depends further on whether an e cess profts ta return was
requred to be fed n the case of the gven ta payer for the ta abe year of
the net operatng oss or the unused e cess profts credt whch resuted n
the carry-back. It s mmatera whether an e cess profts ta return was
requred to be fed for the ta abe year of the defcency. The determnatve
factor s whether an e cess profts ta return was requred to be fed for the
ta abe year of the oss or unused credt whch resuted n the carry-back.
If an e cess profts ta return was requred to be fed for the ta abe year
of the net operatng oss- or the unused e cess profts credt whch resuted n
the carry-back, a defcency n any ta attrbutabe to the appcaton to the
ta payer of such carry-back may be assessed at any tme pror to the e praton
of the perod wthn whch (under the provsons of secton 275 or 276 (a) or (b),
and sectons 603 and 729(a) respectvey makng such sectons 275 and 276 (a)
and (b) appcabe to Subchapters and of Chapter 2) a defcency may be as-
sessed wth respect to the same or any other ta mposed by Chapter 1 or Sub-
chapter or of Chapter 2 for the ta abe year of such oss or unused credt. In
such case, a defcency attrbutabe to the appcaton to the ta payer of a
carry-back thus may be assessed at any tme pror to the e praton of whchever
of the foowng three perods, each perod beng determned under the appcabe
provsons of secton 275, 276 (a) and (b), 603, and 729(a), e pres the atest:
(a) the perod wthn whch a defcency may be assessed wth respect to
the ta mposed by Chapter 1 for the ta abe year of the oss or unused credt
whch resuted n the carry-back
(6) the perod wthn whch a defcency may be assessed wth respect to
the decared vaue e cess profts ta , mposed by Subchapter of Chapter 2,
for the ta abe year of the oss or unused credt whc resuted n the carry-
back
(c) the perod wthn whch a defcency may be assessed wth respect to
the e cess profts ta , mposed by Subchapter of Chapter 2, for the ta abe
year of the oss or unused credt whch resuted n the carry-back.
If a corporaton s not sub|ect to the decared vaue e cess profts ta for the ta -
abe year of the oss or unused credt whch resuted n the carry-back, ether be-
cause ts net ncome, determned as provded n secton 602, for such ta abe year
s not n e cess of 10 per cent of ts decared vaue or because such ta abe year
ended after une 30, 1946, the perod wthn whch a defcency may be assessed
wth respect to the decared vaue e cess profts ta for the ta abe year of the
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29.275-1.
162
oss or unused credt sha be dsregarded n determnng the perod wthn whch
a defcency attrbutabe to the appcaton to the ta payer of a carry-back, re-
sutng from such oss or unused credt, may be assessed.
If no e cess profts ta return was requred to be fed for the ta abe year
of the net operatng oss or unused e cess profts credt whch resuted n the
carry-back, a defcency n any ta attrbutabe to the appcaton to the ta payer
of such carry-back may be assessed at any tme pror to the e praton of the
perod wthn whch (under the provsons of secton 275 or 276 (a) or (b),
and sectons 50 and 603 respectvey makng such sectons 275 and 276 (a) and
(b) appcabe to Subchapters and of Chapter 2) a defcency may be
assessed wth respect to the same or any other ta mposed by Chapter 1 or
Subchapter or of Chapter 2 for the ta abe year of such oss or unused credt.
It w be consdered that no e cess profts ta return was requred to be fed for
the ta abe year of the oss or unused credt f ( ) the ta payer was e empt
from the e cess profts ta for such ta abe year under the provsons of secton
727 ( ) the ta payer, even though sub|ect to te e cess profts ta , was not
requred to fe an e cess profts- ta return for such ta abe year under the
provsons of secton 729 or (C) such ta abe year began after December 31.
1945. In such case, a defcency attrbutabe to the appcaton to the ta payer
of a carry-back thus may be assessed at any tme pror to the e praton of
whchever of the foowng three perods, each perod beng determned under
the appcabe provsons of sectons 275, 276 (a) and (b), 50 , and 603, e pres
the atest:
(I) the perod wthn whch a defcency may be assessed wth respect
to the ta Imposed by Chapter 1 for the ta abe year of the oss or unused
credt whch resuted n the carry-back
() the perod wthn whch a defcency may be assessed wth respect
to the surta on persona hodng companes, mposed by Subchapter of
Chapter 2, for the ta abe year of the oss or unused credt whch resuted
n the carry-back
() the perod wthn whch a defcency may be assessed wth respect
to the decared vaue e cess profts ta , mposed by Subchapter of Chapter
2, for the ta abe year of the oss or unused credt whch resuted n the
carry-back.
If a corporaton s not a persona hodng company, as defned n secton 501,
for the ta abe year of the oss or unused credt whch resuted n the carry-
back, the perod wthn whch a defcency may be assessed wth respect to the
surta on persona hodng companes for the ta abe year of the oss or unused
credt sha be dsregarded n determnng the perod wthn whch a defc-
ency attrbutabe to the appcaton to the ta payer of a carry-back, resutng
from such oss or unused credt, may be assessed. Smary, f a corporaton
s not sub|ect to the decared vaue e cess profts ta for the ta abe year of the
oss or unused credt whch resuted n the carry-back, ether because ts net
Income, determned as provded n secton 602, for such ta abe year s not
n e cess of 10 per cent of ts decared vaue or because such ta abe year ended
after une 30, 1916, the perod wthn whch a defcency may be assessed wth
respect to the decared vaue e cess profts ta for the ta abe year of the
oss or unused credt sha be dsregarded n determnng the perod wthn whch
n defcency attrbutabe to the appcaton to the ta payer of a carry-back,
resutng from such oss or unused credt, may be assessed.
It s mmatera whether an e cess profts ta return n fact was fed for
the ta abe year of the oss or unused credt whch resuted n the carry-back,
whether the defcency s attrbutabe to the appcaton to the ta payer of a
net operatng oss carry-back or an unused e cess profts credt carry-back,
whether the defcency s n respect of the e cess profts ta or some other tas,
or whether the defcency s n respect of the same ta as that of the carry-back
or n respect of some other ta . The determnatve factor Is whether an e cess
profts ta return was requred to be fed for the ta abe year of the oss or
unused credt whch resuted n the carry-back. It s kewse mmatera whether
the ta , In respect of whch the defcency resutng from the appcaton to the
ta payer of the carry-back s to be assessed, s the same knd of ta wth respect
to whch a defcency mght be assessed for the ta abe year of the oss or unused
credt whch resuted In the carry-back. Thus, If a defcency for the caendar
year 1943 wth respect to the ta mposed by Chapter 1 s attrbutabe to the
appcaton to the ta payer of a net operatng oss carry-back from 1945, n
the ta payer was requred to fe an e cess profts ta retnrn for 1945 and f tne
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163
29.275-1.
perods wthn whch defcences wth respect to the ta es Imposed by Chapter 1,
Subchapter of Chapter 2, and Subchapter of Chapter 2 for 1945 e pre
respectvey on March 15, 1949, March 15, 1949, and September 15, 1949, the
perod wthn whch such defcency, attrbutabe to the appcaton to the ta -
payer of the net operatng oss carry-back from 1945, may be assessed wth
respect to the ta Imposed by Chapter 1 for 1943 w e pre on September 15,
1949.
defcency attrbutabe to the appcaton to the ta payer of a carry-back
may resut from an ad|ustment to the net operatng oss or the unused e cess
profts credt, to the resutng carry-back, or to the net operatng oss deducton
or the unused e cess profts credt ad|ustment. defcency may be attrbutabe
to the appcaton to the ta payer of a carry-back even though the net operatng
oss or the unused e cess profts credt or the resutng carry-back, as camed
by the ta payer, s dentca In amount wth the actua oss or unused credt or
the resutng carry-back. or e ampe, f n computng the net operatng oss
deducton the ta payer fas to make the ad|ustment requred by secton 122(c),
the resutng defcency w be consdered to be attrbutabe to the appcaton
to the ta payer of any net operatng oss carry-back whch entered nto the com-
putaton of such net operatng oss deducton. defcency In e cess profts ta
attrbutabe to the appcaton to the ta payer of an unused e cess profts credt
carry-back whch tsef s produced, or whch s ncreased n amount, by a ne
operatng oss carry-back Is to be consdered as kewse attrbutabe to the
appcaton to the ta payer of such net operatng oss carry-back to the e tent
that such unused e cess profts credt carry-back s so produced or Increased
such defcency may be assessed at any tme pror to the e praton of whchever
of the foowng two perods e pres ater: the perod prescrbed n secton 276(d)
wthn whch a defcency attrbutabe to the appcaton to the ta payer of such
unused e cess profts credt carry-back may be assessed, or the perod prescrbed
n secton 276(d) wthn whch a defcency attrbutabe to the appcaton to
the ta payer of such net operatng oss carry-back may be assessed.
If the perod wthn whch a defcency may be assessed under any other app-
cabe provson of aw, both In the case where an e cess profts ta return was
requred to be fed for the ta abe year of the oss or unused credt whch re-
suted n the carry-back and In the case where no e cess profts ta return was
requred to be fed for such ta abe year, s onger than the perod provded n
secton 276(d), a defcency attrbutabe to the appcaton to the ta payer of
such carry-back may be assessed at any tme pror to the e praton of such
onger perod.
Par. 4. There s nserted mmedatey precedng secton 29.322-1
the foowng:
S C. 5. P RIOD O LIMIT TION IN C S O C RRY- C S.
(T D USTM NT CT O 1945.)
(a) Secton 322(b) (5) of the Interna Revenue Code Is amended by
strkng the words or of a carry-back where they appear n subpara-
graph ( ) thereof, and by strkng the ast sentence and Insertng n
eu thereof the foowng: If the cam for credt or refund reates
to an overpayment on account of the effect that the deductbty of
such a debt or oss has on the appcaton to the ta payer of a carry-
back, the perod sha be ether seven years from the date prescrbed
by aw for fng the return for the year of the net operatng oss or the
unused e cess profts credt whch resuts n such carry-back or the perod
prescrbed n paragraph (6), whchever e pres the ater. In the case of
a cam descrbed n ths paragraph, the amount of the credt or refund
may e ceed the porton of the ta pad wthn the perod prescrbed
In paragraph (2) or (3), whchever s appcabe, to the e tent of the
amount of the overpayment attrbutabe to the deductbty of tems
descrbed n ths paragraph.
(b) Secton 322(b) of the Interna Revenue Code Is amended by n-
sertng mmedatey foowng paragraph (5) the foowng new para-
graph:
(6) Speca perod of mtaton wth respect to net oper-
atng LOSS C RRY- C S ND UNUS D C SS PRO ITS CR DIT C RRY-
C S. If the cam for credt or refund reates to an overpayment
attrbutabe to a net operatng oss carry-back or to an unused
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29.275-1.
164
e cess profts credt carry-back, In eu of the three-year perod of
mtaton prescrbed In paragraph (1), the perod sha be that
perod whch ends wth the e praton of the three-year perod pre-
scrbed n paragraph (1) or the perod prescrbed n paragraph
(3), whchever e pres ater, wthn whch cam for credt or re-
fund may be fed wth respect to the ta abe year of the net oper-
atng oss or the unused e cess profts credt whch resuts n such
carry-back. In the case of such a cam, the amount of the credt
or refund may e ceed the porton of the ta pad wthn the perod
provded In paragraph (2) or (3), whchever s appcabe, to the
e tent of the amount of the overpayment attrbutabe to such
carry-back.
(c) Secton 322(d) of the Interna Revenue Code s amended by
strkng the perod at the end thereof and nsertng n eu thereof the
foowng: or (3), If such porton was not pad wthn the perod
descrbed n cause (1), but the notce of defcency was maed wthn
the perod prescrbed n subsecton (b) (6) for the fng of a cam for
credt or refund of an overpayment attrbutabe to a carry-back, or such
a cam was fed, that such porton does not e ceed the amount of the
overpayment attrbutabe to a carry-back .
(d) Secton 322 of the Interna Revenue Code s amended by nsertng
mmedatey foowng subsecton (f) the foowng new subsecton:
(g) Overpayments ttrbutabe to Net Operatng Loss Carry-
backs and Unused cess Profts Credt Carry- acks. If the aow-
ance of accredt or refund of an overpayment of ta attrbutabe to a
net operatng oss carry-back or to an unused e cess profts credt carry-
back s otherwse prevented by the operaton of any aw or rue of aw
other than secton 3761, reatng to compromses, such credt or refund
may be aowed or made, f cam therefor s fed wthn the perod pro-
vded n subsecton (b)(6). If the aowance of an appcaton, credt
or refund of a decrease n ta determned under secton 37 0(b) s
otherwse prevented by the operaton of any aw or rue of aw other
than secton 3761, such appcaton, credt or refund may be aowed
or made f appcaton for a tentatve carry-back ad|ustment s made
wthn the perod provded n secton 37 0(a). In the case of any such
cam for credt or refund or any such appcaton for a tentatve carry-
back ad|ustment, the determnaton by any court. Incudng The Ta
Court of the Unted States, n any proceedng n whch the decson of
the court has become fna, sha be concusve e cept wth respect to the
net operatng oss deducton and the unused e cess profts credt ad|ust-
ment, and the effect of such deducton or ad|ustment, to the e tent that
such deducton or ad|ustment s affected by a carry-back whch was not
n ssue n such proceedng.

(f) ffectve Date. The amendments made by ths secton sha be
appcabe wth respect to a ta abe years bsgnnng after December
31, 1040, e cept that the amendment made by subsecton (d) sha not
be appcabe to any ta abe year wth respect to whch the ta payer
and the Commssoner have entered Into a cosng agreement under the
provsons of secton 3760, pror to the date of enactment of ths ct, n
any case n whch t s e pressy provded In such cosng agreement
that the ta abty for such ta abe year s not to be affected by a net
operatng oss carry-back or by an unused e cess profts credt carry-
back.
S C. 122. R P L O C SS PRO ITS T I 1046. (R -
NU CT O 194o.)

(e) Cams for Refund ased on Carry- acks.
1) In genera. The frst sentence of secton 322(b)(6) (re-
atng to perods of mtaton wth respect to cams for refund
based on carry-backs) s amended to read as foows: If the cam
for credt or refund reates to an overpayment attrbutabe to a
net operatng oss carry-back or to an unused e cess profts credt
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165
29.275-1.
carry-back, In eu of the three-year perod of mtaton prescrbed
n paragraph (1), the perod sha be that perod whch ends wth
the e praton of the ffteenth day of te thrty-nnth mouth fo-
owng the end of the ta abe year of the net operatng oss or the
unused e cess profts credt whch resuts n such carry-back, or the
perod prescrbed n paragraph (3) n respect of such ta abe year,
whchever e pres ater.
(2) Ta abe yeaks to whch appcabe. The amendment made
by ths subsecton sha be appcabe to cams for credt or refund
wth respect to ta abe years begnnng after December 31, 1940.

Par. 5. Secton 29.322-7, as amended by Treasury Decson 5503,
approved March 20,1946 page 156, ths uetn , s further amended
as foows:
( ) y strkng the ast sentence of subsecton (a) and nsertng
n eu thereof the foowng sentence:
The provsons of ths subsecton are sub|ect to the e ceptons provded In sub-
sectons (6), (c), d), and (e) of ths secton and n secton 201 of Pubc Law
291 (Seventy-nnth Congress), npproved December 29, 1945, e tendng to De-
cember 31, 1946, the tme for fng a cam for credt or refund based upon nn
overpayment of the ta as a resut of the faure to take a war oss deducton
n respect of property consdered destroyed or sezed under secton 127(a) of
the Code for a ta abe year begnnng n 1941 or 1942.
( ) y strkng cause (2) of subsecton (c) and nsertng n eu
thereof the foowng:
(2) the effect thnt the deductbty of a debt or oss descrbed n cause
(1) has on the appcaton to the ta payer of a capta oss carry-over pro-
vded n secton 117(e), a net operatng oss carry-over provded n secton
122(b), or an unused e cess profts credt carry-over provded n secton
710(c)(3),
(C) y strkng the second sentence of subsecton (c) whch begns
wth the words In the case of such a cam and nsertng n eu
thereof the foowng:
If the cam for credt or refund reates to an overpayment on account of the
effect that the deductbty of a debt or oss descrbed n cause (1) has on the
appcaton to the ta payer of a net operatng oss carry-back provded n secton
122(b) or an unused e cess profts credt carry-back provded n secton
710(c) (3), such perod sha be whchever of the foowng two perods e pres
ater:
() seven years from the date prescrbed by aw for fng the return
(determned wthout regard to any e tenson of tme for fng such return)
for the ta abe year of the net operatng oss or the unused e cess profts
credt or
() the perod prescrbed In subsecton (e) of ths secton.
In the case of any cam descrbed n ths paragraph the amount of the credt
or refund may e ceed the porton of the ta pad wthn the perod provded
n subsecton (a) or (6) of ths secton, whchever s appcabe, to the e tent
of the amount of the overpayment attrbutabe to the deductbty of tems
descrbed n ths paragraph.
(D) y strkng () and () where they appear n the frst
paragraph of subsecton (c) and nsertng n eu thereof ( ) and
( ), respectvey.
( ) y strkng the second paragraph of subsecton (c) and n-
sertng n eu thereof the foowng:
If cam for credt or refund s not fed wthn the appcabe perod descrbed
n the precedng paragraph, then credt or refund may be aowed or made ony
f cam therefor Is fed, or f such credt or refund Is aowed or made, wthn
any perod prescrbed n subsecton (o) or (6) of ths secton, whchever s
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29.275-1.
166
appcabe, sub|ect to the provsons of such subsecton (a) or (b), mtng
the amount of credt or refund In the case of a cam fed, or, f no cam was
fed, n the case of credt or refund aowed or made wthn such appcabe
perod as prescrbed n such subsecton (a) or (6).
( ) y strkng cause () of subsecton (d) and nsertng n
eu thereof the foowng:
(11) f such porton of the ta was not pad wthn the perod descrbed
n ( .) of ths paragraph, but the notce of defcency was maed wthn
seven years from the tme prescrbed for fng the return (determned
wthout regard to any e tenson of tme for fng such return), or a cam
of the type descrbed n subsecton (c) of ths secton was fed, that such
porton of the ta does not e ceed the amount of the overpayment attrbu-
tabe to the deductbty of tems descrbed n such subsecton (c) or
() f such porton of the ta was not pad wthn the perod descrbed
n () of ths paragraph, but the notce of defcency was maed wthn
the perod prescrbed n subsecton (e) of ths secton for the fng of a
cam for credt or refund of an overpayment attrbutabe to a net operatng
oss carry-back or an unused e cess profts credt carry-back, or such a cam
was fed, that such porton of the ta does not e ceed the amount of the
overpayment attrbutabe to the carry-back.
The amount of the overpayment attrbutabe to the deductbty of tems
descrbed In subsecton (e) of ths secton or to a carry-back sha be determned
under the provsons of subsectons (c) and (c), respectvey. or the m-
taton on the aowance of nterest for any porton of an overpayment descrbed
n () or (), above, see secton 3771 (d) or (e), whchever s appcabe.
(G) y addng at the end thereof the foowng new subsecton:
(e) Overpayment on account of net operatng ogs carry-backs and unused
e cess profts credt carry-backs. (1) Speca perod of mtaton. If the
cam for credt or refund reates to an overpayment attrbutabe to a net operat-
ng oss carry-back, provded n secton 122(b), or to an unused e cess profts
credt carry-back, provded n secton 710(c)(3), then n eu of the 3-year
perod from the date the return was fed n whch the cam may be fed or
credt or refund aowed or made, as prescrbed n subsecton (n) of ths secton,
the perod sha be whchever of the foowng two perods e pres ater:
() the perod whch ends wth the e praton of the 15th day of the
thrty-nnth month foowng the end of the ta abe year of the net operatng
oss or the unused e cess profts credt whch resuted n the carry-back or
() the perod whch ends wth the e praton of the perod prescrbed
n subsecton (6) of ths secton wthn whch a cam for credt or refund
may be fed wth respect to the ta abe year of the net operatng oss or
the unused e cess profts credt whch resuted n the carry-back.
In the case of such a cam, the amount of the credt or refund may e ceed the
porton of the ta pad wthn the perod prescrbed n subsecton (a) or (6) of
ths secton, whchever s appcabe, to the e tent of the amount of the over-
payment attrbutabe to the carry-back. Such a credt or refund can not e ceed
the sum of the foowng:
( ) the porton, f any, of the ta pad wthn the perod provded In sub-
secton (a) or (6) of ths secton, whchever s appcabe, and
( ) the amount of the overpayment attrbutabe to the carry-back.
The porton of an overpayment attrbutabe to a carry-back sha be determned
by treatng the net operatng oss deducton and the unused e cess profts credt
ad|ustment, to the e tent that they are ncreased by the net operatng oss
carry-back or the unused.e eess profts credt carry-back, as the frst ad|ustments
to be made n computng such overpayment.
If cam for credt or refund s not fed, and. f credt or refund s not aowed
or made, wthn the perod descrbed n the precedng paragraph, then credt or
refund may be aowed or made ony f cam therefor s fed, or f such credt
or refund s aowed or made, wthn any perod prescrbed n subsecton (a) or
(6) of ths secton, whchever s appcabe, sub|ect to the provsons of such
subsecton (a) or (6), mtng the amount of credt or refund n the case of a
cam fed, or f no cam was fed, n the case of credt or refund aowed or
made wthn such appcabe perod.
In the case of an overpayment of e cess profts ta attrbutabe to an unused
e cess profts credt carry-back whch tsef s produced, or s ncreased n
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167
29.275-1.
amount, by a net operatng oss carry-back, such overpayment Is to be con-
sdered as attrbutabe to the net operatng oss carry-back to the e tent that
there woud have been no overpayment of e cess profts ta f there had been
no net operatng oss carry-back. Cam for credt or refund of that porton
of the overpayment of e cess profts ta whch s thus attrbutabe to the net
operatng oss carry-back may be fed, or credt or refund aowed or made, at
any tme pror to the e praton of the perod wthn whch cam for credt
or refund of an overpayment attrbutabe to the net operatng oss carry-back
may be fed or such credt or refund aowed or made f no cam s fed.
or the mtaton on the aowance of nterest for an overpayment where
credt or refund s sub|ect to the provsons of secton 322(b)(6), see secton
3771(e).
(2) arred overpayments. If the aowance of a credt or refund of an over-
payment of ta attrbutabe to a net operatng oss carry-back or to an unused
e cess profts credt carry-back s otherwse prevented by the operaton of any
aw or rue of aw (other than secton 3701, reatng to compromses), suc
credt or refund may be aowed or made under the provsons of secton 322(g)
f a cam therefor s fed wthn the perod provded In sectons 322(b) (G) and
29.322-7 (e) (1) for fng a cam for credt or refund of an overpayment at-
trbutabe to a carry-back. Smary, f the aowance of an appcaton, credt
or refund of a decrease In ta determned under secton 37 0(b) s otherwse
prevented by the operaton of any aw or rue of aw (other than secton 3761),
such appcaton, credt or refund may be aowed or made f an appcaton
for a tentatve carry-back ad|ustment s fed wthn the perod provded n
secton 37 0(a). Thus, for e ampe, even though the ta abty for a gven
ta abe year has prevousy been tgated before The Ta Court of the Unted
States, credt or refund of an overpayment may be aowed or made, despte the
provsons of secton 322(c), f cam for such credt or refund s fed wthn
the perod provded In sectons 322(b) (6) and 29.322-7(e) (1).
In the case of a cam for credt or refund of an overpayment attrbutabe
to a carry-back, or In the case of an appcaton for n tentatve carry-back
ad|ustment, the determnaton of any court, ncudng The Ta Court of the
Unted States, n any proceedng n whch the decson of the court has become
fna, sha be concusve e cept wth respect to the net operatng oss deducton
and the unused e cess profts credt ad|ustment, and the effect of such deduc-
ton or ad|ustment, to the e tent that such deducton or ad|ustment s affected
by a carry-back whch was not n ssue n such proceedng. The provsons of
secton 322(g), however, are not to appy to any ta abe year wth respect to
whch the Commssoner and the ta payer have entered nto a cosng agree-
ment under secton 3760 pror to uy 31, 1945, the date of enactment of the
Ta d|ustment ct of 1945, In whch t s e pressy provded that the ta
abty for such ta abe year s not to be affected by a net operatng oss carry-
back or by an unused e cess profts credt carry-back.
The provsons of secton 322(g) may be ustrated by the foowng e ampe:
ampe. Corporaton , whch keeps ts books and makes ts ta returns
on the caendar year bass, fed Its ncome and e cess profts ta returns for
1944 on March 15, 1945. The corporaton camed 100,000 as a deducton for
deprecaton on such returns. The Commssoner asserted that ony 60,000
was propery aowabe as a deducton for deprecaton, and he further asserted
that the corporaton had reazed certan ong-term capta gans n 1944 whch
t mpropery faed to ncude n ts gross ncome. These ssues were tgated
before The Ta Court of the Unted States, whch sustaned the Commssoner s
determnatons wth respect to both the deducton for deprecaton and the
capta gans. Pursuant to the decson of The Ta Court, whch became fna
on December 15, 1946, defcency |udgments were entered for the-Commssoner
wth respect to both the Income ta and the e cess profts ta of the corporaton
for the year 1944. In computng the defcency n e cess profts ta , proper
ad|ustment was made by The Ta Court for an unused e cess profts credt
carry-back from the year 1945 to 1944. The corporaton dd not appea The
Ta Court s decson. In a decson whch became fna on May 1, 1947, the
Supreme Court decded that gans of the type hed ta abe as ong-term capta
gans by The Ta Court n the above proceedng are not sub|ect to ta . The
corporaton sustaned net operatng osses n both 1946 and 1947 and had an
unused e cess profts credt for 1946.
The net operatng oss sustaned by the corporaton n 1917, when carred
back to 1945, ncreased the unused e cess profts credt for 1945. If proper
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29.294-2.
16
cams for credt or refund are fed wthn the perod provded n sectons
322(b) (6) and 29.322-7(e) (1), the corporaton may be aowed credt or refund
of such portons of the overpayments of ts ncome ta , ts e cess profts ta ,
and any other ta affected, for 1944 as are attrbutabe to the net operatng
oss carry-back or unused e cess profts credt carry-backs whch resut from
the above osses and unused credts. In computng such overpayments, no ad-
|ustment s to be made wth respect to the gans hed ta abe as ong-term
capta gans by The Ta Court or wth respect to any other Item, e cept the
net operatng oss deducton and the unused e cess profts credt ad|ustment,
whch entered nto the determnaton of the corporaton s Income ta and e cess
profts ta for 1944. The net operatng oss deducton and e cess profts credt
ad|ustment, however, may be ad|usted to the e tent that they are affected by a
carry-back whch was not n ssue n the above proceedng before The Ta
Court. Lkewse, ad|ustments may be made to refect the effect of such net
operatng oss deducton and unused e cess profts credt ad|ustment on any
other tems whch enter Into the determnaton of the ta abty. Thus, for
e ampe, any deducton mted by net Income or ad|usted gross Income, such
as the deducton for chartabe contrbutons, Is to be recomputed on the bass
of the net Income or ad|usted gross Income as affected by the carry-back. The
porton of the overpayment attrbutabe to the net operatng oss carry-back or
the unused e cess profts credt carry-back s to be determned by treatng the
net operatng oss deducton and the unused e cess profts credt ad|ustment to
the e tent that they are Increased by a net operatng oss carry-back or an
unused e cess profts credt carry-back, as the frst ad|ustments to be made n
computng such overpayment.
Pah. 6. The amendments to Reguatons 111 (coverng ta abe
years begnnng after December 31, 1941) made by paragraphs 1
through 5 of ths Treasury Decson are hereby made appcabe to
ta abe years begnnng after December 31, 1940, and pror to anu-
ary 1, 1942 (such years beng covered by Reguatons 103).
(Ths Treasury Decson s ssued under the authorty contaned n
secton 62 of the Interna Revenue Code (53 Stat., 32 20 U. S. C,
1940 ed., 62), sectons 5 and 6(a) of the Ta d|ustment ct of 1945
(Pubc Law 172, Seventy-nnth Congress), and secton 122 (e) and
(f) of the Revenue ct of 1945 (Pubc Law 214, Seventy-nnth Con-
gress).)
oseph D. Nunan, r.,
Commssoner of Interna Revenue.
pproved May 27,1946.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster May 29, 1946, 11.50 a. m.)
SUPPL M NT M. INT R ST ND DDITIONS TO T T .
S CTION 294. DDITIONS TO T T IN
C S O NONP YM NT.
Secton 29.294-2: Substanta overestmate of
e pected carry-backs.
nterna revenue code.
Reguatons 111 amended. (See T. D. 549 , page 209.)
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169 1 600.
SUPPL M NT O. O RP YM NTS.
S CTION 322. R UNDS ND CR DITS.
Secton 29.322-7: Lmtatons upon the credtng
and refundng of ta es pad
INT RN L R NU COD .
Reguatons I amended. (See T. D. 5516, page 159.)
Secton 29.322-7: Lmtatons upon the credtng
and refundng of ta es pad.
( so Secton 19.322-7, Reguatons 103.)
INT RN L R NU COD .
Reguatons 103 and 111 amended. (See T. D. 5503, page 156.)
SUPPL M NT . R GUL T D IN STM NT COMP NI S.
S CTION 362. T ON R GUL T D IN STM NT
COMP NI S.
Secton 29.362-5: Method of ta aton of share hoders
of reguated nvestment companes.
INT RN L R NU COD .
Capta gan dvdends receved by nonresdent aen ndvduas
and nonresdent foregn corporatons. (See I. T. 3 05, page 120.)
C PT R 2. DDITION L INCOM T S.
SU C PT R . D CL R D LU C SS-PRO ITS T .
S CTION 600. R T O T .
1946-6-12266
T. D. 5495
TITL 20 INT RN L R NU . C PT R I, SU C PT R , P RT 21.
D CL R D LU C SS-PRO ITS T .
Termnaton of ta . Computaton of ta In respect of war oss
recoveres. Treasury Decson 5237 C. . 1943, C2 amended.
Treasury. Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Treasury Decson 5237, approved March ,
1043 C. . 1943,62 , estabshng reguatons reatng to the decared
703672 46 12
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170
vaue e cess-profts ta mposed by Subchapter of Chapter 2 of the
Interna evenue Code, for ncome-ta ta abe years endng after
une 30,1942, as amended by Treasury Decson 5401, .approved ugust
26,1944 C. . 1944, 204 , to sectons 201, 202, and 203 of the Revenue
ct of 1945 (Pubc Lnw 214, Seventy-nnth Congress), approved
November , 1945 C. . 1945, 546 , such Treasury Decson s
hereby amended as foows:
Paragraph 1. The headng of the Treasury Decson s amended
by changng the perod at the end thereof to a comma and addng
thereto tne foowng: and pror to uy 1,1946.
Par. 2. Secton 21.0(a) s amended as foows:
( ) y nsertng mmedatey after Introductory. (a) the fo-
owng: (1).
( ) y nsertng after endng une 30, 1942, the foowng:
and termnatng wth the year ended une 30,1945, .
(C) y addng at the end thereof the foowng:
(2) The Revenue ct of 1045 provdes n part as foows:
S C. 201. R P L O C PIT L STOC T .
ffectve wth respect to years endng after une 30, 1045, chapter 6
(mposng the capta stock ta ) Is repeaed.
Par. 3. Secton 21.0 (b) s amended as foows:
( ) y changng the matter at the begnnng thereof, ncudng
the quotaton of secton COO, to read as foows:
(6) (1) Subchapter of Chapter 2 of the Interna Revenue Code, as amended,
provdes as foows:
Subchapter Decared aue cess-Profts Ta .
S C. 600. R T O T S M ND D Y S CTION 204 O
T R NU CT O 1040, S CTION 506 O T S COND
R NU CT O 1940, S CTION 302 O T R NU CT
O 1941. S CTION 302 O T R NU CT O 1942, ND
S CTION 203 O T R NU CT O 1945 .
(a) Ik.Genera ppcabe to Income-ta ta abe years endng after
une 30, 1042, and pror to uy 1, 1056 . 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, a decared vaue e cess-profts ta equa
to the sum of the foowng:
6 o per centum of such porton of ts net Income 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 decared vaue:
13 o Ppr 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 decared
vaue.
(b) ternatve Ta ppcabe to Income-ta ta abe years endng
after une 30, 1945, and before uy 1, 1946 , If the net ncome for the
ta abe year ncudes any amount on account.of war oss recoveres under
secton 127(c), then, n eu of the ta computed under subsecton (a),
the ta sha be a ta computed as foows:
(1) n amount computed under subsecton (a), after e cudng
from net Income the amount of the war oss recoveres, pus
(2) One and one-quarter per centum of the amount of the war oss
recoveres ncuded n the net ncome or of such porton of the net
Income as woud be sub|ect to the ta mposed by subsecton fa) In
the absence of ths subsecton, whchever s the esser.
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171
coo.
( ) y addng at the end thereof the foowng:
(2) The Revenue ct of 1945 provdes n part as foows:
S C. 202. R P L O D CL R D LU C SS-PRO ITS T .
ffectve wth respect to ncome-ta ta abe years endng after une
30, 1946, subchapter of chapter 2 (mposng the decared vaue e cess
profts ta ) Is repeaed.
Pah. 4. Secton 21.1 s amended by addng at the end thereof the
foowng:
(e) War oss recoveres means recoveres of war osses wthn the con-
tempaton and mtatons of secton 127 of the Interna Revenue Code.
Par. 5. Secton 21.2 s amended by changng the perod at the end
thereof to a comma, and addng thereto the foowng:
and before uy 1, 1946. The aternatve ta mposed by secton 000(b) of the
Interna Revenue Code, appcabe where net ncome for the ta abe year ncudes
any amount on account of war oss recoveres under secton 127(c) of the Code,
Is effectve ony wth respect to ncome-ta ta abe years endng after une
30, 1945, and before uy 1,1946.
Par. 6. Secton 21.3 (a) s amended to read as foows:
(a) Domestc and foregn corporatons. (1) Genera. Wth respect to
ncome-ta ta abe years endng after une 30, 1942, and before uy 1, 1940,
the decared vaue e cess profts ta mposed by secton 600(a) s .n amount
equa to the sum of () 6 o per cent of such porton of the corporaton s net
Income for the Income-ta ta abe year as s In e cess of 10 per cent and not
n e cess of 15 per cent of the decared vaue, pus (11) 13 fo par rent of such
porton of Its net ncome for the ncome-ta ta abe year as s n e cess of
15 per cent of the decared vaue, on the capta stock ta return for the ast
precedng capta stock ta ta abe year. (See e ampe (1), secton 1.4.) No
varaton s permtted between the decared vaue set forth n the corporaton s
capta stock ta return and the decared vaue set forth n ts decared vaue
e cess profts ta return.
(2) ternatve ta where war oss recoveres ncuded n net ncome. Wth
respect to Income-ta ta abe years endng after une 30, 1945, and before uy
1,1946, secton 600(b) provdes an aternatve method for computng the decared
vaue e cess profts ta abty n cases where net ncome ncudes amounts
on account of war oss recoveres under secton 127(c) of the Code. (See
aso Reguatons 111, secton 29.127(c)-.) In such cases, n eu of the ta
as computed under secton 600(a), the ta sha be an nmount computed under
secton 600(a) (see paragraph (a) (1) of ths secton) after e cudng from net
Income the amount of war oss recoveres, pus the esser of the foowng:
() 114 per cent of the. amount of the war oss recoveres ncuded n the
net ncome.
() t per cent of such porton of the net ncome as woud be sub|ect to
the decared vaue e cess profts ta f secton 600(b) were not appcabe.
See e ampes (5) (a) and (5)(b), secton 21.4.
Par. . Secton 21.4 s amended by addng at the end thereof the
foowng:
ampes (5) (a) and (5) (6). These e ampes ustrate the appcaton of
secton 603(b) of the Interna Revenue Code and paragraph 21.3(a) (2) of these
reguatons.
(0) ssume the same crcumstances as n e ampe (1), e cept that the year
nvoved s the caendar year ended December 31, 1945, and nstead of dvdends
receved n the nmount of 5,000, there are war oss recoveres n the amount
of 4,250. The computaton under secton 21.3(a) (2) s as foows:
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600.
172
( ) Deenred vaue e cess profts ta on net ncome of 23,000, ess
war oss recoveres of 4,250, or 20,750 (see e ampe (1)) 1,0S9.00
( ) Under secton 21.3(a) (2) (I): per cent of 4,250,
the amount of the war oss recoveres 53.13
(C) Under secton 21.3(a) (2) () : 1 per cent of 15,000
(the e cess of net ncome over 10 per cent of the decared
vaue), the amount sub|ect to decared vaue e cess profts
ta f secton (00(b) were not appcabe 1 7.50
dd to ( ) the esser of ( ) and (C) 53.13
Decared vaue e cess profts ta under secton COO(b) 1,142.13
(6) nother e ampe s as foows:
ssume the same crcumstances as n (a), e cept that the decared vaue s
220,000. The computaton s as foows:
Net ncome for caendar year 1945 , 25, COO
Less war oss recoveres 4,250
Net ncome e cusve of war oss recoveres 20, 75 . 00
10 per cent of the vaue decared n the capta stock ta return for the
year ended une 30, 1945 (10 per cent of 220,000) 22,000.00
(D) Ta on net Income mnus war oss recoveres 0.00
( ) Under secton 21.3(a) (2) (I) : 1 per cent of war oss
recoveres of 4,250 53.13
( ) Under secton 21.3(a)(2)( ): 1 per cent of such
porton of the net ncome as woud be sub|ect to the
decared vaue e cess profts ta f subsecton 600(b) were
not appcabe (1 per cent of 3,000 ( 25,000 mnus
22,000)) 37.50
The esser of ( ) and ( ) 37.50
Decared vaue e cess profts ta under secton 600(b) 37.50
(Ths Treasury Decson s ssued under the authorty of sectons C 2
and 603 of the Interna Revenue Code (53 Stat., 32, 111 26 U. S. C,
1940 ed., 62, 603), and Tte II of the Revenue ct of 1945 (Pubc
Law 214, Seventy-nnth Congress), approved November , 1945.)
oseph D. Nu a , r.,
Commssoner of Interna Revenue.
pproved ebruary 27, 1946.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster ebruary 2 , 1946,10.29 a. m.)
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173 5 710.
SU C PT R . C SS PRO ITS T .
P T L
S CTION 710. IMPOSITION O T .
Reguatons 112, Secton 35.710-1: Scope 1946-11-12322
of ta . T. D. 5514
( so Sectons 35.710-3 and 35.710-4.)
TITL 2 INT RN L R NU . C PT R I, SU C PT R , P RT 35.
C SS PRO ITS T T L Y RS GINNING T R D C M R 1,
1941.
Reguatons 112 amended to conform to sectons 122(c) and 131(b)
of the Revenue ct of 1045.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. G.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 112 Part 35, Tte 26, Code of
edera Reguatons, Cum. Sup. to sectons 122(c) and 131(b) of
the Revenue ct of 1945 (Pubc Law 214, Seventy-nnth Congress),
approved November ,1945, such reguatons are amended as foows:
Paragraph 1. There s nserted mmedatey precedng secton
35.710-1 the foowng:
S C. 131. ISC L Y R T P Y RS. (R NU CT O 1945.)

(b) cess Profts Ta .
(1) In genera. Secton 710(a) (mposng the e cess profts ta )
s amended by nsertng at the end thereof the foowng:
(7) T I. Y S GINNING IN 1945 ND NDING IN 1940.- In
the case of a ta abe year begnnng n 1945 and endng n 1946,
the ta sha be an amount equa to that porton of a tentatve ta ,
computed as f the aw appcabe to ta abe years begnnng on
anuary 1, 1945, were appcabe to such ta abe year, whch the
number of days n such ta abe year pror to anuary 1, 1940, bears
to the tota number of days n such ta abe year.
(2) Teonca. amendments.
( ) Secton 2(a) of the Ta d|ustment ct of 1945 (reat-
ng to the specfc e empton) s repeaed as of the date of ts
enactment.
( ) Secton 710(b)(1) (reatng to the specfc e empton)
s restored to read as such paragraph read mmedatey pror
to the enactment of the Ta d|ustment ct of 1945, to be ef-
fectve, as so restored, as f secton 2(a) of the Ta d|ustment
ct of 1945 had not been enacted.
S C. 122. R P L O C SS PRO ITS T IN 1946. (R -
NU CT O 1945.)

(c) Unused cess Profts Credt for Ta ab e Year egnnng
fter Decembeb 31, 1945. Secton 710(c)(2) (defnng the unused
e cess profts credt) s amended by nsertng at the end thereof a new
sentence readng as foows: There sha be no unused e cess profts
credt for a ta abe year begnnng after December 31, 1946. The
unused e cess profts credt for a ta abe year begnnng n 1940 and
endng n 1917 sha be an amount whch s such pnrt of the unused
e cess profts credt determned under the precedng provsons of ths
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710.
174
paragraph as the number of days n such ta abe year pror to anuary
1,1947, Is of the tota number of days In such ta abe year.

Par. 2. Secton 35.710-1, as amended by Treasury Decson 547 ,
approved September 20, 1945 C. . 1945, 262 , s further amended
as foows:
( ) y strkng cause () thereof and nsertng n eu thereof
the foowng:
(6) 10,000 f such ta abe year Is a ta abe year begnnng after December 31,
1943 or
( ) y strkng causes (o) and (d) thereof.
(C) y reetterng cause (e) thereof as cause (o).
(D) y strkng The appcaton of (d) above may be ustrated
by the foowng e ampe: and by strkng the e ampe.
( ) y strkng and secton 2(b) of the Ta d|ustment ct
of 1945 where t appears n the sentence begnnng See secton
729(b).
Pak. 3. Secton 35.710-3, as amended by Treasury Decson 547 , s
further amended as foows:
( ) y nsertng at the end of subsecton (a) the foowng new
paragraph:
corporaton may have an unused e cess profts credt for a ta abe year
begnnng In 1946, whch may be carred back to the two precedng ta abe
years, even though no e cess profts ta Is mposed for such ta abe year. The
unused e cess profts credt for a ta abe year begnnng In 1946 s to be com-
puted In the same manner as though an e cess profts ta were mposed for
such ta abe year. In the case of a ta abe year whch begns n 1946 and ends
n 1947, the unused e cess profts credt w be an amount whch s such part
of the unused e cess profts credt determned n the manner prescrbed n the
frst or second paragraph of ths subsecton, whchever s appcabe, as the
number of days In such ta abe year pror to anuary 1, 1947, s of the tota
number of days n such ta abe year. Thus, If a ta abe year begns on De-
cember 1, 194(, and ends on November 30, 1947, and If the unused e cess profts
credt determned n the manner prescrbed n the frst paragraph of ths sub-
secton s 1,000, the unused e cess profts credt for such ta abe year w be
3 es 1,000, or 4.93. There w be no unused e cess profts credt for a
ta abe year begnnng after December 31, 1946.
( ) y nsertng after the second sentence of the frst paragraph of
subsecton (Z ) the foowng new sentence:
There w be no unused e cess profts credt carry-back from any ta abe year
begnnng after December 31, 1940.
(C) y nsertng at the end of subsecton (Z ) the foowng foot-
note:
Under the provsons of secton 122 of the Revenue ct of 1945 no e cess
profts ta w be mposed for any ta abe year begnnng after December 31,
1945, and there w be no unused e cess profts credt for any ta abe year be-
gnnng after December 31, 1946. ccordngy, there w be no unused e cess
profts credt carry-over or carry-back to any ta abe year begnnng after De-
cember 31, 1945, and there w be no unused e cess profts credt carry-back
from any ta abe year begnnng after December 31, 1946.
Par. 4. Secton 35.710-4, as amended by Treasury Decson 53 6,
approved uy 1 1944 C. . 1944,374 , s further amended as foows:
( ) y strkng the headng of subsecton (c) and nsertng n eu
thereof the foowng:
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175
710.
(c) Ta abe years begnnng after December 31, 1943, and endng pror to
anuary 1, 1946.
( ) y nsertng and endng pror to anuary 1, 1946, m-
medatey foowng December 31, 1943, where t appears n the
frst sentence of subsecton (c).
(C) y nsertng mmedatey foowng subsecton (c) the foow-
ng new subsecton:
(d) Ta abe years begnnng n 1945 and endng n 1946. In the case of a
ta abe year whch begns n 1945 and ends n 1946, a tentatve ta sha frst
be computed as f the aw appcabe to ta abe years begnnng on anuary 1,
1945 (see subsecton (c) of ths secton), were appcabe to such ta abe year.
The e cess profts ta for such ta abe year sha be an amount equa to that
porton of such tentatve ta whch the number of days n such ta abe year
pror to anuary 1, 1946, bears to the tota number of days n such ta abe year.
Thus, f a ta abe year begns on ebruary 1, 1945, and ends on anuary 31,
1946, a tentatve ta sha frst be computed under the provsons of subsecton
(c) of ths secton. If such tentatve ta s 10,000, the e cess profts ta for
such ta abe year w be 334/365 10,000, or 9,150.6 .
(D) y reetterng subsecton (d) as subsecton (e).
(Ths Treasury Decson s ssued under the authorty contaned n
secton 62 of the Interna Revenue Code (53 Stat., 32 26 U. S. C, 62)
as made appcabe by secton 729(a) of the Interna Revenue Code
(54 Stat., 9 9 26 U. S. C. 729(a)) and sectons 122(c) and 131(b) of
the Revenue ct of 1945 (Pubc Law 214, Seventy-nnth Congress).)
oseph D. Nunan, r.,
Commssoner of Interna Revenue.
pproved May 14, 1946.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster May 15, 1946, 4.5 p. m.)
Reguatons 112, Secton 35.710-3: Unused e cess
profts credt ad|ustment.
INT RN L R NU COD .
Reguatons 112 amended. (See T. D. 5514, page 173.)
Reguatons 112, Secton 35.710-4: Rate of ta .
INT RN L R NU COD .
Reguatons 112 amended. (See T. D. 5514, page 173.)
Reguatons 112, Secton 35.710-4: Rate of ta .
INT RN L R NU COD .
Ta abe years begnnng n 1945 and endng n 1946. (See Mm.
59 0, page 90.)
Reguatons 112, Secton 35.710-5: Deferment of
payment of ta n case of base perod or nvested
capta abnormaty.
INT RN L R NU COD .
Reguatons 112 amended. (See T. D. 5490, page 179.)
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711(a).
176
S CTION 711(a). C SS PRO ITS N T INCOM : T -
L Y RS GINNING T R D C M R 31, 1939.
Reguatons 112, Secton 35.711 (a)-2: cess 1946-6-12267
profts net ncome f ncome credt s used. T. D. 5496
( so Secton 30.711 (a)-2, Reguatons 109.)
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RT 30 ND
P RT 35.
Reguatons 109 and 112 amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Coectors of Interna Revenue and Others Concerned:
The seventh paragraph of secton 30.711 (a)-2 of Reguatons 109
Part 30, Tte 26, Code of edera Reguatons, 1941 Sup. and the
ffth paragraph of secton 35.711 (a)-2 of Reguatons 112 Part 35,
Tte 26. Code of edera Reguatons, Cum. Sup. , each as amended by
Treasury Decson 5421, approved December 11,1944 C. . 1944. 397 ,
are each further amended to read as foows:
The provsons of secton 711(a)(1)( ), reatng to recoveres of bad debts,
are appcabe n the case of a ta payer usng the reserve method of treatng
bad debts ony f the bad debt recovered has been charged aganst the reserve
account pursuant to secton 19.23(k)-5 of Reguatons 103, and correspondng
provsons of pror reguatons, for a ta abe year begnnng pror to anuary 1,
1940. It s mmatera, for the purposes of makng the ad|ustment under secton
711(a) (1) ( ), whether recoveres of bad debts charged off are credted to the
reserve for bad debts or are reported as gross ncome, but n no case where
recoveres of bad debts are credted to the reserve account sha the amount
e cuded under secton 711(a) (1)( ) be In e cess of the amount by whch the
norma-ta net ncome for the ta abe year was ncreased by reason of the bad
debts recovered. or e ampe, f a deducton of 10,000 from gross ncome
woud have been aowabe for an addton to the reserve account n the absence
of had debts recovered whch have been charged aganst the reserve account
for ta abe years begnnng pror to anuary 1, 1940, and no deducton s requred
durng the ta abe year by reason of such bad debts recovered n the amount
of . 13,000 and credted to the reserve account, the ad|ustment of the norma-ta
net ncome for the ta abe year under secton 711(a)(1)( ) woud be mted
to 10,000. In such case, the e cess of the bad debt recoveres over the amount
whch woud have been added to the reserve account had there been no such
recoveres, 1. e., the 3,000, w decrease the amount to be added to the reserve
In the foowng year, and accordngy such amount may be e cuded under secton
711(a) (1) ( ) n such foowng year.
(Ths Treasury Decson-s ssued under the authorty contaned n
secton 62 of the Interna Revenue Code (53 Stat., 32 26 U. S. C, 62)
as made appcabe by secton 729 (a) of the Interna Revenue Code (54
Stat., 9 9 26 U. S. C., 729(a)).)
oseph D. Nunan, r.,
Commssoner of Interna Revenue.
pproved ebruary 27, 1946.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster ebruary 2 , 1946, 10.29 a. m.)
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177 742.
S CTION 732. R I W O NORM LITI S Y O RD
O T PP LS NOW T T COURT
O T UNIT D ST T S .
Reguatons 112, Secton 35.732-1: Revew of abnor-
mates by The Ta Court of the Unted States.
( so Secton 30.732-1, Reguatons 109.)
INT RN L R NU COD .
Reguatons 109 and 112 amended. (See T. D. 5503, page 156.)
P RT II. RUL S IN CONN CTION WIT C RT IN C NG S.
S CTION 742. SUPPL M NT R G S
P RIOD N T INCOM .
eguatons 112, Secton 35.742-3: ceptons 1946-5-12256
and mtatons as to amounts of e cess profts T. D. 5494
net ncome or defct to be ncuded n Suppe-
ment average base perod net ncome p-
pcabe under both genera average method
and ncreased earnngs method.
TITL 26 INT RN L R NU . C PT R I, SU C PT R . P RT 35.
C SS PRO ITS T T L Y RS GINNING T R D C M R 31,
1 41.
Secton 35.742-3(6) of Reguatons 112, reatng to the computa-
ton of Suppement average base perod net ncome, under the
e cess profts ta , n case of pror stock acquston, amended.
Treasury Department,
Offce of Commssoner of Interna Revenue.
Washngton, D. 0.
To Coectors of Interna Revenue and Others Concerned:
Secton 35.742-3(Z ) of Reguatons 112 Part 35, Tte 26, Code of
edera Reguatons, Cum. Sup. s amended as foows:
( ) y strkng from the s tb paragraph the porton precedng
e ampe (1), and Dy nsertng n eu thereof the foowng:
The acquston of stock by the acqurng corporaton may occur, ether durng
a base perod year or durng an e cess profts ta ta abe year, on a day other
than the frst day of the year as In the cases prevousy dscussed n ths
subdvson.
If the stock acquston occurred n an e cess profts ta ta abe year, ether
the ta abe year for whch the ta s beng computed or a pror ta abe year,
on a day other than the frst day of such year, and f. In the year for whch the
ta s beng computed or pror to the begnnng of such year, the Suppement
transacton occurred, the amount of the component s base perod e perence to
be e cuded under secton 742(f) (1) sha be determned In the same manner
as If the stock acquston had occurred on the frst day of the e cess profts ta
ta abe year n whch the Suppement transacton occurred.
If the stock acquston occurred n a ta abe year of the acqurng corporaton
begnnng n a base perod year but on a day other than the frst day of the year,
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7 1. 17
the amount of the component s e cess profts net Income (or defct) for Its
ta abe year or years begnnng n such base perod year to be e cuded sha
be determned upon the bass of the rato whch the number of days n such
acqurng corporaton s ta abe year or years up to the date of such stock
acquston bears to the tota number of days n such acqurng corporaton s
ta abe year or years. Ths rue may be ustrated by the foowng e ampes,
n whch t s assumed that the base perod years are caendar years:
( ) y strkng from the s th paragraph the whoe of e ampe
(3), and by nsertng n eu thereof the foowng:
s to mtatons upon the average base perod net Income for the e cess
profts ta ta abe year wthn whch a Suppement transacton occurred,
computed by reference to the date of the Suppement transacton, see secton
742(f) (2) and subsecton (c) of ths secton.
s to mtatons upon the use of the capta addtons and reductons of the
component corporaton, see secton 35.743-1(6).
(Ths Treasury Decson s ssued under the authorty contaned n
secton 62, as made appcabe by secton 729(a), and n secton
742(f)(1), Interna Revenue Code (53 Stat, 32, 54 Stat., 9 9, 56
Stat., 925 26 U. S. C, 1940 ed., and Sup., 62, 729(a), 742(f) (1)).)
Wm. T. Sherwood,
ctng Commssoner of Interna Revenue.
pproved ebruary 15, 1946.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster ebruary 1 , 1946, 3.35 p. m.)
P RT III. POST-W R R UND O C SS PRO ITS T .
S CTION 7 0. POST-W R R UND O
C SS PRO ITS T .
Reguatons 112, Secton 35.7 0-1: Post-war refund
of e cess profts ta .
( so Secton 30.7 0-1, Reguatons 109.)
INT RN L R NU COD .
Reguatons 109 and 112 amended. (See T. D. 5490, page 179.)
S CTION 7 1. SP CI L RUL S OR PPLIC TION
O S CTION 7 0.
Reguatons 112, Secton 35.7 1-1: Speca rues for
appcaton of secton 7 0.
( so Secton 30.7 1-1, Reguatons 109.)
INT RN L R NU COD .
Reguatons 109 and 112 amended. (See T. D. 5490, page 179.)
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-179 7 4.
S CTION 7 3. CR DIT OR D T R TIR M NT.
Reguatons 112, Secton 35.7 3-1: Credt for
debt retrement.
INT RN L R NU COD .
Reguatons 112 amended. (See T. D. 5490, beow.)
Reguatons 112, Secton 35.7 3-2: ecton to
take credt for debt retrement for ta abe
years begnnng after September 1, 1942, and
endng before ebruary 25,1944.
INT RN L R NU COD .
Reguatons 112 amended. (See T. D. 5490, beow.)
Reguatons 112, Secton 35.7 3-3: Credt for debt
retrement n case of certan successons.
INT RN L R NU COD .
Reguatons 112 amended. (See T. D. 5490, beow.)
S CTION 7 4. T N P R C NTUM CR DIT
G INST C SS PRO ITS T .
Reguatons 112, Secton 35.7 4-1: Ten per cent 1946-3-12230
credt aganst e cess profts ta . T. D. 5490
( so Secton 710, Secton 35.710-5, Reguatons
112 Secton 7 0, Secton 35.7 0-1, Reguatons
112, Secton 30.7 0-1, Reguatons 109 Secton
7 1, Secton 35.7 1-1, Reguatons 112, Secton
30.7 1-1, Reguatons 109 Secton 7 3, Sectons
35.7 3-1, 35.7 3-2, and 35.7 3-3, Reguatons
112.)
TITL 20 INT RN L R NU . C PT R I, SU C PT R . P RT 35 ND
P RT 30.
Reguatons 112 and 109 amended to conform to secton 3 of the
Ta d|ustment ct of 1945, reatng to changes In provsons wth
respect to post-war refund of e cess-profts ta .
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
reguatons 112.
In order to conform Reguatons 112 Part 35, Tte 26, Code of
edera Reguatons, Cum. Sup. to secton 3 of the Ta d|ustment
ct of 1945 (Pubc Law 172, Seventy-nnth Congress), approved uy
31,1945, such reguatons are amended as foows:
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7 4. 1 0
Paragraph 1. Secton 35.710-5, as amended by Treasury Decson
5393, approved uy 21, 1944 C. . 1944, 415 , s further amended
as foows:
( ) y nsertng n the frst sentence of the second paragraph m-
medatey foowng the word retrement : or the 10 per cent
credt under secton 7 4.
( ) y amendng the ast two sentences of the thrd paragraph to
read as foows:
In such case the ta deferment camed under secton 710(a) (5) and ths secton
sha be dened and approprate ad|ustment sha be made n the amount of ta
otherwse shown by the ta payer to be payabe. or the purposes of secton 271
(made appcabe to Subchapter of Chapter 2 by secton 729) reatng to the
defnton of defcency, the amount of ta shown by the ta payer to be payabe
so ad|usted sha be consdered the amount of ta shown on the return.
Par. 2. There s nserted mmedatey precedng secton 35.7 0-1 the
foowng:
- S C. 3. C NG S IN PRO ISIONS R L TING TO POSTW R
R UND O C SS-PRO ITS T . (T D USTM NT
CT O 1945, PPRO D ULY 31, 1945.)
(a) The frst sentence of secton 7 0(a) of the Interna Revenue
Code s amended by strkng out the words the date of cessaton of
hosttes n the present war and substtutng n eu thereof the
foowng: December 31, 1943 .
(b) Secton 7 0(b) of the Interna Revenue Code s amended by
strkng out the words three months before the date of maturty of
bonds for such year under subsecton (c) and nsertng n eu thereof
the foowng: uy 1, 1945 .
(c) Secton.7 0(c) of the Interna Revenue Code Is amended (1) by
nsertng n the ast sentence after the words to whch ths secton
appes the foowng: sha be payabe at the opton of the owner on
or after anuary 1, 1946, and , and (2) by strkng out the ast two
nes from the tabe at the end thereof.

Par. 3. Secton 35.7 0-1 (a), as amended by Treasury Decson 5442,
approved March 2, 1945 C. . 1945, 2 9 , s further amended by
strkng out the second sentence and nsertng n eu thereof:
The ta abe years so specfed ncude a ta abe years under these reguatons
whch begn before anuary 1, 1944.
Par. 4. There s nserted mmedatey precedng secton 35.7 1-1
the foowng:
S C. 3. C NG S IN PRO ISIONS R L TING TO POSTW R
R UND O C SS-PRO ITS T . (T D USTM NT
CT O 1945, PPRO D ULY 31, 1945.)

(d) Secton 7 1(a) of the Interna Revenue Code s amended by strk-
ng out the words three months before the date of maturty of the
bonds for such year and nsertng n eu thereof the foowng: uy
1, 1945 .
(e) The ast sentence of secton 7 1(b) of the Interna Revenue Code
s amended by strkng out the words the tme of the maturty of bonds
ssued wth respect to such ta abe year and substtutng n eu thereof
the foowng: anuary 1, 1946 .
(f) Secton 7 1(c) of the Interna Revenue Code s amended to read
as foows:
(c) Ta Payments fter Cut-Off Date. In the case of a payment
of the ta mposed by ths subchapter shown on the return for any ta -
abe year for whch a credt s provded n secton 7 0(a), or the pay-
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1 1
7 4.
ment of a defcency n respect of such ta for any such ta abe year,
on or after uy 1, 1945, the amount of the credt under secton 7 0(a)
for such ta abe year attrbutabe to such payment sha be pad the
ta payer n cash. No Interest for the perod after December 31, 1045,
sha be assessed or coected on that porton of the ta or defcency so
pad equa to the credt under secton 7 0(a) attrbutabe to such pay-
ment. If after anuary 1, 1940, there s any credt under secton 7 0(a)
remanng n favor of the ta payer attrbutabe to any ta abe year for
whch a credt s provded n secton 7 0(a), such remander sha be
pad to the ta payer n cash. No amount of any payment made under
ths subsecton to a ta payer sha be ncuded n gross ncome.

Par, 5. Secton 35.7 1-1, as amended by Treasury Decson 5442,
s further amended as foows:
( ) y strkng out secton 35.7 1-1 (a) and nsertng n eu thereof
the foowng:
(a) Defcences refunds and credts of overpayments and payments of
certan post-war credts n cash. In case a defcency s pad by the ta payer, or
an overpayment Is refunded or credted to the ta payer, for any ta abe year
to whch secton 7 0(a) appes, approprate ad|ustments w be made n the
post-war credt account of the ta payer. In such case, whenever the amount
of bonds shoud be ncreased or reduced, the Commssoner of Interna Revenue
sha certfy the status of the account to the Secretary n order that approprate
ad|ustments may be made n the amount of bonds. If the refund or credt of an
overpayment was made on or before ebruary 25,1944 (the date of the enactment
of the Revenue ct of 1943), the ad|ustment of the post-war credt or bonds of the
ta payer sha be made n accordance wth secton 7 1(b) n force pror to such
date. If the refund or credt of an overpayment s made after ebruary 25,
1944, such ad|ustment or. In an approprate case, the reducton n the amount of
the refund or credt of the overpayment of the ta , sha be made n accordance
wth secton 7 1(b), as amended. CoUecton from a ta payer under secton
7 1(b) n force pror to ebruary 25, 1944, of the amount by whch charges
(arsng by reason of a refund or credt of an overpayment) e ceed the amount
of the post-war credt of the ta payer sha be made by the Commssoner of
Interna Revenue.
In the case of a payment of the e cess profts ta shown on the return for a
ta abe year to whch secton 7 0(a) appes, or the payment of a defcency n
respect of the ta for any such ta abe year, on or after uy 1,1945, the post-war
credt attrbutabe to such payment w not be avaabe for the purchase of
bonds, but nstead the amount of such post-war credt w be pad to the ta payer
n cash. No nterest for the perod after December 31, 1945, sha be assessed or
coected on that porton of the e cess profts ta or d fcency n respect of such
ta equa to the amount of the credt under secton 7 0(a) attrbutabe to the
payment of such ta or defcency. The amount of any post-war credt remanng
n favor of the ta payer after anuary 1, 1946, sha. be pad to the ta payer
n cash. ny payment to a ta payer under secton 7 1(c) of amounts of any
post-war credt sha be made by the Commssoner of Interna Revenue. No
nterest w be aowed or pad upon any payment to a ta payer under secton
7 1(c).
or provsons reatng to reducton of the post-war credt on account of the
aowance of a credt for debt retrement, see secton 7 3(c) and secton
35.7 3-(c).
No ncome s reazed by reason of the recept by a ta payer of any payment
under secton 7 1(c). Nor s any ncome reazed by a successor by reason of hs
recept of any such payment, f, under the provsons of secton 113, the outstand-
ng post-war credt wth respect to whch the payment s made had, for the
purpose of determnng gan or oss from a sae or e change, the same bass n
the hands of the successor as t woud have had n the hands of the ta payer.
Otherwse, ncome may be reazed by the successor from the recept of such a
payment.
( ) y strkng out or S5y2 per cent, whchever s appcabe n
the thrd sentence of secton 35.7 1-1 (b) and nsertng n eu thereof:
or, In the case of a ta abe year begnnng n 1943 and endng n 1944, the amount
of e cess profts ta whch woud be payabe f n the computaton under secton
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7 4.
1 2
710(a) (6) ( ) the e cess profts ta rate were 1 per cent and In the computaton
under secton 710(a) (6) ( ) the e cess profts ta rate were 5 per cent
(C) y strkng out subparagraph (4) of secton 35.7 1-1(5).
(D) y strkng out e ampes (5) and (6) n secton 35.7 1-1(6).
Par. 6. There s nserted mmedatey precedng secton 35.7 3-1 the
foowng:
S C. 3. C NG S IN PRO ISIONS R L TING TO POSTW R
R UND O C SS-PRO ITS T . (T D USTM NT
CT O 1945, PPRO D ULY 31, 1945.)

(g) Secton 7 3 of the Interna Revenue Code s amended by nsertng
at the end thereof the foowng new subsecton:
(e) Ta abe Years egnnng fter December 31, 1943. The pro-
vsons of ths secton sha not appy to ta abe years begnnng after
December 31, 1943.

Par. 7. Secton 35.7 3-1, as amended by Treasury Decson 5442, s
further amended as foows:
( ) y nsertng at the end of secton 35.7 3-1 (a) the foowng:
or provsons makng secton 7S3 and the reguatons prescrbed thereunder
nappcabe to ta abe years begnnng after December 31, 1943, see secton
7 3(e) and secton 35.7 3-(e).
( ) y strkng out e ampe (3) n secton 35.7 3-(Z ) and n-
sertng n eu thereof the foowng:
ampe (3). The e cess profts ta mposed upon the W Corporaton for the
caendar year 1942 s 500,000, and for the caendar year 1943 s 300,000. The
amounts pad by the corporaton n repayment of ndebtedness throughout the
year 1942 tota 25,000, and throughout the year 1943 tota 150,000. The out-
standng ndebtedness of the corporaton durng the years 1942 and 1943 s as
foows:

Pad.
orrowed.
Tota In-
debtedness.
25,000
50,000
200,000
200,000
175,000
225.000
225,000
25,0011
225.000
300,000
150.000
150,000
March 15
o.ooo
75,000
150,000
The credt aowabe for debt retrement for 1942 s zero, computed as foows:
40 per cent of 25,000, the tota repad n 1942 (see secton 7 3(a) and
secton 35.7 3- o)) 10,000
ut the credt for debt retrement for 1942 may not e ceed whchever of the
foowng amounts s the esser (see secton 7 3(b) (1) and (3) and secton
35.7 3-1(6) (2)):
10 per cent of 500,000 (amount of ta Imposed) 50,000
40 per cent of zero (amount by whc ndebtedness September 1, 1942,
200,000, e ceeds ndebtedness at cose of ta abe year 1942, 225,000) _ zero
The credt aowabe for debt retrement for 1943 s 20,000, computed as fo-
ows:
40 per cent of 150,000, the tota repad n 1943 (see secton 7 3(a)
and secton 35.7 3-1 (a)) . 60,000
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1 3
ut the credt for debt retrement for 1043 may not e ceed whchever of the
foowng amounts s the esser (see secton 7 3(b) (1) and (2) and secton
35.7 3-(6)(3)):
10 per cent of 3CO,000 (amount of ta mposed) 30,000
40 per cent of 50,000 (amount by whch amount of Indebtedness Septem-
ber 1,1942, 200,000, or smaest amount of ndebtedness at cose of any
precedng ta abe year endng after September 1, 1942 (December 31,
1942), 225,000, whchever amount ( 200,000 or 225,000) s the esser,
200,000, e ceeds amount of ndebtedness at cose of ta abe year (De-
cember 31, 1943), 150,000 20, 000
(C) y nsertng mmedatey after secton 35.7 3-1 (d) the foow-
ng:
(e) Ta abe years begnnng after December SI, 19 3. Nether the provsons
of secton 7 3 nor the provsons of secton 35.7 3-1, 5.7 3-2, or 35.7 3-3 appy
to ta abe years begnnng after December 31, 1943.
Par. . Secton 35.7 3-2(a), as amended by Treasury Decson 5442,
s further amended by nsertng at the end of the second paragraph
thereof the foowng:
or provsons makng secton 7 3 and the reguatons prescrbed thereunder
Inappcabe to ta abe years begnnng after December 31, 1943, see secton
7 3(e) and secton 35.7 3-(e).
Par. 9. Secton 35.7 3-3, added by Treasury Decson 5442, s
amended as foows:
( ) y nsertng at the end of secton 35.7 3-3(a) the foowng:
or provsons makng secton 7 3 and the reguatons prescrbsd thereunder
nappcabe to ta abe years begnnng after December 31, 1943, see secton
7 3(e) and secton 35.7 3-(e).
( ) y strkng out the fourth sentence of secton 35.7 3-3 (c) (2)
and nsertng n eu thereof the foowng:.
or e ampe, If a corporaton s organzed on September 30, 1943, and reports ts
Income on the bass of a ta abe year endng December 31, 1943, the cose of
any precedng ta abe year sha be deemed to be December 31.
(C) y strkng out e ampes (1) and (2) n secton 35.7 3-3(c) (3)
and nsertng n eu thereof the foowng:
ampe (1). On September 30, 1943, the Corporaton merged nto the Y
Corporaton, and the Y Corporaton as a part of the merger assumed the out-
standng ndebtedness of the Corporaton n the amount of 100,000. The
e cess profts ta mposed upon the Corporaton for the tn abe perod of
nne months ended September 30, 1943, s 400,000. The amounts pad by the
Corporaton n repayment of Indebtedness n 1943 tota 90,OCO. The out-
standng ndebtedness of the Corporaton was as foows:
1 ,
Pad.
orrowed.
Tota In-
debtedness.
September 1
200,000
200.000
175.000
175,000
December 5 . .. .I...
25,000
December 3 ::::::::::::: ::::::::::.::...:::.:.:::::::::.:.:
anuary 1, 1943. .
175,000
190,000
100,000
100,000
0
March 15
15,000
one 90
90,000
September 30 (before merger)
September so r S ..::::::::::::::::::.:...:.:....:
Tota pad
90,000
100,000 assumed by Y Corporaton n the merger ceases to be ndebtedness of Corporaton.
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7 4.
1 4
The outstandng ndebtedness of the Corporaton, as reconstructed n
accordance wth paragraph (c) (1) for purposes of the computaton of the credt
for debt retrement of such corporaton for the ta abe perod ended September
30, 1943, s as foows:
September 1, 1942, 200,000 (Indebtedness of the Corporaton Sep-
tember 1, 1942), mnus 100,000 (ndebtedness of Corporaton
assumed by Y Corporaton n the merger, 100,000, but not to e ceed
smaest amount of ndebtedness of Corporaton September 1, 1942,
or at cose of any ta abe year of Corporaton endng after Septem-
ber 1, 1942, and pror to the merger (September 1, 1942, 200,000
December 31, 1942, 175,000), 175,000) 100,000
December 31, 1942, 175,000 (ndebtedness of Corporaton December
31, 1942), mnus 100,000 (ndebtedness of Corporaton assumed by
Y Corporaton n the merger, after appcaton of the mtaton as
shown above) 1 75,000
The credt for debt retrement aowabe to the Corporaton for the ta abe
perod ended September 30, 1943, s 30,000, computed as foows:
40 per cent of 90,000, the tota repad n 1943 (see secton 7 3(a) and
secton 35.7 3-(a)) 36,000
ut the credt for debt retrement aowabe to the Corporaton for the
ta abe perod ended September 30, 1943, may not e ceed whchever of the
foowng amounts s the esser (see secton 7 3(b) (1) and (2) and sectons
35.7 3-1(6) (3) and 35.7 3-3(o) (1)):
10 per cent of 400,000 (amount of ta mposed) 40, 000
40 per cent of 75,000 (amount by whch amount of ndebtedness Sep-
tember 1, 1942, as reconstructed, 100,000, or smaest amount of n-
debtedness, as reconstructed, at cose of any precedng ta abe year
endng after September-1, 1942 (December 31, 1942), 75,000, whch-
ever amount ( 100,000 or 75,000) s the esser, 75,000, e ceeds
amount of Indebtedness at cose of ta abe year (September 30, 1943),
zero) 30, 000
The e cess profts ta mposed upon the Y Corporaton for the fsca year
ended November 30, 1943, s 500,000 and for the fsca year ended November
30, 1944, s 600,000. The amounts pad by the Y Corporaton n repayment of
ndebtedness throughout the fsca year 1943 tota 100,000 and throughout the
fsca year 1944 tota 150,000. The outstandng ndebtedness of the Y Cor-
poraton was as foows:
Tota
ndebtcdnett.
Pad.
orrowed.
December 1, 1941.
September 1, 1942
October 15
November 30
50,000
SI 50. MO
150.000
100.000
100.000
December 1, 1942.
uy 1. 1943
September 30 (before mercer)
September 30 (after merger)..
50.000
50,000
1 150.000
100.000
100,000
November 1.
November 30
Tota pad
100.000
March 15, 1944.
September 1
November 15...
November 30...
December 1. 1943.
Tota pad
150,000
Incudes 100,000 assumed n the merger.
The outstandng ndebtedness of the Y Corporaton, as reconstructed n accord-
ance wth paragraph (c) (2) for purposes of the computaton of the credt for
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1 5
7 4.
debt retrement of such corporaton for the fsca years 19-13 and 1944, Is as
foows:
Tota
Indebtedness.
September 1, 1942, 150,000 (ndebtedness of Y Corporaton September
1,1942), pus 100,000 (ndebtedness of Corporaton assumed by Y
Corporaton In the merger, 100,000, but not to e ceed smaest
amount of ndebtedness of Corporaton September 1, 1942, or at
cose of any ta abe year of Corporaton endng after September
1, 1942, and pror to the merger (September 1, 1942, 200,030 Decem-
ber 1, 1942, 175,000), 175,000) 2501000
November 30, 1942, 100,000 (ndebtedness of Y Corporaton November
30, 1942), pus 100,000 (ndebtedness of Corporaton assumed by
Y Corporaton n the merger, after appcaton of the mtaton as
shown above) 200,000
The credt for debt retrement aowabe to the Y Corporaton for the fsca
year 1943 s 40,000, computed as foows:
40per cent of 100,000, the tota repad n the fsca vear 1943 (see secton
7 3(a) and secton 35.7S3-(o)) 40,000
ut the credt for debt retrement aowabe to the Y Corporaton for the fsca
year 1943 may not e ceed whchever of the foowng amounts s the esser (see
secton 7 3(b) (1) and (2) and sectons 35.7 3-1(6) (3) and 35.7 3-3(c) (2)):
10 per cent of 500,000 (amount of ta mposed) 50,000
40 per cent of 100,000 (amount by whch amount of ndebtedness Sep-
tember 1, 1942, as reconstructed, 250,003, or smaest amount of n-
debtedness, ns reconstructed, at cose of any precedng ta abe year
endng after September 1, 1942 (November 30, 1942), 200,003, whch-
ever amount ( 250,030 or 2)0,000) s the esser, 200,000, e ceeds
amount of ndebtedness at cose of ta abe year (November 30,
1943), 100,000) 40,000
The credt for debt retrement aowabe to the Y Corporaton for the fsca
year 1944 s 10,000, computed as foows:
40 per cent of 150,000, the tota repad n the fsca year 1944 (see secton
7 3(a) and secton 35.7S3-(o)) 60,000
ut the credt for debt retrement aowabe to the Y Corporaton for the
fsca year 1944 may not e ceed whchever of the foowng amounts s the esser
(see secton 7 3(b) (1) and (2) and sectons 35.7 3-1 (6) (3) and 35.7 3-
3(c)(2)):
10 per cent of 000,000 (amount of ta mposed) 00, 000
40 per cent of 100,000 (amount by whch amount of ndebtedness Sep-
tember 1, 1942, as reconstructed, 250,000, or smaest amount of n-
debtedness (Ins reconstructed for the fsca year 1942) at cose of any
precedng ta abe year endng after September 1, 1942 (November 30,
1942, 200,000 November 30, 1943, 100,C00), 100,000, whchever
amount ( 250,000 or 100,000) s the esser, 100,000, e ceeds amount
of ndebtedness at cose of ta abe year (November 30, 1944), zero) 40, 000
ampe (2). On September 30, 1943, the Corporaton nnd the Y Corpora-
ton were consodated nto the Z Corporaton, and the Z Corporaton ns a part of
the consodaton assumed the outstandng Indebtedness of the Corporaton n
the amount of 100.(00 and of the Y Corporaton n the amount of 150,000.
The e cess profts ta mposed upon the Corporaton for the ta abe perod of
nne months ended September 30, 1943, s 400,000. The amounts pad by the
Corporaton n repayment of ndebtedness n 1943 tota 90,000. The out-
standng ndebtedness of the Corporaton durng the years 1942 and 1913 s
the same as n e ampe (1) nnd the credt for debt retrement aownbe to the
Corporaton for the ta abe perod ended September 30, 1943, s 30,000, com-
puted as n e ampe (1).
The e cess profts ta mposed upon the Y Corporaton for the ta abe perod
of nne months ended September 30, 1943, Is 400,000. The amounts pad by the
Y Corporaton n repayment of ndebtedness n 1943 tota 50,000. The outstand-
ng ndebtedness of the Y Corporaton was as foows:
7 72 4 13
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7 4.
1S6

Pad.
orrowed.
Tota In-
debtedness-
September 1
October IS
fco.coo
100.000
on, (to

100.000
uy 1
so. 666
100,000
soa ore
uy 15
1M, W
150. W)
to, 000
0
1I0,CC0 assumed by Z Corporaton n the consodaton ceases to bo ndebtedness of Y Corporaton.
The outstandng ndebtedness of the Y Corporaton, as reconstructed n ac-
cordance wth paragraph (c)(1) for purposes of the computaton of the credt
for debt retrement of such corporaton for the ta abe perod ended September
30, 1913, s as foows:
Tota
ndebtedness.
September 1, 1942. 150,000 (ndebtedness of Y Corporaton September 1,
1942), mnus 100,000 (ndebtedness of Y Corporaton assumed by
Z Corporaton n the consodaton, 150,000, but not to e ceed smaest
amount of ndebtedness of Y Corporaton September 1,1942, or at cose
of any ta abe year of Y Corporaton endng after September 1, 1942,
and pror to the consodaton (September 1, 1942, 150,000 December
31, 1942, 100,000), 100,000) 50,000
December 31, 1942, 100,000 (ndebtedness of Y Corporaton December
31, 1942), mnus 100,000 (ndebtedness of Y Corporaton assumed by
Z Corporaton n the consodaton, after appcaton of the mtaton
as shown above) zero
The credt for debt retrement aowabe to the Y Corporaton for the ta abe
perod ended September 30, 1943, s zero, computed as foows:
40 per cent of 50,000, the tota repad n 1943 (see secton 7 3(a) and
secton 35.7 3-1 (a)) 20.000
ut the credt for debt retrement aowabe to the Y Corporaton for the
ta abe perod ended September 30, 1943, may not e ceed whchever of the fo-
owng amounts s the esser (see secton 7 3(b) (1) and (2) and sectons
35.7 3-1(6) (3) and 35.7 3-3(c) (1)):
10 per cent of 100,000 (amount of ta mposed) 40,000
40 per cent of zero (amount by whch amount of ndebtedness September
1, 1942, as reconstructed, 50,000, or smaest amount of ndebtedness,
as reconstructed, at cose of any precedng ta abe year endng after
September 1, 1942 (December 31, 1942), zero, whchever amount
( 50,000 or zero) Is the esser, zero, e ceeds amount of ndebtedness at
cose of ta abe year (September 30, 1943), zero) sero
The Z Corporaton was organzed on September 30, 1943. The e cess profts
ta Imposed upon the Z Corporaton for that porton of the caendar year 1943
durng whch t was n e stence s 100,000. The amounts pad by the Z Corpo-
raton n repayment of ndebtedness In 1943 tota 100,000. The outstandng
ndebtedness of the Z Corporaton was as foows:
Pad.
orrowed.
Tota a-
debtcdas
September 30, 1943..
October 15..
December 1
December 31
Tota pnd....
oaoco
T.0TO
100,000
1 mount assumed In the consodaton.
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1 7
f 7 4.
The outstandng ndebtedness of the Z Corporaton, as reconstructed In ac-
cordance wth paragraph (c) (2) for purposes of the computaton of the credt
for debt retrement of such corporaton for the ta abe perod ended December
31, 1943, s as foows:
Tota
ndebtednets.
September 1, 1942, zero (Indebtedness of Z Corporaton September 1,
1942), pus 200,000 ( 100,000 (ndebtedness of Corporaton as-
sumed by Z Corporaton n the consodaton, 100,000, but not to
e ceed smaest amount of ndebtedness of Corporaton September
1, 1942, or at cose of any ta abe year of Corporaton endng after
September 1, 1942, and pror to the consodaton (September 1, 1942,
200,000 December 31, 1042, 175,000), 175,000), pus 100,000 (n-
debtedness of Y Corporaton assumed by Z Corporaton n the conso-
daton, 150,000, but not to e ceed smaest amount of ndebtedness
of Y Corporaton September 1, 1942, or at cose of any ta abe year
of Y Corporaton endng after September 1, 1042, and pror to the
consodaton (September 1, 1942, 150,000 December 31, 1942,
100,000), 100,000)) 200,000
December 31, 1942, zero (ndebtedness of Z Corporaton December 31,
1942), pus 200,000 (aggregate ndebtedness of Corporaton and
Y Corporaton assumed by Z Corporaton n the consodaton, after
appcaton of the mtaton as shown above) 200, 000
The credt for debt retrement aowabe to the Z Corporaton for the ta abe
perod ended December 31, 1943, s zero, computed as foows:
40 per cent of 100,000, the tota repad n 1943 (see secton 7 3(a) and
secton 35.7 3-(u)) 40,000
ut the credt for debt retrement aowabe to the Z Corporaton for the
ta abe perod ended December 31, 1943, may not e ceed whchever of the fo-
owng amounts s the esser (see secton 7 3(b) (1) and (2) and sectons
35.7 3-1(6) (3) and 35.7 3-3(c) (2)):
10 per cent of 100,000 (amount of ta mposed) 10, 000
40 per cent of zero (amount by whch amount of ndebtedness September
1, 1942, as reconstructed, 200,000, or smaest amount of ndebted-
ness, as reconstructed, at cose of any precedng ta abe year endng
after September 1, 1942 (December 31, 1942), 200,000, whchever
amount ( 200,000 or 200,000) s the esser, 200,000, e ceeds amount
of debtedness at cose of ta abe year (December 31, 1943), 200,000) _ zero
Par. 10. There s nserted mmedatey precedng Subpart I , as
amended by Treasury Decson 5400, approved ugust 22,1944 C. .
1944, 476 , the foowng:
S C. 3. C NG S IN PRO ISIONS R L TING TO POSTW R
R UND OP C SS-PRO ITS T . (T D USTM NT
CT O 1945, PPRO D ULY 31, 1945.)

(h) Subchapter of Chapter 2 of the Interna Revenue Code s
amended by addng at the end thereof the foowng new secton:
S C. 7 4. T N P R C NTUM CR DIT G INST C SS PRO -
ITS T .
(a) owance. ganst the ta mposed by ths subchapter for
any ta abe year begnnng after December 31, 1943, there sha be a-
owed as a credt an amount equa to 10 per centum of such ta .
(b) Spkca Int||est Pbuvson No nterest shn be aowed or
pad upon any overpayment of ta resutng from the appcaton of sub-
secton (a) to a ta abe year endng before December 31, 1945, uness,
n the return made for such ta abe year, the ta payer cams a credt
under such subsecton.
Sec. 35.7 4-1. Ten Tee Cent Credt ganst cess Profts Ta . (a) Gen-
era rue. Secton 7 4(a) provdes for the aowance of a credt aganst the e -
cess profts ta mposed for certan ta abe years. The ta abe years for whch
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7 4.
1
such credt Is aowabe are those begnnng after December 31,1943. The credt
tnder secton 7 4 of a ta payer for n ta abe year s an amount equa to 10
per cent of the e cess profts ta mposed upon the ta payer for such year. or
such purpose the ta mposed s the amount of ta determned under Subchapter
of Chapter 2 pror to (1) any credt under secton 131, as made appcabe
by secton 729, for ta pad or accrued to a foregn country or possesson of the
Unted States and (2) any ad|ustment under secton 734 on account of poston
Inconsstent wth pror ncome ta abty. If t s determned, In the case nf
any ta payer wth respect to any ta abe year for whch a credt under secton
7 4 s aowabe, that constructve average base perod net ncome shoud be used
pursuant to secton 722 n computng ts ta , the ta mposed, for the purpose
of the 10 per cent credt for such year, s the amount determned pursuant to
the precedng sentence after the determnaton pursuant to such secton. ut n
such case, pendng the fna determnaton of the ta pursuant to sectum 722,
the ta mposed sha, for such purpose, be tentatvey consdered as an amount
determned wthout regard to the determnaton under secton 722, mnus the
amount, f any, by whch the ta payabe at the tme prescrbed for payment s
reduced under secton 710(a) (5) (reatng to deferment of payment of ta n
case of cam under secton 722). or the purpose of the credt, the ta Imposed
does not ncude any nterest, penaty, addtona amount, or addton to the ta .
(6) Speca nterest provson. Secton 7 1(b) provdes that no nterest sha
be aowed or pad upon that porton of any overpayment of e cess profts ta for
a ta abe year endng before December 31, 1945, whch s attrbutabe to the
aowance of a credt under secton 7 4 uness, n the return made for such
ta abe year, the ta payer cams a credt under such secton. If, however, the
ta payer cams the beneft of a credt under secton 7 4 n ts return for a ta -
abe year for whch such credt s aowabe, the restrcton mposed by secton
7 4(b) Is not appcabe. ence, where such credt Is camed on the return, an
understatement of the amount thereof w not deprve the ta payer of Interest
on the resutng overpayment, f Interest s otherwse aowabe. The term the
return as used n secton 7 4(b) means the e cess profts ta return, ncudng
an amended return, fed on or before the due date for such return, or, f the
ta payer fas to fe an e cess profts ta return on or before the due date, the
frst return fed thereafter by the ta payer. The due date of a return s the
date on or before whch the return s requred to be fed In accordance wth
the provsons of the Interna Revenue Code, or the ast day of the perod cov-
ered by an e tenson of tme granted by the Commssoner or a coector.
R GUL TIONS 109.
In order to conform Reguatons 109 Part 30, Tte 26, Code of
edera Reguatons, 1941 Sup. to secton 3 of the Ta d|ustment
ct of 1945 (Pubc Law 172, Seventy-nnth Congress), approved
uy 31,1945, such reguatons are amended as foows:
Par. 11. There s nserted mmedatey precedng secton 30.7 0-1,
as amended by Treasury Decson 5442, approved March 2, 1945, the
foowng:
S C. 3. C NG S IN PRO ISIONS R L TING TO POSTW R
R UND O C SS PRO ITS T . (T D USTM NT
CT O 1945, PPRO D ULY 31, 1945.)
(a) The frst sentence of secton 7 0(a) of the Interna Revenue Code
s amended by strkng out the words the date of cessaton of hosttes
n the present war and substtutng n eu thereof the foowng:
December 31, 1943 .
(b) Secton 7 0(b) of the Interna Revenue Code s amended by strk-
ng out the words three months before the date of maturty of bonds
for such year under subsecton (c) and Insertng n eu thereof the
foowng: uy 1, 1945 .
(c) Secton 7 0(c) of the Interna Revenue Code Is amended (1) by
nsertng n the ast sentence after the words to whch ths secton
appes the foowng: sha be payabe at the opton of the owner
on or after anuary 1, 1946, and , and (2) by strkng out the ast
two nes from the tabe at the end thereof.

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1 9
7 4.
Par. 12. Secton 30.7 0-1 (a), as amended by Treasury Decson
6442, s further amended by strkng out the second sentence and
nsertng n eu thereof:
The ta abe years so specfed nre those endng after December 31, 1941, whch
begn before anuary 1,1944.
Par. 13. There s nserted mmedatey precedng secton 30.7 1-1,
as amended by Treasury Decson 5442, the foowng:
S C. 3. C NG S IN PRO ISIONS R L TING TO POSTW R
R UND O C SS-PRO ITS T . (T D USTM NT
CT O 1945, PPRO D ULY 31, 1945.)

(d) Secton 7 1(a) of the Interna Revenue Code s amended by strk-
ng out the words three months before the date of maturty of the
bonds for such year and nsertng n eu thereof the foowng:
uy 1, 1945 .
(e) The hst sentence of secton 7 1(b) of the Interna Revenue Code s
amended by strkng out the words the tme of the maturty of bonds
ssued wth respect to such ta abe year and substtutng n eu thereof
the foowng: anuary 1, 194G .
(f) Secton 7 1(c) of the Interna Revenue Code s amended to read
as foows:
(c) Ta Payments fter Cdt-Off Date. In the case of a payment
of the ta mposed by ths subchapter shown on the return for any ta -
abe year for whch n credt s provded n secton 7 0(a), or the payment
of n defcency n respect of such ta for any such ta abe year, on or
after uy 1, 1945, the amount of the credt under secton 7 0(a) for
such ta abe year attrbutabe to such payment sha be pad the ta -
payer n cash. No nterest for the perod after December 31, 1945,
sha be assessed or coected on that porton of the ta or defcency
so pad equa to the credt under secton 7 0(a) attrbutabe to such
payment. If after anuary 1, 19:6, there s any credt under secton
730(a) remanng n favor of the ta payer attrbutabe to any ta abe
year for whch a credt s provded n secton 7 0(a), such remander
sha be pad to the ta payer n cash. No amount of any payment made
under ths subsecton to a ta payer sha bo Incuded n gross ncome.

Par. 14. Secton 30.7 1-1 (a), as amended by Treasury Decson
5412, s further amended to read as foows:
(a) Defcences refunds and credts of overpayments and payments of certan
post-car credts n cash. In case a defcency s pad by the ta payer, or an over-
payment s refunded or credted to the ta payer, for any ta abe year to whch
secton 7 0(a) appes, approprate ad|ustments w be mnde n the post-war
credt account of the ta payer. In such case, whenever the amount of bonds
shoud e ncreased or reduced, the Commssoner of Interna Revenue sha
certfy the status of the account to the Secretary n order that approprate ad-
|ustments may be made n the amount of bonds. If the refund or credt of an
overpayment was made on or before ebruary 25, 1941 (the date of the enact-
ment of the Revenue ct of 1943). the ad|ustment of the post-war credt or
bonds of the ta payer sha be made n accordance wth secton 7 1(b) n force
pror to such date. If the refund or credt of an overpayment s made after
ebruary 25, 1944, such ad|ustment or, n an approprate case, the reducton n
the amount of the refund or credt of the overpayment of the ta , sha be made
n accordance wth secton 7 1(b), as amended. Coecton from a ta payer
under secton 7 1(b) In force pror to ebruary 25, 1944, of the amount by
whch charges (arsng by reason of a refund or credt of an overpayment)
e ceed the amount of the post-war credt of the ta payer sha be made by the
Commssoner of Interna Revenue. -
In the ease of a payment of the e cess profts ta shown on the return for n
ta abe year to whch secton 7 )(a) appes, or the payment of a defcency n
respect of the ta for any such ta abe year, on or after uy 1, 1945, the post-war
credt attrbutabe to such payment w not be avaabe for the purchase of
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1141.
190
bonds, but Instead the amount of such post-war credt w be pad to the ta -
payer n cash. No nterest for the perod after December 31, 1945, sha be as-
sessed or coected on that porton of the e cess profts ta or defcency n respect
of such ta equa to the amount of the credt under secton 7 0(a) attrbutabe
to the payment of such ta or defcency. The amount of any post-war credt
remanng In favor of the ta payer after anuary 1, 1 46, sha be pad to the
ta payer n cash. ny payment to a ta payer under secton 7 1(c) of amounts
of any post-war credt sha be made by the Commssoner of Interna Revenue.
No Interest w be aowed or pad upon any payment to a ta payer under sec-
ton 7 1(c).
or provsons reatng to reducton of the post-war credt on account of the
aowance of a credt for debt retrement, see secton 7 3(c) and secton 35.753-
1(c) of Reguatons 112.
No ncome s reazed by reason of the recept by a ta payer of any payment
under secton 7 1(c). Nor s any ncome reazed by a successor by reason of
hs recept of any such payment. If, under the provsons of secton 113, the out-
standng post-war credt wth respect to whch the payment s made had, for the
purpose of determnng gan or oss from a sae or e change, the same bass n
the hands of the successor as t woud have had n the hands of the ta payer.
Otherwse, ncome may be reazed by the successor from the recept of such a
payment.
(Ths Treasury Decson s ssued under the authorty contaned n
secton 62 of the Interna Revenue Code (53 Stat., 32 26 U. S. C,
1940 ed., 62), as made appcabe bv secton 729(a) of the Interna
Revenue Code (54 Stat., 9 9 26 U. S. C, 1940 ed., 729(a)), and sec-
ton 3 of the Ta d|ustment ct of 1945 (Pubc Law 172, Seventy-
nnth Congress).)
Wm. T. Shekwood,
ctng Commssoner of Interna Revenue.
pproved anuary 24, 1946.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster anuary 25, 1946, 3.49 p. m.)
C PT R 5. O RD O T PP LS.
SU C PT R . COURT R I W O O RD D CISIONS.
S CTION 1141. COURTS O R I W.
1946-4-12243
Ct. D. 1660
INT RN L R NU COD .
Note 7 of the opnon n The ohn ccy Co. v. Commssoner of
Interna Revenue and Tabot Ms v. Commssoner of Interna
Revenue (Ct. D. 1CC0, page 191, ths uetn), as amended.
36, ohn eey Co., pettoner, v. Commssoner of Interna Revenue and 47.
Tabot Ms, pettoner, v. Commssoner of Interna Revenue. It s ordered
that the ast paragraph of note 7 n the opnon of these cases, readng as
foows: Snce the edera Trade Commsson and the Packers and Stock-
yards cts dffer as to the fnaty upon revew of the determnatons of the
respectve agences (3 Stat., 720 42 Stat., 162 and 16 ), the reference to the
Commsson and to the ct was to show the choce of a crcut court of ap-
peas for udca revew and was not ntended to suggest the adopton ftf
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191
1141.
The Ta Court revew of any standard of scope of revew emboded n ether
act. be strcken md the paragraph s amended to read as foows: The
reference to the edera Trade Commsson and to the Packers and Stockyards
cts was to show the choce of a crcut court of appeas for |udca revew
and was not ntended to suggest the adopton for The Tu Court revew of any
standard of scope of revew. anuary 2 , 1940.
( so Secton 23(b), Secton 19.23(b)- Sec- 1940-3-12229
ton 115, Secton 19.115-1.) Ct. D. 16G0
INCOM T INT RN L R NU COD D CISION O SUPR M COURT.
1. Gross Income Deductons Inturest Dstrbutons by Cor-
poratons Dvdends naty of Ta Court Decson.
The concusons of The Ta Court that certan payments whch the
ta payer corporatons made to hoders of ther corporate obgatons
were nterest to credtors n the one case and dvdends to stockhod-
ers n the other, the prncpa dfference n the two cases beng that n
the former the obgatons bore per cent noncumuatve Interest and
n the atter cumuatve nterest fuctuatng from 2 per cent to 10
per cent, are fna under the rue of Dobson v. Commssoner (320
U. S., 4 9 Ct. D. 1 ,97, C. . 1944, fC ). The words nterest and
dvdends as used n the ta statutes are we understood, and
The Ta Court s ftted to decde whether the annua payments under
these corporate obgatons are to be cassfed as nterest or
dvdends.
2. Decsons ffrmed and Reversed.
Decson of the Unted States Crcut Court of ppeas, Seventh
Crcut (146 ed. (2d), 466), reversng decson of The Ta Court
(1 T. C., 457), reversed decson of the Unted States Crcut Court
of ppeas, rst Crcut (146 ed. (2d), 00), affrmng decson of
The Ta Court (3 T. C, 05), affrmed.
Supreme Court or the Unted States.
36. The ohn eey Co., pettoner, v. Commssoner of Interna Revenue.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Seventh Crcut.
47. Tabot Ms, pettoner, v. Commssoner of Interna Revenue.
On wrt of certorar to the Unted States Crcut Court of ppeas for the rst Crcut.
anuary 7, 1946.
OPINION.
Mr. ustce Reed devered the opnon of the Court.
These wrts of certorar were granted to e amne the deductbty as nterest
of certan payments whch the ta payer corporatons made to hoders of ther
corporate obgatons. though the obgatons of the two ta payers had ony
one strkng dfference, the noncumuatve n one and the cumuatve quaty n
the other of the payments reserved under the characterzaton of nterest, The
Ta Court (formery the oard of Ta ppeas, 50 Stat., 057 ony ts present
name w be used heren) hed that the payments under the former, the eey
Company case, were Interest and under the Tabot Ms were dvdends. The
crcut court of appeas reversed The Ta Court In the eey case and another
crcut affrmed the Tabot Ms decson. On account of the dversty of
approach n The Ta Court and the revewng courts, we granted certorar.
In the eey case, a corporaton, a of whose common and preferred stock
was owned drecty or as trustee by members of a famy group, was reorganzed
T. C, 457 146 ed. (2d). 466 certorar granted, 325 U. ., udcn Code,
secton 240(a). 3 T. C, 05 146 ed. (2d), 09 certorar granted, 325 U. S., udca
Code, secton 240(a).
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1141.
192
by authorzng the Issue of 230,000 ncome debenture bearer bonds, ssued under
a trust ndenture, cang for per cent nterest, noncumuatve. They were
offered ony to sharehoders of the ta payer but were assgnabe. The debentures
were payabe n 20 years, December 31, 195(5, wth payment of genera nterest
condtoned upon the suffcency of the net Income to meet the obgaton. The
debenture hoders had prorty of payment over stockhoders but were subord-
nated to a other credtors. The debentures were redeemabe at the ta payer s
opton and carred the usua acceeraton provsons for specfc defauts. The
debenture hoders had no rght to partcpate n management. Other changes
not matera here were made n the corporate structure. Debentures were ssued
to the amount of - 150,000 face vaue. The greater part, 114 64 , was ssued n
e change for the orgna preferred, wth 6 per cent cumuatve guaranteed dv-
dends, at ts retrement prce and the baance sod to stockhoders at par, whch
was eventuay pad wth sums obtaned by the purchasers from common stock
dvdends. Common stock was owned n the same proportons by the same stock-
hoders before and after the reorganzaton.
In the Tabot Ms case the ta payer was a corporaton whch, pror to ts
recaptazaton, had a capta stock of 5,000 shares of the par vaue of 100 or
500,000. of the stock wth the e cepton of some quafyng shares was hed
by members, through bood or marrage, of the Tabot famy. In an effort to
ad|ust the capta structure to the advantage of the ta payer, the company was
recaptazed |ust pror to the begnnng of the fsc.n year n queston, by each
stockhoder surrenderng four-ffths of hs stock and takng n eu thereof
regstered notes n aggregate face vaue equa to the aggregate par vaue of the
stock retred. Ths amounted to an ssue of 400,030 n notes to the then stock-
hoders. These notes were dated October 2, 1939, and were payabe to a specfc
payee or hs assgnees on December 1, 1904. They bore annua Interest at a rate
not to e ceed 10 per cent nor ess than 2 per cent, sub|ect to a computaton that
took nto consderaton the net earnngs of the corporaton for the fsca year
ended ast prevous to the annua nterest payng date. There was, therefore, a
mnmum amount of 2 per cent and a ma mum of 10 per cent due annuay and
between these mts the Interest payabe vared n accordance wth company
earnngs. The notes were transferabe ony by the owner s endorsement and the
notaton of the transfer by the company. The nterest was cumuatve and
payment mght be deferred unt the note s maturty when necessary by reason
of the condton of the corporaton. Dvdends coud not be pad unt a then
due nterest on the notes was satsfed. The notes mted the corporaton s
rght to mortgage ts rea assets. The notes coud be subordnated by acton of
the board of drectors to any obgaton maturng not ater than the maturty of
the notes. or the fsca year n queston the ma mum payment of 10 per cent
was made on the notes.
The payments n queston on corporate obgatons were for the years n
the eey case, 1937, 193 and 1939 n the Tabot Ms case for the year 1940.
oth corporatons deducted the payments as nterest from ther reports of gross
ncome under statutory sectons and reguatons set out n the footnote.1 The
appcabe statutes and reguatons were dentca for a perods. The Com-
Internn Revenue Code:
S C. 23. D DUCTIONS ROM GROSS INCOM .
In computng net Income there sha be aowed as deductons:

(b) Interest. Interest pad or accrued wthn the ta abe year on ndebted-
ness, .
S C. 115. DISTRI UTIONS Y CORPOR TIONS.
(a) Defnton of Dvdend. The term dvdend when used In ths chapter (e cept
n secton 203(a)(3) and secton 207(c)(1), reatng to nsurance companes) means an
dstrbuton made b|- n corporaton to Its sharehoders, whether n money or In ot
property. (1) out of ts earnngs or profts accumuated after ebruary 2 , 1913, or (2)
out of the earnngs or profts of the ta abe year .
Treasury Reguatons 103.
Sec. 19.23(b)-. Interest. Interest pad or accrued wthn the year on Indebtedness
may be deducted from gross Income, .

So-caed nterest on preferred stock, whch Is In reaty a dvdend thereon, can not be
deducted In computng net Incnme.
(See Revenue cts of 1030 and 103 , 49 Stat.. 164 , 1659. 52 Stat., 447, 4C0, and
Treasury Reguatons 94, artce 23(b)-, and 101. artce 23(b)-.)
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193
1141.
mssoner asserted defcences because the payments were consdered dvdends
and not nterest.
There s not present In ether stuaton the whoy useess temporary com-
pance wth statutory teraness whch ths Court condemned as fute, as
a matter of aw, n Gregory v. everng (293 U. S. 465 Ct. D. 911, C. . I -1,
193 (1935) ). The demonstrated possbty of saes by the hoders of the
obgatons to persons other than stockhoders aone proves the dfferentaton.
s matera amounts of capta were Invested n stock, we need not consder
the effect of e treme stuatons such as nomna stock nvestments and an
obvousy e cessve debt structure.
rom the foregong statements of facts, t appears that the characterstcs
of a the obgatons n queston and the surroundng crcumstances were of
such a nature that t Is reasonaby possbe for determners to reach the con-
cuson that the secured annua payments were nterest to credtors n one
ease and dvdends to stockhoders n the other case. In the eey case there
were saes of the debentures as we as e changes of preferred stock for deben-
tures, a promse to pay a certan annua amount, f earned, a prorty for the
debentures over common stock, the debentures were assgnabe wthout regard
to an| transfer of stock, and a defnte maturty date n the reasonabe future.
These ndca of ndebtedness support The Ta Court concuson that the
annua payments were nterest on ndebtedness. On the other hand, n the
Tabot Ms case, The Ta Court found the factors there present of fuctuatng
annua payments wth a 2 per cent mnmum, the mtaton of the ssue of notes
to stockhoders n e change ony for stock, to be characterstcs whch ds-
tngush the Tabot Ms notes from the eey Company debentures. Upon
an apprasa of a the facts. The Ta Court reached the concuson that the
annua payments by Tabot Ms were n reaty dvdends and not nterest.
We thnk these concusons shoud be accepted by the crcut courts of appeas
and by ourseves. udca revew of Ta Court decsons depends upon the
Interna Revenue Code, secton 1141(c). (Powers (1).) It reads:
To affbm, modfy, O beverse. Upon such revew, such courts sha have
power to affrm or, f the decson of the oard s not n accordance wth aw,
to modfy or to reverse the decson of the oard, wth or wthout remand-
ng the case for a rehearng, as |ustce may requre.
It s ony recenty that we gave carefu consderaton to the probems of revew
of Ta Court decsons. (Dobson v. Commssoner, 320 U. S., 4 9 Ct. D. 1597,
C. . 1044, 56 .) That opnon emphaszed that our nterpretaton of Congres-
sona purpose, n enactng the statute, |ust quoted for |udca revew of Ta
Court decsons, was that Congress ntended to eave to the fna determnaton
of The Ta Court a ssues wheh were not cear-cut questons of aw.
The provsons for revew are the same now as they were when enacted n
1926. Congress, and a others Interested, were then we aware of the dffcu-
tes n drawng a ne between questons of fact and questons of aw.3 The
egsaton was upon a sub|ect, the coecton of the revenue, n whch edera
admnstratve fnaty had been gven wde scope.4 The Ta Court was orgnay
estabshed to secure an mparta and dsnterested determnaton of the
ssues nvoved, 5 so that the ta payer and the Government woud have an
ndependent revew of the poston of ether on ta demands before payment of
the ta or forecosure of an asserted defcency. Two years ater ts success was
recognzed by commttee commendaton and the enargement of the fnaty of
Its decsons from prma face evdence of the facts contaned theren to
Compare Thayer. Premnary Treatse on vdence nt the Common Law. Ch. ,
fth omes, The Common Law. paces 123- 20. 1 odsworth, story of ngsh Law,
20 , . 12 Dcknson, dmnstratve ustce, ch. I, page 55:
In truth, the dstncton hetween questons of aw and questons of fact reay
ves tte hep In determnng how far the courts w revew and for the good reason that
there Is no f ed dstncton. They are not two mutuay e cusve knds of questons,
oasort upon a dfference of sub|ect-matter. Matters of aw grow downward Into roots
M fact, and matters of fact, reach upward, wthout a break. Into matters of aw. The
knfe of pocy aone effects an artfca ceavage at the pont where the court chooses
to draw the ne between pubc nterest and prvate rght.
R. S. sect on 3224: 26 D. S. C, secton 3653 cner v. Damond ka Co. (2S U. S..
502 Ct. D. 652, C. . II-1, 333 (1933) Carey v. Curts (3 ow.. 246).
r Rept- No- 39 S ty-eghth Congress, frst sesson, page 9 C. . 1939-1 (Tart 2),
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1141.
194
revewabty ony f the decson of the oard s not n accordance wth aw.
s to the mschef whch the mtaton of the scope of |udca revew was to
cure, we fnd ony the words of the commttee reports. Wthout a cearer
descrpton by Congress of the ntended ne to separate revewabty of The
Ta Court decsons from non-revewabty, courts must nterpret the revew
statute, as best they can, to accompsh the decared Congressona purpose of
adequate contro of admnstratve acton wthout substtutng |udca opnon
for that of The Ta Court upon the evdence. (Note 7, supra.)
The ustratons In the report, note 7, supra, are ega questons wthout
doubt, e cept the possbty that the words appcaton of the statute or any
reguaton havng the force of aw may be thought to gve a revewng court
power to pass upon The Ta Court s concuson from the prmary or evdenta
facts. So that n the present cases, t mght be sad to be a queston of aw as to
whether the prmary facts adduced made the payments under consderaton
dvdends or nterest. ut we thnk such concuson gves nadequate weght
to the purpose of The Ta Court. The fnaty of The Ta Court s rungs was
beng enarged by the 1920 ct. The then oard was spoken of as an mparta
and ndependent trbuna of e perts for the determnaton of ta abtes
ns between the Government and the ta payer. (II. Rept. No. 1, S t|-nnth
Congress, frst sesson, page 17 C. . 1939-1 (Part 2), 315 .) There woud
hardy need to be e perts n ta affare to decde questons of dates or amounts
or vaues or to cacuate rates. Ther usefuness es prmary n ther abty
to e amne reevant facts of busness to determne whether or not they come
under statutory anguage. dequate reason for the use of the word appca-
ton of course e sts n stuatons where true ega questons arse, as n
whether an act appes to transfers antecedent to ts enactment or to ncome or
estate ta es from trusts or to stuatons whch nvove confcts of aw. There
s nothng n the conte t n whch the word appcaton s used whch suggests
to us that t shoud be gven ts wdest connotaton.
These cases now under consderaton dea wt we understood words as used
n the ta statutes nterest and dvdends. They need no further dtf-
nton. ( qutabe Lfe ssurance Socety v. Commssoner, 321 U. S., 560 Ct. D.
1604, C. . 1944, 537 Deputy v. DuPont, 30S U. S., 4SS, 40S Ct. D. 1435. C. .
1940-1, 11 .) The Ta Court s ftted to decde whether, the annua payments
under these corporate obgatons are to be cassfed as nterest or dvdends.
The Ta Court decsons merey decare that the undsputed facts do or do not
brng the payments under the defnton of nterest or dvdends. The docn-
. ept. No. 179, S ty-eghth Congress, frst sesson, page C. . 1039-1 (Part 2).
241 44 Stat., I), secton 1003(h) . ept. No. 1, S ty-nnth Congress, frst sesson,
page 17 C. . 1939-1 (Part 2), 315 S. Ret. No. 52, S ty-nnth Congress, frst sesson,
page 34 ( . . 1939-1 (Part 2), 332 .
Whe estabshng a compete system of revew, t has a aong been recognsed that
the ta payer coud secure a |ury tra of fact Issues, f he chose to pay and sue for recovery.
S. ept. No. 52. S tv-nnth Congress, frst sesson, page 37.) Uobsun v. Commssoner,
20 U. S., 4 9. 495 Ct. 1). 1597. C. . 1944, 56 .)
1 . Uept. No. 1, S ty-nnth Congress, frst sesson, page 19-20 C. . 1939-1 (Part 2),
315 .
Court revew uestons of fact and ow. The procedure s made to conform as neary
ns may he to the procedure In the case of an orgna acton In a edera dstrct court.
Inasmuch ns the compcated and technca facts governng ta abty requre a deter-
mnaton by a body of e perts, the revew s taken drecty to an appeate court, |ust
as, for nstnnce. n the case of orders of the edera Trade Commsson, and orders of
the Secretary of grcuture under the Packers and Stockyards ct. In vew of the grant
of e cusve power to the board fnay to determne the facts upon whch ta abty
s based, subdvson (b) of secton 914 mts the revew on appea to what are commony
known as questons of aw. The court upon revew may consder, for e ampe, questons
as to the consttutonaty of the substantve aw apped, the consttutonaty of the
procedure used, faure to observe the procedure requred by aw. the proper nterpretaton
and appcaton of the statute or any reguaton havng the force of aw, the e stence
of at east some evdence to support the fndngs of fact, and the vadty of any rung
upon the admssbty of evdence (see subdvson (a) of secton 907 and subdvson (n
of secton 914). (.Secton 1003(b) of the ct as passed. The court, therefore, may
adequatey contro the acton of the admnstratve offcer or agency, but w not be
burdened wth the duty- of substtutng Its opnon for that of the board upon the evdence.
Snce the edera Trade Commsson and the Packers and Stockyards cts dffer as to
the fnaty upon revew of the determnatons of the respectve agences (3 Stat., 720
42 Stat.. 1G2 and 16 ), the reference to the Commsson and to the ct was to show the
choce of a crcut court of appeas for |udca revew and was not ntended to suggest
the adopton for The Ta Court revew of any standard of scope of revew emboded n
ether ct.
Dcknson. dmnstratve ustce, 312: Pau. Dofsot v. Commssoner The Strange
Ways of Law and act (07 arv. L. R., 753, 26, 32, 40) : rown, act and Law In
udcu Revew (56 arv. L. R., 99, 904).
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195
1622.
ments under consderaton embody eements of obgatons and eements of
stock. There s no one characterstc, not even e cuson from management
whch can be sad to be decsve n the determnaton of whether the obgatons
are rsk nvestments n the corporatons or debts. So-caed stock certfcates
may be authorzed by corporatons whch are reay debts and promses to pay
may be e ecuted whc have ncdents of stock. Such stuatons seem to us to
fa wthn the Dobson rue.
Ths eads us to affrm the Tabot Ms decree and to reverse the eey
udgment.
It s so ordered.
Mr. ustce Rack concurs n the resut n No. 47. e s of the opnon that No.
36 shoud be affrmed for the reasons gven by the crcut court of appeas (146
ed. (2d.), 466).
Mr. ustce urton concurs n the resut n the eey case but dssents from
the resut n the Tabot Ms case on the grounds stated n the dssentng opnon
of Magruder, ., n the crcut court of appeas.
Mr. ustce ackson took no part n the consderaton or decson of these cases.
Dssentng opnon by Mr. ustce Rutedge.
C PT R 9. MPLOYM NT T S.
SU C PT R D. COLL CTION O INCOM T T SOURC
ON W G S.
S CTION 1622. INCOM T COLL CT D
T SOUC .
Reguatons 116, Secton 405.201: Requrement 1946-4-12244
of wthhodng. T. D. 5492
( so Sectons 405.202, 405.203, 405.205, 405.206,
405.209, and 405.501, Reguatons 116.)
TITL 26 INT RN L R NU . C PT R I, SU C PT R D. P RT 405.
COLL CTION O INCOM T T SOURC ON W G S.
Reguatons 116 amended to conform to secton 104 of the Reve-
nue ct of 1945, reatng to reducton n wthhodng of ta at
source on wages.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 116 Part 405, Tte 26, Code of
edera Reguatons, 1944 Sup. to secton 104 of the Revenue ct
of 1945 (Pubc Law 214, Seventy-nnth Congress), approved No-
vember , 1915, such reguatons are amended as foows:
Paragraph 1. There s nserted mmedatey precedng secton
405.201 the foowng:
Compare Ieverng . . d R. Lazarus Co. (30 U. S., 252, 255 Ct. D. 1430. C. . 1039-2,
20 1 : n(mrtff/o v. cverng (316 U. S.. 164, 167 Ct. D. 1555. C. . 1042-1. 2551)
Ieverng v. Stuck Yard Co. (31 U. S., 603, 700. 702 Ct. D. 15 1, C. . 1943, 1051 )
qutahe Socety v. Commssoner (321 U. S., 560, 563 Ct. D. 1604, C. . 1044. 53( 1
Commssoner v. Scottsh mercan Co. (323 U. S., 119 Ct. D. 1619, C. . 1944, 340 ).
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1622.
196
S C. 104. R DUCTION IN WIT OLDING O T T SOURC
ON W G S. (R NU CT O 1045.)
(a) Percentage Method.
(1) In genera. Secton 1022(a) (reatng to the percentage
method of wthhodng) s amended by strkng out paragraph (1)
thereof, by nsertng 17 per centum n eu of 1 per centum
n paragraph (2), by nsertng 10 per centum n eu of 19.
per centum In paragraph (3). and by renumberng paragraphs
(2) and (3) as (1) and (2) respectvey.
(2) Technca amendment. Secton 1622(b)(1) (percentage
method wthhodng tabe) Is amended by strkng out 1 per
centum In the ast coumn of the tabe thereD, and nsertng n
eu thereof 17 per centum .
(b) Wage racket Wthhodng. The tabes contaned n secton
1622(c) (1) (reatng to wage bracket wthhodng) are amended to read
as foows:
// the pay-ro perod vrh respect o an empoyee s weeky
nd the wages are
nd the number of wthhodng e emptons camed s
0
1
2
3
4
5
6
7

s
10(2
t east
ut ess
than
The amount of taot to bo wthhed sha be
n::
o.._
11.
17 of
wnpes
0
0
0
0
0
0
0
0
0
3
11... .
12..
2.00
.10
0
0
0
0
0
0
0
0
0
12
13
2.10
.30
0
0
0
0
0
0
0
0
0
13
14.
2.30
.60
0
0
0
0
0
0
0
0
0
14
15
2.50
.70
0
0
0
0
0
0
0
0
0
15...
16
2.70
. 0
0
0
0
0
0
0
0
0
0
16
17
2. 0
1.00
0
0
0
0
0
0
0
0
0
17....
1
3.00
1.20
0
0
0
0
0
0
0
0
0
1
19
3.20
1.30
0
0
0
0
0
0
0
0
0
19
20
3.30
1.50
0
0
0
0
0
0
0
0
0
20
21
3.50
1.70
0
0
0
0
0
0
0
0
0
21
22
3.70
1. 0
0
0
0
0
0
0
0
0
0
22
23
3. 0
2 00
.20
0
0
0
0
0
0
0
0
23
24
4.00
2.20
.40
0
0
0
0
0
0
0
0
24...
25
4. 20
2.40
.60
0
0
0
0
0
0
0
0
25
26
4.40
2.60
.70
0
0
0
0
0
0
0
0
26... .
27.-
4. 50
2.70
.90
0
0
0
0
0
0
0
0
27
2
4.70
2.00
1.00
0
0
0
0
0
0
0
0
2
29
4.90
3.00
1.20
0
0
0
0
0
0
0
0
21)
30.__
5.00
3. 20
1.40
0
0
0
0
0
0
0
0
30
31 .
5.20
3.40
t 60
0
0
0
0
0
0
0
0
31
32
5.40
3.00
1.70
0
0
0
0
0
0
0
0
32
33
5.60
3.70
1.90
.10
0
0
0
0
0
0
0
33
14
6.70
3.90
2.10
.20
0
0
0
0
0
0
I
34.
35
5.90
4.10
2. 20
.40
0
0
0
0
0
0
0
35...
36
6.10
4.20
2.40
.60
0
0
0
0
0
0
0
36
37
6.20
4.40
2.60
. 0
0
0
0
0
0
0
0
37
3
6.40
4.60
2. 0
.90
0
0
0
0
0
0
0
3
39
6.00
4. 0
2.90
1.10
0
0
0
0
0
0
0
30..
40
6. 0
4.90
3. 10
1.30
0
0
0
0
0
0
0
40
41
6.90
5.10
3.30
1.40
0
0
0
0
0
0
0
41... ..
42
7. 10
5.30
3. 40
1.00
0
0
0
0
0
0
0
42..
43
7.30
6 40
3.60
1. 0
0
0
0
0
0
0
0
43
7.40
6.60
3. 0
2.00
.10
0
0
0
0
0
0
44
45
7.60
5. S
4.00
- . n
.30
0
0
0
0
0
0
45...
46
7. 0
6.00
4.10
2.30
.60
0
0
0
0
0
0
46...
47
.00
6.10
4.30
2.50
.60
0
0
0
0
0
0
47
4
. 20
.40
6.30
6.50
4. 60
4.60
2.60
2. 0
. 0
1.00
0
0
0
0
0
0
0
0
0
0
0
0
4
49
4. 0
3.00
1.20
0
0
0
0
0
0
49
50
.60
6.00
6.00
3.20
1.30
0
0
0
0
0
0
50
51
. 0
6. 0
3.30
1.50
0
0
0
0
0
0
51
52
.90
7.00
6.20
3.50
1.70
0
0
0
0
0
0
52. .
53
9.10
7.20
6.30
3.70
1.R0
0
0
0
0
0
0
53....
54
0.30
7.30
5.60
3. 0
2.00
.20
0
0
0
0
0
54...
65
0.50
7.50
5.70
4.00
2.20
.40
0
0
0
0
0
55....
56
0.70
7.70
5. 0
.60
0
0
0
0
0
56...
57
O.M
7.00
6.00
4.20
2.40
.70
0
0
0
0
0
57
5
10.10
.10
6.20
4.40
2.50
.00
0
0
0
0
0
5
59..
10. 30
. 30
6.30
4.50
2.70
0
0
0

0
59
60
10. 50
.40
6.60
4.70
2.90
1.00
0
0
0
0
60
62
10.70
.70
0. 0
6.00
3.10
1.30
0
0
0
o
0
62
64
11.10
9.10
7.10
6.30
3.50
1.60
0
0 1
0
64
60
11.60
9.50
7.50
5.60
3. 0
200
.20
0
0
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197 1622.
// the pay-ro perod cth respect to an empoyee s weeky Contnued
nd tho wages aro
ut ess
than
nd the number of wthhodng e emptons camed s
0
1
2
3
4
5
6
7

9
10 or
The amount of ta to be wthhod sha be
more
11.90
9.90
7. 0
6.00
4.10
2.30
0.50
0
0
0
0
12.20
10.20
.20
6.30
4.50
2.70
. 0
0
0
0
0
12.60
10.60
a 60
6.70
4. 0
3.00
1.20
0
0
0
0
13.00
11.00
9.00
7.00
5.20
3.30
1.50
0
0
0
0
13.40
11.40
9.40
7.30
5.50
3.70
1.90
0
0
0
0
13.70
11.70
9.70
7.70
5.90
4.00
2.20
.40
0
0
0
14. 10
12.10
10. 10
a 10
6.20
4.40
2.50
.70
0
0
0
14.60
12.50
10.50
aso
6.50
4.70
2.90
1.10
0
0
0
14.90
12.90
10.90
. 0
6.90
5.10
3.20
1.40
0
0
0
15.30
13.20
11.20
9.20
7.20
5.40
3.60
1.70
0
0
0
15.60
13.60
11.60
9.60
7.60
5.70
3.90
2.10
.30
0
0
16.00
14.00
12.00
10.00
a 00
6.10
4.30
2.40
.60
0
0
16.40
1140
12.40
10.40
a30
6.40
4.60
2. 0
.90
0
0
16. 0
14.70
12.70
10.70
.70
6. 0
4.90
3.10
1.30
0
0
17.10
15. 10
13.10
11.10
9.10
7.10
5.30
3.50
1.60
0
0
17.50
15. 50
13. 50
11.50
9.50
7.50
5.60
3. 0
2.00
.10
0
17.90
15.90
13.90
11.90
9.90
7. 0
6.00
4.10
2.30
.50
0
1 .50
16. 50
14.50
12.50
10.50
.50
0.60
4.70
2.90
1. 10
0
19.50
17.50
15.50
13.50
11.40
9.40
7.40
6.60
3. 0
1.90
.10
20.40
1 .40
16.40
14.40
12.40
10.40
.40
6.40
4.60
2. 0
1.00
21.40
19.40
17.30
15.30
13.30
11.30
9.30
7.30
5.60
3.70
1. 0
22.30
20.30
1 .30
16.30
14.30
12.30
10.30
.20
6.30
4.50
2.70
23.20
21.20
19.20
17.20
15.20
13.20
11.20
9.20
7.20
6.40
3.60
24.20
22.20
20.20
1 .20
16.20
14.10
12.10
10.10
a o
6.20
4.40
25.10
23. 10
21.10
19.10
17. 10
15.10
13.10
11.10
9.10
7.10
5.20
26. 10
24. 10
22.00
20.00
1 .00
16.00
14.00
12.00
10.00
.00
6.10
27.00
25.00
23.00
21.00
19.00
17.00
15.00
12.90
10.90
.90
7.00
2 .40
26.40
24.40
22.40
20. 40
1 .40
16.40
14.40
12.30
10.30
.30
30.30
2 .30
26.30
24.30
22.30
20.30
1 .20
16.20
14.20
12.20
10.20
32 20
30. 20
2 .20
26.20
24. 10
22. 10
20.10
1 .10
16. 10
14. 10
12.10
34. 10
32.10
30.00
2 .00
26.00
24.00
22.00
20.00
1 .00
16.00
14.00
35.90
33.90
31.90
29.90
27.90
25.90
23.90
21.90
19.90
17.90
15. 0
19 per cent of the e cess over 200 pus
36.90
34.90
32.90
30.90
2 . 0
26. 0
24. 0
22. 0
20. 0
1 . 0
16. 0
6
70
72
74
76
7
0
2
4
6

90
92
94
96
9
100
105
110
115
120
125
130
135
140
145
150
160
170
1 0
190
200
200 and over.
If the pay-ro perod wth respect to an empoyee s bweeky
nd the
nd the number of wthhodng e emptons camed s
ut es:
than
The amount of ta to be wthhed sha be
17 of
20
wages
0
0
0
0
0
0
0
0
0
0
22
3.60
0
0
0
0
0
0
0
0
0
0
24
3.90
.30
0
0
0
0
0
0
0
0
II
2
4.30
.60
0
0
0
0
0
0
0
0
0
2
4.60
1.00
0
0
0
0
0
0
0
0
0
30
5.00
1.30
0
0
0
0
0
0
0
0
0
32
5.30
1.60
0
0
0
0
0
0
0
0
0
34
5.60
2.00
0
0
0
0
0
0
0
0
0
36
6.00
2.30
0
0
0
0
0
0
0
0
0
3
6.30
2.70
0
0
0
0
0
0
0
0
0
40
6.70
3.00
0
0
0
0
0
0
0
0
0
42
7.00
3.40
0
0
0
0
0
0
0
0
0
44
7.40
3.70
0
0
0
0
0
0
0
0
0
46
7.70
4.00
.40
0
0
0
0
0
0
0
0
4
.00
4.40
.70
0
0
0
0
0
0
0
0
50
.40
4.70
1.10
0
0
0
0
0
0
0
0
52-
.70
5.10
1.40
0
0
0
0
0
0
0
0
54
9.10
5.40
1. 0
0
0
0
0
0
0
0
0
56
9.40
5. 0
2.10
0
0
0
0
0
0
0
0
5
9.70
6.10
2.40
0
0
0
0
0
0
0
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1622.
19
If the pay-ro perod tcth respect to an empoyee s bweeky Contnued
nd the wares aro-
nd the number of wthhodng e emptons camed Is
0
1
2
3
4
5
6
7

9
10 or
ut ess
mare
than
The amount of ta to be wthhed sha be
m
10.10
6.40
2. 0
0
to
SO
0
0
0
0
0
m
10.40
6. 0
3.10
0
0
0
0
0
0
0
0
64
10. 0
7. 10
3.50
0
0
0
0
0
0
II
0
66
11.10
7.50
3. 0
.20
0
0
0
0
0
0
0
6 ..
11. 60
7. 0
4.10
.50
0
0
0
0
0
0
0
70
11. 0
.10
4.50
. 0
0
0
0
0
0
0
1)
72
12.10
50
4. 0
1.20
0
0
0
0
0
0
0
74
12.50
. 0
6.20
1.50
0
0
0
0
0
0
0
76
12. 0
9.20
6.60
1.90
0
0
0
0
0
0
0
7
13.20
9.60
6.90
220
0
0
0
0
0
0
0
0
13.50
9.90
6.20
260
0
0
0
0
0
0
11
2
13.90
10.20
6.50
2.90
0
0
0
0
0
0
0
4
14.20
10.50
6.90
3.20
0
0
0
0
0
0
c
6
14.60
10.90
7.20
.60
0
0
0
0
0
0

14.90
11.20
7.60
3.90
.30
0
0
0
0
0
0
00
15.30
11.60
7.90
4.30
.60
0
0
0
0
0
0
02
16.60
11.90
.30
4.60
.90
0
0
0
0
0
0
04
16.00
12 20
.60
4.90
1.30
0
0
0
0
0
0
96
16.40
12.60
.90
5.30
1.60
0
0
0
0
0
0
9 ..
16. 0
12.90
9.30
6.60
200
0
0
0
0
0
0
100
17.20
13.30
9.60
6.00
230
0
0
0
0
0

102
17.50
13.60
10.00
6.30
2 70
0
0
0
0
0
0
104
17.90
14.00
10.30
.70
3.00
0
0
0
0
0
1)
10
1 .30
14.30
10.60
7.00
3.30
0
0
0
0
0
0
10
a70
14.60
11.00
7.30
3.70
0
0
0
0
0
0
110
19.00
15.00
11.30
7.70
4.00
.40
0
0
0
0
0
112
19.40
15.40
11.70
.00
4.40
.70
0
0
0
0
0
114
19. 0
15. 0
12.00
.40
4.70
1.10
0
0
0
0
II
116
20.20
16.20
12.40
70
6.00
1.40
0
0
0
0
a
11
20.50
16.60
12.70
9.00
5.40
1.70
0
0
0
0
0
120
20.90
16.00
13.00
9.40
5.70
2.10
0
0
0
0
a
124
21.60
17.60
13.60
9.90
6.20
2.60
0
0
0
0
0
12
22.20
1 .20
14.20
10.60
6.90
3.30
0
0
0
0
0
132
23.00
19.00
15.00
11.30
7.60
4.00
.30
0
0
0
0
136
23.70
19.70
16.70
12 00
30
4.60
1.00
0
0
0
0
140
24.50
20.50
16.50
12.60
9.00
6.30
1.70
0
0
0
0
144
25.20
21.20
17.20
13.30
9.70
6.00
240
0
0
0
0
14
26.00
22.00
1 .00
14.00
10.40
6.70
3.00
0
0
0
0
152
26. 0
22.70
1 .70
14.70
11.00
7.40
3.70
.10
0
0
0
156
27.50
23.50
19.50
15.40
11.70
.10
4.40
. 0
0
0
0
160
2 .30
24.20
20.20
16.20
12.40
a 70
6.10
1.40
0
0
II
164
29.00
25.00
21.00
16.90
13.10
9.40
5. 0
2.10
0
0
o
16
29. 0
25.70
21.70
17.70
13. 0
10.10
6.50
2 0
0
0
u
172
30.50
26.50
22.50
1 .40
14.50
10. 0
7.10
3.50
0
0
0
176
31.30
27.20
23.20
19.20
15.20
11.50
7. 0
4.20
.50
0
(1
1 0
32.00
2 .00
24.00
20.00
15.90
12.20
.60
4.90
1.20
0
n
1 4
32. 0
2 .70
24.70
20.70
16.70
12.90
9.20
6.50
1.S0
0
0
1
33.50
29.50
25.50
21.50
17.40
13.50
9.90
0.20
.2.60
0
0
192
34.30
30.30
26.20
22.20
1 .20
14.20
10.60
6.90
3.30
0
II
196
35.00
31.00
27.00
23.00
19.00
14.90
11.30
7.00
3.90
.30
1)
200
35. 0
31. 0
27.70
23.70
19.70
15.70
11.90
.30
4.60
1.00
0
210
37.10
33.10
29.10
25.00
21.00
17.00
13.10
9.50
5. 0
2.20
0
220
39.00
36.00
30.90
26.90
22.90
1 .90
14.90
11.20
7.60
3.90
. 21
230
40.90
36. 0
32. 0
2 . 0
24. 0
20. 0
16.70
12.90
9.20
5.60
1
240
42.70
3 .70
34.70
30.70
26.70
22.60
1 60
14.60
11.00
7.30
3 0
250
44. GO
40.60
36.60
32.60
2 .50
24.50
2a 50
16.50
12 70
9.00
5 40
260
46.50
42.50
3 .50
34.40
30.40
2140
22.40
1 .40
14.40
a to
7.13
270
4 .40
44.40
40.30
36.30
32.30
2a 30
24.30
20.20
16.20
12.40
s S3
2 0
50.30
46.20
42.20
3 .20
34.20
3a 20
26.10
22. 10
1 .10
14.10
II) I
290
52. 10
4 .10
44. 10
40.10
36.10
32 00
2 00
24.00
20.00
16.00
1125
300
54.00
50.00
46.00
42.00
37.90
33.90
29.90
25.90
21.90
17.90
13
320
56. 0
62. SO
4 . 0
44. 0
40. 0
36.70
32.70
2a 70
24.70
20.70
10
340
60.60
56.60
52. 60
4 .50
44. 50
4a 50
36.50
32.50
2 .50
24.40
20 11
360
64. 40
60.40
56.30
52.30
4a 30
44.30
40.30
36.20
32.20
23.20
34. -
3 0
0 .10
64. 10
60.10
56.10
52. 10
4a 00
44.00
40.00
36.00
32.00
27
400
71.90
67.90
63.90
69. 0
65. 0
51. 0
47. 0
43. 0
39.70
35.70
s o
400 and over..
19 per cent of the e cess over 400 pus
73. 0 69. 0
65.70
0L70
67.70
53. 70 49. 70
45.00
41.60
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199 f 1022.
// the pay-ro perod wth respect to an empoyee s semmonthy
nd tho wages
ut oss
than
1
2
3
4
5
6
7

9
10 or
more
The amount of ta to be wthhed sha be
0
0
0
0
0
0
0
0
fo
0
0
0
0
0
0
0
0
0
0
0
.30
0
0
0
0
0
0
0
0
0
.70
0
0
0
0
0
0
0
0
0
1 00
0
0
0
0
0
0
0
0
0
1.30
0
0
0
0
0
0
0
0
0
1.70
0
0
0
0
0
0
0
0
0
2.00
0
0
0
0
0
0
0
0
0
2 40
0
0
0
0
0
0
0
0
0
2.70
0
0
0
0
0
0
0
0
0
3.10
0
0
0
0
0
0
0
0
0
3.40
0
0
0
0
0
0
0
0
0
3.70
0
0
0
0
0
0
0
0
0
4.10
.10
0
0
0
0
0
0
0
0
4. 40
.60
0
0
0
0
0
0
0
0
4. 0
. 0
0
0
0
0
0
0
0
0
5.10
1.10
0
0
0
0
0
0
0
0
5.40
1.50
0
0
0
0
0
0
0
0
6. SO
1. 0
0
0
0
0
0
0
0
0
6.10
2.20
0
0
0
0
0
0
0
0
f.50
2.50
0
0
0
0
0
0
0
0
6. 0
2.90
0
0
0
0
0
0
0
0
7.20
3.20
0
0
0
0
o -
0
0
0
7.50
3.50
0
0
0
0
0
0
0
0
7. 0
3.90
0
0
0
0
0
0
0
0
.20
4.20
.30
0
0
0
0
0
0
0
.50
4.60
.60
0
0
0
0
0
0
0
.90
4.90
1.00
0
0
0
0
0
0
0
9.20
6.30
1.30
0
0
0
0
0
0
0
9.60
5.60
. m
0
0
0
0
0
0
0
9.90
5.90
2 00
0
0
0
0
0
0
0
10.20
6.30
2.30
0
0
0
0
0
0
0
10.60
6.60
2.70
0
0
0
0
0
0
0
10.90
7.00
3.00
0
0
0
0
0
0
0
11.30
7.30
3.30
0
0
0
0
0
0
0
11.60
7.60
3.70
0
0
0
0
0
0
0
11.90
.00
4.00
.10
0
0
0
0
0
0
12.30
.30
4.40
.40
0
0
0
0
0
0
12.60
.70
4.70
. 0
0
0
0
0
0
0
13.00
9.00
6.10
1.10
0
0
0
0
0
0
13.30
9.40
6. 40
1.40
0
0
0
0
0
0
13.70
9.70
5.70
1. 0
0
0
0
0
0
0
14.00
10.00
6. 10
2. 10
0
0
0
0
0
0
14.30
10.40
0.40
2.50
0
0
0
0
0
0
14.70
10.70
6. 0
2. 0
0
0
0
0
0
0
15.00
11.10
7.10
3.10
0
0
0
0
0
0
15.40
11.40
7.40
3.50
0
0
0
0
0
0
15.70
11.70
7. 0
3. 0
0
0
0
0
0
0
16.10
12. 10
.10
4.20
.20
0
0
0
0
0
16.40
12.40
.60
4.50
.60
0
0
0
0
0
17.00
12.90
9.00
6.00
1.10
0
0
0
0
0
17. 0
13.60
9.70
6.70
1. 0
0
0
0
0
0
1 .50
14.30
10.40
6.40
240
0
0
0
0
0
19.30
15.00
11.00
7.10
3.10
0
0
0
0
(1
20.00
15.70
11.70
7. 0
3. 0
0
0
0
0
11
20. 0
16.40
12.40
.40
4.50
.50
0
0
0
0
21.50
17.20
13.10
9.10
5.20
1.20
0
0
0
0
22.30
17.90
13. 0
9. 0
5.90
1.90
0
0
0
0
23.00
1 .70
14.50
10.50
6.50
2.60
0
0
0
0
23. 0
19.40
15.10
11. 20
7.20
3.30
0
0
0
0
24.50
20. 20
15. 0
11.90
7.90
4.00
0
0
0
0
25.30
20.90
16.60
12.60
.60
4.60
.70
0
0
0
20.00
21.70
17.30
13.20
9.30
6.30
1.40
0
0
0
26. 0
22. 40
1 . 10
13.00
10.00
6.00
2.00
0
0
0
27. 50
23. 20
1 . 0
14.60
10.60
6.70
2.70
0
0
0
2 .30
23.90
19. 60
15.30
11.30
7.40
3. 40
0
0
0
29.00
24. 70
20.30
16.00
12.00
.10
4. 10
.10
0
0
29. 0
25. 40
21.10
16. 70
12.70
.70
4. 0
. 0
0
0
30.60
26.20
21. 0
17.50
13.40
9.40
5.50
1.50
0
0
31.30
27.00
22.60
1 .20
14. 10
10.10
6. 10
2. L
0
0
32.60
2 .30
23.90
19.60
15.30
11.30
7.30
3.40
0
0
34.60
30. 10
25. 0
21.40
17.10
13.00
9.10
5.10
1.10
0
36.40
32.00
27.70
23.30
19.00
14.70
10. 0
0. 0
2.90
0
3 .30
33.90
29.60
25.20
20. 0
16.50
12.50
.50
4.60
.60
40.10
35. 0
31.40
27.10
22.70
1 .40
14.20
10.20
6.30
2.30
22..
24..
20..
2 ..
30..
32-
34..
36..
9
100....
102...
104....
106....
10 ...
110....
112...
114....
116
11 ....
120....
124
12 ...
132....
136....
140...
144...
14 ...
152...
156....
160...
164...
16 ...
172
176
1 0
1 4
1
192
196...
200
210
220
230
40.--.
42
44
46
4 .
50
52
54
56 .
6
60
62
64...
66....
6
70.
72
74
76
7
0
2....
4
6

90
92....
94....
96---
9
100
102
104
106...
10
110
112
114
116
11
120
124...
12 ...
132
130
140
144...
14 ...
152
156...
160
164...
16 .-.
172
176
1 0...
1 1...
1
192...
Sr, - ..
200...
210...
220 ..
230..
240-
250-
17 Of
wages
W .n
4.30
4 m
5.00
5.30
6.60
6.00
6.30
6.70
7.00
7.40
7.70
.00
.40
.70
9. 10
9. 40
9.70
10. 10
10.40
10. 0
11.10
11.50
11. 0
12.10
12.50
12. 0
13.20
13.50
13.90
14.20
14.50
14.90
15.20
15.60
15.90
16.30
16.70
17.00
17. 40
17. 0
1 .20
1 .50
1 .90
19.30
19.70
20.00
20.40
20. 0
21.40
22.10
22.90
23.60
24.40
25.10
25.90
26.60
27.40
2 . 10
2 .90
29.60
30.40
31. 10
31.90
32.60
33. 40
34.20
34.90
35.70
37.00
3 .90
40.70
42.60
44.50
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1622. 200
If the pay-ro perod cth respect to an empoyee s semmonthy Contnued
nd tho
nd the number of wthhodng e emptons camed L
t east
ut ess
0
1
2
3
4
5
6
7

9
10 or
more
than

The amoun
t of ta
tobew
thhed
sha b,
-
250
260.-.-.-.-
46.40
42.00
37.70
33.30
29.00
21. 0
20.30
15.90
11.90
00
4.00
260
270
4 .30
43.90
39.50
35.20
30. 0
20.50
22. 10
17. 0
13.60
9. 70
5.70
270
2 0
50. 10
45. 0
41.40
37. 10
32 70
2 . 40
24.00
19.70
15.40
11.40
7.40
2 0
290
62 00
47.70
43.30
39.00
34.60
30 20
25.90
21.50
17.20
13. 10
. )
200
300
53.90
49.60
52 40
45.20
4 .00
40. 0
43.70
36.50
S9.30
32. 10
35.00
27. 0
30.60
23.40
19.10
21.90
14. 0
17.50
10. m
13 4n
300
320
56.70
20.20
320
340
60.50
50.10
51. 0
47.40
43. 10
3 .70
34.40
30.00
25.70
21.30
16. SO
340
360
64.20
6 .00
71. 0
69.90
63.70
67.40
55.50
69.30
63. 10
51.20
64.90
6 .70
46. 0
60 60
64.40
42.50
40.20
50.00
3 . 10
41.90
45.60
33. 0
37.50
41.30
29.40
33.20
36.90
25. 10
2 . 0
3 60
0.70
21
360
3 0
3 0
400
400
420
75.50
71.20
66. 0
62.50
6 . 10
53. 0
49.40
45.10
40.70
36.30
a o
420
440
79.30
3.10
74.90
70.60
74.30
66.20
70.00
61.90
65.60
67.50
61.30
53.20
66.90
4 . 0
52.60
44.50
43 20
40. 10
43. 90
.
.
440
460
7 .70
400
4 0
6. 0
90.60
2 50
6.20
7 .10
1.90
73. 0
77.50
no n
73.20
65.00
90
60 7(1
64.50
56.30
60.10
52 00
55.70
47.60
51.40
4130
4 0
500
19 per cent of the e cess over 500 pus
47.00
500 and over
7/ the pay-ro perod wth respect to an empoyee s monthy
92.50
.10
3. 0
79.40
75.10
70.70
66.30
62.00
57.60
53.30
nd the wages are
nd the
med|
t east
ut ess
0
1
2
3
4
5
6
7

0
10 or
more
than
17 of
wages
7.90
The amount of ta to be wthhed sha be
0
44
0
0
0
0
0
0
0
0
0
0
44
4
0
0
0
0
0
0
0
0
0
0
4
52
.60
.60
0
0
0
0
0
0
0
0
0
62
56
9.20
1.30
0
0
0
0
0
0
0
0
0
50 ...
60
9.90
2.00
0
0
0
0
0
0
0
0
0
64
10.60
2.70
0
0
0
0
0
0
0
0
0
M
0
11.30
3.40
0
0
0
0
0
0
0
0
0
6
72
1200
4. 10
0
0
0
0
0
0
0
0
0
72
76
12 70
4.70
0
0
0
0
0
0
0
0
0
76
0
13.30
6.40
0
0
0
0
0
0
0
0
0
0
4
14.00
6 10
0
0
0
0
0
0
0
0
0

14.70
6. I
0
0
0
0
0
0
0
0
0

02
15.40
7.50
0
0
0
0
0
0
0
0
0
02
96
16.10
.20
.20
0
0
0
0
0
0
0
0
96
100
16 0
. 0
.90
0
0
0
0
0
0
0
0
100
104.
17.40
9.50
1.60
0
0
0
0
0
0
0
0
104
10 .
1 . 10
10.20
230
0
0
0
0
0
0
0
0
10S.
112..
1 . 0
10.90
3.00
0
0
0
0
0
0
0
0
112
116
19.50
11.60
3.70
0
0
0
0
0
0
0
0
116
120
20.20
12.30
4.30
0
0
0
0
0
0
0
0
120.
124.
20.90
12 90
6.00
0
0
0
0
0
0
0
0
124
12 ..
21.50
13.60
5.70
0
0
0
0
0
0
0
0
12
132
22.20
14.30
6.40
0
0
0
0
0
0
0
0
132
136 .
22 90
15.00
7.10
0
0
0
0
0
0
0
0
136
140
23. CO
15.70
7. 0
0
0
0
0
0
0
0
3
140
144
24.30
16.40
a 40
.50
0
0
0
0
0
0
0
144
14S
25,00
17.00
9.10
L20
0
0
0
0
0
0
0
14 .
152
25.70
17.70
9. 0
1.90
0
0
0
0
0
0
0
152.
150
26.30
1 .40
10.50
260
0
0
0
0
0
0
0
15
160
27.00
19. 10
11.20
3.30
0
0
0
0
0
0
0
100
164
27.70
19. 0
11.90
4.00
0
0
0
0
0
0
0
164
16
2 .40
20.50
12.60
4.60
0
0
0
0
0
0
0
16
172.
29. 10
21. 20
13.20
6.30
0
0
0
0
0
0
0
172
176
29. 0
21. 0
13.90
6.00
0
0
0
0
0
0
0
17
1 0
30.40
22.50
14.60
0.70
0
0
0
0
0
0
0
1 0
1 4
31. 10
23.20
15.30
7.40
0
0
0
0
0
0
0
1 4
1
31. 0
29.90
16.00
.10
.10
0
0
0
0
0
0
1
192.
32.60
24.60
16.70
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. 0
0
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201 1622.
If the pay-ro perod wth reaped to an empoyee s monthy Contnued
nd the wages arc
nd the number ot wthhodng
e empt
ons camed s
0
1
2
3
4
5
6
7

9
10 or
t east
ut ess
than
The amoun
t of ta to be wthhed
sha be
more
192
196
33.30
25.30
17.30
59.40
1.50
0
0
0
0
0
n
19 ..
200
34. 10
25.90
oo
10. 10
2.20
0
0
0
0
0
0
200
204
34. 0
26.60
1 .70
10. 0
2.90
0
0
0
0
0
0
204
20
35.60
27.30
19. 40
11.50
3.60
0
0
0
0
0
0
20
212
36.30
2 .00
20.10
12.20
4.20
0
0
0
0
0
0
212
21
37. 10
2 .70
20. 0
12. 0
4.90
0
0
0
0
0
0
S216
220
37. 0
29.40
21.40
13.50
5.60
0
0
0
0
0
0
220
224
3 . CO
30.00
22. 10
14.20
6.30
0
0
0
0
0
0
224
22
39.30
30.70
22. 0
14.90
7.00
0
0
0
0
0
0
22
232
40. 10
31.40
23.50
15.60
7.70
0
0
0
0
0
0
232... .
236
40. 0
32. 10
24.20
16.30
.30
.40
0
0
0
0
0
236
240
41.50
32.90
24.90
16.90
9.00
1.10
0
0
0
0
0
240
24
42.70
34.00
25.90
1 .00
10. 10
2.10
0
0
0
0
0
24
25
44.20
35.50
27.30
19.30
11.40
3.50
0
0
0
0
0
256
2M
45.70
37.00
2 .60
20.70
12. 0
4.90
0
0
0
0
1)
S2M
272
47.20
3 .50
30.00
22.10
14.20
6.20
0
0
0
0
1)
272
2 0
4 .70
40.00
31.40
23.40
15.50
7.60
0
0
0
0
0
2M...
2
50.20
41.50
32. 0
24. 0
16.90
9.00
1.10
0
0
0
0
2
296
51. 0
43.00
34.30
26.20
1 .30
10.30
2.40
0
0
0
0
296
304
53.30
44.50
35. 0
27.60
19.60
11.70
3. 0
0
0
0
0
1304
312
54. O
46. 10
37.30
2 .90
21.00
13. 10
5.20
0
0
0
0
312
320
56.30
47.60
3 .90
30.30
22.40
14.50
0.50
0
0
0
0
320
32
57. 0
49.10
40.40
31.70
23.70
15. 0
7.90
0
0
0
0
32S
336
59.30
50.60
41.90
33.20
25. 10
17.20
9.30
1.40
0
0
0
336
344
60. 0
52.10
43.40
34.70
2-1 .-
1 .60
10.60
2.70
0
0
0
344
352
62.30
53.00
44.90
36.20
27. 0
19.90
12.00
4.10
0
0
0
352.
360
63. 0
55.10
46. 40
37.70
29.20
21.30
13.40
5.50
0
0
1)
36
65.30
56.60
47.90
39.20
30.60
22.70
14.70
6. 0
0
0
0
376..
66. 0
5 . 10
49.40
40.70
32.00
24.00
16. 10
.20
.30
0
0
376
3 4.
6 .30
59.60
50.90
42.20
33.50
25.40
17.50
9.60
1.60
0
D
3 4
392..
69. 0
61. 10
52.40
43.70
35.00
26. 0
1 . 0
10.90
3.00
0
(
392
400
71.30
62.00
53.90
45.20
36.50
2 111
20.20
12.30
4.40
0
0
400
420
73.90
65.20
56.50
47. 0
39. 10
30.50
22.60
14.70
6. 0
0
1)
420
440
77.70
69.00
60.30
51.60
42.90
34.20
26.00
1 .10
10.20
2.30
0
440
460
1.50
72. 0
64. 10
55.30
46.60
37.90
29.50
21.50
13.60
5.70
0
460
4 0
5.20
76.50
67. 0
69. 10
50.40
41.70
33.00
25.00
17.00
9. 10
1.20
4 0
500
9.00
0.30
71.60
62.90
54.20
45.50
36.70
2 .40
20.50
12.50
4.60
500
120
92. 0
4. 10
75.30
66.60
57.90
49.20
40.50
31. 0
23.90
16.00
a oo
S20.
540
96.50
7. 0
79. 10
70.40
61. 70
53.00
44.30
35.60
27.30
19.40
11.50
540
560
100.30
91.60
2.90
74.20
65.50
56.70
4 .00
39.30
30.70
22. 0
14. 90
560.
5 0
104.00
95.30
6.60
77.90
69.20
0.50
51. 0
43. 10
34.40
26.20
1 .30
560
600
107. 0
99.10
90.40
M.70
73.00
64.30
55.60
46.90
3 .10
29.60
21.70
600
040
113.40
104.70
96.00
7.30
7 .60
69. 90
61.20
52.50
43. 0
35. 10
26.90
640
6 0
121.00
112.30
103.00
94. 0
6. 10
77.40
6 .70
60.00
51. 30
42.60
33.90
.S0
720.
12 .50
119. 0
111. 10
102. 40
93. 70
5.00
76.20
67.50
5 . 0
50. 10
41.40
720
760
130.00
127.30
11 .60
W. . I
101.20
92.50
3. 0
75. 10
66.40
57.60
4 .90
760.
00
143.50
134. 0
126. 10
117.40
10 .70
100.00
91.30
2.60
73.90
65.20
5 .50
500
40
151. 10
142.40
133.70
121.90
116.20
107.50
9 . 0
90. 10
1.40
72.70
64.00
S 40...
149.90
141.20
132.50
123. 0
115. 10
106.30
97.60
.90
0.20
71.50
0
020
166. 10
157. 40
14 . 70
140.00
131.30
122.60
113.90
105.20
96. 50
7.70
79.00
920.
960
173.60
164.90
156.20
147.50
13 . 0
130. 10
121.40
112.70
104.00
95.30
.60
60
1.000
1 1.20
172.50
163. 0
155.00
146.30
137.00
12 .90
120. 20
111.50
102. 0
94.10
19 per cent o the e cess over 1,000 pus
1,000 and
1 4.90
17 20
167. 50
15 . 0
150.10
111.40
132. 70
124.00
115.30
106.60
97.90
703672 46 14
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1622.
202
If the pay-ro perod cth respect to an empoyee s a day pay-ro perod or a
msceaneous pay-ro perod
nd the
wages d-
nd the number of wthhodng e emptons camed s
vdeo by the num-
ber of days n such
3
7
9
10 or
perod are
0
1
2
4
5
6

more
t east
ut ess
than
The amount of ta to be wthhed sha be the foowng amount mutped by
the number of days n such perod
17 of
SO
1.50
wages
0
0
0
0
0
0
0
0
10
0
1.50
1.75
0.30
0
0
0
0
0
0
0
0
0
0
1.75
2.00
.30
.05
0
0
0
0
0
0
0
0
0
2.00.
2.25
.35
. 10
0
0
11
0
0
0
0
0
0
2.25.
2.50
.40
.16
0
0
0
0
0
0
0
0
0
2.50
2.75
.46
.20
0
0
0
0
0
0
0
0
0
2.75
3.00
.60
.26
5
0
0
0
0
0
0
0
0
3.00
3.25
.66
.26
0
0
0
0
0
0
0
0
0
3.25
3.50
.60
.30
.05
0
0
0
0
0
0
0
a
3.50
3.75
. 0
.35
. 10
0
0
0
0
0
0
0
0
3.75
4.00
.05
.40
. 15
0
0
0
0
0
0
0
0
4.00
4.25
.70
.45
.20
0
0
0
0
0
0
0
0
4.25
4.50
.75
.50
.26
0
0
0
0
0
0
0
0
4.50
4.75
. 0
.66
.26
0
0
0
0
0
0
0
0
4.75
6.00
. 6
.65
.30
.05
0
0
0
0
0
0
0
5.00
5.25 -
.90
.60
.36
.10
0
0
0
0
0
0
0
5.25
5.50
.90
.66
.40
.15
0
0
0
0
0
0
0
5.60
5.75
.95
.70
.4
.2c
0
0
0
0
0
0
0
5.75
6.00
1.00
.7
.60
.20
0
0
0
0
0
0
0
.00
6.25
1.05
. 0
.66
.26
0
0
0
0
0
0
0
6.25
6.50
1.10
. 6
.66
.30
.06
0
0
0
0
0
0
.50
6.76
1.15
. 5
.60
.36
.10
0
0
0
0
0
0
.75
7.00
1.20
.90
.65
.40
.1
0
0
0
0
0
0
7.00
7.26
1.25
.95
.70
.45
.20
0
0
0
0
0
0
7.25
7.50
1.30
1.00
.75
.50
.20
0
0
0
0
0
0
7.50
7.75
1.35
1.05
. 0
.60
.25
0
0
0
0
0
0
.00 . .
1. 40
1.10
. 6
.66
.30
.06
0
0
0
0
0
.00
.25
1.40
1.15
. 6
.60
.36
.10
0
0
0
0
0
.25
.50
1.45
1.20
.90
.65
.40
.1
0
0
0
0
0
.50
.75
1.50
1.25
.95
.70
.46
. 15
0
0
0
0
0
.75
9.00
1.55
1.30
1.00
.75
.50
.20
0
0
0
0
0
9.00
9.25.
1.60
1.35
1.05
. 0
.50
.25
0
0
0
0
0
9.25
9.50
1.65
1.35
1 10
. 0
.55
.30
.05
0
0
0
0
9.50
9.75
1.70
1.40
1. 15
. 5
.60
.36
. 10
0
0
0
0
9.75
10.00
1.76
1.45
1. 20
.90
.65
.40
.16
0
0
0
0
10.00
10.50
1. 0
1.56
1.25
.95
.70
.46
.20
0
0
0
0
10.50
11.00
1.90
1.65
1.35
1.05
. 0
.55
.30
0
0
0
0
11.00 ....
11.50
2.00
1.75
1. 45
1.16
.90
.60
. 5
.10
0
0
0
11.50
12.00
2.10
1. 0
1.65
1.26
.95
.70
.46
.20
0
0
0
12.00
12.50
2.20
1.90
1.65
1.35
1.05
. 0
.55
.25
0
0
0
12.50
13.00
2.30
2.00
1.70
1.45
1.15
.90
.60
.35
.10
0
0
13.00
13.50
2.40
2. 10
1. 0
1.55
1.25
.95
.70
.45
.20
0
0
13.50
14.00
2.50
2.20
1.90
1.60
1.35
1.05
. 0
.65
.2
0
0
14.00
14.50
2.60
2.30
2.00
1. 70
1.45
1. 15
.90
. 0
.35
. 10
0
14.50
16.00
2.65
2.40
2. 10
1. 0
1.50
1.25
.95
.70
.46
.20
0
15.00
15.50
2.75
2.50
2.20
1.90
1.60
1.35
1.05
. 0
.55
.2
0
15.50
16.00
2. 5
2.55
2.30
2.00
1.70
1.45
1. IS
. 5
.60
.3
.10
1 .00
16.50
2. 95
2.65
2.40
2. 10
1. 0
1.50
1.25
.95
.70
.4
.20
16.50
17.00
3.05
2. 75
2.45
2. 20
1.90
1.60
1.35
1.05
. 0
. 0
.25
17.00
17.50
3. 15
2. 5
2.55
2.30
2.00
1.70
1.40
1.15
. 6
.60
.IS
17.50
1 .00
3.25
2.95
2.65
2.40
2.10
1. 0
1.50
1.25
.96
.70
.45
1 .00
1 .50
3.35
3.05
2.75
2.45
2.20
1.90
1.60
1.30
1.05
. 0
. 0
1 .50
19.00
3.40
3. 15
2. 5
2 55
2.30
200
1.70
1.40
1.1
.
.m
19.00
19.50
3.50
3.25
2.95
2.65
2.35
2. 10
1. 0
1.50
1.25
.95
.70
19.50 ....
20.00
3.60
3.30
3.05
2.75
2.45
2.20
1.90
1.60
1.30
1.05
.73
20.00 ....
21.00
3.75
3. 45
3 20
2.90
2.60
2.30
205
1.75
1.46
1.20
.90
21.00
22.00
3.95
3.65
3.35
3. 10
2. 0
2.50
2.20
1.95
1.65
1.35
L10
22.00
23.00
4.15
3. 5
3.55
3.25
3.00
2.70
2.40
2 10
1. 6
1.65
L2
23.00
24.00
4. 30
4.05
3.75
3.45
3.15
2.90
2.60
230
205
1.75
L44
24.00
25.00
4.50
4.20
3.95
3.65
3.35
3.05
2 0
2.50
220
LM
1.6
25.0(1 ....
26.00
4.70
4. 40
4. 10
3. 5
3.55
3.25
2.95
2 70
2.40
2 10
LS5
2 .00
27.00
4.90
4.60
4.30
4.00
3.75
3.45
3. 15
290
2.60
230
2 00
27.00
2 .00
6.05
4. 0
4.50
4. 20
3.90
3.65
3.35
3.05
2. 0
2.50
2.29
2 .00
29.00
5.25
4. 95
4.70
4. 40
4. 10
3. 0
3.55
3.2
2.95
270
2.40
29.00
30.00
5.45
5.16
4. 5
4.00
4.30
4.00
3.75
3.45
3.15
26
-
19 per cent of the eccss over 30 pus
30.00 and over
6.55
5.25
4.95
4.70
4.40
4.10
3. 0
3.55
3.2
29
3.70

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203
1622.
(e) ffectve Date. The amendments made by ths secton sha be
appcabe ony wth res ect to wages pad on or after anuary 1, 1046.
Par. 2. Secton 405.201 s amended as foows:
( ) y strkng out the second sentence of the second paragraph
and nsertng n eu thereof the foowng:
In usng ths method wth respect to wages pad before anuary 1, 1946, refer-
ence must be made to the percentage method wthhodng tabe n secton
1622(b) (1) pror to ts amendment by the Revenue ct of 1945.
( ) y nsertng mmedaty after method n the thrd sentence
of the second paragraph wth respect to wages pad before anuary
1,1946, .
(C) y strkng out n at the begnnng of the frst sentence n
the e ampe and nsertng n eu thereof Durng 1945 an .
(D) y nsertng mmedatey precedng the paragraph begnnng
wth the words Where the wthhodng the foowng:
In usng the percentage method wth respect to wages pad on or after anuary
1, 1940, reference must be made to the percentage method wthhodng tabe
n secton 1622(b)(1) as amended by the Revenue ct of 1945. The steps n
computng the ta under such method wth respect to wages pad on or after
anuary 1, 1946, are summarzed as foows:
Step 1. Mutpy the amount of one wthhodng e empton by the number of
e emptons camed by the empoyee.
Step 2. Subtract the amount determned n step 1 from the empoyee s wages.
Compare the remander, f any, wth the fgure n the ast coumn of the per-
centage method wthhodng tabe. Take the smaer of the two amounts and
mutpy t by 0.17.
Step 3. dd the amount determned In step 1 and the fgure In the ast coumn
of the percentage method wthhodng tabe. Subtract the sum of these two
fgures from the empoyee s wages. Mutpy the remander, f any, by 0.19.
Step 4. To determne the amount requred to be wthhed, add the amounts
determned In steps 2 and 3.
ampe. Durng 1946 an empoyee has a weeky pay-ro perod, for whch
be s pad 2, and has n effect a wthhodng e empton certcate camng
three e emptons. s empoyer, usng the percentage method, computes the
ta to be wthhed as foows:
Step 1:
mount of one wthhodng e empton 11
Mutped by number of e emptons camed on orm W-4 3
Tota wthhodng e emptons 3
Step 2:
Tota wage payment 2
Less amount determned n step 1 33
(a) aance 49
(6) mount shown n ast coumn of tabe for weeky payro
perod 44
Smaer of (a) or (6) sub|ect to 17 per cent rate 44
0.17
Porton of ta to be wthhed 7.4
Step 3:
Tota wage payment 2
mount determned n step 1 33
mount shown n ast coumn of tabe for weeky payro
perod 44
Tota.
77
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1622.
204
Step 3 Contnued.
aance sub|ect to 19 per cent rate.
5
O. 19
Porton of ta to be wthhed
0.95
Step 4:
Tota ta to be wthhed
.43
( ) y changng e ampe to e ampes n (1) and (2)
thereof.
Par. 3. Secton 405.202 s amended as foows:
( ) y strkng out the frst and second sentences and nsertng
n eu thereof the foowng:
Under the percentage method wth respect to wages pad before anuary 1,
1946, the porton of the ta at the 2.7 per cent rate s computed on the amount
by whch the wages pad e ceed the amount of one wthhodng e empton, re-
gardess of the number of wthhodng e emptons camed. In the computaton
of the portons of the ta wth respect to such wages at the IS per cent rate
and the 19. per cent rate, the amount aowed as the wthhodng e empton
depends upon the number of wthhodng e emptons camed. Under the per-
centage method wth respect to wages pad on or after anuary 1, 1946, the
amount aowed as the wthhodng e empton depends upon the number of
wthhodng e emptons camed.
( ) y strkng out mpoyee n the frst sentence of e ampe
(1) n (a) and nsertng n eu thereof Durng 1945 empoyee,
(C) y strkng out mpoyee n the frst sentence of e ampe
(2) n (a) and nsertng n eu thereof Durng 1945 empoyee.
(D) y nsertng mmedatey after e ampe (2) n (a) the fo-
owng:
ampe (3). Durng 1946 empoyee 0 has a semmonthy pay-ro perod.
The number of wthhodng e emptons camed by C s two. C s wages are
determned at the rate of 1.20 per hour. Durng a certan pay-ro perod he
works ony 40 hours and earns 4 . In computng the amount of the ta at the
17 per cent rate, the amount of two wthhodng e emptons, or 46, s aow-
abe. The 19 per cent rate s not appcabe n ths nstance, snce the amount
of the wages pad for the pay-ro perod s ess than the amount shown n the
ast coumn of the percentage method wthhodng tabe.
ampe ( /). Durng 1946 empoyee D has a weeky pay-ro perod. The
number of wthhodng e emptons camed by D s zero. D s wages are de-
termned at the rate of 10 per day. Durng a certan week D worked ony
two days and resgned. The amount of the ta at the 17 per cent rate s com-
puted on the entre amount of 20, whch amount s ess than the ma mum
amount sub|ect to the 17 per cent rate as shown n the percentage method
wthhodng tabe. The 19 per cent rate s not appcabe n ths nstance, snce
the amount receved s ess than the amount shown n the ast coumn of the
percentage method wthhodng tabe.
( ) y nsertng mmedatey after competed n the fourth
sentence of the e ampe n (6) durng 1945.
( ) y strkng out the ast sentence of the e ampe n (b) and
nsertng n eu thereof the foowng:
The 19.S per cent rate s not appcabe, snce the wages pad for the perod of 12
days are ess than the amount of two wthhodng e emptons pus the ma mum
amount sub|ect to the 1 per cent rate for such perod. If, however, the wages
were pad n 1946 or a subsequent year, the amount of the wthhodng e empton
aowabe for the 12-day perod, In computng the ta to be wthhed, namey,
at the 17 per cent rate, s 36 (12 (2 1.50)). The 19 per cent rate woud
not be appcabe, snce the wages pad for the perod of 12 days woud be ess
than the amount of two wthhodng e emptons pus the ma mum amount sub-
|ect to the 17 per cent rate for suc perod.
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205
1622.
(G) y redesgnatng the e ampe n (c) as e ampe (1) and
nsertng after such e ampe the foowng:
ampe (2). On pr 1, 1046, was empoyed by the Y Rea state Co.
to se rea estate on a commsson bass, commssons to be pad ony upon
consummaton of saes. The number of wthhodng e emptons camed by
s one. On May 20, 1946, receved a commsson of 300. gan on une 15,
1946, receved a commsson of 100. The amount of the wthhodng e empton
n respect of the commsson pad on May 20 for the purpose of computng the
ta at the 17 per cent rate s 75 ( 1.50 50). The amount of the wages s
Insuffcent for the 19 per cent rate to be appcabe n ths nstance. In respect
of the commsson pad on une 15, the ma mum amount sub|ect to ta at the
17 per cent rate, 150 ( 6 26) s the amount to be used for the purpose of
computng the ta at such rate, and the amount of the wages sub|ect to wth-
hodng at the 19 per cent rate s the e cess of the wages ( 400) over 195 ( 39
pus 156).
( ) y strkng out n at the begnnng of the frst sentence
of e ampe (1) and at the begnnng of the frst sentence of e ampe
(2) n (d) and nsertng n eu thereof n each nstance Durng
1945 an.
(I) y nsertng mmedatey after e ampe (2) n (d) the fo-
owng:
ampe (S). Durng 1940 an empoyee havng a day pay-ro perod s
pad wages of 12 per day. The number of wthhodng e emptons camed by
such empoyee s one. The amount of each such day wnge payment sub|ect
to the ta at the 17 per cent rate s 0. The amount of the wages sub|ect to
wthhodng at the 19 per cent rate s the e cess of the wages ( 12) over
7.50 ( 1.50 pus 6).
ampe (. ). Durng 1946 an empoyee works for a certan empoyer for
four days for whch he s pad 36. The number of wthhodng e emptons
camed by the empoyee s two. The amount of the wthhodng e empton
aowabe for the purpose of computng the ta at the 17 per cent rate s 12
(4 3). The amount of the wages s nsuffcent for the 19 per cent rate to
be appcabe.
( ) y nsertng at the end of the paragraph n (d) whch begns
wth the words To ustrate the foowng:
Under the same state of facts, f the wages are pad on or after anuary 1,
1946, the amount of the wthhodng e empton aowabe for the purpose of
computng the ta at the 17 per cent rate s 22 (2 11). The amount of the
wages s nsuffcent for the 19 per cent rate to appy.
Par. 4. Secton 405.203 s amended as foows:
( ) y nsertng at the end of (a) thereof the foowng:
Wth respect to wages pad before anuary 1, 1946, the wage bracket tabes
contaned n secton 1622(c) pror to ts amendment by the Revenue ct of
1945 are to be used. Wth respect to wages pad on or after anuary 1, 1046,
the wage bracket tabes contaned In secton 1622(c) as amended by the Rev-
enue ct of 1045 are to be used.
( ) y nsertng mmedatey after competed n the fourth
sentence of the e ampe n (c) durng 1945.
(C) y nsertng mmedatey after the ast sentence of the e am-
pe n (c) the foowng:
If, however, the wnges were pad n 1946 or a subsequent year, the ta requred
to ba wthhed under the tabe appcabe to a msceaneous pay-ro perod to
be used for such years woud be 0.S0 mutped by the number of days n such
perod, or 9.60 for the 12-day perod.
(D) y redesgnatng the e ampe n (d) as ampe (1) and
nsertng after such e ampe the foowng:
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1622.
206
ampe (2). On pr 1, 1946, s hred by the Y Rea state Co. to se
rea estate on a commsson bass, commssons to be pad ony upon consum-
maton of saes. The number of wthhodng e emptons camed by Is one.
On May 20, 1946, receved a commsson of 300. gan, on une 15, 1946,
receved a commsson of 400. Under the wage bracket method, the amount
of ta to be deducted and wthhed n respect of the commsson pad on My 20
Is 40, whch amount s obtaned by mutpyng 0. 0 (ta under wage bracket
tabe for a day or msceaneous pay-ro perod where wages are at east
6 but ess than 6.25 a day) by 50 (number of days eapsed) and the amount
of ta to be wthhed wth respect to the commsson pad on une 15 s 65,
whch amount Is obtaned by mutpyng 2.50 (ta under wage bracket tabe
for a day or msceaneous pay-ro perod where wages are at east 15 but
ess than 15.50 a day) by 26 (number of days eapsed).
( ) y strkng out n at the begnnng of the frst sentence
of e ampe (1) n (e) and at the begnnng of the frst sentence of
e ampe (2) n (e) and nsertng n eu thereof n each nstance
Durng 1945 an.
( ) y nsertng mmedatey after e ampe (2) n (e) the fo-
owng:
ampe (S). Durng 1946 an empoyee havng a day pay-ro perod s pad
wages of 7 per day. The number of wthhodng e emptons camed by the
empoyee Is one. Under the tabe appcabe to a day pay-ro perod, the
amount of ta to be deducted and wthhed from each such payment of wages
Is 0.95.
ampe (4). Durng 1946 an ndvdua Is hred for four days, for whch he
s pad wages of 36. The number of wthhodng e emptons camed by hm s
two. The amount of ta to be deducted and wthhed under the wage bracket
method s 4.20 (4 1.05).
(G) y strkng out the ast sentence of (/) and nsertng n eu
thereof the foowng:
Thus, wth respect to wages pad on or after anuary 1, 1946, f the pay-ro
perod of an empoyee Is weeky and the wage payment of such empoyee Is
255.25, the empoyer may compute the 19 per cent of the e cess over 200 as f
the e cess were 55 nstead of 55.25.
Par. 5. There s nserted mmedatey precedng secton 405.205 the
foowng:
S C. 104. R DUCTION IN WIT OLDING O T T SOURC
ON W G S. (R NU CT OP 1945.)

(c) Technca mendment. Secton 1622(h)(1)(C) (reatng to
e emptons for wthhodng) s amended by strkng out the words
a surta e empton under secton 25(b) (3) and by Insertng n eu
thereof an e empton under secton 25(b) (1) (C) .

(e) ffectve Date. The amendments made by ths secton sha be
appcabe ony wth respect to wages pad on or after anuary 1, 1946.
S C. 102. LLOW NC OP S M MPTIONS OR NORM L
T S OR SURT . (R NU CT O 1915.)
(a) In Genera. So much of secton 25(b) (reatng to credts for
surta ) as precedes paragraph (2) thereof s amended to read as
foows:
(b) Credts fob oth Norma Ta and Surta .
(1) Credts. -There sha be aowed for the purposes of both
the norma ta and the surta , the foowng credts aganst net
ncome:

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207
1622.
(C) n e empton of 500 for each dependent whose gross
ncome for the caendar year n whch the ta abe year of the
ta payer begns s ess than 500, e cept that the e empton
sha not he aowed In respect of a dependent who has made
a |ont return wth hs spouse under secton 51 for the ta abe
year begnnng n such caendar year.

(c) Ta abe Years to Whch ppcabe. The amendments
made by ths secton sha be appcabe wth respect to ta abe years
begnnng after December 31, 1015.
Par. 6. Secton 405.205 s amended by nsertng mmedatey after
the ast sentence of (b) thereof the foowng:
Smary, n order for an empoyee to be abe to cam for the caendar year
1916 a wthhodng e empton wth respect to a partcuar ndvdua (other
than the empoyee s spouse) there must be a reasonabe, e pectaton that the
empoyee w be aowed an e empton wth respect to such ndvdua under
secton 25(b) for hs ncome ta ta abe year 1916.
Par. 7. Secton 405.20G s amended by strkng out (Rev. 1944)
wherever occurrng after orm W-4 theren.
Par. . Secton 405.209, as amended by Treasury Decson 5431,
approved anuary 19, 1945 C. . 1945, 326 , s further amended
as oows:
( ) y nsertng mmedatey after e ampe (2) n (a) thereof
the foowng:
ampe (3). C s empoyed as a saesman at a monthy saary of 100 pus
commssons on saes made durng the month. The number of wthhodng
e emptons camed s one. Durng anuary, 1946, C earned 275 n commssons,
whch together wth the saary of 100 was pad on ebruary 9, 1946. Under
the wage bracket method the amount of the ta requred to be wthhed s
shown n the tabe appcabe to a monthy pay-ro perod. Under ths tabe
t w be found that the amount of ta requred to he wthhed s 5 .10.
ampe (4) D s empoyed at a saary of 3,000 per annum pad semmonthy
on the 15th day and the ast day of each month, pus a bonus and commsson
determned at the end of each 3-month perod. The number of wthhodng
e emptons camed s four. The bonus and commsson for the 3-month perod
endng on March 31, 1940, amount to 250, whch was pad on pr 10. 1946.
Under the-wage bracket method, the amount of ta requred to be wthhed
on the aggregate of the bonus of 250 and the ast precedng semmonthy wage
paymont of 125, or 375, s 50.60. Snce ta n the amount of 5.70 was wth-
hed on the semmonthy wage payment of 125, the amount to be wthhed on
pr 10, 1946, s 44.90.
( ) y redesgnatng the e ampe n (6) as ampe () and
nsertng mmedatey after such e ampe the foowng:
ampe (2). n empoyee has a weeky pay-ro perod endng on Saturday of
each weak, the wages for whch are pad on Wednesday of the succeedng week.
On the 11th day of each month he s pad a bonus based upon producton durng
the pay-ro perods for whch wages were pad n the precedng month. The
empoyee was pad a weeky wage of 35 on each of the fve Wednesdays occurrng
In anuary, 1946. On ebruary 11, 1046, the empoyee was pad a bonus of 125
based upon producton durng the ve pay-ro perods covered by the wages pad
n anuary. On the date of payment of the bonus, the empoyee, who s marred
and has two chdren, has a wthhodng e empton certfcate n effect camng
four wthhodng e emptons. The amount of the ta to be wthhed from the
bonus pad on ebruary 11, 1946, s computed as foows:
Wages pad n anuary, 1946, for fve pay-ro perods (5 35) 175.00
onus pad ebruary 11, 1946 125. 00
ggregate of wages and bonus
verage wage per pay-ro perod ( 30CM-5)
00.00
60.00
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1622
20
Computaton of ta under percentage method:
Ta at 17 per cent on ( 60 44) 2. 72
Ta at 19 per cent None
Ta on average wage for one week 2. 2
Ta on average wage for fve weeks 13 60
Less: Ta prevousy wthhed on weeky wage payments of 35 None
Ta to be wthhed on suppementa wages 13.60
Computaton of ta under wage bracket method:
Ta on 00 wage under weeky wage tabe 3.10 per week for fve
weeks 15.50
Less: Ta prevousy wthhed on weeky payments of 35 None
Ta to be wthhed on suppementa wages 15.50
Par. 9. There s nserted mmedatey precedng secton 405.501 the
foowng:
S C. 104. R DUCTION IN WIT OLDING OP T T SOURC ON
W G S. (R NU CT O 1945.)

(d) Wthhodng Statements.
(1) Secton 10 5(a) (reatng to wthhodng recepts) s amended
by nsertng after requred to deduct and wthhod a ta n respect
of the wages of an empoyee the foowng: , or who woud have
been so requred f the empoyee had camed no more than one wth-
hodng e empton, .
(2) Secton 102(5 (a) and (b) (reatng to penates n connecton
wth wthhodng recepts) are amended ( ) by strkng out n
respect of ta wthhed pursuant to ths subchapter n each of such
subsectons, and ( ) by strkng out recept wherever appearng
theren and nsertng n eu thereof statement .
(e) ffectve Date. The amendments made by ths secton sha be
appcabe ony wth respect to wages pad on or after anuary 1, 1940.
Par. 10. Secton 405.501 s amended as foows:
( ) y strkng out (Rev.) wherever occurrng after orm
W-2 theren.
( ) y strkng out the frst sentence and nsertng n eu thereof
the foowng: fc
Wth respect to wages pad before anuary 1, 1940, every empoyer or other
person requred to deduct and wthhod ta sha furnsh to each empoyee from
whose wages ta es are wthhed the orgna and dupcate of orm W-2, showng
the name and address of the empoyer, the name and address of the empoyee, the
wages pad, and the amount of ta wthhed durng the caendar year. Wth
respect to wages pad on or after anuary 1, 1946, every empoyer or other person
makng payment of wages s requred to furnsh to each empoyee from whose
wages ta es are wthhed, or woud be wthhed f such empoyee had camed no
more than one wthhodng e empton, the orgna and dupcate of orm W-2,
showng the name and address of the empoyer, the name and address of the
empoyee, the wages pad, and the amount of ta wthhed, f any, durng the
caendar year, even though no ta s requred to be deducted and wthhed wth
respect to such empoyee s wages. or e ampe, f the tabe method s used, a
wthhodng statement must be furnshed each empoyee whose earnngs durng
any pay-ro perod are equa to or n e cess of the smaest wage for whch ta
must be wthhed from empoyees camng one e empton. If the percentage
computaton method s used, a wthhodng statement must be furnshed each
empoyee whose wages durng nny pay-ro perod are n e cess of one wthhodng
e empton for such pay-ro perod as shown n the percentage method wthhod-
ng tabe contaned n secton 1022(b) (1).
(Ths Treasury Decson s ssued under the authorty contaned n
secton 3791 of the Interna Revenue Code (53 Stat., 4C7 26 U. S. C,
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209 5779.
3791) and secton 104 of the Revenue ct of 1945 (Pubc Law 214,
Seventy-nnth Congress), approved November , 1945.)
Wm. T. Sherwood,
ctng Commssoner of Interna Revenue.
pproved anuary 30,1946.
os n . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster anuary 31, 1 46, 4.12 p. m.)
S CTION 1625. R C IPTS.
Reguatons 116, Secton 405.501: Recepts 1946-1-12206
for ta wthhed at source on wages. Crcuar 1 52
orm W-2, Wthhodng Statement for 1940. Rues for reproduc-
ton carfed.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Was7ngton 5, D. C, December 19,1945.
Coectors of Interna Revenue and Others Concerned:
1. Reference s made to Crcuar 1 37 C. . 1945, 329 , para-
graph 2(6).
2. The requrement that the space for the empoyee s name be at the
top of a reproduced form s not to be construed as preventng the ower-
ng of that space suffcenty to permt the use of wndow enveopes
meetng the Post Offce Department s mnmum requrement as to
dstance from the top of the enveope to the top of the wndow. ow-
ever, the space for the empoyee s name must be above that for the
empoyer s name.
3. Correspondence reatve to the contents of ths crcuar shoud
refer to ts number and to the symbos C: Co.
oseph D. Nunan, r.,
Commssoner.
C PT R 37. T M NTS, CR DITS, ND R UNDS.
S CTION 3779. T NSIONS O TIM OR P Y-
M NT O T S Y CORPOR TIONS
P CTING C RRY- C S.
1946-6-1226
T. D.549
TITL 26 INT RN L R NU . C PT R I. SU C PT R , P RT 20
SU C PT R , P RT 474.
Reguatons prescrbed under secton 4(a) of the Tn d|ustment
ct of 1U45,1 and Reguatons 111 amended to conform to secton 4(b)
Sectons 474.0 to 474.13, ncusve, are Issued under the authorty contaned In ecton
3791 of the Interna Revenue Code (53 Stat.. 407 26 U. S. C. 1040 ed.. 3701) and secton
4(a) of the Ta d|ustment ct of 1945 (Pubc Law 172, Seventy-nnth Congress).
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3779.
210
of the Ta d|ustment ct of 1945, reatng to e tensons of tme for
payment of ta es by corporatons e pectng carry-backs, and tenta-
tve carry-back ad|ustments.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
P RT I.
Tabe of Contents.
Secton.
474.0. Numberng of sectons.
474.1. tensons of tme for payment of ta es by corporatons e pectng carry-
backs.
474.2. Contents of statement.
474.3. mount of ta the tme for payment of whch may be e tended.
474.4. Payment of remander of ta where e tenson reates to ony part of ta .
474.5. Perod of e tenson.
474.6. Revsed statements.
474.7. Termnaton by Commssoner.
474. . Payments on termnaton.
474.9. Interest.
474.10. Tentatve carry-back ad|ustments.
474.11. Computaton of ncrease or decrease n pror years ta es affected by the
carry-back.
474.12. owance of ad|ustments.
474.13. ssessment of erroneous aowances.
Secton 4(a) of the Ta d|ustment ct of 1945 (Pubc Law 172,
Seventy-nnth Congress), approved uy 31, 1945 C. . 1945, 532 ,
provdes as foows:
S C. 4. T NSIONS O TIM OR P YM NT O T S Y
CORPOR TIONS P CTING C RRY C S, ND T NT -
TI C RRY- C D USTM NTS,
(a) Chapter 37 of the Interna Revenue Code s amended by addng at
the end thereof the foowng new sectons:
S C. 3779. T NSIONS O TIM OR P YM NT O T S Y
CORPOR TIONS P CTING C RRY- C S,
(a) In Genera. If a corporaton, n any ta abe year endng on or
after September 30,1945, fes wth the coector a statement, as provded
In subsecton (b), wth respect to an e pected net operatng oss carry-
back or unused e cess profts credt carry-back from such ta abe year,
the tme for payment of a or part of any ta mposed by chapter 1 or 2
for the ta abe year mmedatey precedng such ta abe year sha be
e tended, to the e tent and sub|ect to the condtons and mtatons here-
nafter provded n ths secton.
(b) Contests of Statement. The statement wth respect to an
e pected carry-back referred to n subsecton (a) of ths secton sha
be sworn to n the manner prescrbed by secton 52 n the case of a return
and sha be fed at such tme and n such manner and form as the
Commssoner, wth the approva of the Secretary, may by reguatons
prescrbe. Such statement sha set forth that the corporaton e pects
to have a net operatng oss carry-back, as provded n secton 122(b), or
an unused e cess profts credt carry-back, as provded n secton
710(c) (3), from the ta abe year n whch such statement Is made, and
sha set forth, n such deta and wth such supportng data and e pana-
ton as such reguatons sha requre
(1) the estmated amount of the e pected net operatng oss or
unused e cess profts credt
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211
3779.
(2) the reasons, facts, and crcumstances whch cause the corpo-
raton to e pect such net operatng oss or unused e cess profts
credt
(3) the amount of the reducton, attrbutabe to the e pected
carry-back. In the aggregate of the ta es prevousy determned
for a ta abe years affected by the carry-back pror to the ta abe
year of the e pected oss or unused credt such ta es prevousy
determned beng ascertaned n accordance wth the method pre-
scrbed n secton 3 01(d) and such reducton beng determned
by appyng the e pected carry-back n the manner provded by aw
to the tems on the bass of whch such ta es were determned but
such reducton beng decreased by the amount of any credts under
secton 7 0 propery aocabe to such reducton
(4) the ta or ta es and the amount thereof the tme for payment
of whch s to be e tended and
(5) such other nformaton for the purpose of carryng out the
provsons of ths secton as may be requred by such reguatons.
The coector sha, upon request, furnsh a recept for any statement
fed, whch sha set forth the date of such fng.
(c) mount to Whch tenson Reates and Instament Pay-
ments. The amount the tme for payment of whch may be e tended
under subsecton (a) wth respect to any ta sha not e ceed the amount
of such ta shown on the return, ncreased by any amount assessed as
a defcency (or as nterest or addtons to the ta ) pror to the date
of fng the statement and decreased by any amount pad or requred to be
pad pror to the date of such fng, and the tota amount of the ta es
the tme for payment of whch may be e tended sha not e ceed the
amount stated under cause (3) of subsecton (b). or the purposes
of ths subsecton, an amount sha not be consdered as requred to be
pad uness shown on the return or assessed as a defcency (or as nterest
or addton to the ta ), and an amount assessed as a defcency (or as
nterest or addtons to the ta ) sha be consdered to be requred to
be pad pror to the date of fng of the statement f the tenth day
after notce and demand for ts payment occurs pror to such date. If
an e tenson of tme under ths secton reates to ony n part of a ta ,
the tme for payment of the remander sha be consdered to be the
dates on whch payments woud have been requred If such remander
had been the ta and the ta payer had eected to pay the ta n four
equa nstaments as provded n secton 56(b).
(d) Perod of tenson. The e tenson of tme for payment pro-
vded In ths secton sha e pre
(1) on the ast day of the month In whch fas the ast date
prescrbed by aw (ucudng any e tenson of tme granted the
ta payer) for the fng of the return for the ta abe year of the
e pected net operatng oss or unused e cess pn fts credt, or
(2) f an appcaton for tentatve carry-back ad|ustment provded
In secton 37 0 wth respect to such oss or unused credt s fed before
the e praton of the perod prescrbed n cause (1), on the date
on whch notce s maed by regstered ma by the Commssoner to
the ta payer that such appcaton s aowed or dsaowed n whoe
or n part.
(e) Revsed Statements. ach statement fed under subsecton
(a) wth resnect to any ta abe year sha be n eu of the ast statement
prevousy fed wth respect to such year. If the amount the tme for
payment of whch s e tended under a statement fed s ess than the
amount under the ast statement prevousy fed the e tenson of tme
sha he termnated as to the dfference between the two amounts.
(f) Termnaton by Commssoner. The Commssoner s not
requred to make any e amnaton of the statement, but he may make
such e amnaton thereof as he deems necessary and practcabe. The
Commssoner sha termnate the e tenson as to any part of the amount
to whch It reates whch he deems shoud be termnated because, upon
such e amnaton, he beeves that, as of the tme such e amnaton s
made, a or any part of the statement ceary s In a matera respect
erroneous or unreasonabe.
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3779.
212
, (e) Payments on Termnaton. If an e tenson of tme s term-
nated under subsecton (e) or (f) wth respect to any amount, then
(1) no further e tenson of tme sha be made under ths sec-
ton wth respect to such amount, and
(2) the tme for payment of such amount sha be consdered
to be the dates on whch payments woud have been requred f
there had been no e tenson wth respect to such amount and the
ta payer had eected to pay the ta n four equa nstaments as
provded In secton 56(b).
(h) eopardy. If the Commssoner beeves that coecton of the
amount to whch an e tenson under ths secton reates s n |eopardy, he
sha mmedatey termnate such e tenson and notce and demand
sha be made by the coector for payment of such amount.
() Interest. In the case of an amount the tme for payment
of whch has been e tended, there sha be coected as part of such
amount nterest from the dates on whch payments woud have been
requred f there had been no e tenson and the ta payer had eected
to pay the ta n four equa nstaments as provded n secton 56(b)
(1) upon so much of such amount as s satsfed under secton
37 0(b) by appyng or credtng thereto, wthn the perod of e ten-
son, a decrease n ta determned n connecton wth an appca-
ton under secton 37 0(a), nterest at the rate of 3 per centum per
annum to the date of such satsfacton, e cept that on so much of
such satsfed amount as s not In e cess of the amount of the def-
cences assessed under secton 37 0(b) and whch s not so satsfed,
the rate sha be 0 per centum per annum and
(2) upon the remander of the amount the tme for payment of
whch has been e tended, nterest at the rate of 6 per centum per
annum to the date such amount s pad.
If the Commssoner determnes that durng the perod of e tenson
credt or refund of an overpayment has been aowed or made, or a def-
cency assessed, affectng the amount to whch the e tenson reates and
that the ta payer coud not have taken such overpayment or defcency
nto account n the statement or a revsed statement, approprate ad|ust-
ment sha he made n the nterest.
S C. 37 0. T NT TI C RRY- C D USTM NTS.
(a) ppcaton for d|ustment. ta payer may fe an appca-
ton for a tentatve carry-back ad|ustment of the ta es for pror ta abe
years affected by a net operatng oss carry-back, provded n secton
122(b) or an unused e cess profts credt carry-back, provded n sec-
ton 710(c)(3), from any ta abe year endng on or after September
30. 1915. The appcaton sha be verfed n the manner prescrbed by
secton 51 or secton 52 In the case of a return of such ta payer, and
sha be fed, on or after the date of fng of the return for the ta abe
year of the net operatng oss or unused e cess profts credt from whch
the carry-back resuts and wthn n perod of tweve months from the
end of such ta abe year, n the manner and form requred by regua-
tons prescrbed by the Commssoner wth the approva of the Secre-
tary. The appcaton sha set forth, n such deta and wth such sup-
portng data and e panaton as such reguatons sha requre
(1) the amount of the net operatng oss or unused e cess profts
credt
(2) the amount of the ta prevousy determned for each pror
ta abe year affected by such carry-back the ta prevousy deter-
mned beng ascertaned n accordance wth the method prescrbed
n secton 3 01(d)
(3) the amount of ncrease or decrease n each such ta , attrb-
utabe to such carry-back such ncrease or decrease beng deter-
mned by appyng the carry-back n the manner provded by aw
to the tems on the bass of whch such ta es were determned.
If an appcaton under secton 124(|) for tentatve ad|ustment of
ta wth respect to amortzaton has been prevousy fed but such
ad|ustment has not been prevousy determned, then for the pur-
poses of ths secton the assessments, appcatons, credts, and
refunds provded for n secton 124(k) sha be consdered as havng
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213
3779.
prevousy been made upon the bass of such appcaton under
secton 124(|)
(4) the amount by whch the aggregate of such decreases e ceeds
the aggregate of such ncreases
(5) the unpad amount of each such ta , not ncudng any
amount requred to be shown under paragraph (6)
(6) the amount, wth respect to each ta for the ta abe year
mmedatey precedng the ta abe year of such oss or unused
credt, as to whch an e tenson of tme for payment under secton
3779 s n effect and
(7) such other nformaton for the purposes of carryng out the
provsons of ths secton as may be requred by such reguatons.
n appcaton under ths subsecton sha not consttute a cam for
credt or refund.
. (b) owance of d|ustments. Wthn a perod of nnety days
from the date on whch an appcaton for a tentatve carry-back ad|ust-
ment s fed under subsecton (a), or from the ast day of the month
n whch fas the ast date prescrbed by aw (ncudng any e tenson
of tme granted the ta payer) for fng the return for the ta abe year
of the net operatng oss or unused e cess profts credt from whch such
carry-back resuts, whchever s the ater, the Commssoner sha make,
to the e tent he deems practcabe n such perod, a mted e amnaton
of the appcaton, to dscover omssons and errors of computaton
theren, and sha determne the amount of the ncrease or decrease In
each ta attrbutabe to such carry-back upon the bass of the appcaton
and the e amnaton, e cept that the Commssoner may dsaow, wth-
out further acton, any appcaton whch he fnds contans errors of com-
putaton whch he deems can not be corrected by hm wthn such nnety-
day perod or matera omssons. ach such ncrease sha be deemed
determned as a defcency and sha be assessed, wthout regard to the
restrctons on assessment n secton 272. ach such decrease sha be
apped aganst any unpad amount of the ta decreased (ncudng any
amount of such ta as to whch an e tenson of tme under secton 3779 s
n effect) and any remander sha be credted
(1) aganst the defcences (and addtons to the ta ) assessed
under ths subsecton,
(2) aganst any unsatsfed amount of any ta for the ta abe
year mmedatey precedng the ta abe year of the net operatng
oss or unused e cess profts credt the tme for payment of whch
ta Is e tended under secton 3779, and
any remander sha, wthn such nnety-day perod, be ether credted
aganst any ncome, war profts, or e cess profts ta or nstament thereof
then due from the ta payer, or refunded to the ta payer. The appca-
ton, credt or refund of a decrease determned under ths subsecton
sha be deemed a credt or refund of an overpayment wthn the meanng
of sectons 7 1(b) and 3 07(b)(1).
(c) ssessment of rboneous owances. If the Commssoner
determnes that the amount apped, credted or refunded under subsec-
ton (b) s n e cess of the overassessment attrbutabe to the carry-back
wth respect to whch such amount was apped, credted or refunded,
he may assess the amount of the e cess as a defcency as f t were due
to a mathematca error appearng on the face of the return, as provded
n secton 272(f). Upon makng such assessment, the Commssoner sha
schedue as an overassessment the decrease n any other ta resutng
from the ad|ustments refected n the computaton of the defcency.
S C. 37 1. T NSION O TIM ND T NT TI C RRY-
C ND MORTIZ TION D USTM NTS IN T C S OP
CONSOLID T D R TURNS.
If the corporaton seekng an e tenson of tme under secton 3779,
a tentatve carry-back ad|ustment under secton 37 0, or a tentatve
ad|ustment wth respect to an amortzaton deducton under secton
124 (|) and (k), made or was requred to make a consodated return,
ether for the ta abe year wthn.whch the net operatng oss or the
unused e cess profts credt arses or wthn whch the eecton s made
to termnate the amortzaton perod, or for a precedng ta abe year
affected by such oss, credt, or eecton, the provsons of such sectons
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3779.
214
sha appy ony to such e tent and sub|ect to such condtons, mta-
tons, and e ceptons as the Commssoner, wth the approva of the Sec-
retary, may by reguatons prescrbe.
Pursuant to the above-quoted provsons of the Ta d|ustment ct
of 1945, the foowng reguatons are hereby prescrbed:
Secton 474.0. Numberng of Sectons. Inasmuch as these reguatons con-
sttute Part 474 of Tte 26 of the 1945 Suppement to the Code of edera Regu-
atons, each secton of the reguatons bears a number begnnng wth 474 and
a decma pont. References to sectons preceded by 474. are references to
sectons of these reguatons. References to sectons not preceded by 474. and
references to chapters are references to sectons and chapters of the Interna
Revenue Code uness otherwse e pressy ndcated.
Sec. 474.1. tensons of Tme for Payment of Ta es by Corporatons pect-
ng Carry backs If a corporaton fes a statement wth respect to an e pected
net operatng oss carry-back or unused e cess profts credt carry-back from
any ta abe year endng on or after September 30, 1945, such corporaton may
e tend the tme for the payment of a or any part of certan ta es to the e tent
and sub|ect to the mtatons provded In secton 3779. corporaton may estend
the tme for payment wth respect to ony such ta es as meet the foowng
three requrements:
(o) The ta must be one mposed by Chapter 1 or Chapter 2
(6) The ta must be for the ta abe year mmedatey precedng the
ta abe year of the e pected net operatng oss or unused e cess profts
credt
(c) The ta must be shown on the return or must be assessed wthn the
ta abe year of the e pected net operatng oss or unused e cess profts
credt and
( ) The ta must not have been pad or requred to have been pad pror
to the fng of the statement.
The tme for payment of the ta s automatcay e tended under secton 3775
upon the fng of a statement by the corporaton wth the coector of nterna
revenue where the ta Is payabe wth respect to the e pected net operatng
oss carry-back or unused e cess profts credt carry-back. The perod of e -
tenson s that provded In secton 3779(d) uness sooner termnated by acton
of ether the Commssoner of Interna Revenue (herenafter referred to n these
reguatons as the Commssoner) or the corporaton.
Sec 474.2. Contents of Statement. The statement wth respect to an e pected
carry-hack whch must be fed by a corporaton n order to e tend the tme for
payment of ta under secton 3779 s to be fed on orm 113 . The statement
must be fed out In accordance wth the nstructons accompanyng the form,
and a nformaton requred by the form and the nstructons must be furnshed
by the ta payer. The statement must bo sworn to n the manner prescrbed n
secton 52 In the case of a corporaton ncome ta return. The coector, upon
request, w furnsh a recept for any statement fed. Such recept w show
the date the statement was fed.
The reducton, attrbutabe to the e pected carry-back. In the aggregate of the
ta es prevousy determned for a ta abe years, affected by the carry-back, pror
to the ta abe year of the e pected net operatng oss or unused e cess profts
credt w be the e cess of the decreases over the ncreases, attrbutabe to the
e pected carry-hack or any reated ad|ustments, n such ta es as prevousy
determned. The ta prevousy determned s to be ascertaned n accordance
wth the method prescrbed n secton 3 01(d). In genera, therefore, the ta
prevousy determned w be the tu shown by the ta payer on ts return, n-
creased by any amounts assessed (or coected wthout assessment) as defcences
pror to the date of the fng of the statement, and decreased by any amounts
abated, credted, refunded, or otherwse repad pror to such date. ny tems
as to whch the Commssoner and the ta payer are In dsagreement at the tme
of the fng of the statement sha be taken nto account n ascertanng the tas
prevousy determned ony f, and to the e tent that, they were reported n the
return, or were refected n any amounts assessed (or coected wthout assess-
ment) as defcences, or n any amounts abated, credted, refunded, or otherwse
repad, pror to the date of the fng of the statement. The ta prevousy
determned w refect the foregn ta credt, the credt for ta wthhed at
source provded n secton 32, the credt for debt retrement provded n secton
7 3, and the 10 per cent credt aganst the e cess profts ta provded In secton
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215
3779.
7 4, but w not refect the postwar credt provded n secton 7 0. In the
case of any ta abs year begnnng n 1044 for whch the credt provded n
secton 7 4 s not camed on the return, the ta shown on the return, for pur-
poses of ths subsecton, sha be the ta shown on the return as fed reduced by
the e cess of (1) the credt under secton 7 4 to the e tent that an amount
has not been abated, credted, refunded, or otherwse repad n respect of such
credt pror to the date of fng the statement, over (2) any amount camed
on the return as. a credt for debt retrement under secton 7 3. In the case
of any ta abe year begnnng pror to anuary 1, 1944, any amount abated,
credted, refunded, or otherwse repad n connecton wth the postwar credt
under secton 7 0, and the amount of any bonds ssued as prescrbed In sectons
7 0 and 7 1 n connecton wth the e cess profts ta for such ta abe year, whether
or not such bonds have been redeemed, sha not be consdered an amount abated,
credted, refunded, or otherwse repad n respect of the e cess profts ta for
such ta abe year.
The ncrease or decrease, attrbutabe to the e pected carry-back or any
reated ad|ustments, n any ta prevousy determned s to be ascertaned, e cept
for such carry-back and reated ad|ustments, on the bass of the Items whch
entered nto the computaton of such ta as prevousy determned. ccordngy,
as n ascertanng the ta prevousy determned, tems must be taken nto account
ony to the e tent that such tems were ncuded n the return, or were refected
n amounts assessed (or coected wthout assessment) as defcences, or n
amounts abated, credted, refunded, or otherwse repad, pror to the date of the
fng of the statement. Thus, for e ampe, f the ta payer camed a deducton
for deprecaton of 10,000 n ts return and the Commssoner asserts that ony
4,030 s propery deductbe, no change s to be made n the 10,000 deprecaton
deducton as shown by the ta payer on hs return uness a defcency has been
assessed, or an amount coected wthout assessment, pror to the date of the
fng of the statement as a resut of a change n the deprecaton deducton, or
uness such change n the deprecaton deducton was refected n an amount
abated, credted, refunded, or otherwse repad pror to such date. In determnng
the ncrease or decrease n any ta prevousy determned, any tems whch are
affected by the carry-back must be ad|usted to refect such carry-back. Thus, any
deducton mted, for e ampe, by net ncome, such as the deducton for chartabe
contrbutons, s to be recomputed on the bass of the net ncome as affected by
the carry-back. Smary, n any case where one ta s aowabe as a deducton
n computng a second ta , or where the ncome sub|ect to one ta s a credt n
computng the ncome sub|ect to the second ta , such deducton or credt must be
ad|usted to refect such carry-back. In determnng the decrease n e cess profts
ta for any ta abe year begnnng pror to anuary 1,1944, the ta as recomputed
by takng nto account the carry-back and any reated ad|ustments s not to be
decreased by the amount of the postwar credt, under secton 7 0. whether or not
any amount has been abated, credted, refunded, or otherwse repad n connecton
wth such credt, or by the amount of any bonds, whether or not such bonds have
been redeemed, ssued as provded n sectons 7S0 and 7 1 n connecton wth the
e cess prcfts ta for such ta abe year. In determnng the net operatng oss
deducton, the ad|ustments requred by sectons 122(c), 711(a) (1) ( ), and
711(a) (2) (L) are kewse to be made.
The reducton n the aggregate of the ta es prevousy determned s a net
reducton. That s, n determnng such reducton, a decrease, attrbutabe to a
carry-back, n any one ta , e. g., the e cess profts ta , w be offset by an ncrease
n any other ta , e. g., the norma ta and the surta , resutng from such decrease.
decrease n e cess profts ta attrbutabe to an unused e cess profts credt
carry-back whch tsef resuts from, or s ncreased n amount by, a net operatng
oss carry-back w be consdered to be attrbutabe to such net operatng oss
carry-back. Thus, f a corporaton has a net operatng oss n the caendar year
1945 whch when carred back to 1943 resuts n an unused e cess profts credt
for 1943, the decrease n e cess profts ta for 1941 resutng from the unused
e cess profts credt carry-back from 1943 w be consdered to be attrbutabe to
both the unused e cess profts credt carry-back from 1943 and to the net operatng
oss carry-back from 1945. The decrease n the e cess profts ta for 1941,
however, w be consdered to be attrbutabe to the net operatng oss carry-back
from 1945 ony to the e tent that such decrease resuts from such net operatng
oss carry-back.
Sec. 474.3. mount of Ta the Tme for Tatment of Whch May be -
tended. (a) Tota amount to whch e tenson may reate. The tota amount of
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3779.
216
one or more tn es the tme for payment of whch may he e tended under secton
3779 may not e ceed the amount shown n tem 4(c) of orm 113 .
(6) mount of any one ta to whch e tenson may reate. The ta payer s to
specfy n tem 5( ) of orm 113 the ta or ta es and the amount thereof the
tme for payment of whch s to be e tended. In case of any one ta the amount
to whch an e tenson may reate may not e ceed the amount of such ta shown
on the return as fed, Increased by any amount assessed as a defcency (or as
nterest or addtons to the ta ) pror to the date of fng the statement and
decreased by any amount pad or requred to be pad pror to such date. or
ta abe years begnnng n 1944, the amount of ta to whch an e tenson may
reate s to be further reduced by any amount whch s to be abated, credted,
refunded, or otherwse repad n connecton wth the credt provded n secton
7 4 wthout regard to the date on whch such abatement, credt, refund, or other
repayment s n fact aowed or made. In determnng the amount of ta requred
to be pad pror to the date of fng the statement, ony the foowng amounts sha
be taken nto consderaton:
(1) The amount of the ta shown on the return as fed and
(2) ny amount nssessed as a defcency (or as nterest or addtons to
the ta ) f the tenth day after notce and demand for ts payment occurs
pror to the date of the fng of the statement.
Denquent nstaments are to be consdered amounts requred to be pad pror to
the date of fng the statement. In the case of any authorzed e tenson of
tme unrer secton 00(c), the amount of ta the tme for payment of whch
Is so e tended s not to bs consdered requred to be pad pror to the end of such
e tenson. Smary, any amount assessed as a defcency (or as nterest or
addtons to the ta ) s not to be consdered requred to be pad pror to the
date of the fng of the statement uness the tenth day after notce and demand
for ts payment fas pror to the date of the fng of the statement.
The ta payer may choose to e tend the tme for payment of a of one or more
tn es, or t may choose to e tend the tme for payment of portons of severa
ta es. The tn es chosen by the ta payer need not be those ta es whch are
affected by the carry-back. The amount to whch an e tenson may reate n the
case of any one ta may not e ceed the amount specfed n secton 3779(c) and
shown n tem 5(1) of orm 113 , and the tota amount of a ta es the tme
for payment of whch may be e tended may not e ceed the amount specfed
n secton 3779(c) and shown n tem 4(c) of orm 113 . Such amounts repre-
sent the ma mum amounts the tme for payment of whch may be e tended
the amount the tme for payment of whch s e tended n the case of any one
ta , or the tota of such amounts, may be ess than the ma mum amounts
specfed n secton 3779(c) and shown n tems 5(1) and 4(c), respectvey, of
orm 113 .
Sec. 474.4. Payment of Remander of Ta Where tenson Reatks to
Ony Part of t|e Ta . If an e tenson of tme reates to ony part of the ta ,
the tme for payment of the remander of the ta sha be consdered to be the
dates on whch payments woud have been requred f such remander had been
the ta and the ta payer had eected to pay the ta n four equa nstaments.
The provsons of ths secton may be ustrated by the foowng e ampe:
ampe. Corporaton , whch keeps ts books and makes ts ta returns
on te caendar year bass, fed ts ncome ta return for 1945 on March 13.
194(5. The corporaton showed a ta of 1,000 on ts return and pad one-fourth
of such ta , or 250, on March 15, 1940. On une 1, 1946, Corporaton . pur-
suant to the provsons of secton 3779 and these reguatons, e tended the tntt
for payment of 000 of such ta . The remander of the ta the tme for payment
of whch was not so e tended, . e., 400, s to be consdered the ta for purposes
of determnng when t s to be pad. Such remander s to e pad n four
equa nstaments on each of the norma nstament dntes. Snce the corpora-
ton has aready pad 250 on March 15, 194(5, t w have nothng to pay on
une 15,194G, t w pay 50 on September 15, 1 )46, and 100 on December 15.1940.
Sec. 474.5. Perod of tenson. If the tme for the payment of any fa
has been e tended pursuant to secton 3779, such e tenson sha e pre
(a) on the ast day of the month n whch fas the ast date prescrbed
by aw (ncudng any e tenson of tme granted the ta payer) for the fn
of the return for the ta abe year of the e pected net operatng oss or unused
e cess profts credt: or
(6) If an appcaton for a tentatve carry-back ad|ustment provded n
secton 37 0 wth respect to such oss or unused credt s fed before the
e praton of the perod specfed n (a), above, on the date on whch notce
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217
3779.
s maed by regstered ma to the ta payer that such appcaton s aowed
or dsaowed n whoe or n part.
Sec. 474.6. Revsed Statements. corporaton may fe more than one state-
ment under secton 3779 wth respect to any one ta ube year. ach statement
s to be consdered a new statement and not an amendment of any pror statement.
ach such new statement s to be n eu of the ast statement prevousy fed wth
respect to the ta abe year of the statement and may e tend the tme for payment
of a greater or esser amount of ta than was e tended under the pror statement.
The e tenson may not reate to any amount of ta whch was pad or requred to
be pad pror to the date of fng the new statement. ny amount of ta the tme
for payment of whch was e tended under a pror statement, however, may con-
tnue to be e tended under the new statement. If the amount the tme for payment
of whch s e tended under the new statement s ess than the amount so e tended
under the ast statement prevousy fed, the e tenson of tme sha be termnated
on the date the new statement s fed as to the dfference between the two amounts.
See secton 3779(g) for the dates on whch such dfference must be pad. If
a corporaton pays any amount of ta , the tme for payment of whch was e -
tended, pror to the date the e tenson woud otherwse termnate, the e tenson
wth respect to such amount sha be deemed termnated, wthout regard to
whether a new statement s fed, on the date such amount s pad. The corpo-
raton sha Indcate on each new statement fed that t has aready fed one or
more pror statements wth respect to the ta abe year of the statement. The
corporaton sha kewse ndcate the dates each pror statement was fed and
the amount of each ta the tme for payment of whch was e tended under each
pror statement.
The provsons of ths secton may be ustrated by the foowng e ampe:
ampe. Corporaton , whch keeps ts books and makes ts ta returns on
the caendar year bass, fed ts Income ta return for 1945, showng a ta of
100,000, on March 15, 1946. t the same tme t fed a statement under secton
3770 n whch t stated that t e pected to have a net operatng oss of 75,000 n
194G and that the reducton n the aggregate of a ta es prevousy determned
for ta abe years pror to 1940, attrbutabe to the e pected net operatng oss
carry-back resutng from such e pected oss, woud be 30,000. The corporaton
accordngy e tended the tme for payment of 30,000 of ts ncome ta for 1945,
and pad 17,500 of such ta on March 15, 1946 (see sectons 3779(c) and 474.4).
s a resut of ts operatons durng the ne t severa months, the corporaton
fed a second statement on une 1, 1946, n whch t stated that ts e pected net
operatng oss for 1946 woud amount to 300,000 and that the correspondng
reducton n the aggregate of a ta es prevousy determned for ta abe years
pror to 1946 woud amount to 120,000. Corporaton under the new statement
may e tend the tme for payment of the three nstaments of 17,500 due on
une 15, 1946, September 15, 1946, and December 15, 1946, and the tme for pay-
ment of the 30,000 e tended under the frst statement fed on March 15, 1946,
may contnue to be e tended under the second statement. The 17,500 whch
was pad on March 15, 1946, w not be affected by the second statement fed
on une 1, 1946. If the corporaton had faed to pay the 17,500 on March 15,
1946, and had not secured an e tenson of tme under secton 56(c) unt a
east une 1, 1946, wth respect to such amount, the tme for payment of such
17,500 coud not be e tended under the second statement fed on une 1, 1946.
Corporaton mght fe a second statement to show that t had overestmated
the amount of ts e pected net operatng oss and accordngy to termnate the
e tenson wth respect to part or a of the ta . The corporaton mght fe a
second statement even though ts estmate of ts e pected net operatng oss had
not changed snce t fed ts frst statement. or e ampe, the corporaton mght
have computed ncorrecty the reducton, attrbutabe to the e pected net operat-
ng oss carry-back from 1946, n the aggregate of ts ta es prevousy determned
for a ta abe years pror to 1946. In such case, the corporaton mght fe a
second statement showng the correct computaton of such reducton and n-
creasng or decreasng the amount of ta the tme for payment of whch was e -
tended to correspond to the correct computaton. The corporaton mght fe a sec-
ond statement n order to change the knd of ta the tme for payment of whch
s to be e tended even though the tota amount of ta the tme for payment of
whch was e tended s not to be changed.
Sec. 474.7. Termnaton ny Commssoner. (a) fter an e amnaton of the
statement fed by the corporaton s made. The Commssoner s authorzed to
make such e amnaton of the statements fed as he deems necessary and prae-
703672 16 15
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S 3779.
21
tcabe. If upon such e amnaton as he may make, the Commssoner beeves
that, as of the tme he makes the e amnaton, a or any part of the statement
Is In a matera respect erroneous or unreasonabe, he w termnate the e ten-
son as to any part of the amount to whch such e tenson reates whch he deems
shoud be termnated.
(6) eopardy. If the Commssoner beeves that the coecton of any
amount to whch an e tenson under secton 3779 reates Is In eopardy, he w
Immedatey termnate the e tenson. In the case of such a termnaton, note
and demand s to be made by the coector for payment of such amount, and
there may be no further e tenson of tme under secton 3779 wth respect to
such amount.
Sec. 474. Payments on Termnaton. If an e tenson of tme under secton
779 s termnated wth respect to any amount ether (1) by the fng of a new
statement by the ta payer under secton 3779(e) e tendng the tme for pay-
ment of a esser amount than was e tended n n pror statement or (2) by acton
of the Commssoner under secton 3779(f) after makng an e amnaton of the
statement ted by the corporaton, no further e tenson of tme may be made
under secton 3779 wth respect to such amount. The tme for payment of such
amount sha be the dates on whch payments woud have been requred f there
had been no e tenson wth respect to such amount and the ta payer had eected
under secton 56(b) to pay the tn In four equa nstaments.
The provsons of ths secton may be ustrated by the foowng e ampes:
ampe (1). Corporaton C, whch keeps ts books and makes ts ta return
on a caendar year bass, fed ts 1945 ncome ta return, showng a ta of
1,000, on March 15, 1946. t the same tme the corporaton fed a statement
under secton 3779 and these reguatons e tendng the tme for payment of the
entre 1,000. ou the bass of an e pected unused e cess profts credt carry-back
from 19-10. On uy 1, 1940, the corporaton fed a new statement ndcatng tha:
the reducton, attrbutabe to the e pected unused e cess profts credt carry-
back from 1046, n the aggregate of ts ta es for years pror to 1946 woud be
ony 600, and thus termnated the above e tenson to the e tent of 400. The
tme for payment of such 400 may not be e tended agan, and such 400 s
payabe as f t were the ta for 1945 and Corporaton C had eected to pay
such ta In four equa nstaments. That Is, 100 s payabe on March 15,19
100 on une 15, 1946, 100 on September 15, 1946, and 100 on December 15,
1946. Interest s payabe under secton 3779(1) (2) on such amounts at the rate
of 6 per cent per annum and Is to be computed from the respectve dates on
whch such amounts were payabe. Inasmuch as the March 15 and une 13
dates had aready passed when Corporaton O termnated the e tenson wth
respect to the 400, 200 s payabe mmedatey upon such termnaton, and
100 s payabe on September 15, 1946, and 100 on December 15, 1946. The
fact that the corporaton dd not pay the 100 on March 15, 1946, and the 10
on une 15, 1946, s not to be consdered such a faure to pay an nstament
on or before the date f ed for ts payment as woud make the entre ta become
due under the provsons of secton 56(b). Interest, however, w be computed
upon the frst 100 from March 15, 1946, and upon the second 100 from une
15, 1946. See sectons 3779(1) and 474.9.
ampe (2). If Corporaton C n e ampe (1) had shown a ta of 1.2W
on Its return and accordngy had pad 50 on March 15, 1940, and 50 on une
15, 1940, the other fcts beng the same as n e ampe (1), then upon the ter-
mnaton as to the 400, 200 woud be payabe mmedatey ( e., 100 whch n
the ght of the termnaton shoud have been pad on March 15, 19S6, and W
whch shoud have been pad on une 15, 1940), and two nstaments of 1M
each woud be payabe on September 15, 1946, and on December 15, 1946. Inter-
est woud be computed from the same dates as In e ampe (1).
The above e ampes woud aso appy If the e tenson of tme for the pay-
ment of the 400 were termnated by the Commssoner under secton 3779(f)
because he beeved that the statement fed by Corporaton C under secton
779 e tendng the tme for payment of ta was ceary erroneous or unreason-
abe n a matera respect. If, however, the Commssoner on uy 1, 1946, ter-
mnated the e tenson wth respect to such 400 under secton 3779(h) oceans
he beeved the coecton of such amount was n |eopardy, the entre 400 woud
be payabe mmedatey upon notce and demand by the coector. In such case
Interest woud be computed on 100 from March 15, 1940, on 100 fom une 15.
1946, and on the remanng 200 from uy 1,1940. See sectons 3779(1) and 474
Sec. 474.9. Interest. Interest Is payabe on any amount the tme for payment
of whch s e tended under secton 3779. The nterest, whch s to be coected as
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3779.
part of such amount, Is to be computed from the dates on whch payments woud
have been requred f there had been no e tenson, and the ta payer had eected
under secton 56(b) to pay the ta In four equa nstaments, at the foowng
rates:
(a) t the rate of 3 per cent per annum on so much of such amount as s sats-
fed by appyng or credtng thereto, wthn the perod of e tenson (see secton
3779(d)), a decrease n ta determned n respect of an appcaton for a tentatve
carry-back ad|ustment, as provded n secton 37S0(a), to the date of such sats-
facton, e cept that the rate s to be 0 per cent per annum upon so much of the
satsfed amount as does not e ceed the amount of the defcences assessed under
secton 37 0(b) n respect of such appcaton whch s not so satsfed and
(6) t the rate of 0 per cent per annum upon the remander of the amount the
tme for payment of whch was e tended to the date such amount s pad.
Interest thus w be payabe at the rate of 3 per cent per annum upon any
amount the tme for payment of whch has been e tended under secton 3779 to
the e tent that such amount s satsfed by appyng or credtng thereto, wthn
the perod of e tenson, a decrease n ta determned In respect of an appcaton
for a tentatve carry-back ad|ustment under secton 37 0(a). The appcaton for
the tentatve carry-back ad|ustment must be wt respect to the same ta abe year
as that of the e pected net operatng oss or unused e cess profts credt. In
determnng whether an amount has been so satsfed, however, the net effect of
the carry-back, ncudng any resutng defcences, must be taken Into account.
Interest upon any amount not so satsfed w be payabe at the rate of 6 per cent
per annum.
The provsons of ths secton may be Iustrated by the foowng e ampe:
ampre. Corporaton D, whch came nto e stence on anuary 1, 1945, and
whch keeps Its books and makes ts ta returns on the caendar year bass,
e tended the tme for payment of S55 of ts e cess profts ta for 194. ) on the
bass of an e pected unused e cess profts credt carry-back from 1946. The
corporaton n fact had an unused e cess profts credt In 1946 and t fed an
appcaton for a tentatve carry-back ad|ustment under secton 37 0(a) on March
31, 1947. Such appcaton showed a decrease n e cess profts ta for 1945 of
55 and a resutng ncrease n ncome ta for 1945 of 400. Corporaton D s
appcaton was aowed n fu on une 29, 1947, and the resutng decrease of
55 n e cess profts ta for 1945 was apped aganst the S55 of e cess profts
ta for 1943 the tme for payment of whch had been e tended (see secton
37 0(b)). The Commssoner, however, smutaneousy assessed, and notce and
demand was made for, the 400 ncrease n Corporaton D s ncome ta for 1945.
Inasmuch as the entre decrease n ts e cess profts ta for 1945 had been
apped aganst the unpad amount of ts e cess profts ta for 1945, the corpora-
ton pad such 400 ncrease In ncome ta n cash wthn 10 days after notce and
demand. The reducton In the nggregate of the corporaton s ta es as prevousy
determned for 1945, attrbutabe to the unused e cess profts credt carry-back
from 1946, was ony 455, and the corporaton therefore shoud not have e tended
the tme for payment of more than 455 of ts 1945 ta es. Inasmuch as In effect
ony 455 of the amount the tme for payment of whch had been e tended was
satsfed by reason of the carry-back, Interest s to be coected at the rate of 3
per cent per annum on the 55 and at the rate of 0 per cent per annum on the
remanng 400. The Interest w be computed on the 455 and on the 400 at the
rates of 3 per cent and 6 per cent per annum, respectvey, as f one-fourth of each
such amount were payabe on March 15, 1940, one-fourth on une 15, 1946, one-
fourth on September 15, 1946, and one-fourth on December 15, 1946. Interest on
the 455 w run unt the date the reducton n e cess profts ta for 1945. deter-
mned n respect of the above appcaton for a tentatve carry-back ad|ustment,
s apped aganst the e cess profts ta for 1945 the tme for payment of whch
was e tended, and nterest on the 400 w run unt the date such 400 Is pad.
No nterest w he payabe n ths case on the above 400 ncrease n ncome ta
for 1945 resutng from the decrease n e cess profts ta for 1945. See secton
292(c). The corporaton, however, w be abe for a penaty of 5 per cent of
2 6.25, or 14.31, for e tendng the tme for payment of an amount substantay
In e cess of an amount the tme for payment of whch mght propery have been
e tended. See secton 294(e) and secton 29.294-2 of Reguatons 111.
If an e tenson of tme under secton 3779 s termnated ether by acton of
the ta payer (by payng an amount the tme for payment of whch had been
e tended or by fng a new statement e tendng the tme for payment of a esser
amount than was e tended In a pror statement) or by the Commssoner (because
he beeves the statement fed was erroneous or unreasonabe In a matera
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3779.
220
respect or because he beeves that the coecton of an amount to whch the
e tenson reates s n |eopardy), nterest s payabe on the amount to whch
such termnaton reates at the rate of 6 per cent per annum to the date of
payment. Lkewse, If the ta payer fas to fe an appcaton for a tentatve
carry-back ad|ustment pror to the ast day of the month n whch fas the
ast date prescrbed by aw (ncudng any e tenson of tme granted the ta -
payer) for fng the return for the ta abe year of the e pected net operatng
oss or unused e cess profts credt, nterest s payabe on the amount to whch
the e tenson reates at the rate of 6 per cent per annum to the date of payment.
In such case Interest w be payabe at the rate of 6 per cent per annum wthout
regard to whether the ta payer coud have fed an appcaton for a tentatve
carry-back ad|ustment, whch woud have been aowed by the Commssoner,
pror to such ast date and wthout regard to whether the ta payer n fact
does fe such an appcaton at some tme after such ast date. If part of an
amount the tme for payment of whch has been e tended s satsfed by appyng
or credtng thereto, wthn the perod of e tenson, a decrease n ta determned
In respect of an appcaton for a tentatve carry-back ad|ustment and part s
not so satsfed, nterest w be payabe on the frst part at the rate of 3 p r
cent per annum and on the second part at the rate of 6 per cent per annum.
The acton of the Commssoner n aowng or dsaowng an appcaton for
n tentatve carry-back ad|ustment determnes the nterest payabe on amounts
the tme for payment of whch has been e tended under secton 3779 such
nterest s not to be affected by a ater determnaton by the Commssoner or
any court, ncudng The Ta Court of the Unted States. If, however, the
Commssoner determnes, ether at the tme of the termnaton of the e tenson
or at some tme thereafter, that durng the perod of e tenson a credt or refund
of an overpayment has been aowed or made, or a defcency assessed, affectng
the amount to whch the e tenson under secton 3779 reates and that the corpora-
ton coud not have taken such overpayment or defcency nto account In the
statement or n a revsed statement, au approprate ad|ustment w be made
In determnng what part of such amount sha bear nterest at the rate of 3
per cent and what part at the rate of C per cent per annum.
Sec. 474.10. Tentatve Carry- ack d|ustments. (a) In genera. ny ta -
payer who cams a net operatng oss or unused e cess profts credt for any
ta abe year endng on or after September 0, 1945, may fe an appcaton under
secton 37 0 for a tentatve carry-back ad|ustment of the ta es for a ta abe
years pror to the ta abe year of the oss or unused credt whch are affected
by the net operatng oss carry-back or the unused e cess profts credt carry-
back resutng from such oss or unused credt. The rght to fe an appcaton
for a tentatve carry-back ad|ustment Is not mted to corporatons, but s ava-
abe to any ta payer who has a carry-back from a ta abe year endng on or
after September 30, 1945. corporaton may fe an appcaton for a tentatve
carry-back ad|ustment even though t has not e tended the tme for payment of
ta under secton 3779. If a corporaton has both a net operatng oss and an
unused e cess profts credt n any ta abe year endng on or after September
30, 1 45, t may fe an appcaton for a tentatve carry-back ad|ustment n respect
of both the net operatng oss carry-back and the unused e cess profts credt
carry-back resutng from such oss and unused credt.
decrease n e cess profts ta attrbutabe to an unused e cess profts
credt carry-back whch tsef resuts from, or Is Increased n amount by, a
net operatng oss carry-back w be consdered to be attrbutabe to both the
unused e cess profts credt carry-back and the net operatng oss carry-back.
If a corwraton has, e. g., a net operatng oss n the caendar year 194
whch when carred back to 1943 resuts In an unused e cess profts credt
for 1943, the decrease n e cess profts ta for 1941 resutng from the unused
e cess profts credt carry-back from 1943 w be consdered to be attrbutabe
to bot the unused e cess profts credt carry-back from 1943 and to the net
operatng oss carry-back from 1945. The decrease n e cess profts ta for
1941, therefore, w be taken nto account n determnng the effect on pror
years ta es of the net operatng oss carry-back from 1945 f the corporaton
fes an appcaton for a tentatve carry-back ad|ustment wth respect to the
net operatng oss carry-back from 1945. The decrease n the e cess profts
ta for 1941 w be taken nto nccount, however, ony to the e tent that t
resuted from the net operatng oss carry-back from 1945.
(6) Contents of appcaton. The appcaton for a tentatve carry-back
ad|ustment n the case of a corporaton s to be fed on orm 1139, and n
the case of ta payers other than corporatons on orm 1045. The appcatons
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221
3779.
are to be fed out n accordance wth the nstructons accompanyng such
forms, and a nformaton requred by the forms and the nstructons must
be furnshed by the ta payer. The appcaton n the case of a corporaton
s to be sworn to n the manner provded n secton 52 n the case of a corpo-
raton ncome ta return. The appcaton n the case of a ta payer other
than a corporaton s to be verfed n the manner, provded n sectons 51
and 142 n the case of an ncome ta return of such ta payer.
n appcaton for a tentatve carry-back ad|ustment does not consttute
a cam for credt or refund. If such appcaton s dsaowed by the Com-
mssoner n whoe or In part, no sut may be mantaned n any court for
the recovery of any ta based on such appcaton. The ta payer, however,
may fe a reguar cam for credt or refund under secton 322 at any tme
pror to the e praton of the appcabe perod of mtaton, and may man-
tan a sut based on such cam f t s dsaowed or f the Commssoner
does not act on the cam wthn s months from the date It s fed. Such
reguar cam may be fed before, smutaneousy wth, or after the fng
of the appcaton for a tentatve carry-back ad|ustment. The fng of an
appcaton for a tentatve carry-back ad|ustment w not consttute the
fng of a cam for credt or refund wthn the meanng of secton 322(b)
for purposes of determnng whether a cam for credt or refund was fed
pror to the e praton of the appcabe perod of mtaton. reguar
cam for credt or refund under secton 322 fed after the fng of an
appcaton for a tentatve carry-back ad|ustment s not to be consdered an
amendment of such appcaton but s to be consdered a new cam. Such
reguar cam, however, In proper cases may consttute an amendment to a
pror reguar cam fed under secton 322.
(o) Tme and pace of fng appcaton. The appcaton for a tentatve
carry-back ad|ustment s to be fed on or after the date of the fng of the
return for the ta abe year of the net operatng oss or the unused e cess
profts creft, and must be fed wthn a perod of 12 months from the end
of such ta abe year. ny appcaton fed pror to the date the return
for the ta abe year of the oss or unused credt s fed sha be consdered
to have been fed on the date such return s fed. The appcaton s to
be fed wth the coector of nterna revenue where the ta was pad or the
assessment was made.
Sec. 474.11. Computaton of Increase or Decrease n Pror Years Ta es
ffected b the Carry-back. The ta payer s to determne the amount of
ncrease or decrease, attrbutabe to the carry-back, n each ta prevousy deter-
mned, whch s affected by suc carry-back, for each ta abe year pror to the
ta abe year of the net operatng oss or unused e cess profts credt. The ta
prevousy determned s to be ascertaned n accordance wth the method pre-
scrbed n secton 3 01(d). In genera, therefore, the ta prevousy determned
w be the ta shown on the return ns red, Increased by any nmounts assessed
(or coected wthout assessment) as defcences pror to the date of the fng
ot the appcaton for a tentatve carry-back ad|ustment, and decreased by any
amounts abated, credted, refunded, or otherwse repad pror to such date.
ny tems as to whch the Commssoner and the ta payer are In dsagreement
at the tme of the fng of the appcaton sha be taken Into account n ascer-
tanng the ta prevousy determned ony f, and to the e tent that, they were
reported n the return, or were refected In any amounts assessed (or coected
wthout assessment) as defcences, or n any amounts abated, credted, refunded,
or otherwse repad, pror to the date of fng the appcaton. The ta prevousy
determned, therefore, w refect the foregn ta credt, the credt for ta
wthhed at source provded n secton 32, the cret for debt retrement pro-
vded n secton 7 3, and the 10 per cent credt aganst e cess profts ta provded
n secton 7S4, but w not refect the postwar credt provded n secton 7S0.
In the case of any ta abe year begnnng n 1044 for whch the credt provded
n secton 7 4 s not camed on the return, the ta shown on the return, for
purposes of ths secton, sha be the ta shown on the return as fed reduced by
the e cess of ( ) the credt under secton 7 4 to the e tent that an amount has
not been abated, credted, refunded, or otherwse repad n respect of such credt
pror to the date of fng the appcaton, over (b) any amount camed on the
return as a credt for debt retrement under secton 7 3. In the case of any
ta abe year begnnng pror to anuary 1, 1044, any amount abated, credted,
refunded, or otherwse repad, pror to the date of fng the appcaton, n con-
necton wth the postwar credt provded In secton 7S0, and the amount of any
bonds Issued as provded n sectons 7 0 and 7 1 n connecton wt the e cess
profts ta for such ta abe year, whether or not such bonds have been redeemed,
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3779.
222
sha be consdered an amount abated, credted, refunded, or otherwse repad
n respect of the e cess profts tu for such ta abe year pror to the date of
fng the appcaton.
Tha Increase or decrease n each ta prevousy determned whch Is affected
by the carry-back or any reated ad|ustments Is to be determned, e cept for such
carry-back and reated ad|ustments, on the bass of the Items whch entered Into
the computaton of such ta as prevousy determned the ta -prevousy deter-
mned beng ascertaned n the manner descrbed In ths secton. In determnng
any such ncrease or decrease, accordngy, Items sha be taken nto account
ony to the e tent that they were reported In the return, or were refected n
amounts assessed (or coected wthout assessment) as defcences, or n amounts
abated, credted, refunded, or otherwse repad, pror to the date of fng the
appcaton for a tentatve carry-back ad|ustment. If the Commssoner and
the ta payer are n dsagreement as to the proper treatment of any tem. It
sha be assumed for purposes of determnng the ncrease or decrease n the
ta prevousy determned that such tem was correcty reported by the ta pa|f
uness, and to the e tent that, the dsagreement has resuted In the assessment
of a defcency (or the coecton of an amount wthout an assessment), or the
aowng or makng of an abatement, credt, refund, or other repayment, pror
to the date of fng the appcaton. Thus, If the ta payer camed a deducton
on ts return of T 0,000 for saares pad Its offcers but the Commssoner asserts
that such deducton shoud not e ceed 20,000, and the Commssoner and the
ta payer have not agreed on the amount propery deductbe pror to the date
the appcaton for a tentatve carry-back ad|ustment s fed, 50,000 sha be
consdered as the amount propery deductbe for purposes of determnng the
ncrease or decrease n each ta prevousy determned n respect of the app-
caton for a tentatve carry-back ad|ustment. In determnng the ncrease or
decrease n any ta prevousy determned, any tems whch are affected by
the carry-back must be ad|usted to refect such carry-back. Thus, any deduc-
ton mted, for e ampe, by net ncome or ad|usted gross Income, such as the
deducton for chartabe contrbutons, s to be recomputed on the bass of the
net Income or ad|usted gross ncome as affected by the carry-back. Smary,
n any case where one ta s aowabe as a deducton n computng a second
ta , or where the ncome sub|ect to one ta Is a credt n computug the ncome
sub|ect to the second ta , such deducton or credt must be ad|usted to refect
such carry-back. In determnng the decrease n e cess profts ta for any ta -
abe year begnnng pror to anuary 1, 1044, the ta as recomputed by takng
nto account the carry-back and any reated ad|ustments Is to be decreased by
any amount whch has been abated, credted, refunded, or otherwse repad, pror
to the date of fng the appcaton, In connecton wth the postwar credt under
secton 7 0, and by the nmount of any bonds, whether or not such bonds have
been redeemed, ssued as provded n sectons 7 0 and 7 1 n connecton wth
the e cess profts ta for such ta abe year, to the e tent that such amounts
are propery aocabe to such ta as recomputed. In computng the net operatng
oss deducton for purposes of determnng any such ncrease or decrease, proper
ad|ustments as requred by sectons 122(c), 711(a) (1) ( ), and 711(a) (2) (L)
are to be made.
In determnng the Increase or decrease In any ta prevousy determned whch
s affected by the carry-back, the ta prevousy determned s to be ncreased or
decreased by the amount of any ncrease or decrease n such ta shown on an
appcaton fed under secton 124(|), reatng to appcatons for tentatve ad|ust-
ments wth respect to the amortzaton deducton, to the e tent that such ncrease
or decrease shown n the appcaton fed under secton 124(|) has not beer,
assessed or aowed pror to the date of fng the appcaton for the tentatve
carry-back ad|ustment. The tems whch enter nto the computaton of the ta
prevousy determned are to be ad|usted n conformty wth such ncrease or
decrease shown on the appcaton fed under secton 124(|) for a tentatve ad|ust-
ment wth respect to the amortzaton deducton. The provsons of ths para-
graph wth respect to an appcaton fed under secton 124( ) are not to appy n
any case n whch such appcaton has been dsaowed pror to the date the
appcaton for a tentatve carry-back ad|ustment s fed.
Sec. 474.12. owance of d|ustmknts. The Commssoner s to act upon any
appcaton for a tentatve carry-back ad|ustment fed under secton 37 0(a)
wthn a perod of 90 days from whchever of the foowng two dates s the ater:
(a) The date the appcaton s fed or
(6) The ast day of the month n whch fns the ast date prescrbed by aw
(ncudng any e tenson of tme granted the ta payer) for fng the return for
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223
5 3779.
the ta abe year of the net operatng oss or unused e cess profts credt from
whch the carry-back resuts.
Wthn the above 90-day perod the Commssoner w make, to the e tent he
deems practcabe n such perod, an e amnaton of the appcaton to dscover
omssons and errors of computaton. e s to determne wthn such perod the
ncrease or decrease n any ta prevousy determned, affected by the carry back
or any reated ad|ustments, upon the bass of the appcaton and such e amna-
ton. Such ncreases and decreases are to be determned n the same manner as
that provded n secton 37 0(a) for the determnaton by the ta payer of the
ncreases and decreases n ta es prevousy determned whch must be set forth n
the appcaton for a tentatve carry-back ad|ustment. The Commssoner, how-
ever, may correct any errors of computaton or omssons he may dscover upon
e amnaton of the appcaton. In determnng the ncrease or decrease n each
ta prevousy determned whch s nff|cted by the carry-back or any reated
ad|ustments, he accordngy may correct any mathematca error appearng on
the appcaton and he may kewse correct any ad|ustment requred by the aw
and ncorrecty made by the ta payer n computng ts net operatng oss, ts
unused e cess profts credt, the resutng carry-backs, or ts net operatng oss
deducton or unused e cess profts credt ad|ustment. If the requred ad|ust-
ment has not been made by the ta payer and the Commssoner has avaabe the
necessary nformaton to make such ad|ustment wthn the above 90-day perod,
he may, In hs dscreton, make such ad|ustment. Thus, f the ta payer s appca-
ton fas to take nto account certan ta -free nterest whch he receved n the
year of the net operatng oss, or n a pror year the ta es for whch are affected by
the resutng net operatng oss carry-back, the Commssoner, f he knows the
amount of such ta -free nterest receved by the ta payer n such year, may take
such ta -free nterest nto account n determnng the ncreases and decreases n
the ta es prevousy determned whch are affected by the carry-back. In deter-
mnng such ncreases and decreases, however, the Commssoner w not, for
e ampe, change the amount camed on the return as a deducton for deprecaton
because he beeves that the ta payer has camed an e cessve amount kewse,
he w not Incude n gross ncome any amount not so ncuded by the ta payer
even though the Commssoner beeves that such amount s sub|ect to ta and
propery shoud be ncuded n gross ncome.
If the Commssoner fnds that an appcaton for a tentatve carry-back
ad|ustment contans matera omssons or errors of computaton, he may
dsaow such appcaton n whoe or n part wthout further acton. If,
however, he deems that any error of computaton can be corrected by hm
wthn the above 90-day perod, he may do so and aow the appcaton n whoe
or n part. The Commssoner s determnaton as to whether he can correct
any error of computaton wthn the above 90-day perod sha be concusve.
Smary, hs acton In dsaowng, n whoe or n part, any appcaton for a
tentatve carry-back ad|ustment sha be fna and may not be chaenged n any
proceedng. The ta payer n such case, however, may fe a reguar cam for
credt or refund under secton 322, and may mantan a sut based on such cam
If It s dsaowed or f the Commssoner does not act upon the cam wthn
s months from the date t Is fed.
In the case of any appcaton for a tentatve carry-back ad|ustment whch
the Commssoner aows n whoe or n part, any ncrease determned by the
Commssoner n any ta prevousy determned whch s affected by the carry-
back or any reated ad|ustments sha be deemed to have been determned as
a defcency and sha be assessed wthout regard to the restrctons on assess-
ment provded In secton 272. Such ncrease may be assessed, for e ampe,
wthout regard to whether a notce of defcency n respect of such ncrease
Is sent to the ta payer and wthout regard to whether a pror notce of de-
fcency has been maed to the ta payer. The ta payer w not have the
rght to contest the assessment before The Ta Court of the Unted States whether
or not the Commssoner sends hm a notce In respect of such ncrease.
ach decrease determned by the Commssoner n any ta prevousy deter-
mned whch s affected by the carry-back or any reated ad|ustments sha frst
be apped aganst any unpad amount of the ta wth respect to whch such
decrease was determned. Such unpad amount of ta may ncude one or more
of the foowng:
(1) n amount wth respect to whch the ta payer s denquent
(2) n amount the tme for payment of whch has been e tended under
secton 779 whch s due and payabe on or after the date on whch the
decrease s aowed and
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3779.
224
(3) n amount (Incudng an amount the tme for payment of whch
has been e tended under secton 56(c), but not Incudng an amount the
tme for payment of whch has been e tended under secton 3779) whch
s due and payabe on or after the date on whch the decrease s aowed.
In case the unpad amount of ta Incudes more than one of such amounts, the
Commssoner, n hs dscreton, sha determne aganst whch amonnt or
amounts, and n what proporton, the decrease s to be apped. In genera, how-
ever, the decrease w be apped aganst any amounts descrbed n causes
(1), (2), and (3) of ths paragraph n the order named. If there are severa
amounts of the type descrbed n cause (3), nny amount of the decrease whch
s to be apped aganst such amounts w be apped by assumng that the tw
prevousy determned mnus the amount of the decrease to be so apped s
the ta and the ta payer had eected to pay such ta In four equa nsta-
ments. The unpad amount of ta aganst whch a decrease may be appa
may not ncude any amount of ta for any ta abe year other than the year
of the decrease. fter makng such appcaton, the Commssoner w credt
any remander of the decrease as foows:
() ganst any ncrease (ncudng addtons to the ta ) determned
n nny ta whch s attrbutabe to the carry-back or any reated ad|ust-
ments and whch has been assessed under secton 37 0(b): and then
() ganst any unsatsfed amount of any ta for the ta abe year mme-
datey precedng the ta abe year of the net oparatng oss or the nnsed
e cess profts credt the tme for payment of whch as been e tended under
secton 3779.
ny remander of the decrease after such appcaton and credts may, wthn the
above CO-day perod, In the dscreton of the Commssoner, be credted aganst any
ncome, war profts, or e cess profts ta or nstament thereof then due from the
ta payer, and, If not so credted, s to be refunded to the ta payer wthn och
CO-day perod.
The appcaton, credt, or refund of a decrease n ta determned under secton
37 0 sha consttute a credt or refund of an overpayment wthn the meanng
of sectons 7 1(b) and 07(b)(1), reatng, respectvey, to postwar credts or
postwar bonds n the case of credts or refunds and to the perod of mtatons n
the case of reated ta es under Chapter 1 and Chapter 2.
Sec. 474.13. ssessment of rboneous owances. If the Commssoner deter-
mnes that any amount apped, credted, or refunded under secton 37 0(b) wth
respect to an appcaton for a tentatve carry-back ad|ustment s n e cess of the
overnssessment propery attrbutabe to the carry-back upon whch such appca-
ton was based, he may assess the amount of the e cess as a defcency as f enrt
defcency were due to a mathematca error appearng on the face of the return.
That s, the Commssoner may assess an amount equa to the e cess, and such
amount may be coected, wthout regard to the restrctons on assessment and co-
ecton mposed by secton 272. Thus, the Commssoner, for e ampe, may assess
such amount wthout regard to whether he has maed the ta payer a pror notce
of defcency. ther before or after assessng such an amount, the Commssoner
w notfy the ta payer that he has made, or w make, such assessment Such
notce w not consttute a notce of defcency, and the ta payer may not fe a
petton wth The Ta Court of, the Unted States based on such notce. The
ta payer, however, wthn the appcabe perod of mtaton may fe a reguar
cam for credt or refund under secton 322 based on the carry-back, f e has
not aready fed such a cam, and may mantan n sut based on such cam ff
Is dsaowed or f t s not acted upon by the Commssoner wthn s months
from the date the cam Is fed.
Upon assessng any defcency under secton 37 0(c), the Commssoner w
schedue as an overassessment the decrease In any other ta resutng from the
ad|ustments refected n the computaton of the defcency so assessed. Thus, f
the Commssoner determnes that 55 of e cess profts ta for 1944 was apped,
credted, or refunded n respect of an appcaton for a tentatve carry-bad
ad|ustment n e cess of the amount whch propery shoud have been so appe
credted, or refunded, the Commssoner may assess such 55 as a defcency
wthout regard to the restrctons on assessment mposed by secton 272. Gener-
ay, however, such defcency w resut n a decrease of Income ta for 1944 n
the amount of 400. Upon assessng the S55 of e cess profts ta for 1944, the
Commssoner accordngy w schedue such decrease of 400 n Income ta f r
1944 as an overassessment, and such 400 overassessnent of ncome ta w he
credted aganst the 55 defcency n e cess profts ta . The ta payer, therefore,
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225
3779.
w be requred to pay ony the dfference between Ihe two nmounts, or 455, n
satsfacton of the defcency.
The method provded n secton 37S0(c) to recover any amount apped, credted,
or refunded n respect of an appcaton for a tentatve carry-back ad|ustment
whch the Commssoner ater determnes shoud not have been so apped,
credted, or refunded s not an e cusve method. Two other methods are ava-
abe to recover such amount: (a) by way of a defcency notce under secton
272(a) or (6) by a sut to recover an erroneous refund under secton 3740. The
Commssoner, n hs dscreton, may proceed by way of any one or more of the
three avaabe methods to recover any amount whch he determnes was mprop-
ery apped, credted, or refunded n respect of an appcaton for a tentatve
carry-back ad|ustment.
P RT II.
In order to conform Reguatons 111 Part 29, Tte 26, Code of
edera Reguatons, Cum. Sup. to secton 4(b) of the Ta d|ust-
ment ct of 1045 (Pubc Law 172, Seventy-nnth Congress), approved
uy 31,1945, such reguatons are amended as foows:
Paragraph 1. There s nserted mmedatey precedng secton
29.294-1, as amended by Treasury Decson 5420, approved December
,1944 C. . 1944, 355 , the foowng:
S C. 4. T NSIONS O TIM OR P YM NT O T S Y
COItPO TIONS P CTING C RRY- C S, ND T NT -
TI C RItY- C D USTM NTS. (T D USTM NT
CT O 1945.)

(b) Secton 21)4 of the Interna Revenue Code s amended by addng
at the end thereof the foowng new subsecton:
(e) Stm.ST TI I. O RST T M NT O P CT D C. RRY- aC . If the
tme for payment of any ta or ta es for any ta abe year s e tended
under secton 3779, there sha be added to such ta or ta es an amount
equa to 5 per centum of the penaty porton, f any, of the amount to,
whch such e tenson reates, uness the ta payer estabshes to the
satsfacton of the Commssoner that, as of the end of the ta abe year
n whch such e tenson was made, there was reasonabe cause to e -
pect there woud be no such penaty porton. The penaty porton sha
be the e cess of the amount to whch such e tenson reates whch s
not pad by the end of the ta abe year n whch such e tenson s made
over 125 per centum of the amount to whch such e tenson reates
whch s satsfed by appyng thereto a decrease n ta n respect of an
appcaton under secton 37 )(a) ess any amounts assessed In respect
of such appcaton whch are not so satsfed.

Par. 2. There s nserted mmedatey foowng secton 29.294-1, as
amended by Treasury Decson 5420, the foowng new secton:
Sec. 29.294-2. Substanta Overestmate of pected Carry- acks. Secton
294(e) provdes for an addton to the ta n case the amount of ta the tme
for payment of whch has been e tended under secton 3779 s substantay In
e cess of the amount the tme for payment of whch mght propery have been
e tended. Such addton to (he ta s n addton to the nterest payabe under
secton 3779(), to any other appcabe addtons to the ta , and to any app-
cabe crmna penates.
Secton 294(e) provdes that f the tme for payment of any amount of ta
or ta es has been e tended under secton 3779, there sha be added to such
ta or ta es an amount equa to 5 per cent of the penaty porton, f any, of the
amount to whch such e tenson reates uness the ta payer estabshes to the
satsfacton of the Commssoner that, as of the end of the ta abe year n whch
the e tenson was made, there was reasonabe cause to e pect that there woud
be no such penaty porton. If the e tenson of tme under secton 3779 reates
to more than one ta , any addton to the ta under secton 294(e) w, n the
dscreton of the Commssoner, be added to any one ta or prorated among
two or more of such ta es In any proporton he deems advsabe.
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S 3779.
226
The penaty porton Is the e cess of
(a) the amount to whch an e tenson reates whch s not pad by the
end of the ta abe year n whch the e tenson was made, over
(6) 125 per cent of (1) the amount to whch such e tenson reates whch
s satsfed by appyng or credtng thereto a decrease n ta determned n
respect of an appcaton for a tentatve carry-back ad|ustment under secton
37 0, ess (2) any amounts assessed n respect of such appcaton whch are
not so satsfed.
The penaty porton In effect, therefore, Is the e cess of the amount of ta the
tme for payment of whch was e tended over 125 per cent of the amount the tme
for payment of whch mght propery have been e tended. The amount the
tme for payment of whch mght propery have been e tended s the net amount
to whch the e tenson reates whch s satsfed by appyng or credtng thereto
a decrease n ta determned n respect of an appcaton for a tentatve carry-
back ad|ustment under secton 37 0.
ny amount to whch an e tenson under secton 3770 reates whch s pad
pror to the end of the ta abe year n whch the e tenson was made sha not
be deemed to be an amount the tme for payment of whch was e tended n
determnng under secton 2f 4(e) whether the amount the tme for payment of
whch was e tended was substantay n e cess of the amount the tme for pay-
ment of whch mght propery have been e tended. Interest on any amount
so pad pror to the end of the ta abe year n whch the e tenson was made
w be payabe at the rate of 6 per cent per annum.
The computaton of the penaty porton and the resutng addton to the ta
may be ustrated by the foowng e ampe:
ampe. Corporaton , whch came nto e stence on anuary 1, 1945, and
whch keeps ts books and makes ts ta returns on the caendar year bass, fed
a statement under secton 3770 on March 15. 1946, e tendng the tme for pay-
ment of 55 of ts e cess profts ta for 1945. The e tenson was based on an
e pected unused e cess profts credt carry-back from 1046, and no part of the
amount to whch the e tenson reated was pad pror to the end of 1046. The
corporaton n fact had an unused e cess profts credt for 1040, and on March
31, 1947, t fed an appcaton under secton 37 0(a) for a tentatve carry-bad
ad|ustment wth respect to the resutng unused e cess profts credt carry-back
from 1046. The appcaton showed that the corporaton s e cess profts ta for
1945 was decreased by 55 as a resut of such unused e cess profts credt carry-
back from 194C. The appcaton kewse showed that the corporaton s ncome
ta for 1045 was ncreased by 400 as a resut of the decrease n ts e cess
profts ta for 1945. The Commssoner aowed the appcaton In fu on une
29, 1947, and the 400 Increase n the corporaton s Income ta for 1945 was
assessed on that date. The 55 decrease n the corporaton s e cess profts ta .
for 1945 was apped aganst the 55 of ts e cess profts ta for 1945 the tme
for payment of whch had been e tended pursuant to the statement fed under
secton 3770 on March 15. 1046. Snce the entre decrease n the corporaton s
e cess profts ta for 1945 was apped rgnnst the amount of ts e cess profts
ta for 1D45 the tme for payment of whch had been e tended under such state-
ment, the corporaton pad the 400 ncrease n ts ncome ta for 1945 n cash.
The penaty porton s 2 0 25, and the addton to the ta s 14.31. These
amounts are computed as foows:
(a) mount to whch e tenson under secton 3779 reated whch was
not pad pror to the end of 1046 55.00
(6) mount to whch e tenson under secton 3779 reated
whch was satsfed by appyng thereto a decrease n ta
determned n respect of the appcaton for a tentatve
carry-back ad|ustment S55. 00
(c) mount of ncrease In ncome ta for 1045 assessed n re-
spect of the appcaton for a tentatve carry-back ad|ust-
ment whch was not satsfed by credtng thereto a de-
crease In ta determned n respect of such appcaton. 400. 00
(d) mount of ta the tme for payment of whch mght prop-
ery have been e tended (tem (6) ess tem (c)) 455.00
(e) 125 per cent of 455 56 , 73
(/) The penaty porton (tem (a) ess tem (e))
(g) ddton to the ta (5 per cent of 2 6.25) 14.31
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227
3 03.
Snce the reducton, attrbutabe to the unused e cess profts credt carry-back
from 1946, n the aggregate of a of Corporaton s ta es prevousy determned
for ta abe years pror to 1946 was ony 455, the corporaton propery shoud not
have e tended under secton 3779 the tme for payment of an amount greater
than 455. The penaty porton accordngy Is the e cess of the amount the tme
for payment of whch was e tended over 125 per cent of the amount the tme for
payment of whch mght propery have been e tended. The above addton to the
ta , n the amount of 14.31, w be added to the e cess profts ta for 1945 and
coected as part of such ta uness Corporaton estabshes to the satsfacton
of the Commssoner that as of December 31, 1946, there was reasonabe cause to
e pect that there woud be no penaty porton. Such addton to the ta w be
assessed and coected even though the unused e cess profts credt carry-back
from 1946 reduces the ad|usted e cess profts net ncome for 1945 to zero and
thus serves n effect to offset the entre e cess profts ta for 1945 whch woud
otherwse be due.
(Part II of ths Treasury Decson s ssued under the authorty
contaned n secton G2 of the Interna Revenue Code (53 Stat., 32 26
U. S. C, 1940 ed., 62) and secton 4(b) of the Ta d|ustment ct of
1945 (Pubc Law 172, Seventy-nnth Congress).)
oseph D. Nunan, r.,
Commssoner of Interna Revenue.
pproved ebruary 27, 1946.
OS P . O CoNN LL, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster March 1,1946, 9.59 a. m.)
C PT R 3 . MISC LL N OUS PRO ISIONS.
S CTION 37 0. T NT TI C RRY- C
D USTM NTS.
INT RN L R NU COD .
Reguatons prescrbed w th respect to tentatve carry-back ad|ust-
ments. (See T. D. 549 , page 209.)
S CTION 3 0 . D RM NT O T TTRI UT L
TO S R IC P Y OR COMMISSION D S R IC ND
O T TTRI UT L TO PR -S R IC RN D
INCOM .
INT RN L R NU COD .
Deferment of payment of ta es. (See Mm. 5972, page 44.)
INT RN L R NU COD .
Cassfcaton of warrant offcers. (See Mm. 5972 (Suppement 1),
page 49.)
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Msc.
22
Skcton 29.3 0 -1: Deferment of certan ta es of
members of the mtary or nava forces.
( so Secton 19.3 0 -1, Reguatons 103.)
INT RN L R NU COD .
Reguatons 103 and 111 amended. (See T. D. 550 , page 27.)
Secton 29.3 0 -2: rst nstament date.
( so Secton 19.3 0 -2, Reguatons 103.)
INT RN L R NU COD .
Reguatons 103 and 111 amended. (See T. D. 550 , page 27.)
Secton 29.3 0 -3: Ta attrbutabe to servce pay.
( so Secton 19.3 0 -3, Reguatons 103.)
INT RN L R NU COD .
Reguatons 103 and 111 amended. (See T. D. 550 , page 27.)
Secton 29.3 0 -4: stmated ta for war years.
INT RN L R NU COD .
Reguatons 111 amended. (See T. D. 550 , page 27.)
Secton 19.3 0 -4: Ta attrbutabe to pre-servce
earned ncome.
INT RN L R NU COD .
Reguatons 103 amended. (See T. D. 5503, page 27.)
MISC LL N OUS.
1946- -12293
- Ct.D. 1672
processng and foor ta es agrcutura ad|ustment act unted
states code decson of supreme court.
1. Sut Recovery of owed Refund of Processng and oor
Stocks Ta es Set-off and Countercam ursdcton of
Court of Cams.
Tho Government In 1042 owed the pettoner an amount aowed
t ns refund of processng and foor stocks ta es. y drecton of the
Genera ccountng Offce the chock coverng the refund was ssued
to the Reconstructon nance Corporaton to whch the pettoner
owed a baance on a note for borrowed money n e cess of the amount
of ts ta refund. In a sut for payment of the amount aowed as
refund of processng and foor stocks ta es brought n the Court of
Cams, that court had |ursdcton to hear and determne a counter-
cam aganst the ta payer for a arger amount owed by t to the Re-
constructon nance Corporaton on a note for borrowed money.
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229
Msc.
Such ndebtedness was a cam on the part of the Government en-
ttng t to set up a countercam under 2 U. S. C, secton 250(2).
That the Congress chose to ca the Reconstructon nance Corpora-
ton a corporaton does not ater ts characterstcs so as to make t
somethng other than an agency seected by the Government to ac-
compsh purey governmenta purposes.
2. Decson ffrmed.
Decson of the Court of Cams (50 ed. Supp., 122) affrmed.
Supreme Court of the Unted States.
Cherry Cotton 3s, Inc., pettoner, v. The Unted States.
Petton for wrt of certorar to the Court of Cams.
March 25,1946.
OPINION.
Mr. ustce ack devered the opnon of the Court.
In 1942 the Government owed the pettoner a 3,104. 7 refund of processng
and foor ta es pad by the pettoner under the grcutura d|ustment ct.
The pettoner owed the Reconstructon nance Corporaton 5,903.51, baance
on a note for borrowed money. The Genera ccountng Offce drected the
Treasury not to pay the ta refund to the pettoner, but to ssue a check for the
refund payabe to the R. . C. to partay qudate pettoner s ndebtedness
to that governmenta agency. s authorzed by 2 U. S. C. 250(1), the pettoner
then brought sut aganst the Government for the ta refund n the Court of
Cams. The Government fed a countercam for the 5,)03.51, assertng the
rght to do so under 2 U. S. C. 250(2), whch gves the Court of Cams |ursdc-
ton to hear and determne set-offs, countercams, or other de-
mands whatsoever on the part of the Government of the Unted States aganst any
camant aganst the Government n sad court. The pettoner chaenged the
|ursdcton of the Court of Cams to hear and determne the countercam on
these two grounds: (1) the Comptroer e ceeded hs authorty n drectng the
Treasury to pay the ta refund to the R. . C. nstead of to the pettoner (2) the
R. . C. shoud be treated n the same way as a prvatey owned corporaton and
when so treated the pettoner s admttedy vad ndebtdness to R. . C. s not
a cam on the part of the Government enttng t to set up a countercam
under 2 U. S. C. 250(2). The Court of Cams re|ectng both these contentons,
rendered |udgment for the Unted States and aganst the pettoner for the
amount It owed the R. . C. ess the amount of the ta refund. We granted
certorar.
Ltte need be sad as to the contenton concernng the aeged ack of authorty
of the Genera ccountng Offce to drect the Treasury not to pay the pettoner,
snce we agree wth the Court of Cams that ts |ursdcton to hear and deter-
mne countercams s n no way dependent upon the premnary ntergovern-
menta steps whch precede court acton. or ths reason the pettoner s
argnment based on our decson n Sknner ddy Corporaton v. McCar (275
. S., 1), where we consdered the power of the Comptroer Genera n reaton
to whoy dfferent egsaton, has no bearng on the power of the Court of
Cams under 2 U. S. C. 250(2).
Nor do we fnd any |ustfcaton for gvng to 250(2) the narrow nterpretaton
urged. Its purpose was to permt the Government, when sued n the Court of
Cams, to have determned n a snge sut n questons whch nvoved mutua
obgatons between the Government and a camant aganst t. Legsaton of
ths knd has ong been favored and encouraged because of a beef that t accom-
pshes among other thngs such usefu purposes as avodance of crcuty of
acton, nconvenence, e pense, consumpton of the court s tme, and n|ustce.
(Chcago N. W. Raoay v. Lnde, 2 1 U. S., 14, 17 and cases cted.)
We have no doubt but that the set-off and countercam |ursdcton of the
Court of Cams was ntended to permt the Government to have ad|udcated n
one sut a controverses between t and those granted permsson to sue t,
whether the Government s nterest had been entrusted to ts agences of one
knd or another. very reason that coud have prompted Congress to authorze
the Government to pead countercams for debts owed to any of ts other
agences appes wth equa force to debts owed to the R. . C. Its drectors
are apponted by the Presdent and affrmed by the Senate Its actvtes are
a amed at accompshng a pubc purpose a of ts money comes from the
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230
Government Its profts If any go to the Government Its osses the Government
must bear. That the Congress chose to ca It a corporaton does not ater ts
characterstcs so as to make It somethng other than what t actuay s, an
agency seected by Government to accompsh purey governmenta purposes.
(Inand Watcrcays Corporaton v. Young, 309 U. S., 517, 524.) Nor s the
congressonay granted power to pead a countercam to be reduced because In
other stuatons and wth reaton to other statutes, we have apped the doctrne
of governmenta mmunty or prorty rather strcty.1 The Government here
sought nether mmunty nor prorty. Its rght to countercam rests on df-
ferent prncpes, one of whch was graphcay e pressed by the sponsors of
the ct of whch secton 250(2) s a part: It Is as much the duty of the
ctzen to pay the Government as t s the duty of the Government to pay the
ctzen. (59 Congressona Gobe, 1074, Thrty-seventh Congress, second ses-
son.)
ffrmed.
Mr. ustce ackson took no part In the consderaton or decson of ths
case.
S CTION 3466 O T IS D ST TUT S.
1946-10-12312
Ct. D. 1C73
SOCI L S CURITY T S SOCI L S CURITY CT R IS D ST TUT S-
D CISION O SUPR M COURT.
State Pboceedng ssgnment fob eneft of Cbedtors Pr|obty
of Cams of Unted States Oveb Cams of State fob Unem-
poyment Ta es.
Cams of the Unted States for edera unempoyment compensa-
ton ta es under Tte 9 and edera nsurance contrbutons ta es
under Tte of the Soca Securty ct aganst an nsovent ta payer
who had made a vountary assgnment of a hs property for the
beneft of credtors have prorty, under secton 3400, Revsed Stat-
utes, over cams of the State of Inos for ta es due under ts
Unempoyment Compensaton ct. Whe soca securty egsa-
ton provdes a method for accompshng State and edera unem-
poyment reef systems, ntegrated n pan, functon, and purpose,
and whe sound State systems are essenta to compete success of
the Congressona pan. Congress dd not thereby ntend n effect to
amend secton 3460, R. S., by makng ts prorty provsons Inap-
pcabe to State unempoyment ta cams. Snce secton 3406 s
not Inconsstent wth ether the e press anguage or purpose of the
Soca Securty ct, t must be apped here.
/ Supbeme Court of the Unted States.
Peope of the State of Inos, e ret. Robert L. Gordon, Drector of Labor,
pettoner, v. The Unted States of merca.
On wrt of certorar to the Supreme Court of the State of Inos.
pr 22, 1946.
OPINION. v
Mr. ustce Cack devered the opnon of the Court.
In ths case the Supreme Court of Inos hed that certan ta cams of the
edera Government aganst an nsovent ta payer must be satsfed n fu before
the State of Inos can recover amounts due as ta es under Its Unempoyment
Compensaton ct. (391 111., 29.) Ths decson s substantay n confct wth
Soan Shpyard et a. . . eet Corporaton (25 U. S., 549) etfer t eftr f.
Reconstructon nance Corporaton (300 U. S., 3S1) Reconstructon nance Corpora-
ton v. . O. enhan Corporaton (312 U. S., 1).
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231
Msc.
that of the Supreme Court of Rhode Isand n Rnrd v. |ou urnture Co.
(67 R. I., 251, 6 R. I., 35 ), and we granted certorar to resove ths confct.
The cam of the Unted States s for edera unempoyment compensaton
ta es under Tte 9 and edera nsurance contrbutons ta es under Tte of
the Soca Securty ct (40 Stat, 620).1 The prorty camed by the Unted
States rests on R. S. 3460, whch provdes n part that Whenever any person
Indebted to the Unted States not havng suffcent property to pay
a hs debts, makes a vountary assgnment of hs property, the debts due
to the Unted States sha be frst satsfed.
The State concedes that the facts here brng the Unted States ta cams
wthn the genera prorty provsons of secton 3466. The ta payer whe nso-
vent had made a vountary assgnment of a hs property for the beneft of cred-
tors. nd t s we setted that ta es are debts wthn the meanng of secton
3466. (Unted States v. Wad, 323 U. S., 353, 355 Ot. D. 1624, C. . 1945,
459 . The State s ony contenton Is that the Soca Securty ct evnces a Con-
gressona purpose to free State unempoyment ta cams from the genera
prorty provsons of secton 3406.
The State draws ts nference not from an e press decaraton of Congressona
purpose, but from what t deems to be broad mpcatons behnd the genera
scheme of the Soca Securty ct. The contenton s that enforcement of pror-
tes over State unempoyment compensaton ta cams woud weaken State
unempoyment compensaton funds and thus tend to frustrate the manfest pur-
pose of Congress to foster, n the natona nterest, soundy fnanca and stabe
State unempoyment compensaton systems. The State ponts to the foowng
as showng Congress nterest n State systems. Tte 9 of the Soca Securty
ct contans provsons Intended to nduce States to set up sound unempoyment
compensaton n accordance wth congressoray prescrbed standards. To ths
end State systems that meet these standards are permtted to bud up ther
own funds by coecton from empoyers wthn the State of 90 per cent of the
ta those empoyers woud otherwse have to pay to the edera Government.
State funds must be pad nto the Unted States Treasury, to be credted to a
speca fund, and can be wthdrawn ony for payng unempoyment benefts.
urthermore, the edera porton of unempoyment compensaton ta es can
be used to hep States pay admnstratve e penses. nd Congress, snce passage
of the orgna ct, has enacted egsaton guaranteeng the sovency of State
funds. (5 Stat., 790.) of these facts, and some others to whch the State
refers, are sad to show that the paramount purpose of the soca securty egs-
aton was to treat unempoyment reef as a probem to be soved by the edera
Government by ts assumpton of the prmary burden of makng State systems
a success.
We agree that the soca securty egsaton provdes a method for accompsh-
ng State and edera unempoyment reef systems, Integrated n pan, functon,
and purpose, and that sound State systems are essenta to compete success of
the Congressona pan. ut we can not agree that Congress thereby ntended
In effect to amend secton 3466, by makng ts prorty provsons nappcabe
to State unempoyment ta cams. or whe the State and edera Govern-
ments were to cooperate, the underyng phosophy of the edera ct was to
keep the State and edera systems separatey admnstered. The ct nowhere
ndcates a purpose to treat a State unempoyment cam as. the State here urges
us to treat ts cam tantamount to a cam of the Unted States.
urthermore, sectons 07(c) and 905(b) of the edera ct, and the provsons
they ncoporated by reference, made appcabe to soca securty ta es a other
provsons of aw reatng to the assessment and coecton of other ta es uness
such other remedes are nconsstent wth the Soca Securty ct. Whe there
Is no evdence that Congress n these sectons had secton 3466 specfcay n mnd,
these provsons ndcate that Congress ntended, so far as practcabe, to appy to
soca securty ta es a of the remedes avaabe to the edera Government n
coectng other ta es. Secton 3466 provdes one of these remedes. Snce, as has
been ndcated, t s not nconsstent wth ether the e press anguage or purpose of
the Soca Securty ct, t must be apped here.
Prevous decsons of ths Court reed on by the State do not support ts con-
tenton. Those cases, n so far as they hed that secton 3466 dd not gve the
Unted States prorty over certan other types of cams, dd so because ater cts
were found to contan provsons pany nconsstent wth Unted States prorty.
sma part of the Government s cam was for capta stock ta es, but toa fact Is
o no sgnfcance here.
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131, rt. 131-1.
232
(Cook County Natona ank v. Unted States, 10T U. S., 445 Unted States v.
Guaranty Trust Co., 2 0 U. S., 47 . Cf. Unted States v. mory, 314 U. S., 423,
431-432.) We fnd no such nconsstency here. nd ony the panest ncou-
stency woud warrant our fndng an mped e cepton to the operaton of so
cear a command as that of secton 3-160. (Unted States v. mory, supra, 433.)
ffrmed.
Mr. ustce ackson took no part n the consderaton or decson of ths case.
. R NU CT O 193 .
SU TITL . G N R L PRO ISIONS.
P RT II. COMPUT TION O N T INCOM .
S CTION 22(b). GROSS INCOM : CLUSIONS
ROM GROSS INCOM .
rtce 22(b) (1)-1: Lfe nsurance mounts pad by
reason of the death of the nsured.
R NU CT O 193S.
Reguatons 101 amended. (See T. D. 5515, page 26.)
S CTION 23 (m). D DUCTIONS ROM GROSS
INCOM : D PL TION.
rtce 23(m)-10: Depeton d|ustments of accounts
based on bonus or advanced royaty.
R NU CT O 10 .
Lessor s share of net profts receved from o e tracted from eased
ands. (See Ct. D 1664, page 69.)
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.
rtce 131-1: nayss of credt for ta es. 1946-5-12253
I. T. 37 7
R NU CTS O 1936 ND 193 .
The ta es mposed under artce 14, Chapter II. frst schedue
artce 21, Chapter III, second schedue and artces 26 and 27,
Chapter I , thrd schedue, of the Me can aw Ley de Impuesto
sobre a entn nre ncome ta es, and credt therefor s aowabe
under sectons 131 of the Revenue cts of 1036 and 103 .
I. T. 3113 (C. . 103S-1, 103), I. T. 312 (C. . 1930-1 (Pr.rt 1),
139), as modfed by I. T. 33 5 (C. . 1940-1, 103), and I. T. 3320
(C. . 1039-2, 101), revoked. 1
In I. T. 3320 (C. . 1939-2, 191), t was hed that the Me can
proportona rate ta of 10 per cent on partcpatons from o pro-
ducton, mposed by artces 26 and 27, Chapter I , thrd schedue,
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233
131, rt. 145-1.
of Ley de Impuesto sobre a Renta s not an ncome ta wthn the
purvew of secton 131 of the Revenue ct of 1936, and no credt s
aowabe therefor aganst Unted States ncome ta .
In Santa uaa Mnng Co. v. Commssoner (2 T. C, 241), t was
hed that ta es pad by the pettoner n 1937 and 193 to the Me can
Government under artces 26 and 27, Chapter I , thrd schedue, of
the Me can statute entted Ley de Impuesto sobre a Renta, based
upon pettoner s gross revenue from mnng propertes ocated n
the Repubc of Me co, are ncome ta es for whch a credt s aow-
abe under sectons 131 of the Revenue cts of 1936 and 193 . Non-
acquescence n that decson was pubshed (C. . 1943, 39), a petton
for revew was fed, and, at the request of the Government, the petton
for revew was dsmssed by the court. Nonacquescence n the decson
has now been wthdrawn and acquescence substtuted (page 4, ths
uetn). In vew of the acquescence n the decson of The Ta
Court n the Santa uaa Mnng Co. case, supra, I. T. 3320 s revoked.
cquescence n Santa uaa Mnng Co. v. Commssoner, supra,
and revocaton of I. T. 3320, supra, make t necessary to reconsder
certan other pubshed rungs of the ureau nvovng ta es under
smar provsons of the Me can aw. In I. T. 3193 (C. . 193 -1,
193), t was hed that the ta mposed under artce 14, Chapter II, frst
schedue, of the aw of Me co Ley de Impuesto sobre a Renta s
not an ncome ta , and credt therefor s not aowabe under secton
131 of the Revenue ct of 1936. rtce 14 of the Me can aw requres
an advance payment of 3 per cent to be made on the vaue of merchan-
dse sent nto Me co from abroad as shown by the nvoce. Such pay-
ment s consdered fna uness the ta payer fes an annua return
showng the ta to be ess than the ncome ta computed under artce
, Chapter II, frst schedue, of the aw. In I. T. 32 (C. . 1939-1
(tart 1), 139), t was hed that the 5 per cent ta mposed under
artces 20 and 21, Chapter III, second schedue, of the Me can aw
Ley de Impuesto sobre a Renta s not an ncome ta , and credt
therefor s not aowabe under secton 131 of the Revenue ct of 193 .
That rung was modfed by I. T. 33 5 (C. . 1940-1, 103), whch
hods that the ta mposed upon nterest under artce 20 of the
Me can aw s an ncome ta for whch credt s aowabe under
secton 131, but the rue as to the dsaowance of credt for the ta of
5 per cent mposed by artce 21 of the Me can aw upon the tota
revenue of the dstrbutor of movng pcture fms was not dsturbed.
The anguage used by The Ta Court n Santa uaa Mnng Co.
. Commssoner, supra, s broad enough to warrant the appcaton of
that decson to the provsons of the Me can aw whch are referred
to n I. T. 3193, supra, and I. T. 32 , supra, and those rungs are
hereby revoked. The revocaton of I. T. 32 does not, however, affect
that porton of I. T. 33 5, supra, reatng to the ta mposed upon
nterest under artce 20, Chapter III, second schedue, of the Me can
aw, whch ta s aowabe as a credt.
rtce 145-1: Penates.
R NU CT O 193 .
Crcut court of appeas revew of fndngs of fact supported by
evdence n a crmna proceedng. (See Ct. D. 1666, page 122.)
703072 40 10
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26, rt. 26-2. 234
INCOM T RULINGS. P RT IL
R NU CTS O 1937 ND 1936.
SU TITL . G N R L PRO ISIONS.
P RT II. COMPUT TION O N T INCOM .
S CTION 22(b). GROSS INCOM : CLUSIONS
ROM GROSS INCOM .
rtce 22(b) (1)-1: Lfe nsurance mounts pad
by reason of the death of the nsured.
R NU CT O 1936.
Reguatons 94 amended. (See T. D. 5515, page 26.)
S CTION 24. IT MS NOT D DUCTI L .
rtce 24-2: Capta e pendtures.
R NU CT O 103 .
Payments by assgnee to assgnor for rght to e pot o property
under an assgnment reservng an economc nterest n the o. (See
Ct. D. 1674, page 237.)
S CTION 26. CR DITS O CORPOR TIONS.
rtce 26-2: Credt n connecton wth con- 1946-2 12214
tracts restrctng payment of dvdends. Ct. D. 1656
ncome ta revenue act of 1930 decson of supreme court.
1. Cbedts of Corporatons Ta on Undstrbuted Profts Con-
tracts Restrctng Payment of Dvdends Constructon of
Statutes.
Secton 26(c) (1) of the Revenue ct of 1036, whch aowed credts
desgned to afford reef where the payment of dvdends s prevented
by certan contract provsons, s confned to contracts made wth
credtors and does not e tend to restrctons mposed wthn the body
corporate. Therefore, preferred stock certfcates ssued by the ta -
payer corporaton embodyng a reference to a provson of the cor-
porate charter that there sha be no dvdend on the common stock
unt a of the preferred stock has been retred, redeemed and ds-
charged do not consttute contracts whch entte the corporaton
to the aowance of credt under secton 26(c) of the Revenue ct of
1936.
2. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, fth Cr-
cut (147 ed. (2d), 972), affrmng memorandum opnon of The
Ta Court of the Unted States, affrmed.
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235
26, rt. 26-2.
StfP M CoC T O T UNIT D ST T S.
ercues Gasone Co., Inc., v. Commssoner of Interna Revenue.
On wrt of certorar to the Unted States Crcut Court of ppeas for the fth Crcut.
December 17, 1045.
OPINION.
Mr. ustce ack devered the opnon of the Court.
Ths case requres us to construe secton 20(c)1 of the undstrbuted profts ta
aw (40 Stat., 164 ), enacted by Congress n 1936. The undstrbuted profts ta ,
whch was not contnued by Congress after 193 , was a surta at graduated rates
upon corporate profts not dsrbuted durng the ta year by way of dvdends.
Secton 20(c) aowed credts desgned to afford reef where the payment of
dvdends s prevented by certan contract provsons. Subdvson (c) (1) of
the secton aowed such a credt where a dstrbuton of earnngs woud voate
a provson of a wrtten contract e ecuted by the corporaton whch
provson e pressy deas wth the payment of dvdends. Itacs supped.
Subdvson (c)(2) aowed a credt where earnngs and profts of the ta abe
year are requred (by a provson of a wrtten contract
e ecuted by the corporaton , whch provson e pressy deas wth the
dsposton of earnngs and profts of the ta abe year) to be pad wthn the
ta eb e yenr n dscharge of a debt, or to be rrevocaby set asde wthn the
ta abe year for the dscharge of a debt. Itacs supped. Pettoner camed
a credt under secton 26(c) (1) but n assessng the defcency for 1037 the Com-
mssoner re|ected ths cam. The Ta Court sustaned the Commssoner an|
ts |udgment was affrmed by the crcut court of appeas. (147 ed. (2d), 972.)
We granted certorar because of confctng determnatons by the crcut courts
as to the scope of these credt provsons.
Pettoner, a Deaware corporaton, admts abty as transferee of the assets
of the ercues Gasone Co., Inc., a Lousana corporaton, whch was dssoved
In 1039. rtce of the orgna charter of the transferor authorzed the
ssuance of non-par common stock and of preferred stock at 50 par vaue. The
preferred stock was entted to cumuatve dvdends at the rate of per
annum n preference and prorty to any payment of any dvdend
on the common stock for such year. The charter further provded that there
sha be no dvdend on the common stock unt a of the preferred stock has
been retred, redeemed and dscharged. certfcates of preferred stuck con-
taned the foowng provson: or Rghts and otng Powers of Preferred
Stock See rtce of Charter. The pettoner contends that these preferred
stock certfcates consttuted contracts e ecuted by the corporaton whch e -
pressy prohbted the payment of dvdends whe these shares were outstandng
1 S C. 26. CR DITS O CORPOR TIONS.
In the case of a corporaton the foowng credts sha be aowed to the e tent provded
In the varous sectons mposng ta
(C) CUNT CTS R STRICTING P YM NT O DI ID NDS.
(1) Prohbton on payment of dvdends. n amount equa to the e cess of the
ad|usted net ncome over the aggregate of the amounts whch can be dstrbuted wthn
the ta abe vear as dvdends wthout voatng a provson of a wrtten contract
e ecuted by the corporaton pror to May 1, 1930. whch provson e pressy deas wth
the payment of dvdends. If a corporaton woud be entted to n cr. dt under ts
paragraph because of a contract provson and aso to one or more credts because of
other contract provsons, ony the argest of such credts sha be aowed, and for such
purpose f two or more credts are equa n amount ony one sha be taken nto account.
(2) Dsposton of profts of ta abe ykar. n amount equa to the porton
of the earnngs and profts of the ta abe year whch s requred (by a provson of a
wrtten contract e ecuted by the corporaton pror to May 1, 193G, whch provson
e pressy deas wth the dsposton of earnngs and profts of t e ta abe year) to
be pad wthn the ta abe year In dscharge of a debt, or to be Irrrevoenby 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. or the purposes of ths paragraph, a requrement to pay
or set asde an amount equa to n percentage of earnngs and profts sha be consdered
a requrement to pay or set asde such percentage of earnngs an profts. s used n
ths paragraph, the word debt does not Incude a debt Incurred after pr 30, 1030.
(3) Doube cp.edt not aowed. If both paragraph ( and pnrngrnph (2) appy,
the one of such paragraphs whch aows the greater credt sha be apped and. f
the credt aowabe under each paragraph s the same, ony one of such paragraphs
sha be apped.
Lehgh Structura Stee Co. v. Commssoner (127 ed. (2d), C7) Phadepha Record
Co. T. Commssoner (145 ed. (2d), 613).
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I 26, rt. 26-2.
236
and that pettoner s therefore entted to the credt aowed under subdvson
(c)(1).
We thnk that the preferred stock certfcates are not the knd of contracts
whch entte a corporaton to aowance of credt under subdvson (c) (1).
In our vew that subdvson must be read n the ght of secton 2 (c) and the
ct as a whoe, and when thus read, Is confned to contracts made wth credtors
and does not e tend to restrctons Imposed wthn the bodv corporate. In
neverng v. Northwest Stee Ms (311 U. S., 46 Cr, D. 146 , C. . 1940-2, 1S1 ),
the queston before us was whether secton 26(c) (1) aows a credt where the
payment of dvdends Is prohbted by statute. In construng secton 26(c,
we stated:
That the anguage used n secton 26(c)(1) does not authorze a credt for
statutory prohbted dvdends s further supported by a consderaton of secton
26(c)(2). y ths secton, a credt Is aowed to corporatons contractuay
obgated 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 secton ha
reference ony to a wrtten contract e ecuted by the corporaton are dentca
wth those used n secton 26(c) (1). There s no reason to beeve that Congrw
ntended that a broader meanng be attached to these words as used n secton
6(c) (1) than attached to them under the necessary mtatons of 26(c)( ).
(311 U. S., 46, at 49 50.) Itacs supped.
We thus hed that secton 26(c)(1) s mted to contracts nvovng ordnary
obgatons to credtors and snce preferred stockhoders are not credtors (War-
ren v. ng, 10 U. S., 3 9, 399), secton 26(c) (1) does not appy here.
Pettoner contends, however, that our constructon of secton 26(c)(1) was
erroneous but for reasons gven n the Northwest Stee case we thnk t was
correct and adhere to It. Our constructon fnds further support n secton
20(c) (3) whch, n order to prevent Doube credt, provdes that n the event
both subdvsons (c)(1) and (e)(2) appy, the one of such paragraphs
whch aows the greater credt sha be apped and, f the credt aowabe
under each paragraph s the same, ony one of such paragraphs sha be apped.
Congress havng thus made the reef obtanabe under (c)(1) and (c)(2)
mutuay e cusve has ndcated that t consdered the two subdvsons as
nterdependent. Congress therefore ntended to cover the same type of contract,
namey a contract wth credtors, n both subsectons and not to e tend subdvson
(c)(1) to ntracorporate contracts whe subdvson (c)(2) was to cover con-
tracts wth credtors ony. Moreover statements made n the course of the
Congressona debate refer to secton 26(c) as a whoe, as provdng for the
reef of corporatons prevented from payng dvdends by contracts nvovng
the payment of debts. No other vew of the secton woud be n keepng wth
the pocy behnd the undstrbuted prcfts ta . That ta was desgned to reach
profts hed by the corporaton whch as a consequence coud not be ta ed as
dvdends n the hands of stockhoders. n ntracorporate agreement s smpy
one way of keepng profts In the corporaton s treasury so that the ta coector
can not reach them. To hod that such an agreement entted the corporaton
to ta credt woud defeat the very purpose of the undstrbuted profts ta .1
The re|ecton of pettoner s cam for ta credt was proper.
ffrmed.
Mr. ustce urton dssents.
Dssentng opnon by Mr. ustce Reed, n whch the Chef ustce |ons.
Mr. ustce ackson took no part n the consderaton or decson of ths case.
See for ustraton the tatomcut by the on. Samue . ( 0 Concessona Record,
6004).
See Warren Teephone Co. v. Commssoner (12 ed. (2d), 503, 506). ere there was
nothR n te agreement that absoutey prohbted the payment of dvdends. Darng
1937 and transferor had outstandng 1,294 hares or preferred stock of a tota par
vaue of 04,700. Those shares were a retred In 1939. ad they been redeemed n 1937
there woud have been nothng In the agreement preventng the dstrbuton of earnngs.
Consequenty t does not ceary appear that there was any provson n the agreements
absoutey prohbtng the payment of dvdends. (Cf. Dr. Pepper ottng Co. v. Comms-
soner, 45 IS. T. .. 540: Stacy Manufacturng Co. . Commssoner, 46 . T. .. 199, 205.)
The oard of Ta ppeas and ater The Tut Court have consstenty hed that secton
26(c)(1) does not cover the type of agreement here nvoved. (Thbaut D. o/ rr Co. -
Commssoner, 42 . T. ., 29 : |er Co. v. Commssoner, decded December 4, 1941: vdd
Internatona Corporaton v. Commssoner, 45 . T. ., 737 shop D. abcoek Manufac-
turng Co. v. Commssoner, 45 . T. ., 776 Phadepha Record v. Commssoner, decded
anuary 23, 1943.)
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114, rt. 114-1.
SU C PT R C SUPPL M NT L PRO ISIONS.
SUPPL M NT . COMPUT TION O N T INCOM .
S CTION 114. SIS OR D PR CI TION
ND D PL TION.
rtce 114-1: ass for aowance of depre- 1946-11-12323
caton and depeton. Ct. D. 1674
INCOM T R NU CTS O 1934 ND 1930 D CISION O SUPR M
COURT.
1.,Gross Income. cusonb conomc Interest n O n
Pace Rght to Net I bofts Sae or fsgnment.
The ta payer, an operatng company for the producton of o, and
assgnee of a contract whch transferred o rghts prevousy
obtaned by a ease from the owners of the and, was requred to pay
to the assgnor 50 per cent of the net proceeds of the o produced
and sod from the and. Underyng and overrdng o royates
were retaned by others. ed: The assgnor had an economc
nterest n the o n pace through ts contro over e tracton, a part
of whch nterest t retaned under the contract, and the ta payer
was entted to e cude the payments to the assgnor from ts ncome
from the o sod from the property for the sca years endng durng
1930, 1937, and 193S. Ownershp of a royaty or other economc
Interest n addton to the rght to net profts s not essenta to make
the possessor of a rght to a share of the net proft the owner of an
economc nterest In the o n pace. The transacton n ths case
can not propery be construed as a sae, but s rather an assgnment
to the ta payer of the rght to e pot the property wth a reservaton
In the assgnor of an economc nterest n the o.
2. Decson Dstngushed.
everng v. be O Land Co. (303 U. S., 372, Ct. D. 1322, C. .
193 -1, 293) dstngushed.
3. Decson Reversed.
Decson of the UntPd States Crcut Court of ppeas, fth
Crcut (150 ed. (2d), 621), affrmng decson of The Ta Court of
the Unted States (3 T. C, 11 7), reversed.
Supreme Court of the Unted States.
urton-Sutton O Co., Inc., pettoner, v. Commssoner of Interna Revenue.
On wrt of certorar to the Unted States Crcut Court of ppeas for the fth Crcut.
pr 22, 1946.
opnon.
Mr. ustce Reed devered the opnon of the Court.
The ta payer, the pettoner here, s the operatng company for the producton
of o from Lousana ands. The ta payer acqured a contract from . G. Sutton,
grantee n the contract, that mposed upon the grantee the obgaton to deveop
the o and. or that purpose the contract transferred to the grantee a o
rghts prevousy obtaned by S. W. Sweeney by a ease from the owners of the
and, the Cameron Parsh Schoo oard. Through another transacton the grantor
In the Sutton contract, the Guf Refnng Co. of Lousana, acqured these rghts
from Sweeney. n underyng o royaty was retaned by the schoo board and
an overrdng o royaty by Sweeney. The contract between Guf and Sutton
requred the grantee-operator, who s now ths ta payer, to pay to the grantor,
Guf, 50 per cent of the proceeds of the o produced and sod from the and, de-
ductng from the proceeds certan temzed e penses of the producer. Those
e penses are so genera In character that It may be sad fary that Guf was to
receve 50 per cent of the net from operatons.
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114, rt. 114-1.1
23
The Issue here s the correctness of the ta payer s manner of handng ths
50 per cent net from operatons, pad to Guf, n ts return for edera ncome as
for ts fsca years endng durng 1936, 1937, and 193 under the Revenue cts
of 1934 and 1936. The ta payer deducted these payments of 50 per cent of net
ncome from ts ncome for each of the years from the o sod from the property.
It camed that Guf retaned an economc nterest n the o n pace to the e tent
of ths 50 per cent payment. The Ta Court uphed the Commssoner s ncuson
of an amount equa to these 50 per cent payments n the ta payer s gross ncome.
They were ncuded by the Commssoner n the ncome on the theory that the 50
per cent payments represented capta nvestment by the ta payer. That s, they
were a part of the cost of the ease. (3 T. C, 11 7.) If ths theory s correct,
t s proper to add an equvaent sum, as the Commssoner dd. to the ta payer s
gross ncome.1 The Crcut Court of ppeas affrmed The Ta Court. ( urton-
mutton O Co. v. Commssoner, 150 ed. (2d), 621.)
decson on the category of e pendtures to whch these 50 per cent dsburse-
ments beong affects both the operators who make them and the owners, essors,
vendors, grantors, however they may be cassed, who receve them. If they are
capta Investments to one, they are capta saes to the other. If they are rents or
royates pad out to one, they are rents or royates receved by the other.1 The
decson beow confcts n prncpe wth Commssoner v. e O Co. (144 ed.
(2d), 276). rby Petroeum Co. v. Commssoner (No. 56 ths term, decded
anuary 2 ,1946 Ct. D. 1064, page 69, ths uetn , nvoved payments of a share
of net ncome by a producer but dffers from ths case because the essor there was
a andowner who reserved a royaty as we as a share In the net profts. Conse-
quenty, we granted certorar ( U. S., ).
The appcabe provsons n the Revenue cts for 1934 and 1930 and the regu-
atons thereunder arc substantay the same for the two cts. We nsert beow
those that seem pertnent. The ssue of the character of these 50 per cent pay-
ments s not setted, however, by the statutes or reguatons. These prescrbe the
edera ncome ta accountng procedure after a determnaton that an e pend-
ture of an operator s or s not a rent, a royaty or an ordnary busness e pense,
hut throw tte ght on what s a rent or royaty.
In the rby case, we hed that a payment of a share of the net profts from o
producton by the operator to the owner of the and was a rent or royaty and
ta abe to the andowner as ncome from the o property. Therefore the owner
coud take from the payment the 27 per centum aowance for depeton pro-
1 The Commssoner and The Ta Court aowed the ta payer depeton upon Its entre
net ncome, so ad|usted, under secton 114(b).
rbn Petroeum Co. v. Commtaoncr (No. 56, ths term, decded annnrv 2S. 1946,
sp opnon pages 4 and 5 Ct. D. 1604, page 69, ths uetn) nderson v. cverng (310
U. S., 404, 407 Ct. D. 1456. C. . 1940-1, 10 ).
1 Revenue ct of 1930 (ch. 090. 49 Stat., 164 , 1060. 16 6):
S C. 23. D DUCTIONS ROM GROSS INCOM .
In computng net Income there sha be aowed as deductons:

(m) Depeton. In the case of mnes, o and gas wes, other natura deposts, and
tmber, a reasonabe aowance for depeton and for deprecaton of mprovements, accord-
ng to the pecuar condtons n ench case such reasonabe aowance n a cases to he
made under rues and reguatons to be prescrbed by the Commssoner, wth the approva
of the Secretary. In the case of eases the deductons sha be equtaby appor-
toned between the essor and essee.
S C. 114. SIS OR D PR CI TION ND D PL TION.
(b) ass for Depeton.
(3) Percentage pepeton for o anp oas wes. In the case of o and gas
wes the aowance for depeton under secton 23(m) sha be 27 per centum of
the gro S Income from the property durng the ta abe year, e cudng from such gross
Income an amount equa to any rents or royates pad or Incurred by the ta payer In
respect of the property.
Treasury Reguatons 94, promugated under the Revenue ct of 1936:
rt. 23(m)- as amended by T. D. 5413, C. . 1944, 124). Depeton of Mnes. O
and Gas Wes, Other Natura Deposts, and Tmber Deprecaton of Improve-
ments.

(g) The term gross ncome from the property. as used In sectons 114(b)(3) and
114(b) (4) ( ) and artces 23(m)- to 23(m)-2 of Reguatons 94 means the
foowng:
In the case of o and gas wes, gross Income from the property as used In secton
114(b) (3) means the amount for whch the ta payer ses the o and gas In the Immedate
vcnty of the we.
In a cases there sha be e cuded In determnng the gross Income from the prop-
erty an amount equa to any rents or royates whch were pad or ncurred by the ta -
payer n respect of the property and are not otherwse e cuded from the gross ncome
from the property.
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239
114, rt. 114-1.
vded by secton 114(b) (3). The reason gven n the rby cnse for hodng that
the payment of a part of the net return from the property to the andowner
was a royaty or rent, was that the owner had a capta nvestment an economc
nterest n the o wth a possbty of proft from that nterest or nvestment
soey from the e tracton of the o. s herenbefore ndcated, the andowner
n the rby case had retaned aso a one-s th o royaty and had receved a
bonus. It was conceded that as both the bonus and the royaty represented a
return for the sae n part of the essor s nvestment n the o n pace, the essor
was entted to depeton on both.
The respondent urges that n the rby case t was the essor s economc nterest
n some of the o tsef, or ts proceeds, because of the bonus and royaty rghts,
whch made the net proft payments sub|ect to depeton n the essor s hands that
net profts receved are not depetabe uness the recpent s entted aso to o
royates. Consequenty, the Government contends that n ths case where there
s ony a share n profts due to the assgnor, Guf, the rby case concuson on
the rght to depeton shoud not be e tended but that the |udgment beow shoud
be affrmed on the ground that the proft payment was a part of the purchase
prce. In deang wth the operator s e cuson from gross ncome of agreed
payments to essors or assgnors of eases out of net profts and wth the essor s
or assgnor s rghts to depeton, The Ta Court has not foowed consstenty
the prncpe that a reserved royaty s necessary to make a net proft payment
depetabe to the essor and deductbe from gross ncome from the property
by the operator. number of The Ta Court cases on depeton and deducton
4 readng of secton 114(b)(3) shows that the gross Income from the property
means Income from the o and gas wes on the property. eterng v. Twn e Synd-
cate, 293 U. S., 312 Ct. D. 905, C. . I -1, 253 (1935) evcrng v. Producer Corpo-
raton, 303 U. S., 37C, 3 2 Ct. D. 1321, C. . 193 -1, 343 .) Other Income woud not be
depetabe under that secton. Rents or royates n the secton are those payabe for
the prvege of e tracton.
rby Petroeum Co. v. Commssoner (supra, page 2) urnet v. arme (2 7 U. S.,
103, 111 Ct. D. 611, C. . I-2, 210 (1932) Murphy O Co. v. urnet (2S7 U. S., 299,
302 Ct. D. 619, C. . II-1. 231 (1933) ).
The prncpe upon whch The Ta Court and the Crcut Court of ppeas decded ths
case for respondent dffers from respondent s present contenton. Ths prncpe was that
an obgaton to pay a part of net proceeds s a persona covenant of the obgor and was
the purchase prce for the assgnment. ( urton-Sutton O Co. v. Commssoner, 150 ed.
(2d), 621, 622: 3 Ta Court. 11 7, 1194, reyng upon untana Petroeum Co. v. Commg-
soncr, 143 ed. (2d), 5 , 590-591 44 . T. ., 624, 627 everng v. be O Land Co.,
303 U. ., 372 Ct. D. 1322. C. . 193 -1. 293 .)
In W. . Green (26 . T. ., 1017), the essor was aowed depeton on a net ncome
payment n addton to hs royaty on the grouud that the net ncome payment was ke
a bonus.
In Marrs McLean (41 . T. ., 565, 573), whch was decded after the be case, The
Ta Court sad a transfer of eases for cash and a share of the profts was a sae. Where
ony a three-fourths Interest In the ease was transferred and the transferor was to have
one-fourth of the net profts, depeton was aowed the assgnor.
In e O Co. (docket No. 10714 , decded December 1 , 1942), a essor corporaton
that had eased Its o ands for a cash payment pus 50 per cent of the net profts as
defned n the ease and no royaty, was hed to hav e retaned an nterest n the o n
pace through ts ownershp of the and. Ceary, pettoner retaned an Interest n the
o produced because t coud compe the essee to se 50 per cent of the producton ese-
where f t became dssatsfed wth amounts reazed by the essee. (Memorandum op.,
page 7. See Commssoner v. e O Co.. 144 ed. (2d), 277, affrmng. Compare . .
/fns (T. C. Docket Nos. 2735-2736, une 29., 1945).)
In rov Petroeum Co. (2 T. C, 123 . 1261). The Ta Court reed on the atter rung
In Marrs McLean and hed that the essor coud depete Its net profts payment, as we as
Its royaty. It ater e paned ths rung as based on the rby Company s retenton of n
one-s th o rovatv, thus reservng to tsef an Interest n the o n pace. state
0/ Dan . aphet, 3 T. C. 0. 93.)
In the aphet cnse. depeton on net profts from an assgnee s operaton was dened an
assgnor of a ease who had receved n cash payment but had not reserved a royaty. It
was sad no economc nterest was reserved.
In . . Inns (T. C. Docket Nos. 2735-2736. une 29, 1945, n smar probem arose as to
deductbty by god ease operators from ther gross Income of a share In net profts pad
to the subessor of the ease. The Ta Court found no dfference between such a payment
to a subessor and one to a essor. oth were sad to have eeonon o nterests and therefore
depetabe rghts. e O Co., supra, was foowed and untana, supra, dstngushed
as a sae by assgnment rather than subease. Wams ar Dredgng Co. s In accord.
(T. C. Docket Nos. 32 4. 4074, une 30. 1945.)
In untana Petroeum Co. (44 . T. ., 6241, an operator-assgnee acqured an o ease
bv an agreement that caed for payment by the assgnee to the assgnor of one-fourth of
the net proceeds from the eased property wth no reservaton of royaty. The oard
concuded that the assgnment was a purchase and no deducton of the amount of net
profts pad was aowabe. (See aso untana Petroeum Co. v. Commssoner, 143 ed.
(2.1). 5 S.)
In .ucon ock raceu (5 T. C, 296, 302), decded une 21, 1945. The Ta Court under
smar crcumstances foowed untana and hed an operator-assgnee was entted to
depeton on gross producton but coud not e cude the net proft payment to hs nssgnee
from hs gross, as the transfer of the ease, In consderaton of a net proft payment ony,
was a sae.
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114, rt. 114-1.
240
cted n the precedng note dd nvove reserved royates as we as payments of
net profts. The e O Co. and . . Inns dd not. We do not agree wth the
Government that ownershp of a royaty or other economc nterest n addton
to the rght to net profts s essenta to make the possessor of a rght to a share
of the net proft the owner of an economc nterest n the o n pace. The dec-
son n rby dd not rest on that pont.
To et the character of the net proft payments turn whoy on the ownershp (f
a royaty of some sort by the one who receved the net proft woud make the
rght to depeton a form of words. No such mechanca appcaton of a
Natona Ta ct Is desrabe. Compare Unmet v. arme (2 7 U. S., 103, 110-111
Ct. D. G, C. . I-2, 210 (1032) ). Ths ta payer s acquston of Sutton s
contract wth Guf paces the ta payer n Sutton s stuaton as operator of the
schoo hoard ease. The schoo board and Sweeney, the orgna partes to the
ease, unquestonaby have royates whch woud compe a determnaton that
net ncome payments woud be sub|ect to depeton f pad to them n addton to
ther royates. It does not ogcay foow, t seems to us, that the mere recept
of the net ncome payments by dfferent essors or assgnors can change the
character of the ta payer s arrangements from eases to purchases.
It seems generay accepted that t s the owner of a capta nvestment or
economc nterest n the o n pace who s entted to the depeton. nderson
v. Ueverng, 310 U. R., 404, 407 Ct. D. 14.- 5, C. . 1040-1, 10 ueem ock
raecy, 5 T. C., 203, 302 rby Petroeum Co. v. Commssoner, supra.) Whether
the nstrument creatng the rghts s a ease, a subease or an assgnment has
not been deemed sgnfcant from the edera- ta vewpont n determnng
whether or not the ta payer had an economc nterest n the o n pace.
(Pamer v. ender. 2 7 U. S., 551, 557, 55 Ct. D. 041, C. . II-1, 235 (1033) .)
Nor has the tte to the o n pace been consdered by ths Court as decsve of
the capta nvestment of the ta payer n the o. Technca tte to the property
depeted woud ordnary be requred for the appcaton of depeton or depre-
caton. It s not matera whether the payment to the assgnor s n o or
n cash whch s the proceeds of the o ( erernq v. Tcn e Sm wate, 293
U. S., 312, 321 Ct. D. 905, C. . I -1, 253 (1035) ), nor that some of the
payments were n the form, of a bonus for the contract, ( urnet v. arme,
2S7 U. S.. 103, 111 Murphy O Co. v. urnet. 2 7 U. S.. 209, 302 Ct. D. 619. C. .
II-1, 231 (1933) .) Congress, however, has recognzed the pecuar character
of the busness of e tractng natura resources. Leases are a method of
e potaton of the and for o and payments under eases are ncome to the
essor, ke payments of rent. 10 Recepts from o saes are gross ncome to
the operator and sub|ect to statutory deductons. Snce essors as we as essees
and other transferees of the rght to e pot the and for o may retan for
themseves through ther contro over the e potaton of the and vauabe
benefts arsng from and dependent upon the e tracton of the o, Congress
provded as eary as the Revenue ct of 191 for equtabe apportonment of
the depeton aowance between them to correct what was sad to be an e stng
nequaty n the aw or ts admnstraton.
2 7 T . S., at 5.17 : The anguage of the statute s broad enough to provde, at east,
for every case n whch the ta payer has acqured, by nvestment, any nterest n the o n
pace, and secures, by any form of ega reatonshp. Income derved from the e tracton of
the o, to whch he must ook for n return on hs capta.
2|7 U. S., nt 55 : ven though ega ownershp of It. In a technca sense, remaned n
ther essor, they, as essees, nevertheess acqured an economc Interest In t whch repre-
sented ther capta Investment and was subect to depeton under the statute. (Lynch
. hvorth Stephens Co., 207 U. S., 364: urnet v. arme, 2 7 U. S., 10. .. 109, 110
Santera Coo Co. v. urnet, 2 7 U. S., 0 Ct. D. 01 , C. . II -1, 272 (1932) rbr
Petroeum Co. v. Commssoner, supra, page 3.)
Statton s Independence . owbert (231 U. S., 399, 413-414).
urnet v. arme (2 7 U. S.. 103. 107-10 ).
See Lynch v. tcorth-Stcphens Co. (267 U. S., 304, 370 T. I). 3600, C. . 1Y-1. 162
(1925) ) Pamer v. ender (2 7 U. S., 551. 556).
40 Stat., 1057, 1067, 107 , sectons 214(a) (10), 234(a) (9).
15 II. ept. No. 767. S ty-ffth Congress, second sesson, September 3. 191S C. .
1930-1 (Part 2), 6), Deductons (5) and for corporatons. Dednctoons (41.
The nequaty referred to under the Revenue ct of 1910 (30 Stat., 759, secton 5.
ghth (a)), arose from the preferred treatment gven the owner over the essee. See
earngs, ouse Commttee on Ways and Means, S ty-ffth Congress, second sesson,
pages 455, 510-517, 523-52 . 530-531. Reguatons 33, Income Ta . promugated anuary
2, 191 . artce 170 Reguatons 45, 1920 ed., Income Ta , promugated anuary 2 , 1921,
artce 201.
The appcabe aw for aowance of depeton In o and gas wes appears n secton
114(b) (3). It s Identca wth the I. U. C., secton 114(b) (3). Ths secton Is the resut
of admnstratve e perence wth o and gas depeton. ( earngs. Senate Commttee on
nance, S ty-nnth Congress, frst sesson, pages 177-17 earngs, ouse Commttee
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241
114, rt. 114-1.
In the present case, the assgnor of the pettoner before assgnment had an
economc nterest n the o n pace through ts contro over e tracton. Under
the contract wth pettoner, ts assgnor retaned a part of ths nterest 50
per, cent of net. Lke the other hoders of such economc nterest through
royates, the pettoner ooked to the speca depeton aowances of secton
114(b)(3) to return whatever capta nvestment t had. The cost of that
nvestment to the benefcary of the depeton under secton 114(b)(3) s
unmportant. Depeton depends ony upon producton. It s the essor s, essee s
or transferee s possbty of proft from the use of hs rghts over producton,
dependent soey upon the e tracton and sae of the o, whch marks an
economc nterest n the o. (See rby Petroeum Co. v. Commssoner, supra,
page 4.) Through retenton of certan rghts to payments from o or ts proceeds
n hmsef, each of these assgnors of parta e potaton rghts n o ands
has mantaned a capta nvestment or economc nterest n the o or ts
proceeds. s the o Is e tracted and sod that economc nterest n the o n
pace s reduced and the hoder or owner of the nterest s entted to hs equtabe
proporton of the depeton as rent or royaty. The operator, of course, may
deduct such payments from the gross recepts.
Of course, such a transferor, whether the andowner or any ntermedate
assgnor, may competey dvest hmsef of any nterest, economc or otherwse,
n the e tracton of the o. s the record shows no reservaton of an economc
nterest by Sutton, the assgnee of Guf and the assgnor of pettoner, he appears
to have done so n ths case. (See everng v. be O Land Co., 303 U. S., 372
Ct. D. 1322, C. . 193 -1, 293 .) Whe, as ponted out above, the payment of
proceeds n cash, the form of the nstrument of transfer and ts effect on the
tte to the o under oca aw are not decsve of the rght to partcpaton n
depeton under sectons 23(m) and 114(b)(3), there must be a determnaton
under edera ta aw as to whether the transferor has made an absoute
sae or has retaned such economc nterest as we have |ust descrbed n the
precedng paragraph. ( rby Petroeum Co. v. Commssoner, supra, page 6.)
We have sad that the nstrument shoud be construed as a sae when a arge
cash payment was made wth a reserved payment that coud be satsfed by
future saes of the transferred property wthout e tracton of the o. Obvousy
there coud be no depeton wthout e tracton. nderson v. everng, 310
D. S., 404, 412.) On the other hand, we have construed an assgnment of o
eases for cash and a deferred payment, payabe out of o ony,.f, as and when
produced, as the reservaton of an economc nterest n the o not a sae.
(Thomas v. Perkns, 301 U. S., 655 Ct. D. 1237, C. . 1937-1, 162 .)
The Government contends that everng v. be O Land Co. (303 U. S., 372)
contros ths case. The transfer of the eases n be was hed an absoute sae.
There the transfer was for cash, deferred payments n cash, f the assgnee dd
not take advantage of a stpuaton for abandonment, and a one-thrd nterest
n the net profts of the assgnee. It was further provded that be, the assgnor
after the transfer, shoud have no nterest n or to sad propertes, e cept
n the case of an abandonment of the property by the assgnee. Ths provson
for the transfer of a nterest of the assgnor was emphaszed as a sgnfcant
part of the agreement for transfer. The ssue upon whch ths Court passed
was the cassfcaton of the deferred payments. Were they gross ncome from
the property or recepts from a sae of the eases These deferred payments
were not payabe out of o saes but were payabe absoutey, uness there was
an abandonment. Ths Court concuded that the addton of a provson for the
payment of a share of net profts dd not quafy n any way the effect of the
transactons as an absoute sae. (Page 375.) In vew of what we have sad
n ths and n the rby Petroeum case as to the economc nterest n the o
of a recpent of a share of net profts, the hodng of be shoud not be e tended
to the facts of ths agreement.
The assgnor. Guf, n the assgnment here Invoved, requred the grantee to
dr prompty, to account for producton, to pay over 50 per cent of recepts,
on Ways and Means, S ty-nnth Coneress. naee 1006.) (See . Rept. No. 1, SI tv-nnth
Congress, frst sesson, December 7, 1025 C. . 1939-1 (Part 2), 315 , Dscovery aue
secton 204(c)(2). 44 Stat., 16.) or dscusson see everng v. Twn e Syndcate
(293 U. S.. 312) and rby Petroeum Co. . Commssoner, supra, page 3). Depeton s
now an arbtrary percentage aowance based on producton from the wes wthout regard
to cost or vaue of the property.
partcpaton In net profts dsassocated from an economc Interest does not enabe
a recpent of such profts to beneft from depeton. . everng v. O Donne, 303 U. S.,
370 Ct. D. 1324, C. . 193 -1, 337 .)
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( 145, rt. 145-1.
242
ess agreed costs and e penses, and to se the producton on defned terms to
grantor, f grantor desred to purchase. Ths Inst cause dd not appear n the
be contract. Such n transfer of rghts to e pot coud not, we thnk, propery
be construed as a sae. It s rather an assgnment to the operator, pettoner
here, of the rght to e pot the property u wth a reservaton n the assgnor
of an economc nterest n the o.
Reversed.
Mr. ustce ackson took no part n the consderaton or decson of ths case
Concurrng opnon by Sr. ustce rankfurter.
Mr. ustce ack and Mr. ustce Dougvs dssent
S CTION 117. C PIT L G INS ND LOSS S.
rtce 117-1: Meanng of capta assets.
R NU CT O 1936.
G. C. M. 21497 (C. . 1939-2,1 7) and I. T. 3336 (C. . 1939-2,1 9)
revoked. (See G. C. M. 24910 and I. T. 3 03, pages 101 and 103, re-
spectvey, of ths uetn.)
SUPPL M NT C CR DITS G INST T .
S CTION 131. T S O OR IGN COUNTRI 6 NL
POSS SSIONS O UNIT D ST T S.
rtce 131-1: nayss of credt for ta es.
R NU CT O 1936.
Ta es mposed under Me can aw Ley de Impuesto sobre a
enta. (See I. T. 37 7, page 232.)
SUPPL M NT D. R TURNS ND P YM NT O T .
S CTION 145. P N LTI S.
rtce 145-1: Penates.
R NU CT O 1936.
Crcut court of appeas revew of fndngs of fact supported by
evdence n a crmna proceedng. (See Ct. D. 1666, page 122.)
13 See the dscusson of e O Co. In note 7, supra.
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243 114, rt. 114-1.
INCOM T RULINGS. P RT DDL
R NU CTS O 1935 ND 1934 OR PRIOR CTS.
SU TITL . G N R L PRO ISIONS.
P RT II. COMPUT TION O -N T INCOM .
S CTION 22(b). C ROSS INCOM : CLUSIONS
ROM GROSS INCOM .
rtce 22(b) (1)-1: Lfe nsurance mounts pad
by reason of the death of the nsured.
R NU CT O 1034.
Reguatons G amended. (See T. D. 5515, page 26.)
S CTION 23(c). D DUCTIONS ROM GROSS
INCOM : T S G N R LLY.
rtce 23(c)-1: Ta es.
R NU CTS O 192 , 1932, ND 1934.
ccrua of Mssour rea property ta es. I. T. 2 5 (C. . I -1,
64 (1935) ) modfed. (See I. T. 3777, page 63.)
S CTION 24. IT MS NOT D DUCTI L .
rtce 24-2: Capta e pendtures.
R NU CT O 1934.
Payments by assgnee to assgnor for rght to e pot o property
under an assgnment reservng an economc nterest n the o. (See
Ct. D. 1674, page 237.)
SU TITL C SUPPL M NT L PRO ISIONS.
SUPPL M NT . COMPUT TION O N T INCOM .
S CTION 114. SIS OR D PR CI TION
ND D PL TION.
rtce 114-1: ass for aowance of deprecaton
and depeton.
R NU CT O 1034.
Payments by assgnee to assgnor for rght to e pot o property
under an assgnment reservng an economc nterest n the o. (See
Ct. D. 1674, page 237.)
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115, rt. 115-1.
244
S CTION 115. DISTRI UTIONS Y CORPOR TIONS.
rtce 115-1: Dvdends. 1946- -12-292
Ct. D. 1671
INCOM T R NU CT O 1934 S COND R NU CT O 1940
D CISION O SUPR M COURT.
1. Dstrbutons by Corporatons .Stock Ta abe as Dvdend
rom arnngs and Profts ppcaton of Second Revenue
ct of 1940.
The ta payer and hs wfe n 1929 organzed a corporaton to
whch they transferred securtes whch had cost them 14,500,000,
but whch had acqured a market vaue of ,000,000 by the date
the corporaton was organzed. In 1934 the corporaton dstrb-
uted certan shares of stock to the ta payer the vaue of whch was
not ncuded n ta payer s ncome ta return for that year. Ths
was based on the contenton that the dstrbuton was a capta
dstrbuton and not a dvdend from earnngs and profts, arsng
from the use as a base for determnng earnngs and profts the
far market vaue of the transferred securtes rather than ther
cost to the transferor. ed: The cost of the securtes to the
ta payer was the proper base for ascertanng whether the cor-
poraton coud make a dstrbuton from profts the use of that
fgure woud show a surpus n 1934 and the dstrbuton of the
stock was from earnngs and profts and therefore ta abe as a
dvdend under secton 115(a) of the Revenue ct of 1934. The
fact that the case was pendng before the oard of Ta ppeas
on September 20, 19-10, does not e empt the sharehoder from the
ta abty to whch he woud otherwse be sub|ect. Secton 501
(c) of the Second Revenue ct of 19-10 means that the enactment of
secton 501(a) of that ct was not to affect the ta abty of
those who had cases before the oard or courts, whatever that
abty under the earer revenue aws. Under those earer aws
the dstrbuton of stock to the ta payer mposed on hm a ta a-
bty- whch remaned unaffected by the enactment of the 1940
statute.
2. Decson oowed.
Commssoner v. Wheeer (324 U. S., 542, Ct. D. 1637, C. . 1945, 349)
foowed.
3. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, S th
Crcut (150 ed. (2d), 19S), affrmng memorandum opnon of
The Ta Court of the Unted States, reversed.
Supreme Court of the Unted States.
Commssoner of Interna Revenue, pettoner, v. Chares T. sher, dcard .
sher, and Leo SI. utze, ecutors of the state of red . sher, and
urtha SI. sher.
On wrt of certorar to the Unted States Crcut Court of p| as for the S th Crcut
March 11, 1946.
opnon.
Mr. ustce ack devered the opnon of the Court.
In 1934 the Senor Investment Corporaton, organzed n 1929 by one sher
and hs wfe for famy nvestment purwses, dstrbuted to sher 43,300 shares
of Genera Motors stock vaued at 1,723, 1.25. sher and hs wfe made a
|ont ta return but dd not report ths amount as ncome. The ta payers
contended that snce the Senor Investment Corporaton showed a book defct
for 1934, the dstrbuton n queston was a capta dstrbuton and not a
corporate dvdend from earnngs and profts, whch atter was the t| P
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245
116, rt. 116-1.
of dstrbuton ta abe under secton 115(a) of the then controng ta aw.
(4 Stat., 6 0, 711.) The Commssoner decded that the foowng crcum-
stances |ustfed a fndng that the dstrbuton was ta abe as a dvdend from
earnngs or profts : When the Senor Investment Corporaton was organzed
sher and hs wfe pad for ther shares of stock wth securtes whch had
cost them 14,500,000 but had by the date of organzaton acqured a market
vaue of ,000,000. To show that the corporaton had a defct and that con-
sequenty the dstrbuton of Genera Motors stock was not from earnngs
or profts, the ta payers used the corporaton s computaton based on the
S ,000,000 rather than the 14,500,000 fgure. The Commssoner decded that
the 14,500,000 cost to sher and hs wfe of the securtes they transferred
to the corporaton n e change for shares of ts stock was the proper base
for ascertanng whether the corporaton coud make a dstrbuton from profts
that the use of that fgure woud show a surpus n 1934 and that the dstrbu-
ton of the Genera Motors stock was therefore a ta abe dvdend from earn-
ngs or profts. On revew The Ta Court foowng ts pror hodngs re|ected
the Commssoner s argument and decded for the respondents. The crcut
court of.arpeas afrmed. (150 ed. (2d), 19 .)
Snce secton 112 of the Revenue ct of 1934 dd not ta the gan resutng from
transfers of property to a corporaton n e change for stock n that corporaton,
t s obvous that re|ecton of the Commssoner s contenton woud resut n per-
mttng the secton 112 e empton to be used as a devce for evadng ta es Congress
ntended to mpose on many gans actuay reazed from safes of property. ut
we uphed the vews urged by the Commssoner here, n Commssoner v. Wheeer,
(324 U. S., 542 Ct D. 1C37, C. . 1945, 349 ), decded on the same day that
the crcut court of appeas handed down ts decson n ths case. In that case
we hed that n the Second Revenue ct of 1940 ( 54 Stat., 974, 1004-1005 C. .
1940-2, 450, 479 ISO ), Congress carfed ts orgna purpose n enactng the
1934 ct and others to requre that corporate earnngs be computed on a bass of
cost of the property to transferors ke sher. That decson woud have con-
troed the dsposton of ths case were t not for the fact that on rehearng the
crcut court of appeas hed that a provso n the Second Revenue ct of 1940
e cepted ta payers ke sher from abty under the Revenue ct of 1934.
That provso stated that the 1940 ct shoud not 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. Ths case was pendng before the ta court on September 20, 1940,
and respondents here contend that the provso was ntended to e empt sher
from the ta abty to whch he woud otherwse be sub|ect.
In other words respondents assert that Congress ntended by the provso to pck
out a sma group of ta payers and award them speca ta e emptons whch the
whoe ct was desgned to deny a other ta payers who dd not happen to have
ta tgaton pendng n September 1910. The provso ndcates no such purpose.
The provso means what It says, that the enactment of the 1940 ct was not to
affect the ta abty of those who had cases before the oard or courts, what-
ever that ta abty under the earer revenue aws. Under those earer aws
as nterpreted by us n the Wheeer case, the dstrbuton of Genera Motors stock
to sher mposed on hm a ta abty whch remaned unaffected by the enact-
ment of the 1940 statute.
Reversed.
Mr. ustce Dougas, Mr. ustce Murphy and Mr. ustce ackson took no
part n the consderaton or decson of ths case.
S CTION 116. CLUSIONS ROM GROSS INCOM .
rtce 116-1: Incomes of foregn governments,
ambassadors, and consus.
R NU CT O 191 .
Corporaton whoy owned bv foregn government. O. D. 62 (C. .
2,124 (1920)) revoked. (See I. T. 37 9, page 100.)
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1131, rt. 131-7.
246
S CTION 117. C PIT L G INS ND LOSS S.
rtce 117-1: Meanng of capta assets.
R NU CT O 1934.
G. C. M. 21497 (C. . 1939-2,1 7) and I. T. 3336 (C. . 1939-2,1 9)
revoked. (See G. C. M. 24910 and I. T. 3S03, pages 101 and 103, re-
spectvey, ths uetn.)
S CTION 131. T S O OR IGN COUNTRI S ND
POSS SSIONS O UNIT D ST T S.
Revocaton of G. C. M. 202 6 (C. . 193 -2, 223), reatve to the
provso contaned n secton 131(f) of the Revenue ct of 1932
wth respect to the credt of a domestc corporaton on account of
ta es of a foregn subsdary.
Reconsderaton has been gven to G. C. M. 202 6 (C. . 193 -2,223).
reatve to the provso contaned n secton 131(f) of the Revenue ct
of 1932 wth respect to the credt of a domestc corporaton on account
of ta es of a foregn subsdary, n the ght of the decson n Genera
oods Corporaton v. Commssoner (4 T. C, 209, acquescence, page 2
In G. C. M. 202 6, supra, the domestc corporaton was the owner of
a of the capta stock of a foregn corporaton from whch t receved
dvdends n 1933 whch were pad n part from earnngs for 1932 and
n part from earnngs for 1933. The subsdary pad no foregn ta
on earnngs for the year 1932 for the reason that the foregn govern-
ment aowed osses from pror years to be apped aganst ncome for
that year. It was hed that n appyng the provso contaned n sec-
ton 131(f) of the Revenue ct of 1932 the porton of the dvdends
receved from earnngs for 1932 and the porton of the dvdends
receved from earnngs for 1933 shoud be segregated and no foregn
ta credt aowed as to that porton of the dvdends attrbutabe to
earnngs for 1932.
In Genera oods Corporaton v. Commssoner, supra, The Ta
Court hed that the mtaton upon the credt under the provso n sec-
ton 131(f) of the Revenue ct of 1934 (contanng the same anguage
as the provso n secton 131(f) of the Revenue ct of 1932) shoud be
determned by a snge computaton based upon the rato of-te dv-
dends receved by the domestc corporaton to the domestc corpo-
raton s entre net ncome for the year n whch the dvdends were
receved, athough the dvdends were pad n part from the sub-
sdary s current earnngs or profts and n part from the earnngs or
profts of pror years. The court stated n part that
t Is unnecessary and Immatera to compute by separate years the UtI-
dends pad out of accumuated profts or to appy the rato of the amount of dv-
SUPPL M NT C CR DITS G INST T .
rtce 131-7: Domestc corporaton ownng a
ma|orty of the stock of foregn corporaton.
194G-1-12204
G. CM. 24 23
R NU CT O 1932.
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247
131, rt. 131-7.
dends pad out of accumuated ncome for each separate year to the entre net
ncome of the domestc corporaton for. the ta abe year, as was done by respondent.
The Ta Court cted and reed upon the decson n Coca-Coa Co. v.
Unted States (55 ed. Supp., 616).
In vew of acquescence n the decson n the Genera oods Cor-
poraton case and snce the poston taken by the ureau n G. C. M.
202 6, supra, s nconsstent wth that decson, G. C. M. 202 6 s
hereby revoked.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
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MPLOYM NT T RULINGS.
INT RN L R NU COD .
C PT R 9, SU C PT R . D R L INSUR NC CONTRI UTIONS
CT.
Secton 1400: Rate of ta . 1946-1-12207
Reguatons 106, Secton 402.302: Rates and T. D. 54S7
computaton of empoyees ta .
( so Secton 1400 Reguatons 10 , Secton
402.402.)
TITL 26 INT RN L R NU . C PT R I, SU C PT R D, P RT 402.
MPLOY S T ND MPLOY RS T UND R T D R L INSUR NC
CONTRI UTIONS CT.
Reguatons IOC amended to conform to secton 401 of the Revenue
ct of 194 ), postponng unt anuary 1, 11147, the ncrease n rates
of the ta es under the edera Insurance Contrbutons ct.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Wa hns/ton, D. C.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 106 Part 402, Tte 26, Code of
edera Reguatons, Cum. Sup. , reatng to the empoyees tas
and the empoyers ta under the edera Insurance Contrbutons
ct (Subchapter . Chapter 9, Interna Revenue Code), to secton
401 of the Revenue ct of 1945 (Pubc Law 214, Seventy-nnth Con-
gress), approved November ,1945 C. . 1945, 54G , such reguatons
are amended as foows:
Paragraph 1. Immedatey precedng secton 402.301, reatng to
measure of empoyees ta , the foowng s nserted:
S CTION 401(a) O T R NU CT O 1045.
Causes (1) and (2) of secton 1400 of the eder|| Insurance Contr-
butons ct (Interna Revenue Code, sec. 1400) arc amended to road
as foows:
(1) Wth respect to wages receved durng the caendar vears
1030, 1940, 1941, 1042, 1943, 19-14, 194. ., and 1U4G, the rate sha be
1 per centum.
(2) Wth respect to wages receved durng the caendar years
1947 and 194 , the rate sha be 2 per centum.
Par. 2. Secton 402.302, as amended by Treasury Decson 5430,
approved anuary 17, 1945 C. . 1945, 369 , reatng to rates
and computaton of empoyees ta , s further amended to read as
foows:
(24 )
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249
Regs. 106, 402.302.
Sec. 402.302. Rates and Computaton of mpoyees Ta . The rates of em-
poyees ta appcabe for the respectve caendar years are as foows:
Per cent.
or the caendar years 1940,1941, 1942, 1943, 1944, 1945, and 1946 1
or the caendar years 1947 and 194 2 6
or the caendar year 1949 and subsequent caendar years 3
The empoyees ta s computed by appyng to the wages receved by the
empoyee the rate In effect at the tme such wages are receved.
ampe. Durng 1946 s an empoyee of and s engaged n the per-
formance of servces whch consttute empoyment (see secton 402.203). In the
foowng year, 1947, receves from . 1,000 as remuneraton for servces
performed by n the precedng year. The ta s payabe at the 2 per cent
rate n effect for the caendar year 1947 (the year n whch the wages are
receved), and not at the 1 ptv cent rate whch s In effect for the caendar year
1946 (the year n whch the servces were performed).
Par. 3. Immedatey precedng secton 402.401, reatng to measure
of empoyers ta , the foowng s nserted:
S CTION 401(b) O T R NU CT O 1945.
Causes (1) and (2) of secton 1410 of such ct edera Insurance
Contrbutons ct (Interna Revenue Code, sec. 1410) are amended
to read as foows:
(1) Wth respect to wages pad durng the caendar years 1939,
1940, 1941, 1942, 1943, 1944, 1945, and 1940, the rate sha be 1 per
centum.
(2) Wth respect to wages pad durng the caendar years 1947
and 194 , the rate sha be 2 per centum.
Par. 4. Secton 402.402, as amended by Treasury Decson 5430, re-
atng to rates and computaton of empoyers ta , s further amended
to read as foows:
Sec. 402.402. Rates and Computaton of mpoyers Ta . The rates of em-
poyers ta appcabe for the respectve caendar years are as foows:
Per cent.
or the caendar years 1940. 1941, 1942, 1943, 1944, 1945, and 1946 1
or the caendar years 1947 and 194 2y2
or the caendar year 1949 and subsequent caendar years 3
The empoyers ta s computed by appyng to the wages pad by the empoyer
the rate n effect at the tme such wages are pad.
Par. 5. The ast paragraph of secton 402.705, as amended by Treas-
ury Decson 5430, reatng to speca refunds of empoyees ta on
wages over 3,000, s further amended by strkng out 1945 and
1946 wherever they now appear theren, and by nsertng n eu
thereof 1946 and 1947, respectvey.
(Ths Treasury Decson s ssued under the authorty contaned n
secton 1429 of the Interna Revenue Code (53 Stat., 17 26 U. S. C,
1940 ed., 1429) and secton 401 of the Revenue ct of 1945 (Pubc
Law 214, Seventy-nnth Congress).)
os r D. Nunan, r.,
Commssoner of Interna Revenue.
pproved December 27, 1945.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster December 2 , 1945, 11.1 a. m.)
703672 46 17
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Regs. 106, 402.203.
250
Secton 1400: Rate of ta .
Reguatons 106, Secton 402.402: Rates and compu-
taton of empoyers ta .
Increase n rates of ta es postponed unt anuary 1, 1947 regua-
tons amended. (See T. D. 54 7, page 24 .)
Secton 1426: Defntons. 1946-7-122 1
Reguatons 106, Secton 402.203: mpoyment T. D. 5502
after December 31, 1939.
( so Secton 1426 Reguatons 106, Sectons
402.213, 402.227 aso Subchapter C ( edera
Unempoyment Ta ct), Secton 1607
Reguatons 107, Sectons 403.203, 403.213,
403.227.)
TITL 26 INT RN L R NU . C PT R I, SU C PT R D. P RT 402 D
P RT 403.
Reguatons 106 amended to conform to secton 1426 (I) and (|)
of the Interna Revenue Code, reatng to servces performed respec-
tvey by offcers and members of crews empoyed by War Shppng
dmnstraton. and by certan empoyees of onneve Power
dmnstrator and Reguatons 107 amended to conform to secton
1607(m) of the Interna Revenue Code, reatng to servces per-
formed by certan empoyees of onneve Power dmnstrator.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
R GUL TIONS 106.
In order to conform Reguatons 106 Part 402, Tte 26, Code of
edera Reguatons, Cum. Sup. , reatng to the empoyees ta and
the empoyers ta under the edera Insurance Contrbutons ct
(Subchapter , Chapter 9, Interna Revenue Code), to secton 1426()
of the Interna Revenue Code, added by secton 1(b) (1) of the ct
of March 24, 1943 (57 Stat., 46), as amended by secton 1 of the ct
of pr 4, 1944 (5 Stat,, 1 ), and by secton 1 of Pubc Law 21,
Seventy-nnth Congress, approved March 24, 1945, and to secton
1426(|) of the Interna Revenue Code, added by secton 7(a) of Pubc
Law 201, Seventy-nnth Congress, approved October 23, 1945, such
reguatons are amended as foows:
Paragraph 1. Immedatey foowng the ctaton after the prov-
sons of aw under the capton S CTION 1426 O T CT as
set forth precedng secton 402.201, the foowng s nserted:
() Offcers and Members of Crews mpoyed by War Shppno
dmnstraton. The term empoyment sha ncude such servce
as s determned by the dmnstrator, War Shppng dmnstraton,
to be performed after September 30,1941, and pror to the termnaton of
tte I of the rst War Powers ct, 1941, on or n connecton wth any
vesse by an offcer or member of the crew as an empoyee of the Unted
States empoyed through the War Shppng dmnstraton, or, In respect
of such servce performed before ebruary 11, 1942, the Unted States
Martme Commsson, but sha not ncude any such servce performed
(1) under a contract entered nto wthout the Unted States and durng
the performance of whch the vesse does not touch at a port n the
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251
Regs. 106, 402.203.
Unted States, or (2) on a vesse documented under the aws of any
foregn country and bareboat chartered to the War Shppng dmns-
traton. The term wages means, wth respect to servce whch con-
sttutes empoyment by reason of ths subsecton, such amount of remu-
neraton as s determned (sub|ect to the provsons of ths secton) by
the dmnstrator, War Shppng dmnstraton, to be pad for such
servce. The dmnstrator and such agents as he may desgnate for
the purpose are authorzed aud drected to compy wth the provsons
of the nterna revenue aws on behaf of the Unted States as the
empoyer of ndvduas whose servce consttutes empoyment by reason
of ths subsecton, but the dmnstrator and hs agents sha not be
abe for the ta on any empoyee mposed by secton 1400 (uness the
dmnstrator or hs agent coects such ta from the empoyee) wth
respect to servce performed before the date of enactment of ths sub-
secton whch consttutes empoyment by reason of the enactment of ths
subsecton. The dmnstrator, War Shppng dmnstraton, and the
Unted States Martme Commsson, and ther agents or persons actng
on ther behaf or for ther account, mny, for convenence of admns-
traton, make payments of the ta mposed under secton 1410 wthout
regard to the 3,f00 mtaton n secton 1426(a) (1), but they sha not
be requred to obtan a refund of the ta pad under secton 1410 of the
Interna Revenue Code on that part of the remuneraton of seamen n
ther empoy not ncuded n wages by reason of secton 1426(a) (1) of
the Interna Revenue Code. (Sec. 1426 (), I. R. C, added by sec. 1(b)(1),
ct of Mar. 24, 1943, 57 Stat. 46, as amended by sec. 1, ct of pr. 4,
1944, 5 Stat., 1 , and by sec. 1, P. L. 21, Seventy-nnth Congress,
approved Mar. 24, 1945. The amendments are effectve wth respect to
servce performed after Sept. 30, 1941, and pror to the termnaton of
tte I of the rst War Powers ct, 1941.)
(|) Certan mpoyees of onneve Power dmnstrator. The
term empoyment sha ncude such servce as s determned by the
onneve Power dmnstrator (herenafter caed the dmnstrator)
to be performed after December 31, 1945, by a aborer, mechanc, or
workman, n connecton wth constructon work or the operaton and
mantenance of eectrca factes, as an empoyee performng servce
for the dmnstrator, but sha not ncude any servce performed by
such a aborer, mechanc, or workman, to whom the ct of May 29, 1930
(46 Stat. 46 ), as amended, appes. The term wages means, wth
respect to servce whch consttutes empoyment by reason of ths sub-
secton, such amount of remuneraton as s determned (sub|ect to the
provsons of ths secton) by the dmnstrator to be pad for such
servce. The dmnstrator s authorzed and drected to compy wth
the provsons of the Interna revenue aws on behaf of the Unted
States as the empoyer of ndvduas whose servce consttutes empoy-
ment by reason of ths subsecton. (Sec. 1426(|), I. R. C, added by sec.
7(a), P. L. 201, Seventy-nnth Congress, approved Oct. 23, 1945.)
Par. 2. Immedatey precedng secton 402.203, the foovrng s
nserted:
S CTION 1426() O T CT.
O IC RS ND M M RS O CR WS MPLOY D Y W R S IP-
PING DMINISTR TION.
The term empoyment sha ncude such servce as s determned
by the dmnstrator, War Shppng dmnstraton, to be performed
after September 30, 1941, and pror to the termnaton of tte I of the
rst War Powers ct, 1941, on or n connecton wth any vesse by an
offcer or member of the crew as an empoyee of the Unted States em-
poyed through the War Shppng dmnstraton, or, n respect of such
servce performed before ebruary 11, 1912, the Unted States Martme
Commsson, but sha not ncude any such servce performed (1) under
a contract entered nto wthout the Unted States and durng the per-
formance of whch the vesse does not touch nt a port n the Unted
States, or (2) on a vesse documented tnder the aws of any foregn
country and bareboat chartered to the War Shppng dmnstraton.
(Sec. 1426(), I. R. C. added by sec. b) (1), ct of Mar. 24,
1943 (57 Stat, 46), as amended by sec. 1, ct of pr. 4, 1944 ( 5 Stat
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Regs. 106, 402.203. 252
1 ). The amendment Is effectve wth respect to servce performed
after Sept. 30, 1941, and pror to the termnaton of tte I of the rst
War Powers ct, 1041.)
S CTION 1426(|) O T CT.
C RT IN MPLOY S O ONN ILL POW
DMINISTR TOR.
The term empoyment sha ncude such servce as s determned
by the onneve Power dmnstrator (herenafter caed the dmn-
strator) to be performed after December 31,1945, by a aborer, mechanc,
or workman, In connecton wth constructon work or the operaton
and mantenance of eectrca factes, as an empoyee performng
servce for the dmnstrator, but sha not ncude any servce per-
formed by such a aborer, mechanc, or workman, to whom the ct of
May 29, 1930 (40 Stat. 40 ), as amended, appes. (Sec.
1426( ), I. R. C, added by sec. 7(a), P. L. 201, Seventy-nnth Congress,
approved Oct. 23, 1945.)
Pak. 3. Secton 402.203 s amended by addng at the end thereof the
foowng new paragraph:
(d) Servces performed for War Shppng dmnstraton or onneve Povt
dmnstrator. Notwthstandng any other provson of these reguatons, such
servces as consttute empoyment under secton 1426 (I) or (|) of the ct sha
consttute empoyment wthn the meanng of the ct and of these reguatons.
Secton 142C() of the ct reates to certan servces performed after September
30, 1941, and pror to the termnaton of Tte I of the rst War Powers ct,
1941, on or n connecton wth a vesse by an offcer or member of the crew as
an empoyee of the Unted States empoyed through the War Shppng dmuv
traton or, n respect of such servces performed before ebruary 11, 1942, the
Unted States Martme Commsson. Secton 1426( ) of the ct reates tn
servces performed after December 31, 1945, by certan aborers, mechancs, or
workmen, n connecton wth constructon work or the operaton and mantenance
of eectrca factes, as empoyees of the Unted States empoyed through the
onneve Power dmnstrator.
Par. 4. The frst sentence of secton 402.213 s amended to read as
foows:
Servces performed n the empoy of the Unted States Government, e cept as
provded n secton 1426 () or (|) of the ct (see secton 402.203(d)), are
e cepted.
Par. 5. Immedatey precedng secton 402.227, the foowng f
nserted:
S CTION I426() O T CT.
O IC RS ND M M RS O CR WS MPLOY D Y W R
S IPPING DMINISTR TION.
The term wages means, wth respect to servce whch
consttutes empoyment by reason of ths subsecton, such amount of
remuneraton as s determned (sub|ect to the provsons of ths sec-
ton) by the dmnstrator, War Shppng dmnstraton, to be pad
for such servce. The dmnstrator, War Shppng dmn-
straton, and the Unted States Martme Commsson, and ther agents
or persons actng on ther behaf or for ther account, may, for con-
venence of admnstraton, make payments of the ta mposed under
secton 1410 wthout regard to the . 3,000 mtaton n secton
1420(a)(1), but they sha not be requred to obtan a refund of the
ta pad under secton 1410 of the Interna Revenue Code on that part
of the remuneraton of seamen n ther empoy not ncuded n wages
by reason of secton 1420(a) (1) of the Interna Revenue Code. (Sec.
1420(), I. R. C, added by sec. 1(b) (1), ct of Mar. 24, 1043, 57 Stat. 46,
as amended by sec. 1, P. L. 21. Seventy-nnth Congress, approved Mar.
24, 1945. The amendment Is effectve wth respect to servce performed
after Sept. 30, 1941. and pror to the termnaton of Tte I of the rst
War Powers ct, 1941.)
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253
Regs. 106, 402.203.
S CTION 1426(|) O T CT.
C RT IN MPLOY S O ONN ILL POW R
DMINISTR TOR.
The term wages means, wth respect to servce whch
consttutes empoyment by reason of ths subsecton, such amount of
remuneraton as s determned (sub|ect to the provsons of ths sec-
ton) by the dmnstrator to be pad for such servce. (Sec.
1426(|), I. R. C, added by sec. 7(a), P. L. 201, Seventy-nnth Congress,
approved Oct. 23, 1945.)
Par. 6. Secton 402.227() s amended by addng at the end thereof
the foowng new subparagraph:
(4) Remuneraton for certan servces performed for War Shppng dmn-
straton or onneve Power dmnstrator. Notwthstandng any other pro-
vson of these reguatons, such remuneraton for empoyment as consttutes
wages under secton 1426 () or (|) of the ct sha consttute wages wthn the
meanng of the ct and of these reguatons. See secton 402.203(d), reatng
to servces whch consttute empoyment under secton 1426 () and (|).
R GUL TIONS 107.
In order to conform Reguatons 107 Part 403, Tte 26, Code of
edera Reguatons, Cum. Sup. , reatng to the e cse ta on empoy-
ers under the edera Unempo)Tnent Ta ct (Subchapter C, Chap-
ter 9, Interna Revenue Code), to secton (507(m) of the Interna
Revenue Code, added by secton 7(d) of Pubc Law 201, Seventy-
nnth Congress, approved October 23, 1945, such reguatons are
amended as foows:
Par. 7. Immedatey foowng the ctaton after the provsons of
aw under the capton Secton 1G07 of the ct as set forth preced-
ng secton 403.201, the foowng s nserted:
(m) Certan mpoyees of onnevt|.e Power dmnstrator. The
term empoyment sha ncude such servce as s determned by the
onneve Power dmnstrator (herenafter caed the dmnstrator)
to be performed after December 31, 1945, by a aborer, mechanc, or
workman, n connecton wth constructon work or the operaton and
mantenance of eectrca factes, as an empoyee performng servce
for the dmnstrator. The term wages means, wth respect to
servce whch consttutes empoyment by reason of ths subsecton, such
amount of remuneraton as s determned (sub|ect to the provsons of
ths secton) by the dmnstrator to be pad for such servce. The
dmnstrator s authorzed and drected to compy wth the provsons
of the nterna revenue aws on behaf of the Unted States as the em-
poyer of ndvduas whose servce consttutes empoyment by reason
of ths subsecton. (Sec. 1607(m), I. R. C, added by sec. 7(d), P. L.
201, Seventy-nnth Congress, approved Oct. 23, 1945.)
Par. . Immedatey precedng secton 403.203, the foowng s n-
serted:
S CTION 1607(m) O T CT.
C RT IN MPLOY S O ONN ILL POW R
DMINISTR TOR.
The term empoyment sha ncude such servce as s determned
by the onneve Power dmnstrator (herenafter caed the dmn-
strator) to be performed after December 31,1945, by a aborer, mechanc,
or workman, n connecton wth constructon work or the operaton and
mantenance of eectrca factes, as an empoyee performng servce
for the dmnstrator. (Sec. 1607(m), I. R. C, added by sec.
7(d), P, L. 201, Seventy-nnth Congress, approved Oct. 23, 1945.)
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Regs. 106, 403.203.
254
Par. 9. Secton 403.203 s amended as foows:
( ) y nsertng mmedatey after the headng of such secton the
foowng:
(a) In genera.
( ) y addng at the end of such secton the foowng new para-
graph:
( ) Servce performed for onneve Power dmnstrator. Notwthstandng
any other provson of these reguatons, such servces as consttute empoyment
under secton 1607(m) of the ct sha consttute empoyment wthn the
meanng of the ct and of these reguatons (Incudng secton 403.205, reatas
to who are empoyers). Secton 1007(m) of the ct reates to servces perform
after December 31, 1945, by a aborer, mechanc, or workman, n connecton wth
constructon work or the operaton and mantenance of eectrca factes, as
an empoyee of the Unted States empoyed through the onneve Power d-
mnstrator.
Par. 10. The frst sentence of secton 403.213 s amended to read as
foows:
Servces performed n the empoy of the Unted States Government, e ce
as provded n secton 1607(m) of the ct (see secton 403.203(b)), are e cepted.
Par. 11. Immedatey precedng secton 403.227, the foowng s
nserted:
S CTION 1607(m) O T CT.
C RT IN MPLOY S O ONN ILL POW R
DMINISTR TOR.
The term wages means, wth respect to servce whch
consttutes empoyment by reason of ths subsecton, such amount of
remuneraton as s determned (sub|ect to the provsons of ths secton)
by the dmnstrator to be pad for suc servce. (Sec.
1607(m), I. R. C added by sec. 7(d), P. L. 201, Seventy-nnth Congress,
approved Oct. 23, 1045.)
Par. 12. Secton 403.227(6) s amended by addng at the end thereof
the foowng new subparagraph:
(4) Remuneraton for certan servces performed for onneve Power d-
mnstrator. Notwthstandng any other provsons of these reguatons, suet
remuneraton for empoyment as consttutes wngeg under secton G07(m) of
the ct sha consttute wages wthn the meanng of the ct and of thes
reguatons. See secton 403.203(6), reatng to servces whch consttute em-
poyment under secton 1607 (m).
(Ths Treasury Decson s ssued under the authorty contaned n
sectons 1429 and 1609 of the Interna Revenue Code (53 Stat., 175.
1 20 U. S. C, 1940 ed., 1429,1G09) n secton 1426() of the Inter-
na Revenue Code, added by secton 1(b) (1) of tho ct of March 24,
1943 (57 Stat., 46), as amended by secton 1 of the ct of pr 4,
1944 (5 Stat., 1 ), and by secton 1 of Pubc Law 21, Seventy-nnth
Congress, approved March 24, 1945 and n sectons 142G( n and
1607 (m) of the Interna Revenue Code, added by secton 7 of Pubc
Law 201, Seventy-nnth Congress, approved October 23, 1945.)
oseph D. Nun an, r.,
Commssoner of Interna Revenue.
pproved March 1 ,194G.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster March 10,1946,1121 a. m.)
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255 Regs. 107, 403.204.
Secton 1426: Defntons.
Reguatons 106, Secton 402.213: Unted States
and nstrumentates thereof.
Servces performed for War Shppng dmnstraton and onne-
ve Power dmnstrator. (See T. D. 5502, page 250.)
Secton 1426: Defntons.
Reguatons 106, Secton 402.227: Wages.
Seamen and certan empoyees of onneve Power dmnstrator.
(SeeT. D. 5502, page 250.)
C PT R 9, SU C PT R C D R L UN MPLOYM NT T CT.
Secton 1607: Defntons.
Reguatons 107, Secton 403.203: mpoyment after
December 31,1939.
Servces performed for onneve Power dmnstrator. (Sae
T.D. 5502, page 250.)
Secton 1607: Defntons. 1946-3-12232
Reguatons 107, Secton 403.204: Who are Mm. 5967
empoyees.
( so Soca Securty ct, Secton 907
Reguatons 90, rtce 205.)
Status for edera empoyment ta purposes of corporate offcers
who perform no servces or ony nomna or mnor servces and who
receve no compensaton.
Mmeograph 5723 revoked and Mmeograph 4 S0 C. . 1939-1
(Part 1), 312 modfed.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C, anuary 4, Of.
Coectors of Interna Revenue and Others Concerned:
1. It has been the poston of the ureau heretofore that offcers of
corporatons and of organzatons ta abe as corporatons who perform
no servces and receve no compensaton are to be counted nevertheess
as empoyees for purposes of the ta mposed by Tte I of the Soca
Securty ct and by the edera Unempoyment Ta ct on empoyers
of eght or more. (Mm. 5723 dated une 27, 1944.) Ths poston
was based on the provsons of secton 1101(a)(6) of the Soca
S curty ct and secton 1607() of the edera Unempoyment Ta
ct and has been supported by the decson of the Crcut Court of
ppeas for the Tenth Crcut n the case of Nchoas v. The Rchov)
Manufacturng Co. (126 ed. (2d), 16). The foregong provsons of
the respectve cts state that The term empoyee ncudes an offcer
of a corporaton, and the court consdered ths anguage a suffcent
bass for hodng the offcer nvoved n the case before t to have
been an empoyee for purposes of the Soca Securty ct, wthout
appyng the usua tests of the empoyer-empoyee reatonshp. Sev-
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Regs. 107, 403.204.
256
era court decsons nvovng the ureau s poston on ths sub|ect sub-
sequenty have been handed down and have resuted n reconsderaton
of that poston.
C S O D CY PRODUCTS CO. . W LC .
2. In Deccy Products Co. v. Wech (C. C. . 1,124 ed. (2d), 502),
the court hed, n effect, that a corporate offcer s not an empoyee
uness he meets the tests determnatve of the ordnary empoyment re-
atonshp. Ths case nvoved the status of an ndvdua who, f
counted as an empoyee, rendered the company abe to ta for the
caendar year 1936 under Tte I of the Soca Securty ct as an
empoyer of eght or more. The ndvdua n queston dd the neces-
sary ega work when the corporaton was organzed n 1923 under the
aws of Massachusetts, has been ts attorney ever snce and n that ca-
pacty receves compensaton. t the tme of organzaton he was
eected statutory cerk, an offce requred under the aws of the State,
and hed that offce unt 1937. s cerk he prepared the mnutes of
meetngs and sgned them. ccordng to hs testmony no annua
meetngs were hed durng some years but n most years the annua
meetng of stockhoders was hed foowed by the annua meetng of
drectors, both of whch he attended, prepared the mnutes, and sgned
them. Durng 1936 the tota tme e pended by hm n attendng the
meetngs was a tte over haf an hour and dctaton of the mnutes
requred fve mnutes, these servces comprsng hs tota dutes and
servces as cerk durng the caendar year. No charge was made for
hs servces as cerk, these beng ncdenta to hs dutes as attorney
for the corporaton. Under the by-aws of the corporaton the cerk s
requred to attend meetngs of the stockhoders and of the drectors
to record upon the corporate book of records the proceedngs of the
respectve meetngs to notfy the stockhoders and drectors of ther
respectve meetngs, n accordance wth the by-aws and to perform
such other dutes as the drectors sha from tme to tme prescrbe.
3. though the court dsagreed wth the Government s contenton
that the cerk, as an offcer, was an empoyee soey because of the pro-
vsons of secton 1101(a) (6) of the Soca Securty ct, the vew was
e pressed, n effect, that nevertheess those provsons and the fact that
he was an offcer dd not prevent hm from beng an empoyee wthn
the meanng of the ct f he met the ordnary empoyment reatonshp
tests. The court e pressy stated ts ntenton not to ay down any
precse defnton of such reatonshp, consderng that the boundares
mtng the reatonshp appeared wth suffcent carty to permt t
to determne the cerk s status. The undsputed facts and observa-
tons upon whch the court based ts concuson that the cerk was an
empoyee of the corporaton are, n substance, that he performed serv-
ces for the corporaton that the short perod of tme requred n per-
formng the servces dd not make t any ess a renderng of servces
that obvousy, he was cerk durng the entre year and f the drectors
or stockhoders saw ft to meet more often, hs work mght have as-
sumed greater proportons that hs servng as cerk was a necessary
ncdent of the conduct of the corporaton s busness under the State
aws that hs servces as cerk can not be sad to have been a gratutous
undertakng, beng ncdenta to hs work as the corporaton s attorney,
n whch capacty he was pad that whe he may not have receved
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257
Regs. 107, 403.204.
any dentfabe compensaton as cerk he dd not serve wthout consd-
eraton that t s hard to thnk that he woud have acted as cerk f he
had not been the corporaton s attorney that from the standpont of
contro and supervson, the cerk was sub|ect to the board of drectors
and the board coud drect hm n the performance of the dutes of hs
offce and prescrbe dutes other than those specfed n the by-aws
that t coud not be sad that he had no superors n the corporaton
who coud gve hm orders and the powers of the board were not
nufed by the fact that he was the ony one famar wth the ega
procedure nvoved and that here the cerk was sub|ect to contro as to
the acts that consttuted the e ecuton of hs agency.
C S O IND P ND NT P TROL UM CORPOR TION . LY.
4. The court n Independent Petroeum Corporaton v. y (C. C. .
5, 141 ed. (2d), 1 9) hed that an unpad corporate offcer, who per-
formed ony nomna servces, s not to be counted as an empoyee.
The offcer nvoved n ths case, the wfe of the presdent, was eected
secretary of the corporaton and hed that offce throughout the year
193 . Upon ts organzaton a shares of the corporaton were ssued
to the presdent e cept one whch for organzatona purposes was
ssued, but not devered, to hs wfe, the secretary. Recovery of the
ta pad for the year 193 under Tte I of the Soca Securty ct
was sought by the corporaton on the ground that the secretary was
not an empoyee and wthout her t was not an empoyer of eght or
more.
5. The corporaton s secretary actuay had no connecton wth the
busness and gave no attenton to t her husband, as presdent and
genera manager and soe owner, performed a the dutes both of
presdent and secretary, e cept that n 103 she sgned two ta returns
and the mnutes of an annua stockhoders meetng whch had been
prepared by her husband and were presented to her for sgnature at
ther home she never performed any duty provded by the corporate
by-aws e cept to sgn the three nstruments referred to above she
receved no saary, wages, or other compensaton, drecty or nd-
recty, and dd nothng ese whatever for the corporaton.
6. In concudng that the secretary was not to be counted as an em-
poyee the court e pressed the vew, n substance, that t was the Con-
gressona ntent n defnng the term empoyee n the Soca
Securty ct as ncudng an offcer of a corporaton, to convey the
meanng that offcers were not to be e cuded as empoyees f they were
reay empoyed by the corporaton. The opnon of the court was
that the wordng of the defnton dd not necessary mean that a
offcers of a corporaton are empoyees but ony such as worked for t
n fact. eng of ths opnon, the court determned that the secre-
tary was not an ndvdua n the empoy of the corporaton n any
common or usua understandng of the words, havng on ony one or
possby two occasons done anythng for t.
C S O N TION L WOOD N O SSOCI TION . UNIT D ST T S.
7. The Court of Cams, ctng the two foregong decsons and the
decson n the case of Magruder v. Yeow Cab Co. of D. C, Inc. (141
ed. (2d), 324), and statng that ts concuson was n accord wth
those decsons, aso hed n Natona Wooden o ssocaton v.
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Regs. 107, 403.204.)
25
Unted States (59 ed. Sup., 11 ) that unpad corporate offcers, per-
formng ony nomna servces, are not to be counted as empoyees for
purposes of Tte I of the Soca Securty ct and the edera
Unempoyment Ta ct. Ths case nvoved the status of the asso-
caton s presdent, three vce presdents, and ts treasurer, the con-
tenton beng made by the assocaton that none of these ndvduas
was ts empoyee and that wthout them t-was not sub|ect to ta under
ether ct as an empoyer of eght or more durng the years 193G to
1939, ncusve.
. s found by the court the facts, so far as matera here, are that
not countng as empoyees ts presdent, three vce presdents, or ts
treasurer, the assocaton dd not have n e cess of seven empoyees at
any tme durng the years nvoved. The dutes of the presdent of
the assocaton, a nonproft unncorporated trade assocaton of wooden
bo manufacturers, were to presde over the annua meetngs and to
wrte occasona etters. or ths he receved no remuneraton and was
entted to none. In some nstances where he made a trp to presde
over a meetng, e cusvey for that purpose, he was rembursed hs
actua traveng e penses by the assocaton and no more. The three
vce presdents performed no dutes, receved no remuneraton, and
were entted to none. Ther offca poston was essentay an honor-
ary one. The treasurer countersgned checks upon the assocaton s
bank of depost. Under an arrangement wth the bank such checks
were to be vad ony when countersgned ether by the treasurer or
by a prevousy desgnated member of the assocaton s board of gov-
ernors. cept for the countersgnng of checks, the staff of empoyees
at the assocaton s offce and pace of busness performed the actua
work normay done by a treasurer. No remuneraton was receved by
the treasurer from the assocaton and he was entted to none.
9. The busness of the assocaton actuay was conducted by the
secretary-manager, who was empoyed by the board of governors,
worked under ther supervson, and receved a saary for hs servces.
No offce factes, cerca assstants, or toos wth whch to perform
any dutes, wore provded for the presdent, vce presdents, and treas-
urer. The atter offcers, who were members of the board of governors,
dd not hre the empoyees, f ther wages, or dscharge them, those
dutes beng performed by the secretary-manager, nor dd they deter-
mne the poces of the assocaton, as the board of governors per-
formed that functon.
10. On the bass of the foregong facts the court hed that the asso-
caton was not abe for the ta . It was the court s opnon, n sub-
stance, that for purposes of measurng the ta on tota wages and
countng empoyed ndvduas n determnng whether the assocaton
was an empoyer of eght or more, t woud seem that, n evyng the
ta on such an empoyer, Congress had n mnd ony ndvduas who
were pad compensaton. The observaton was made n ths connec-
ton that the ta beng measured by tota wages pad, a corporate
offcer who receved no compensaton dd not ncrease the ta burden
on a corporaton sub|ect to the ta and t woud seem nconsstent to
count such an offcer n order to brng the corporaton wthn the cass
sub|ected to the ta . It was further observed that there can be no
enforceabe contract of empoyment wthout an agreement to pay com-
pensaton n some form, as otherwse there woud be no consderaton
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259
Regs. 107, 403.204.
for the contract that uness the offcers here nvoved receved some
sort of remuneraton havng a cash vaue, they were not empoyees as
that word was evdenty used n the ct and t was agreed that they
receved no compensaton havng a cash vaue. Wth reference to the
Government s contenton that these offcers must be ncuded as em-
poyees n vew of the provsons of secton 1101(a) (6) of the Soca
Securty ct, and the smar provsons of secton 1607 () of the ed-
era Unempoyment Ta ct, that The term empoyee ncudes
an offcer of a corporaton, the court took the vew that ths concuson
does not foow. It was ponted out that the word empoyee ord-
nary denotes a subordnate person and s frequenty construed to e -
cude the offcers of a corporaton. In the court s opnon the purpose
of the foregong provson of aw was ntended to prevent ths con-
structon and not to ncude an offcer who receved no compensaton
for hs servces. The court concuded that by ths genera provson t
was not ntended by Congress to ncude wthn the empoyees of a
corporaton, for purposes of the unempoyment ta , an offcer who re-
ceved no compensaton, who dd not ncrease the corporaton s ta
burden, and who derved no benefts from the ct and that ony those
empoyees were to be counted who drew compensaton and for whose
beneft the ct was enacted.
POSITION O UR U.
11. Consderng the trend of |udca opnon, t has been decded
that the ureau s poston, stated n paragraph 1 of ths mmeograph,
shoud no onger be adhered to and, effectve mmedatey, that pos-
ton s hereby abandoned. Mmeograph 5723, dated une 27, 1944,
hereby s revoked. Offcers of a corporaton who, as such, perform
no servces and receve no remuneraton n any form, are not to be con-
sdered, n ther capacty as offcers, as empoyees of the corporaton
for empoyment ta purposes. Smary offcers of a corporaton
who, as such, perform some servces of a mnor or nomna nature but
wthout consderaton or remuneraton n any form and who are not
entted to remuneraton, w not be consdered as empoyees of the
corporaton ether because of such servces or because of havng the
status of offcers.
12. In determnng whether servces actuay performed by a cor-
porate offcer n that capacty may be consdered to be of a mnor or
nomna nature the character of the servces, frequency and duraton
of ther performance, and the actua or potenta mportance or neces-
sty of the servces n reaton to the conduct of the corporaton s bus-
ness, are the prmary eements to be consdered. Thus, occasona
sgnng of documents or checks, presdng over or attendance at nfre-
quent meetngs, and smar soated and noncontnuous acts havng no
matera bearng or effect on the day-to-day functonng of the cor-
poraton n the conduct of ts busness, w be consdered, as a genera
rue, to be servces of a mnor or nomna nature.
13. Where servces are performed for whch there s consderaton,
drect or ndrect compensaton, or enttement to such compensaton,
n any form, the empoyer-empoyee reatonshp w be hed to e st,
as a genera rue, uness t s estabshed that the servces are n fact
of a mnor or nomna nature and, n addton, that the consderaton
or compensaton s so nconsequenta and of such a character as to
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Regs. 107, 403.211.
260
make the performance of the servces n fact gratutous under the cr-
cumstances nvoved. though an offcer, as such, may receve no
dentfabe compensaton n cash or n somethng other than cash for
the performance of servces, consderaton for the servces may be
present because of some other compensated reatonshp wth the cor-
poraton, or other crcumstance, whch negatves a concuson that de
servces are performed gratutousy.
14. s the status of honorary corporate offcers now may be deter-
mned soey on the bass of ths mmeograph, wthout reference to the
addtona tests specfed n Mmeograph 4 S0, dated ebruary 4,1939
C. . 1939-1 (Part 1), 312 , the atter mmeograph s hereby mod-
fed to e cude honorary corporate offcers from ts provsons. Mmeo-
graph 4 0 w reman n effect n so far as t reates to rtuastc off-
cers of fraterna organzatons, but s to be apped n con|uncton wth
ths mmeograph f approprate n any case.
15. Ths mmeograph s to be apped wth retroactve effect andtk
status of corporate offcers for empoyment ta purposes determned
accordngy. Coectors shoud refer doubtfu cases to the ureau for
consderaton.
16. Correspondence reatng to ths mmeograph shoud refer to the
number and the symbos C: RR.
Wm. T. Sherwood,
ctng Commssoner.
Secton 1007: Defntons. 1946-3-12233
Reguatons 107, Secton 403.211: Offcers Mm. 5976
and members of crews.
( so Soca Securty ct, Sectons 11 and 907
Reguatons 91 and 90, rtces 10 and 206(3).)
edera empoyment ta es cepton from empoyment wth
respect to offcers and members of crews of vesses.
Revokng S. S. T. 209 (C. . 1937-2, 42 ), S. S. T. 244 (C. .
193 -1, 433), and S. S. T. 2 3 (C. . 193 -1, 437).
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C, anuary 17,19|6.
Coectors of Interna Revenue and Others Concerned:
1. Secton 907(c) (3) of the Soca Securty ct and secton
1607(c)(3) of the Interna Revenue Code n force pror to anuary
1.1940, provde n part as foows:
The term empoyment means any servce e cept
(3) Servce performed as an offcer or member of the crew of a vesse on
the navgabe waters of the Unted States.
In secton 1007(c) (4) of the edera Unempoyment Ta ct a smnr
e cepton from empoyment, for purposes of that ct, s provded
wth respect to servces performed on or after anuary 1, 1940.
2. Secton 11(b)(5) of the Soca Securty ct and secton
1426(b) (5) of the Interna Revenue Code n force pror to anuary
1,1940, provde n part as foows:
The term empoyment means any servce e cept
(5) Servce performed as an ocer or member of the crew of a vesse
documented under the aws of the Unted States or of any foregn conntrT.
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2G1
Regs. 107, 403.211.
The edera Insurance Contrbutons ct does not provde an e cep-
ton from empoyment wth respect to such servces performed on
or after anuary 1,1940.
3. In the reguatons appcabe to the above-mentoned e ceptons
from empoyment, the e presson offcer or member of the crew
of a vesse s stated to ncude the master or offcer n charge of the
vesse, however desgnated, and every ndvdua, sub|ect to hs au-
thorty, servng on board and contrbutng n any way to the opera-
ton and wefare of the vesse. The word vesse s stated to n-
cude every descrpton of watercraft or other contrvance used as a
means of transportaton on water. ( rtce 20G(3) of Reguatons
90 artce 10 of Reguatons 91: and secton 403.211 of Reguatons
107.)
4. Certan types of vesses are equpped and operated prmary for
use n dredgng, drvng pes, cannng fsh, or other actvtes n whch
some of the empoyees aboard the vesses perform ony ncdenta
servces n connecton wth transportaton or navgaton. In the past
the ureau of Interna Revenue ordnary regarded as offcers or
members of the crews of such vesses ony those empoyees who had
substanta dutes n ad of navgaton or transportaton, as dstn-
gushed from those empoyees who.had tte or no connecton wth
the operaton and wefare of the craft as vesses or vehces of trans-
portaton. The foowng pubshed rungs were made on that bass:
. . T. 209, C. . 1037-2, 42 .
The empoyer owns foatng pe drvers, barges and dredges, and
empoys ndvduas to serve thereon as dock buders, casson buders,
concrete m ers, carpenters, etc., n connecton wth the constructon
of pers and docks. The ureau rued that such empoyees are not
members of the crew of such vesses.
. . T. 244, C. . 103 -1, 433.
The empoyer owns a cannery whch s ocated on board one of ts
vesses. fu crew s sgned for the navgaton of the vesse. dd-
tona ndvduas suc as superntendents, cerks, machnsts, and
others are empoyed n the operaton of the cannery and the cannng
of fsh theren. Such ndvduas are not requred to sgn the shp s
artces but are sub|ect to the authorty of the master of the shp. The
ureau rued that such ndvduas are not members of the crew of the
vesse.
. . T. 2 3, C. . 193 -1, 43T.
n ndvdua s empoyed as shpkeeper durng the wnter months
when a vesse s frozen n. The crew s dsbanded, and the shpkeeper
s eft n compete charge of the vesse, hs dutes beng to protect t
generay, shove snow off the hatches, and care for the cargo. The
ureau rued that the shpkeeper s not an offcer or member of the
crew.
5. Reconsderaton of the pubshed rungs referred to above resuts
n the determnaton that they are erroneous when consdered n the
ght of the decson n erwnd-Whte Coa Mnng Co. v. Rothcnses
(1 7 ed. (2d), 60), n whch the Unted States Crcut Court of p-
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Regs. 107, 403.213.
262
peas for the Thrd Crcut stated, n part, that crew s the compe-
ment necessary aboard for the wefare and customary operaton
of a vesse. s
6. The e presson offcer or member of the crew of a vesse, as
used for edera empoyment ta purposes, ncudes the master or
offcer n charge of the vesse, however desgnated, and every nd-
vdua, sub|ect to hs authorty, (a) whose prmary dutes requre
hs servce and contnued presence on the vesse or ts au ary equp-
ment, (b) whose servces there contrbute n any way to the wefare
and customary operaton of the vesse, and (c) whose servces are per-
formed n the empoy of the owner or operator of the vesse. The
customary operaton of a vesse ncudes any and every functon
whch the vesse s equpped or ntended to perform. The number
of ndvduas servng on a vesse s mmatera an ndvdua serv-
ng aone may be an offcer or member of the crew f hs servces
otherwse meet the condtons stated above. Certan empoyees such
as ongshoremen, however, whose prmary dutes do not requre ther
contnued presence on vesses, may perform servces on a vesse wthout
becomng members of the crew.
7. The servces descrbed n S. S. T. 244 (cannery on vesse), and
n S. S. T. 2 3 (shpkeeper), are performed by empoyees who, n
servng on board and n contrbutng to the customary operaton of
the vesses, are offcers or members of the crews of such vesses. In
S. S. T. 209, however, the servces of dock buders, Casson buders,
concrete m ers, and carpenters are not descrbed n suffcent deta
for a determnaton whether or not such ndvduas are members of
crews. The customary operatons of the vesse, and the nature of serv-
ces performed by empoyees n connecton wth such operatons, are
controng factors for a determnaton of the status of such empoy-
ees. carpenter, for e ampe, s not a member of the crew of a vesse
f hs prmary dutes requre hs presence on and or on structures
whch arc a part of the and, and hs presence on the vesse s casua.
On the other hand, f the customary operatons of a vesse requre the
contnued presence of a carpenter on board the vesse, then such car-
penter s a member of the crew f he otherwse meets the condtons
stated n the frst sentence of paragraph 6, above. Whether such an
empoyee s an offcer or member of the crew of a vesse must n
doubtfu cases be determned upon an e amnaton of the partcuar
facts of each case.
. S. S. T. 209, S. S. T. 244, and S. S. T. 2 3 are revoked.
9. Inqures reatng to ths mmeograph shoud refer to the number
thereof and to the symbos C: R .
Wm. T. Sherwood,
ctng Commssoner.
. Secton 1607: Defntons.
Reguatons 107, Secton 403.213: Unted States
and nstrumentates thereof.
onneve Power dmnstrator, certan empoyees of. (See T. D.
5502, page 250.)
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263 Regs. 91, rt. 10.
Secton- 1607: Defntons.
Reguatons 107, Secton 403.227: Wages.
Certan servces performed for onneve Power dmnstrator.
(See T. D. 5502, page 250.)
T S UND R SOCI L S CURITY CT.
TITL I . T ON MPLOY RS O IG T OR MOR .
Secton 907: Defntons.
Reguatons 90, rtce 205: mpoyed ndvduas.
Uncompensated offcers. (See Mm. 5967, page 255.)
Secton 907: Defntons.
Reguatons 90, rtce 206(3): Offcers and members of crews.
Offcers and members of crews of vesses. (See Mm. 5976, page
260.)
TITL III T S WIT R SP CT TO MPLOYM NT.
Secton 11: Defntons.
Reguatons 91, rtce 10: Offcers and members of crews.
Offcers and members of crews of vesses. (See Mm. 5976, page
260.)
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MISC LL N OUS T RULINGS.
ST T T .
INT RN L R NU COD .
C PT R 3.
Reguatons 105, Secton 1.17: Transfers 1946-10-12311
condtoned upon survvorshp. T. D. 5512
TITL 2 INT RN L R NU . C r-T R I, SU C PT R , P RT 1.
R GUL TIONS R L TING TO ST T T .
Secton 1.17 of Reguatons 105 amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Coectors of Interna Revenue and Others Concerned:
Secton 1.17 of Reguatons 105 Part 1, Tte 26, Code of ed-
era Reguatons, Cum. Sup. s amended by changng the headng
and the frst paragraph to read as foows:
Sec. 1.17. Transfehs Intended to Take ffect at oe fter the Decedent s
Deah. transfer of an nterest n property by the decedent durng hs fe
(other han a bona fde sae for an adequate and fu consderaton In money or
money s worth) s ntended to take effect n possesson or en|oyment at or
after hs death, and hence the vaue of such property nterest s ncudbe n
hs gross estate, f
(1) possesson or en|oyment of the transferred nterest can be obtaned
ony by benefcares who must survve the decedent, and
(2) the decedent or hs estate possesses any rght or nterest n the
property (whether arsng by the e press terms of the nstrument of trans-
fer or otherwse).
The decedent sha not be deemed to possess a rght or nterest n the property
f hs rght or nterest conssts soey of an estate for hs fe. ( or reguatons
concernng the separate provson of the statute deang drecty wth the case
of a fe estate retaned n property transferred by the decedent, see secton
1.1 .) Where possesson or en|oyment of the transferred nterest can be ob-
taned by benefcares ether by survvng the decedent or through the occur-
rence of some other event or through the e ercse of a power, subparagraph (1)
sha not be consdered as satsfed uness, from a consderaton of the terms
and crcumstances of the transfer as a whoe, the power or event s deemed to
be unrea, n whch case such event or power sha be dsregarded. cept as
provded n the ast paragraph of ths secton, the vaue of the property so
transferred s Incudbe wthout regard to the date when the transfer was
made, whether before or after the enactment of the Revenue ct of 1916.
ampe (1). The decedent at 90 years of age transferred property n trust,
provdng for an estate for fe n hs granddaughter, 22 years of age, and a
remander to a chd of the granddaughter. It was further provded that the
estate n remander woud revest n the decedent f he survved the fe tenant
(264)
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265
Regs. 105, 1.17.
Snce the property may revert to the decedent and snce the benefcary takng
the remander must survve the decedent In order to obtan possesson or en|oy-
ment of the property, the vaue of the estate n remander s ncudbe n the
decedent s gross estate. The vaue of the outstandng fe estate s not so
ncudbe, snce the fe tenant need not survve the decedent n order to obtan
possesson or en|oyment thereof.
ampe (2). The decedent, durng hs fe, transferred property n trust,
gvng the ncome therefrom to hs son for fe and the remander to hs son s
Survvng Issue. If no ssue survved the fe tenant, the property was to revert
to the decedent or hs estate. Ths transfer does not satsfy requrement (1)
specfed above, snce the fe tenant s survvng ssue need not survve the
decedent In order to obtan possesson or en|oyment of the property. ccord-
ngy, no porton of the property s ncudbe n the gross estate under ths
secton.
ampe ( ). The decedent, durng hs fe, transferred property n trust,
gvng the ncome to hs wfe for her fe and the remander to hs father f
vng at the wfe s death. If not, the property was to revert to the decedent f
vng, and f not, t was to pass to the decedent s Issue and ther hers. If the
father s death occurs frst foowed by the death of the decedent, t woud appear
at the moment mmedatey pror to the atter s death that possesson or en|oy-
ment of the remander nterest can be obtaned ony by benefcares who must
survve the decedent. nd snce the property may revert to the decedent, re-
qurements (1) and (2) are both satsfed, and the vaue of the estate n remander
s ncudbe n the decedent s gross estate.
ampe (- ). The decedent, durng hs fe, transferred property n trust,
provdng for payment of the ncome to hs son unt the atter reached the age
of 25, at whch tme the son woud receve the corpus. If the sou ded before
reachng 25, the corpus was to revert to the decedent f vng and f not, It was
to pass to hs sou s hers. No porton of the property Is ncudbe n the deced-
ent s gross estate. though the property may revert to the decedent, hs son
can obtan possesson or en|oyment of the remander nterest even though the
decedent s vng. Thus, the frst requrement Is not satsfed.
ampe (5). The decedent transferred property n trust retanng a fe
estate and gvng a succeedng fe estate to another, wth the remander to such
succeedng fe tenant s ssue who survved both the decedent and the fe tenant.
The decedent aso retaned the power to desgnate who sha take the remander
n case the succeedng fe tenant ded wthout survng ssue. ere, possesson
or en|oyment of the property can be obtaned by the succeedng fe tenant and
by the succeedng fe tenant s ssue ony f they survve the decedent thus
satsfyng requrement (1). Requrement (2) s aso satsfed wth respect to
the nterests of both benefcares snce the decedent retaned a rght n the entre
property, 1. e., a contngent power of appontment. The entre vaue of the prop-
erty, ncudng the vaue of the succeedng fe estate and the remander s,
therefore, ncudbe n the decedent s gross estate.
ampe (6). The decedent transferred property n trust, reservng a fe
estate and provdng succeedng fe estates n hs wfe and son. Upon the death
of the son, the prncpa was to be pad to the son s wfe f the son s wfe dd
not survve her husband, to the son s ssue and f there were no ssue, to the
decedent s ne t of kn. In ths case, the decedent has parted wth every rght
or Interest n the property and hence requrement (2) s not satsfed. ccord-
ngy, no part of the property s ncudbe n the decedent s gross estate.
ampe (7). The decedent transferred property n trust to pay the ncome
to hs son durng decedent s fe, and at decedent s death to pay the prncpa to
hs son f vng f not, to hs son s Issue survvng both the son and the decedent.
In ths ease, the property may revert to the estate of the decedent f nether hs
son nor hs son s ssue survves hm. Moreover, nether the son nor the atter s
ssue can obtan possesson or en|oyment of the property uness they survve
the decedent. The entre vaue of the estate n remander s, therefore, ncud-
be n the atter s gross estate.
ampe ( ). The decedent, durng hs fe, transferred property n trust
provdng for payment of the ncome to hs daughter durng the fe of the
survvor of hmsef and hs wfe, and the remander to hs daughter or her
ssue. The wfe was gven the unrestrcted power to nter, amend or revoke
the trust. t the decedent s death, hs wfe s st vng. ere, athough t
appears mmedatey pror to the decedent s death that the property may revert
703672 40 1
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Regs. 105, 1.20.
266
by operaton of aw to the decedent s estate n the event that the daughter and
her Issue shoud predecease the decedent and hs wfe, the frst requrement Is
not satsfed, snce the wfe can obtan possesson or en|oyment of the property
durng the decedent s fetme through the e ercse of her power to ater, amend,
or revoke. No part of the property s, therefore, ncudbe n the decedent s
gross estate. If the wfe had predeceased the decedent, requrement (1) woud
be satsfed, snce t woud appear mmedatey pror to the decedent s death that
nether hs daughter nor her ssue, the remanng benefcares, coud obtan
possesson or en|oyment of the property uness they survved the decedent.
Under these crcumstances, the vaue of the remander woud be ncudbe n
the gross estate.
(Ths Treasury Decson s ssued under the authorty contaned
secton 3791 of the Interna evenue Code (53 Stat., 467 26 U. S. C,
3791).)
oseph D. Nunan, r.,
Commssoner of Interna Revenue.
pproved May 1,1946.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster May 2,1946,11.51 a. n.)
Reguatons 105, Secton 1.20: Transfers wth 1946-3-12231
power to change the en|oyment. Ct. D. 1661
estate ta nterna revenue code decson op supreme court.
1. Gboss state Transfers n Trust Power to ter, mend, or
Revoke ddton of Phrase or Termnate Decaratort
of stng Law.
The decedent on anuary 20, 1935, by a snge trust ndenture
created three severa rrevocabe trusts, one for each of hs three
sons, the trusts beng dentca n terms and gvng to each son the
benefca nterest n one-thrd of the trust fund. The decedent was
named and acted as trustee unt hs death on October 5,19 0. ach
trust was to contnue for a perod of 15 years uness earer ter-
mnated under power reserved to the grantor, or for a onger term
on specfed condtons. The grantor reserved to hmsef the power
to termnate any or a of the trusts and dstrbute the prncpa,
wt accumuated ncome, to the benefcares then entted to re-
ceve t, retanng no power to revest n hmsef or hs estate any
porton of the corpus or ncome. arous provsons for dspos-
tons over were made to cover contngences created by the death of
the benefcares durng contnuance of the trust. The trust was
to termnate n any event upon the death of the ast survvor
of the three sous and the e praton of 21 years thereafter. ed:
The power of the grantor to termnate the trust s a power to
ater, amend, or revoke wthn the meanng of secton 11(d) (2)
of the Interna Revenue Code. The power to termnate contn-
gences upon whch the rght of en|oyment Is staked, so as to
make certan that a benefcary w have t who may never come
nto t f the power s not e ercsed, affects not ony the tme of
en|oyment but aso the person or persons who may en|oy the
donaton. The addton of the phrase or termnate n secton
11(d)(1), whch appes to transfers made after une 22, 1936,
was merey decaratory of e stng aw and not a change of
substance.
2. Decson Reversed and Remanded.
Decson of the Unted States Crcut Court of ppeas, fth
Crcut (14 ed. (2d), 740), affrmng decson of The Ta Court
(3 T. C, 571), reversed and cause remanded.
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267
Regs. 105. 1.20.
Supeme Court of the Unted States.
Commssoner of Interna Revenue, pettoner, v. state of arry omes,
Deceased, Lucy U. omes, Independent ecutr .
On wrt of certorar to the Unted States Crcut Court of ppeas for the fth Crcut.
anuary 2,1940.
OPINION.
Mr. ustce Rutedge devered the opnon of the Court.
In Whte v. Poor (206 U. S., 0 Ct. D. 1044, C. . I -2, 335 (1935) ), the
queston arose whether the power to ater, amend, or revoke ncuded the
power of a decedent to termnate a trust so as to brng the trust estate wthn
hs gross estate for purposes of the transfer ta mposed by secton 302(d) of
the Revenue ct of 192G (ch. 27, 44 Stat., 9, 71). The Court, fndng t unneces-
sary to determne that queston, dsposed of the case upon another ground. The
queston s here agan, ths tme nescapaby, but wth a further egsatve hstory
and a somewhat dfferent settng of fact.
In 1936, mmedatey foowng the Whte decson, Congress revsed secton
302(d) by rewrtng t nto two separate paragraphs reatng to revocabe trans-
fers, one appyng to transfers after une 22, 1936, the other to transfers on or
pror to that date. These are now sectons 11(d) (1) and (2) of the Interna
Revenue Code, whch are set forth In the margn.1 or present purposes the
dfference camed to be mportant conssted In changng the phrase to ater,
amend, or revoke appyng to transfers on or pror to une 22, 1936, so that n
secton 11 (d) (1) t reads to ater, amend, revoke, or termnate, as to trans-
fers after that date.
owever secton 11(d)(2) governs the transfer n ths case, snce t was
made n anuary, 1935, pror to the dvdng date. nd the queston most
mooted has been whether the change was one of substance or was ony a carfy-
ng amendment. Put dfferenty, the prncpa ssue s whether power to ater,
amend, or revoke ncuded power merey to termnate the nterests created by
the trust or requred some further change.
The Ta Court and the Crcut Court of ppeas for the fth Crcut, one
udge dssentng, have rued that the change was substanta, not merey decara-
tory. (3 T. C, 571 14 ed. (2d), 740.) ccordngy they have hed that no
defcency resuted from the ta payer s faure to ncude the vaue of the trust
estate created by the decedent omes n hs gross estate for estate ta pur-
poses. The Commssoner mantans the contrary vew. ecause of aeged con-
fct wth decsons from other crcuts, certorar was granted. ( U. S., .)
We thnk The Ta Court and the court of appeas were n error n ther vew
of the statute s effect.
Te facts were stpuated. In so far as necessary to state, they are as foows.
On anuary 20, 1935, by a snge trust ndenture omes created three severa
S C. 11. GROSS ST T .
The vaue of the gross estate of the decedent sha be determned by Incudng the vaue
at the tme of hs death of a property, rea or persona, tangbe or Intangbe, wherever
stuated, e cept rea property stuated outsde of the Unted States
(d) Rkvocabe Transfers.
(1) Transfers after une 22, 1930. To the e tent of nny nterest theren of
whch the decedent has at any tme made a transfer (e cept n onse of a bona-fde sne
for an adequate and fu consderaton n money or money s worth), by trust or other-
wse, where the en|oyment thereof was sub|ect at the date of hs death to nny change
through the e ercse of n power (n whatever cnpaoty e ercsabe) by the decedent
aone or by the decedent In con|uncton wth any other person (wthout regnrd to when
. or from what source the decedent acqured such power), to ater, amend, revoke, or
termnate, or where any such power s renqushed n contempaton of decedent s
death.
(2) Transfers on or tror to une 22. 1936. To the e tent of any Interest theren
of whch the decedent has at any tme made a transfer, by trust or otherwse, where
the en|oyment thereof was sub|ect at the date of s death to any change through the
e ercse of a power, ether by the decedent aone or In con|uncton wth any person, to
ater, amend, or revoke, or where the decedent renqushed nny such power In con-
tempaton of hs death, e cept n case of n bona fde sae for an adequate and fu
consderaton n money or money s worth. cent n the case of transfers made after
une 22, 1930. no nterest of the decedent of whch e has made a transfer sha be
Incuded In the gross estate under paragraph (1) uness t s ncudbe under ths
paragraph. (20 U. S. C, secton 11.)
c/on v. Drseo (117 ed. (2d), 477 (C. C. . 3) Commssoner v. offhcmcr s
state (149 ed. (2d), 7 3 (C. C. . 2)). See aso the authortes cted In note 11 nfra.
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Regs. 105, 1.20.
26
Irrevocabe trusts, one for each of three sons then aged 22, 19 an 14 years re-
spectvey. ach was gven the benefca nterest In one-thrd of a common fund
consstng of corporate stock ater converted Into other assets.1 The three trusts
were dentca n terms. omes was named and acted as trustee unt hs death
October 5, 1940.
ach trust was to contnue for a perod of 15 years, uness earer termnated
under power reserved to the grantor, or for a onger term on specfed condtons
summarzed beow. ut the grantor reserved to hmsef durng hs fetme
the power to termnate any or a of the trusts and dstrbute the prncpa, wth
accumuated ncome, to the benefcares then entted to receve t e re-
taned no power to revest n hmsef or hs estate any porton of the corpus or
ncome.
arous provsons for dsposton over were made to cover contngences
created by the death of benefcares durng contnuance of the trust. Generay
stated, the scheme was that the survvng ssue of each son shoud take hs share of
the corpus, recevng t share and share ake, uncondtonay f over 21 as bene-
fcares unt attanng that age, f under t. If a son shoud de wthout ssue, hs
share or trust was to go pro rata to the other two sons, or ther survv-
ng ssue per strpes f ether other son shoud be dead wthout ssue, the sur-
vvor or hs ssue was to take the whoe and If a the sons shoud be deceased
wthout ssue, whatever mght reman n the trust estate was gven to the grant-
or s wfe, f vng f not, to her hers at aw. The trust was to termnate n any
event upon the death of the ast survvor of the three sons and the e praton
of 21 years thereafter.
The trustee was gven broad dscretonary power to appy each benefcary s
share of the corpus for hs mantenance, wefare, comfort or happness, wth a
precatory suggeston of beraty.
The ncome was sub|ect to spendthrft provsons and dscretonary power of
accumuaton. If not accumuated, t was to be dstrbuted to the benefcary,
preferaby n monthy nstaments.
The prncpa contenton s that the sum of the varous provsons was to create
or reserve to the decedent ony a power to acceerate n tme the en|oyment of the
benefca Interests brought nto beng by the trusts that these were vested n-
terests that no power was reserved to revest them or any of them n the donor
or hs estate or to change or ater them, or the terms of the gfts, n any manner
other than by mere acceeraton of en|oyment and that the powers thus reserved
are not suffcent to brng the trust estate, or any part of t, wthn the coverage
of secton 11(d) (2).5
Ths vew presupposes two thngs. One s that termnaton of contngences
upon whch en|oyment s dependent does not change, ater, or revoke en|oy-
ment the other, that the power to ater, amend, or revoke specfed n secton
11(d) (2) does not Incude a power to termnate contngences whch acceerate
en|oyment, wth the effect of makng certan that the benefcary takng w have
t rather than others to whom t woud or mght nure f termnaton wvre onger
deferred.
One dffcuty wth respondent s poston Is n ts concepton of en|oyment.
More than once recenty we have emphaszed that en|oyment or en|oy, as
used n these and smar statutes, are not terms of art, but connote substanta
present economc beneft rather than technca vestng of tte or estates. (Cf.
Unted States v. Pezer, 312 U. S., 399, 403 Ct. D. 1495, C. . 1941-1, 441
ondren v. Commssoner, 324 U. S., 1 , 20 Ct. D. 1627, C. . 1945, 421 :
The corporaton whch had ssued the stock was qudated and the corporate assert
were transferred to the trust to repace the stock.
The power of termnaton was reserved by paragraph 11 of the ndenture, as foows:
Grantor, durng hs fetme, and my son or sons heren named, whe actng as trustee
hereunder, may, f deemed advsabe by them as trustee, dstrbute to ether of grantor s
chdren, the whoe or any part of the prncpa of ther respectve trusts, and ther nter-
ests thereunder. nd grantor may, durng hs fetme, If deemed advsabe by hm. and
son or sons heren named, whe actng as trustee hereunder, may. If deemed advsabe by
them as trustee, termnate ether or a of sad trusts heren created for the respectve
beneft of my sad sons, and dstrbute the prncpa of the trust to the persons entted to
receve the same under the terms hereof on the date of such termnaton.
It seems questonabe on the wordng that the grantor s power of termnaton, ke that
of hs sons, was mted by the cause whe actng as trustee hereunder. See note 13
and te t.
6 The ta payer asserts that each son acqured, on e ecuton of the ndenture. a fee smpe
tte to one-thrd of the trust corpus and ncome, sub|ect ony to the trustee s power of
management for 15 years at the most and to the son s vng unt ths power shoud end.
The reserved power of termnaton, t Is sad, appes ony to the severa contngences whch
mght affect the tme of en|oyment, but not en|oyment Itsef.
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269
Regs. 105, 1.20.
Commssoner v. Dsston, 325 U. S., Ct. D. 1642, C. . 1915, 4261.) In
ths sense It s cear that none of the sons hero had a present rght to mmedate
en|oyment of ether ncome or prncpa (see Commssoner v. Dsston, supra),
athough each may have been nvested wth what respondent regards as a fee
smpe n an equtabe nterest, sub|ect to dvestment by the contngency of the
benefcary s death durng contnuance of the trust. So ong as t contnued
and t mght contnue for the fe of the survvor of the three sons and 21 years
t coud not be sad wth assurance that any of the sons, or hs Issue, woud come
nto present en|oyment of hs share, or any part of t for n connecton wth the
possbe occurrence of many contngences, ncudng the grantor s death and hs
earer e ercse of the power of termnaton, t s to be recaed that the grantor
reserved to hmsef, whe actng as trustee, the power to accumuate the ncome.
It seems obvous that one who has the power to termnate contngences upon
whch the rght of en|oyment s staked, so as to make certan that a benefcary
w have t who may never come nto t f the power s not e ercsed, has power
whch affects not ony the tme of en|oyment but aso the person or persons who
may en|oy the donaton. More therefore s nvoved than mere acceeraton of
the tme of en|oyment. The very rght of en|oyment s affected, the dfference
dependent upon the grantor s power beng between present substanta beneft and
the mere prospect or possbty, even the probabty, that one may have t at
some uncertan future tme or perhaps not at a. donor who keeps so strong a
hod over the actua and mmedate en|oyment of what he puts beyond hs own
power to retake has not dvested hmsef of that degree of contro whch secton
11(d) (2) requres n order to avod the ta .
ut the respondent rees heavy upon the egsatve hstory and the
contnued use of ater, amend, or revoke n the 1936 revson, whch at the
same tme ntroduced or termnate to govern future transactons, as e pressve
of Intenton to dfferentate the two casses of transfers. Ths vew puts empha-
ss on the meanng of revoke rather than of en|oyment, and e cudes from
that term s scope a power not amountng to more than one of termnaton.
We thnk the hstory gves the opposte story. The 1936 revson resuted
from the Whte decson, whch rased doubt whether Congress had ncuded
the power to termnate n the words ater, amend, or revoke. To carfy the
matter Congress removed a doubt for the future by enactng secton 11(d) (1).
t the same tme t adopted secton 11(d)(2), whch retaned the earer
phrasng. Ths was from concern that retroactve appcaton of secton
11(d)(1) shoud not mpose ta es on pror transfers not comprehended by
the pror aw, as the concudng sentence of secton 11(d)(2) shows. Not-
wthstandng ths and the doubt created by Whte v. Poor, supra, the report of
the Commttee on Ways and Means of the ouse of Representatves e pressy
States that the addton of or termnate n secton 11(d) (1) was decara-
tory of e stng aw. dmnstratve nterpretaton, ncudng Treasury regu-
atons, support ths vew, whch aso s ether foowed or ndcated In decsons
of the crcut courts of appeas, e cept the one now n revew.10 s we have
ponted out, that vew s more consonant wth the structure and Interpretaton
It s true that ths case Is not one nvovng the ta abty of gfts of future nterests
In property as was true of the cases cted. It s kewse true that the aws reatng to
estate ta es and those reatng to gft ta es are not competey recproca. ( state of
Sanford v. Commssoner, 30 U. ., 39 Ct. D. 1420, C. R. 1939-2. 340 Smth v.
Shaughnesey, 31 U. S., 170 Ct. D. 157D. C. . 1943, 1144 .) ut there can be no dfference
In the meanng of the words en|oyment and en|oy as they are used In the pertnent
statutory provsons respectvey.
See note 1.
The report stated: nother change made In subsecton (n) of secton 200 has been
to e pressy Incude a power to termnate aong wth the powers to ater, amend, or
revoke. In the case of Whte v. Poor, supra, the Supreme Court dd not pass on the queston
of whether the power to termnate was Incuded n the anguage reatng to a power to
ater, amend, or revoke. Snce n substance a power to termnate s the equvaent of a
power to revoke, ths queston shoud be set at rest. press provson to that effect
has been made and It s beeved that t Is decaratory of e stng aw. (II. ept. No. 2 1 ,
Seventy-fourth Congress, Second Sesson, 10.) The report was ssued In connecton wth
. R. 12793, of the same sesson, of whch secton 200 contaned the changes ater enacted,
wthout presenty matera dfference, as secton 05 of the Revenue ct of 1930, now
secton 11(d) of the Code.
See Treasury Reguatons 105, secton 1.20, statng: Such addton s consdered but
decaratory of the meanng of the subdvson pror to the amendment. power to
termnate capabe of beng so e ercsed ns to revest n the decedent the ownershp of the
transferred property or an nterest theren, or as otherwse to nure to hs beneft or the
beneft of hs estate. Is, to that e tent, the equvaent of a power to revoke, and tvhen
otherwse so e ercsabe as to cfect a change n the en|oyment, s the equvaent of a power
to ater. Itnc added.
Cf. the authortes cted In note 11.
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Regs. 105, 1 1.23.
270
gven concomtant ta ng ct provsons. or a these reasons, we thnk t
must preva.
Respondent s other contentons requre ony bref notce. The contngences
here were too numerous and too Important n ther effects not ony upon the
tme but aso upon the rght of Immedate en|oyment for them to be regarded
as trva or nconsequenta, as respondent urges. Decedent s faure to reserve
for hmsef any benefca Interest or power to recapture one Is not con-
trong. (Porter v. Commssoner, 2 U. S., 436 Ct. D. 647, C. . II-1, 354
(1933) .) Nor s the fact that he coud not seect new benefcares outsde those
comprehended by the ndenture, and was therefore mted to changng en|oy-
ment among that group.
It seems suggested that the power of termnaton was reserved to the grantor,
not n the capacty of donor, but ony n that of trustee, from whch the con-
cuson appears to be drawn that no power of termnaton was reserved wthn
the meanng of secton 11(d)(2). s we have noted, the eeventh para-
graph of the ndenture s not whoy cear concernng the premse. ut n
terms the reservaton Is to the grantor, durng hs fetme and grammatca
constructon of the second sentence seems to ndcate the quafyng cause
whe actng as trustee hereunder was ntended to appy ony to the decedent s
son or sons actng n that capacty. If the queston has been saved, we can
not say upon ths anguage that the grantor dd not reserve the power of termna-
ton to hmsef as donor rather than merey as trustee. It s unnecessary there-
fore to determne whether, f the reservaton were dfferent, the varaton n
wordng between sectons 11 (d) (1) and (2) n ths respect woud be matera.14
We have consdered respondent s remanng contentons and fnd them wthout
mert.
The |udgment of the court of appeas s reversed and the cause Is remanded
for further proceedngs consstent wth ths opnon.
Reversed and remanded.
Mr. ustce Dougas dssents.
Mr. ustce ackson took no part In the consderaton or decson of ths case.
ST T T INT RN L R NU COD , S M ND D D CISION O
supreme court.
1. Gross state Communty Interests Lousana auhty of
Ta Consttutonaty of Statute.
n estate ta mposed under the provsons of secton 11(e) (2) of
the Interna Revenue Code, as amended by secton 402 of the Revenue
ct of 1 42, on the termnaton of the marta communty by the
death of the husband, a domced resdent of Lousana, the ta
beng measured by the vaue of the entre communty property snce
no part thereof was shown to be attrbutabe to compensaton for
persona servces of the wfe or to her separate property, s vad
and nfrnges no consttutona provson.
Chckcrng v. Commssoner (11 ed. (2(1), 254) : Commssoner v. Ioffhcmcr s statt
(149 e. (2(1), 7:13) Commssoner v. rdgeport Cty Trust Co. (124 ed. (2(1). 4 ):
Guggenhem v. ecerng (117 ed. (2d), 4G9) : Commssoner v. Chase Natona ont
( 2 ed. (2d). 157 Ct. D. 1191. C. . 1937-1. 29 )) Unon Trust Co. of Pttsburgh v.,
Drscnt (13 ed. (2d), 152) : Mard v. Mooney (121 ed. (2d), 257) Meon v. PrscoU
(117 ed. (2d), 477) oderness v. Commssoner ( 6 ed. (2d), 137 Ct. D. 1216. C. .
1937-1, 295 ).
Ibd. The pnrentheten phrase (In whatever capacty e ercsabe) was added to
secton 11 (d) (1) at the same tme as or termnate, and possby aso as a consequence of
the decson In Whte v. Poor. though the egsatve reports are not cear (see . ept
No. 2 1 , Seventy-fourth Congress, second sesson, 9), ths change aso has been hed to
have been decaratory of e stng aw. (Wech v. Terhune, 126 ed. (2d), 695: Unon
Trust Co. of Pttsburgh v. Drsco, 13 ed. (2d), 152 see aso Treasury Reguatons
105, secton 1.20 : state o Net te ton v. Commssoner, 4 T. C, 9 7.)
See the precedng note.
Reguatons 105, Secton 1.23: Communty
property.
1946-2-12215
Ct. D. 1657
u Note 4.
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271
Regs. 105, 1.23.
2. Gross state Communty Interests Lfe Insurance Pro-
ceeds adty of Ta Consttutonaty of Statute.
The entre proceeds of nsurance poces on the decedent s fe,
the premums on whch were pad from communty funds no part
of whch was shown to be attrbutabe to compensaton for persona
servces of the survvng spouse or to her separate property, are
ncudbe n hs gross estate under secton 11(g) (4) of the Interna
Revenue Code, as amended by secton 404 of the Revenue ct of
1942. The death of the nsured, snce t ended hs contro over the
dsposton of the proceeds and gave bs wfe the present en|oyment
of them, may be consttutonay made the occason for the m-
poston of an ndrect ta measured by the proceeds themseves.
. Decson Reversed.
Decson of the Unted States Dstrct Court, astern Dstrct of
Lousana (00 ed. Supp., 169), reversed.
SurR M Court of the Unted States.
oachm O. ernandez, Unted States Coector of Interna Revenue, appeant, v.
Samue O. Wener, Wam . Wener, and acques L. Wener.
ppea from the Dstrct Court of the Unted States for the astern Dstrct of Lousana.
December 10, 1945.
opnon.
Mr. Chef ustce Stone devered the opnon of the Court.
In ths case the Commssoner of Interna Revenue, proceedng under secton
11(e)(2) of the Interna Revenue Code (20 U. S. C), secton 11(e)(2), as
amended by secton 402 of the Revenue ct of 1942 (56 Stat., 79 ), has eved an
estate ta on the termnaton of the marta communty by the death of the
husband, a domced resdent of Lousana, the ta beng measured by the
vaue of the entre communty property. nd on the authorty of secton
11(g) (4) of the Code (26 U. S. C), secton 11(g) (4), as amended by secton
404 of the same statute, he aso ncuded n decedent s gross estate the entre
proceeds of Insurance poces on the decedent s fe.
The prncpa questons for decson arc (1) whether the power asserted
by the statute, to ta the entre communty nterest, s wthn the ta ng power
of the Unted States (2) whether the ta Infrnges the due process cause
of the ffth amendment (3) whether the ta ng statute contravenes the com-
mand of rtce I, secton of the Consttuton that e cses sha be unform
throughout the Unted States (4) whether the ta so far as t s meas-
ured by the survvng wfe s share of the communty property, s a drect ta ,
nvad because not apportoned as requred by rtce I, secton of the
Consttuton and (5) whether the ta nvades the powers reserved to the
States by the tenth amendment.
ppeees, the chdren and soe hers of decedent, brought ths sut n the
Dstrct Court for astern Lousana, to recover from appeant, the coector,
as an aeged overpayment, so much of the estate ta pad as s attrbutabe to the
ncuson In decedent s gross estate of hs wfe s share of the communty property,
and of a, rather than haf, of the nsurance money. The dstrct court of three
udges gave |udgment for appeees (60 ed. Supp., 169), hodng that the statute
as apped voated the due process cause of the ffth amendment. The case
comes here on drect appea from the udgment of the dstrct court under secton
2 of the ct of ugust 24, 1937 ( 50 Stat, 751, 2 U. S. C, secton 349a), appeant
assgnng as error the ower court s rung that the statute dened due process,
and the court s faure to sustan the evy as a consttutona e ercse of the
edera ta ng power.
The facts as found by the dstrct court are not n dspute. In 1907, decedent,
a resdent of Lousana, marred a Lousana resdent wth whom he ved n
that State unt hs death, hs wfe survvng. Durng the marrage he carred
on n Lousana varous knds of busness. Wth the e cepton of certan rea
estate ocated n Msssspp, a the property of decedent at the tme of hs
death was hed n ownershp by the marta communty whch e sted between
hm and hs wfe. t no tme durng the e stence of the communty was the
wfe ganfuy empoyed outsde the househod, nor dd she receve from any one
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Regs. 105, 1.23.
272
any saary or other compensaton for persona servces, nor was any part of the
communty property derved orgnay from any separate property of her owa
Decedent, havng by hs w consttuted appeees hs soe hers, and havng
no debts of consequence, no admnstraton was had on hs estate, and appeees
were by |udgment of the probate court paced n possesson of a decedent s
property.
ppeees fed the edera estate ta return. In whch they reported ony one-
haf of the net vaue of the communty property as sub|ect to the ta . Incuded
n the communty property, and aso reported to the e tent of ony one-haf, were
the proceeds of 15 poces of nsurance on the fe of decedent, a of whch were
(a) effected by decedent durng the marrage, (6) named the wfe as benefcary,
and (c) reserved the rght to the nsured of changng the benefcary. of tre
premums on these poces had been pad from communty funds. The Comms-
soner assessed a defcency n estate ta based upon respondents faure to
ncude In the gross estate, sub|ect to ta , the entre vaue of a the communty
property, and the proceeds of the 15 nsurance poces. ppeees pad the
defcency and, foowng re|ecton of ther cam for refund, brought the present
sut to recover the amount of the defcency payment whch has resuted n the
|udgment n ther favor.
Secton 402 of the Revenue ct of 1942 amended secton 11(e) of the Interna
Revenue Code (26 U. S. C, secton 11(e)) so as to ncude n the gross estate
of decedent, sub|ect to the estate ta :
(2) Communty nterests. To the e tent of the Interest theren hed
as communty property by the decedent and survvng spouse under the aw
of any State of the Unted States, e cept such part
thereof as may be shown to have been receved as compensaton for persona
servces actuay rendered by the survvng spouse or derved orgnay from
such compensaton or from separate property of the survvng spouse. In
no case sha such nterest ncuded n the gross estate of the decedent be
ess than the vaue of such part of the communty property as was sub|ect
to the decedent s power of testamentary dsposton. 1
The revenue aws make no provson for the dstrbuton of the burden of the
ta beyond provdng that the ta sha be a en on a of the property ncuded
n the decedent s gross estate. (Secton 27(a), I. R. C, 26 U. S. C, secton
27(a). See Detrot ank v. Unted States, 317 U. S., 329, 331-333 Ct. D. 1569,
C. . 1943, 1126 .) Secton 26(b) of the I. R. C. contempates that the ta be
pad out of the ta abe estate before ts dstrbuton, uness otherwse drected
by decedent s w. though the share of the survvng spouse s sub|ect to the
en and the ta must be pad out of the estate as a whoe, the edera statute
eaves t to the States to determne how the ta burden sha be dstrbuted among
those who share n the ta ed estate. (See Rggt v. De Draao, 317 U. S., 95.)
ppeees argument s n substance that the nature of communty property
Is such that husband and wfe each has, by vrtue of the estabshment of ther
marta communty, and from ts begnnng, a present haf nterest n such
property that the death of ether effects no transfer or renqushment of any
nterest n the property other than that of the haf share whch the decedent
had before hs death and that the survvor n consequence of the death of the
other spouse acqures no new or dfferent nterest n the property, but ony retans
the haf share he or she had pror to the death of the other spouse. rom ths
appeees concude that the death of ether spouse s not an event whch n any
case can brng more than one-haf of the communty property wthn the reach
of the power to ay and coect mposts and e cses conferred on
1 Secton 11 of the Interna Revenue Code (20 U. S. C. secton 111 ns amended h
secton 404 of the ct of 1942, provdes that the ta abe vaue of the gross estate of the
decedent sha he determned by ncudng the vaue at the tme of hs death of
(g) roceeds of Lft, Insurance.
(1) To the e tent of the amount recevabe by the e ecutor
(2) To the e tent of the amount recevabe by a other benefcares as
nsurance under poces upon the fe of the decedent ( ) purchased wth premums,
or other consderatons, pad by the decedent, or ( ) wth
respect to whch the decedent possessed at hs death any of the ncdents of owner-
shp. .
(4) or the purposes of ths subsecton, premums pad wth
ftroperty hed ns communty property by the nsured and survvng spouse under the
aw of any State, sha be consdered to have been pad by the Insured.
e cept such part thereof as may be shown to have been receved as conmen-
snton for persona servces actuay rendered by the survvng sponee or derved
orgnay from such compensaton or from separate property of the survvng spouse
and the term ncdents of ownershp Incudes Incdents of ownershp possessed M
the decedent at hs death ns manager of the communty.
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273
Regs. 105, SI.23.
Congress by rtce I, secton of the Consttuton, and that the present amend-
ment ta ng the entre vaue of the communty property on the death of ether
spouse s a dena of due process because the death of nether operates to transfer,
renqush or enarge any ega or economc nterest n the property of the other
spouse. ence t s sad that the statute nfrnges due process by addng to the
concededy vad ta on the decedent s haf share a further ta measured by the
one-haf nterest of the survvng spouse. urther, t s urged In support of the
due process contenton, that the statute arbtrary and caprcousy nvents
dfferent rues of ta aton whose aternatve appcaton s governed by a snge
consderaton, namey, whch w yed the greater ta and that- the statute
creates a presumpton contrary to State aw, and havng no ratona bass n fact,
that the entre communty s owned or economcay attrbutabe to the spouse
frst to de. It s aso argued that even f Congress coud vady mpose the ta
where, as here, the husband s frst to de, there s no bass for the ta where the
wfe des frst, and that snce the statute purports to appy In ether case, and Is
not separabe, t can not be vady apped n ths.
It s aso contended that the ta s not unform as requred by rtce I,
secton , cause 1 of the Consttuton, because the |ont Interests of husband
and wfe n communty property States are ta ed accordng to a dffercut and more
onerous standard than s apped to comparabe |ont nterests, and specfcay
to tenances In common and mted partnershps, created under the aws of
other States n whch the presumpton s not apped and because the statute
dsregards for purposes of ta aton the property aws of the communty property
States, whe recognzng the property aws of other States for those purposes.
It Is sad too that the evy s a drect ta , nvad because not apportoned
( rtce I, secton 9, cause 4 of the Consttuton), n so far as t contempates
coecton of part of the ta out of the wfe s haf of the communty property,
snce, t s sad, there s no e csabe event touchng her property on her husband s
death and the ta coected out of her property s In effect a drect ta upon t.
nd fnay the ta s sad to nvade the powers reserved to the States by the
tenth amendment, to determne property reatonshps wthn ther borders.
The merts of these contentons can not ba accuratey apprased wthout some
nqury as to the nature of respectve spouses communty property nterests as
defned by Lousana aw. We have had occason n severa earer cases to make
some e amnaton of the aws governng the nterests of the spouses n com-
munty property States. (See e. g., Mofftt v. eey, 21 U. S., 400 Poe v. Seaborn,
2 2 U. S., 101 Ct. D. 259, C. . I -2, 202 (1930) ender v. rfaff, 2 2 U. S., 127
fCt D. 261, C. . I -2, 200 (1930) Commssoner v. armon, 323 U. S., 44 Ct. D.
1616, ,C. . 1944,166 .) Counse for appeees concede that the opnon n ender
v. Pf aff, supra, so far as t goes, correcty defnes the severa nterests of the
spouses n Lousana communty property. To that we now add a more detaed
statement so far as t may be reevant to the decson of the present case.
y the aw of Lousana, every marta status sub|ect to the aws of the State
supernduces a partnershp or communty of the spouse wth respect to property
n the State acqured durng the fe of the communty, uness there be at the tme
of the marrage a stpuaton to the contrary.1 earnngs and a property
acqured by the husband or wfe durng the fe of the communty become com-
munty property, wth certan mted e ceptons not here nvoved, and whch
need not be detaed further than to say that the spouses can acqure some sep-
arate property durng marrage.3 It s sad that a property acqured by the
spouses durng the marrage whch fas nto the communty s due to the |ont
or common efforts, abor, Industry, economy, and sacrfces of the husband and
wfe, and that for ths reason the husband and wfe each has at a tmes an
equa present nterest n an undvded haf of the whoe communty. The man-
agement of the communty s entrusted to the e cusve contro of the husband,
and he may dea wth and dspose of communty property wth no abty to
account to the wfe so ong as the communty contnues. The rue s, however,
that the husband may not gve away any of the mmovabes, nor a quota of the
Dart s Lousana Cv Code (1945), artce 2399.
Id., artce 2402 see Traer v. Cocy (33 La. nn., 425). The Income from the sepa-
rate property of the husband, and of such of the wfe s separate property as s gven over
to the husband s management aso fas Into the communty by artce 2402, upra ee aso
eberr v. yand (10 La.. 493).
Successon of Wener (203 La., 649) see aso Phps v. Phps (160 La., 13, 25
et teg.).
Darfs Lousana Cv Code (1945), artce 2404.
McCaffrey v. enson (40 La. nn., 10) rcrson v. rcrson (164 La., 6 7).
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Regs. 105, 1.23.
274
movabes, uor muy he frauduenty make any aenaton of property to n|ure
hs wfe.
So one as the communty contnues, the wfe has no contro over communty
property. She may not gve t away, nor se t, and n genera, may not bnd
t for the payment of her debts. Rut upon the termnaton of the communty,
she, her hers or other desgnees receve n fu possesson and en|oyment one-haf
n vaue of the tota communty assets sub|ect to the payment of communty
debts.10 Ths rght so to receve one-haf s ndefeasbe, and f she de frst,
her hers or egatees take her haf-share to the e cuson of the husband f the
husband de frst, hs haf passes to hs hers or as he has drected, and the
other haf s the wfe s.
amnaton of the egsatve hstory of the chaenged statute, as dscosed
by the commttee hearngs and reports and the Congressona debates, can
eave no uoubt that the purpose of Congress n enactng t was the emnaton
of what was beeved to be an unequa dstrbuton of the ta burdens of estate
ta es whch ed Congress to appy to communty property the prncpes of
death ta es whch t had aready apped to other forms of |ont ownershp,
on the death of ether of the |ont owners. The report of the ouse commttee
recommendng the adopton of the amendment to secton 11 of the Interna
Revenue Code ponted out the preferenta treatment accorded by the edera
estate ta aws to communty property. ( . Rept. No. 2333. Seventy-seventh
Congress, second sesson, pages 35 to 37, 100 C. . 1942-2, 372 .)a
7 Dart s Lousana Cv Code (1045), artce 2404. The rghts secured to the wfe by ths
nhbton on gfts apparenty may not be enforced aganst the husband or those takng under
hm ether durng the fe of the communty or after Its termnaton. The soe remedy s
a sut aganst the donee to recover the property n hs hands ( ster v. Senge, 21 La. nn.,
210 rcrson v. rerson, supra), and even such a sut apparenty may not be mantaned
unt after the termnaton of the.communty. (Daggett, The Communty Property System
of Lousana (1931), 24.) Where the husband has aened some part of the communty n
fraud of hs wfe s rghts, she or those representng her have an acton for rembursement
aganst the husband or hs representatves upon the termnaton of the communty, but not
before. (Ouce v. Lawrence, 2 Ln. nn., 226, 22 .) The fraud requred for an acton of
ths knd seemngy must be ntentona and the motve for the transfer. (See artce 2404.
supra Successon of Packwood, 12 Rob. (La.), 334, 364-365 posto v. Lapeyrousc, 135
So., 14 (La. pp.).)
ywater v. ndere (175 La., 109 ) : D. II. omes v. Morrs (1 La.. 431).
Dart s Lousana Cv Code (1945), artces 2406, 2425. t the dssouton of the
communty, the share of each spouse n the partnershp s assets s credted wth one-haf
of the amount by whch the other spouse s separate property has been enhanced n vaue
by the appcaton thereto of communty funds or of common abor (d., artce 240 :
Don v. Uon, 35 La. nn., 92). The wfe s share must aso be credted wth one-haf of
the amount of communty funds e pended to pay the husband s separate debts (.Genn v.
am, 3 La. nn., 611), athough those debts may be satsfed durng the communty by
evy upon communty property. (Davs . Compfon, 13 La. nn., 96.)
The communty reatonshp ends upon the death of one spouse, dvorce, separaton from
bed and board, or, n the nbsence of these, upon a |udgment of udca separaton of prop-
erty. (See Dart s Lousana Cv Code (1945), artces 2425, 2427, 2430.) Ony the wfe
may request such a separaton and the separaton Is not a mere matter of consent between
the spouses (Drsco v. Perce, 115 La., 156). She must show that her dowry rghts or other
separate property entrusted to the husband are n danger owng to her husband s ms-
management or fnanca embarrassment, or that ke condtons render t doubtfu that she
or the chdren of the marrage w have the beneft of her own earnngs, or of her future
acqustons of separate property. (Davock v. Darcy, 6 Rob. (La.), 342 Webb v. e, 24
La. nn.. 75: Meyer v. Smth, 24 La. nn., 153 ones . ones, 119 La., 677.)
Dart s Lousana Cv Code (1945), artces 2406, 2409, 2430.
See Successon of Wener, supra.
11 The report stated:
or the purpose of edera estate ta aton, husband and wfe vng n communty-
property States en|oy a preferenta treatment over those vng n noneommunty-property
States. Ths s due to the fact that a of the property acqured by the husband after
marrage, through hs own efforts, n a communty-property State s treated as f one-haf
beonged to the wfe. In the noneommunty-property States, a such property s regarded
as beongng entrey to the husband. The dfference n the amount of the edera estate
ta s enormous as shown by the foowng tabes .
The tabes show the great dsparty between the estate ta eved on communty property
upon the death of the husband who had accumuated t nnd the death of the husband n
ke crcumstances n noncommunty States. The ta upon an estate of 100,000 beng
500 n a communty property State and 0,500 n noncommunty property States. In te
case of n 5,000,000 estate the ta savng n n communty property State woud amount to
ns much as 4 5, 00. the savng on a 10,000,000 estate n a communty property State
amountng to ns much as 1,171, 00.
The proposed amendment, t was sad, emnates speca estate ta prveges en|oyed
by decedents of communty property estates. To the same effect s Senate Report No.
1631. Seventy-seventh Congress, second sesson, page 231 C. . 1042-2. 5041. The Inquty
nherent n aowng spouses n communty property States to bear a ghter ta burden
than ther counterparts n other States had been brought to Congressona attenton on
other occasons. (See e. g., Presdent Roosevet s message to Congress une 1, 1937. . Doc.
No. 200. Seventy-ffth Congress, frst sesson, pace 5: aso Reports to the ont Commttee
on Interna Revenue Ta aton, oume 2, Part II (1933), pages 15, 11 -121, 139-140.)
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27o
Regs. 105, 1.23.
There Is no dspute as to the constructon or operaton of the provsons of
the statute. ppeees do not deny that the Commssoner correcty apped the
statute and correcty computed the ta f the statute s vad. ere, as w
presenty appear, there s no bass for sayng that the statute, ether n ts purpose
or n ts practca effect, operates to reguate matters whose reguaton the Con-
sttuton reserved to the States. It s a revenue measure enacted n the e ercse
of the edera power to ay and coect an e cse. Congress has a wde attude
n the seecton of ob|ects of ta aton ( rushaber v. Unon Pacfc R. R., 240 U. S.,
1, 12 Steward Machne Co. v. Davs, 301 U. S., 54 , 5S1 Ct. D. 1236, C. . 1937-1,
444 ), and even under the equa protecton cause of the fourteenth amendment,
whch was not ncuded n the ffth, the States may dstngush, for purposes
of transfer ta es, between property whch has borne Its far share of the ta
burdens and smar or ke property passng to the same cass of benefcares
whch has not. (Watson v. State Comptroer, 254 U. S., 122.) ence we are
concerned ony wth the power of Congress to enact the ta .
It s true that the estate ta as orgnay devsed and consttutonay supported
was a ta upon transfers. ( nocton v. Moore, 17 U. S., 41 Y. M. C. . v.
Davs, 264 U. S., 47, 50.) ut the power of Congress to mpose death ta es s not
mted to the ta aton of transfers at death. It e tends to the creaton, e ercse,
acquston, or renqushment of any power or ega prvege whch s ncdent
to the ownershp of property, and when any of these s occasoned by death, t
may as ready be the sub|ect of the edera ta as the transfer of the property
at death. (See romey v. McCaughn, 2 0 U. S., 124, 135, et seq. Ct. D. 140,
C. . III-2, 392 (1029) .)
Congress may ta rea estate or chattes f the ta s apportoned, and wthout
apportonment t may ta an e cse upon a partcuar use or en|oyment of
property or the shftng from one to another of any power or prvege Incdenta
to the ownershp or en|oyment of property. ( romey v. McCaughn. supra
urnet v. Wes, 2 9 U. S., 670, 67 Ct. D. 6 , C. . II-1, 261 (1933) cf.
Nashve, C. d St. L. Ry. v. Waace, 2 U. S., 249, 267-27 cnneford v. Sas
Mason Co., 300 U. S., 577, 5 2.) The power to ta the whoe necesary embraces
the power to ta any of ts ncdents or the use or en|oyment of them. If the
property tsef may consttutonay be ta ed, obvousy t s competent to ta
the use of t ( yton v. Unted States, 3 Da., 171 ngs v. Unted States.
232 U. S., 201). or the sae of t ( cof v. mes, 173 U. S., 509 Thomas v. Unted
States, 192 U. S., 363, 670), or the gft of t ( romey v. McCaughn, supra). It
may ta the e ercse, none ercse, or renqushment of a power of dsposton
of property, where other mportant ndca of ownershp are ackng. (Satonsta
v. Satonsta, 276 U. S., 200 Chase Natona ank v. Unted States. 27 U. S.. 327
Ct. D. 40, C. . III-1, 30 (1929) state of Rogers v. Commssoner, 320 U. S.,
410 Ct. D. 1594, C. . 1C43, 1115 cf. Graves v. Schmdapp. 315 U. S., 657
wth secton 11(d) (f) of the Interna Revenue Code (26 U. S. C, secton
11(d)(f)).)
If the gft of property may be ta ed we can not say that there s any want
of consttutona power to ta the recept of t, whether as the resut of
nhertance (Stcbbns v. Rey, 26 U. S., 137) or otherwse, whatever name
may be gven to the ta , and even though the rght to receve t, as dstngushed
from ts actua recept and possesson at a future date, antedated the statute.
Recept n possesson and en|oyment s as much a ta abe occason wthn
the reach of the edera ta ng power as the en|oyment of any other ncdent
of property. The takng of possesson of nherted property s one of the
most ancent sub|ects of ta aton known to the aw. Such ta es e sted on
the uropean Contnent and n ngand pror to the adopton of our Con-
sttuton.11
It s upon these prncpes that ths Court has consstenty sustaned the
appcaton of estate ta es upon the death of one of the |ont owners to
property hed n |ont ownershp, measured by the fu vaue of the property
so hed. We uphed a ke ta when apped to tenances by the entrety
n Tyer v. Unted States (2S1 U. S., 497 Ct. D. 190. C. . -1, 3 3 (1 W0)1)
Thrd Natona ank Trust Co. v. Whte (2 7 U. S.. 577) and to property
hed n |ont tenancy n Unted States v. acobs and Dmock v. Corwn (com-
panon cases) (306 U. S., 363 Ct. D. 13 , C. . 1939-1 (Part 1), 330 ).
eten v. ohnson (279 U. S., 47, 54, et seq. Geason Ots, Inhertance Ta aton
(4th ed.), page 243 et seq. euda reef was a payment e acted of the her for the
prvege or admsson to possesson of the and of hs ancestor. Dgby, story of the
Law of Rea Property (5th ed.), page 40.
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Regs. 105, 1.23.
27G
Decson n these cases was not rested, as appeees argue, on the ground
that the ta was mposed on a gft made by the husband, who had created the
tenancy, vewed as a substtute for a testamentary transfer, or on any event
whch antedated the death of one of the |ont owners. Instead, as we sad
n Whtney v. Ta Commsson (309 U. S., 530, 539), the emphass n these
cases was on the practca effect of death n brngng about a shft n
economc nterest, and the power of the egsature to fasten on that shft as
the occason for a ta . We ponted out n Tyer v. Unted States (supra,
503, 5C4), that the use, possesson and en|oyment of the |ont property whch
was |ont before the death was thereby made e cusve n the survvor, and
thus consttuted a defnte accesson to the property rghts of the survvor.
These crcumstances were thought suffcent to make vad the ncuson of
the property n the gross estate whch forms the prmary bass for the measure-
ment of the ta . nd n Unted States v. acobs, supra, ths Court sustaned
the ta , assaed on due process grounds, when apped to a |ont tenancy
created before the enactment of the ta ng statute. We sad (306 U. S., at 371)
that the sub|ect of the ta was not the gft to the wfe made by the husband s
creaton of the |ont tenancy for hmsef and wfe, but the change n possesson
and en|oyment of the entre property, occasoned by the death of one of the
|ont tenants, am that the ta was appropratey measured by the vaue of
the entre property. Under the statute the death of decedent s the event
In respect of whch the ta s ad. It s the e stence of the |ont tenancy
at that tme and not ts creaton at an earer date whch furnshes the bass
of the ta . (Ortwod v. everng, 290 U. S., 50, 5 Ct, D. 757, C. . II-2,
305 (1933) . Compare Satonsta v. Satonsta, supra, 271.)
Smary, the termnaton by death of a power to dspose of property,
created before the enactment of the ta statute does not offend due process
(Rdneeke v. Trust Co., 27 U. S., 339 T. D. 4201, C. . TII-1, 305 (19291 ),
nor does a ta upon the recept of ncome whch was earned and due before
the enactment of the ta ng statute. ( rushaber v. Unot Pacfc R. Co., supra,
20 Lunch v. ornby, 247 U. S., 339, 343 Taft v. owers, 27 U. S., 470. 4 3,
4S4 Ct. n. 49, C. . TII-1, 220 (1929) 1 Cooper v. Unted State , 2 0 U. S., 400,
411 Ct. D. 163, C. . I -1, 272 (1930) .) It s the recept n possesson or
en|oyment of the proceeds of a rght prevousy acqured and vested upon
whch the ta s ad. Such was deemed to be the ta abe event under our
earer death ta es. (Capp v. Mason, 94 U. S., 5 9 anderbt v. dman,
196 U. S., 4S0. nd see Mofftt v. ey, supra.)
Wth these genera prncpes n mnd we turn to ther appcaton to edera
death ta es ad wth respect to the nterests n communty property. s we
have seen, the death of the husband of the Lousana marta communty not
ony operates to transfer hs rghts n hs share of the communty to hs hers
or those takng under hs w. It termnates hs e pansve and sometmes
proftabe contro over the wfe s share, and for the frst tme brngs her haf
of the property nto her fu and e cusve possesson, contro and en|oyment.
The cessaton of these e tensve powers of the husband, even though they were
powers over property whch he never owned, and the estabshment n
the wfe of new powers of contro over her share, though t was aways hers,
furnsh approprate occasons for the mposton of an e cse ta .
Smary, wth the death of the wfe, her tte or ownershp n her share
of the communty property ends, and passes to her hers or other appontees.
More than ths, her death, by endng the marta communty, berates her
husband s share from the restrctons whch the e stence of the communty
had paced upon hs contro of t. e acqures by her death, the rght to
have hs share of the communty separated from hers by partton and to
hod t free of a contros. e obtans, for the frst tme, the rght to gve
away hs mmovabes, and the rght to gve away hs movabes as a whoe or
by a fracton of the whoe. ere too, the wfe s death brngs nto beng a
new set of reatonshps wth respect to hs share of the communty as we
as hers, among whch are new powers of contro and dsposton whch are
proper sub|ects of an e cse ta measured by the vaue of hs share. nd
whe we do not rest decson on the pont, t s of some sgnfcance that
ths shft of ega reatonshps effects a shft n pont of economc substance.
The precept that the wfe s equa coowner wth her husband of communty
property undoubtedy cas nto pay wthn the marta reatonshp persona
and psychoogca forces whch have great mportance n the practca de-
termnaton of how communty property sha be managed by the husband.
Though t may be mpossbe fuy to transate these mponderabes Into ega
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277
Regs. 105, 1.23.
rues, the death of the wfe undoubtedy brngs, n every practca aspect,
greater freedom to the husband n hs dsposton of that share of communty
property whch s techncay hs, than s to be gathered soey from a readng
of statutes and case aw.
Ths redstrbuton of powers and restrctons upon power s brought about by
death notwthstandng thnt the rghts n the property sub|ect to these powers
and restrctons were n every sense vested from the moment the communty
began. It s enough that death brngs about changes n the ega and economc
reatonshps to the property ta ed, and the earer certanty that those changes
woud occur does not mpar the egsatve power to recognze them, and to evy
a ta on the happenng of the event whch was ther generatng source.
The prncpes whch sustan the present ta aganst due process ob|ectons
are precsey those whch sustaned the Caforna ta , measured by the entre
vaue of communty property n Mofftt v. ey, supra. There the Court recognzed
that the survvng wfe took her share of the property on her husband s death,
not as an her, but as an owner of an nterest, the rght to whch she acqured
before the death and before the enactment of the ta ng act. ut the evy upon
the entre vaue of the communty was sustaned, not as a ta upon property
or the transfer of It, but as a ta upon the vestng of the wfe s rght of pos-
sesson and en|oyment arsng upon the death of her husband, whch the Court
deemed an approprate sub|ect of ta aton, notwthstandng the contract, equa
protecton and due process causes of the Consttuton. So far as Coodye v.
Long (2 2 U. S., 5 2) s nconsstent wth Mofftt v. ey, supra, and the con-
tentons now urged by the Government, the appcaton of the reasonng of the
Coodge case, to the ta aton of |ont or communty nterests must be taken
to have been mted by our decsons n Tyer v. Unted States, supra, and Unted
States v. acobs, supra, and the cases foowng them.
What we have sad of the nature and ncdence of the ta on communty
property n arge measure dsposes of the varous other contentons of appeees.
Snce the evy s an e cse and not a property ta , the case s not one of takng the
survvor s property to pay the ta on decedent s estate. s the ta s upon the
surrender of od ncdents of property by the decedent and the acquston of new
by the survvor, t s appropratey measured by the vaue of the property to
whch these ncdents attach. The ta burden thus ad s not so unreated to
the prveges en|oyed by the ta payers who are owners of the property affected
that t can be sad to be an arbtrary e ercse of the ta ng power. (Mken v.
Unted States, 2 3 U. S., 15 Ct. D. 320, C. . -, 472 (1931) urnet v. Wes,
supra, 67 -679. Compare Sutonsta v. Satonsta, supra.) Whe t may gen-
eray be true, as appeees argue, that nether the husband nor wfe gans any
over-a fnanca advantage when the other des, t suffces that the decedent oses
and the survvor acqures, wth respect to the property ta ed, substanta rghts of
en|oyment and contro whch may be of vaue. Labty to the ta , n order
to avod consttutona ob|ecton, does not have to rest upon the en|oyment by
the ta payer of a the prveges and benefts of the most favored owner at a
gven tme and pace. Corss v. owers, 2 1 U. S., 376 Ct. D. 1 , C. . I -1.
254 (1930) Renecke v. Smth, 2 9 T . S., 172 Ct. D. 664, C. . II-1, 256
(1933) cf. urnet v. Guggenhem, 2 U. S., 2S0 Ct. D. 636, C. . II-1, 374
(1933) .)
We fnd no bass for the contenton thnt the ta Is arbtrary and caprcous
because t ta es transfers at death and aso the shftng at death of partcuar
ncdents of property. Congress s free to ta ether or both, and here t has
ta ed both, as t may consttutonay do, n order to accompsh the purposes
and pocy of ta aton to protect the revenue and avod an unequa dstrbuton
of the ta burden. Watson v. Comptroer, supra.)
ven f t coud be thought to affect the consttutonaty of the ta ng statute,
t s pan that the statute does not depend for ts operaton upon any presumpton
that the entre communty property s owned or economcay attrbutabe to the
spouse frst to de. Save as the statute tsef grants an e empton by such
attrbuton, so far as the communty property may be shown to have been
receved as compensaton for persona servces actuay rendered by the survvng
The force of Mofftt v. ey, supra, as an authorty controng the ta aton of com-
munty property In Lousana where the wfe s Interest s vested before the death of the
husband. Is not mpared by the fact that the Caforna courts nter hod that the wfe s
Interest n communty property n thnt Stnte s not so vested. Cf. Unted States v. Robbna
(269 U. ., 315 T. D. 3 17, C. . -, 1 (11)20) ) wth Unted States v. Macom 2S .
T . S., 792). The Mofftt case was decded upon the assumpton that the wfe s nterest was
vested.
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Regs. 105, 1.23.
27
spouse or derved orgnay from such compensaton or from separate property
of the survvng spouse, the ta s ad wthout regard to the economc source
of the communty property. part from the e empton, t s, as we have seen,
the shftng at death of the Incdents of the property, regardess of orgn, whch
Is the sub|ect of the ta .
The present statute, whch was enacted n order to secure a more equtabe
dstrbuton of the burden of edera death ta es, Is assaed because the ta s
ackng n unformty. ut the Unformty n e cse ta es e acted by the Con-
sttuton s geographca unformty, not unformty of ntrnsc equaty and
operaton. ( nocton v. Moore, supra, 3-109.) The Consttuton does not
command that a ta have an equa effect n each State (d., page 104). It
has ong been setted that wthn the meanng of the unformty requrement
a ta s unform when t operates wth the same force and effect n every pace
where the sub|ect of t s found. ( ead Money Cases, 112 U. S., 5 0, 594. See
aso La ee Iron Works v. Unted States. 256 U. S., 377, 392-393 romey v.
McCaughn, supra, 13 Stecard Machne Co. v. Davs, supra, 5 3.)
The amendment ta ng communty property nterests s appcabe through-
out the terrtory of the Unted States wherever such nterests may be found.
There s no ack of geographca unformty because n some States they are not
found. or a ta ng statute does not fa short of the prescrbed unformty
because ts operaton and ncdence may be affected by dfferences n State aws.
(Phps v. Commssoner, 2 3 U. S., 5 9, 002 Ct. D. 350, C. . -, 2G4 (1931)
Rggs v. De Drago, supra, 102.) Dfferences of State aw whch may brng
a person wthn or wthout the category desgnated by Congress as ta abe
may not be read nto the Revenue ct to spe out a ack of unformty In the
consttutona sense. (Poe v. Seaborn, supra, 117-11 .)
ppeees suggest that nterests n tenances n common and mted partner-
shps are very ke nterests n communty property, and that f the ta s to be
unform, the one can not be ta ed uness the other s aso. ut even f t be
as appeees argue, that common aw famy partnershp or other arrangements
wth dfferent names can be so devsed that the mnrta reatonshp s attended
by the same powers and restrctons as those derved from the aws of the com-
munty property States, and that they are dfferenty or more ghty ta ed than
communty property nterests, we fnd no ack of unformty n the consttutona
sense. The present amendment s geographcay unform n ts appcaton to
the ony sub|ect of whch t treats, communty property nterests, and t eves
n every State an dentca ta upon the sub|ect matter ncuded wthn ts
terms a defned property nterest created by State aw, havng a common
hstorca orgn, a common name, and consttutng a unversay recognzed
dstnct cass of property nterests.
There can be no doubt that the seecton of such a cass for ta aton woud
not offend aganst the ffth amendment, or even .the fourteenth, merey because
t dd not attempt to reach casua arrangements resutng from ndvdua agree-
ments. Ta es must be ad by genera rues. (See State Raroad Ta Cases,
92 U. S., 575, 612 ead Money Cases, supra, 595 La ee Iron Works v. Unted
States, supra, 392 Great tantc t Pacfc Tea Co. v. Gros|ean, 301 U. S., 412,
424.) Consderatons of practca admnstratve convenence and cost n the
admnstraton of ta aws afford adequate grounds for mposng a ta on a we
recognzed and defned cass, wthout attemptng to e tend t so as to embrace
a penumbra of speca and more or ess casua nterests whch n each case may
or may not resembe the ta ed cass. ( urnet v. Wes, supra, 27 Cannchac v.
Southern Coa Coke Co., 301 . S., 495. 511 Rapd Transt Co. v. New York,
303 U. S., 573, 5 2-5 3 Madson venue Offces v. rocnc, appea dsmssed, No.
3C of ths term.) Such nterest woud be but soated specmens of the attorney s
art, and key to resst efforts to dentfy them wth the ta abe sub|ect.
ppeees contenton that the unformty cause precudes such cassfcaton
woud n effect add to the consttutona restrants upon Congress an equa pro-
tecton cause more restrctve than that of the fourteenth amendment, and s
wthout |udca or hstorca support. Ths Court n La ee Iron Works v.
Unted States, supra, 3 )2, et seq. recognzed that the unformty cause, beyond
requrng geographca unformty n the appcaton of the partcuar ta ad by
the ta ng ct, coud not be taken to mpose greater restrctons on Congress s
power to ta than those whch the equa protecton cause paces upon the States.
We reaffrm what ths Court has many tmes hed, that the consttutona com-
1 See footnote 12, ante.
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279
Regs. 105, 1.23.
mand that cses sha be unform throughout the Unted States refers to
geographca unformty n the appcaton of the partcuar e cse whch Con-
gress has prescrbed. We concude that t adds nothng to restrctons whch
other causes of the Consttuton may mpose upon the power of Congress tc
seect and cassfy the sub|ects to ta aton. It requres ony that what Congress
has propery seected for ta aton must be dentcay ta ed n every State where
It s found.
n e cse ta , whch the Consttuton requres to be unform, ad upon the
shftng at death of some of the ncdents of property, coud hardy be thought
to be a drect ta whch must be apportoned. (See romey v. McOaughn,
supra, 13 .) The contenton that such a ta s drect because measured by the
property whose ncdents are shfted at death, was re|ected n romey v.
McCaughn, supra, and n Tyer v. Unted States, supra, 501-5 , and Phps v.
Dme Trust S. /). Co. (2 4 U. S., 160, 1(55 Ct. D. 426, C. . -2, 420 (1931) ).
ta mposed upon the e ercse of some of the numerous rghts of property s
ceary dstngushabe from a drect ta , whch fas upon the owner merey
because he s owner, regardess of hs use or dsposton of the property. The
persstence of ths dstncton and the |ustfcaton for t rests upon the hstorc
fact that e cse ta es of ths type were not understood to be drect ta es when
the Consttuton was adopted, and as we upon the reuctance of ts Court
to enarge, by constructon, mtatons upon the soveregn power of ta aton by
rtce I, secton , so vta to the mantenance of the Natona Government.
( romey v. McCaughn, supra, 137.)
The tenth amendment does not operate as a mtaton upon the powers,
e press or mped, deegated to the Natona Government (Unted States v.
Darby, 312 U. S., 100, 123-124.) The amendment has ceary paced no restrcton
upon the power, deegated to the Natona Government to ay an e cse ta
qua ta . Undoubtedy every ta whch ays ts burden on some and not others
may have an ncdenta reguatory effect. ut snce that s an nseparabe
concomtant of the power to ta , the ncdenta reguatory effect of the ta s
embraced wthn the power to ay t. It has ong been setted that an ct of
Congress whch on ts face purports to be an e ercse of the ta ng power, s not
nny the ess so because the ta s burdensome or tends to restrct or suppress
the thng ta ed. In such a case t s not wthn the provnce of courts to nqure
nto the une pressed purposes or motves whch may have moved Congress to
e ercse a power consttutonay conferred upon t. (Sonznsky v. Unted States,
300 U. S., 506, 513-514 Ct. D. 1217, C. . 19 7-1, 351 , and cases cted.)
We concude that the ta here ad wth respect to the communty property
Infrnges no consttutona provson.
The ncuson of a the proceeds of decedent s fe nsurance poces wthn
hs gross estate for purposes of estate ta aton, requres no e tended dscusson.
There s no contenton that the proceeds of the poces are not made ta abe
by the terms of secton 11(g) of the Interna Revenue ct Code as amended
by secton 404 of the Revenue ct of 1942.16 The amendment ndcates on ts
face the purpose to brng the provsons for the ta aton of the proceeds of
nsurance poces payabe at death nto harmony wth the amendment ta ng
communty nterests, and the court beow seems to have regarded, as do the
partes here, the dsposton of the questons affectng the ta on communty
nterests, as determnatve of the vadty of the ta on the proceeds of the po-
ces. ut t s suffcent for present purposes that the ta s ad upon the
amount recevabe by the wfe as a benefcary of the poces on the death of her
husband, and that the husband possessed at hs death an ncdent of ownershp,
the power to change the benefcares.
or reasons whch we have aready fuy deveoped n ths opnon, the death
of the nsured, snce t ended hs contro over the dsposton of the proceeds,
and gave hs wfe the present en|oyment of them, may be consttutonay made
the occason for the mposton of an ndrect ta measured by the proceeds
themseves. (Stebbns v. Rey, supra, 141 Chase Natona ank v. Unted
States, supra.)
Reversed.
Mr. ustce ackson took no part In the consderaton or decson of ths case.
Concurrng opnon by Mr. ustce Dougas, n whch Mr. ustce ack |ons.
M See footnote 1, ante.
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Regs. 105, 1.23.
2 0
Reguatons 105, Secton 1.23: Communty
property.
1946-2-12216
Ct. D. 165
ST T T INT RN L R NU COD , S M ND D D CISION O
SUPR M COURT.
1. Gross state Communty Interests Te as adty or
Ta Consttutonaty of Statute.
n estate tn mposed under the provsons of secton 11 (e) (2) of
the Interna Revenue Code, ns amended by secton 402 of the Revenue
ct of 1942, on the termnaton of a Te as marta communty upon
the death of the husband, a domced resdent of Te as, the ta beng
measured by the vaue of the entre communty property snce no
part thereof was shown to be attrbutabe to compensaton for per-
sona servces of the wfe or to her separate property, s vad and
nfrnges no consttutona provson. The death of ether the hus-
band or the wfe of the Te as communty effects suffcent ateraton
n the spouses possesson and en|oyment and recproca powers of
contro and dsposton of the communty property as to warrant the
mposton of an e cse ta measured by the vaue of the entre
communty.
2. Decson Reversed.
Decson of the Unted States Dstrct Court, Western Dstrct of
Te as (09 ed. Supp., 4 3), reversed.
The Unted States of merca, appeant, v. enry Rompe, r., dmnstrator
De ons Non Cum Testamcnto nnc o of rnst erhst, Deceased.
ppea from the Dstrct Court of the Unted States for the Western Dstrct of Te as.
Mr. Chef ustce Stone devered the opnon of the Court.
Ths s a companon case to No. 5 , ernandez v. Wener, decded ths day Ct
D. 1057, page 270, ths uetn . The Commssoner of Interna Revenue, pro-
ceedng under secton 11(e) (2) of the Interna Revenue Code (26 U. S. C, secton
11(e) (2)), as amended by secton 402 of the Revenue ct of 1942 ( 56 Stat. 79 ),
has eved, and appeee has pad, an estate ta on the termnaton of a Te as
marta communty by the death of the husband, a domced resdent of Te as,
the ta beng measured by the vaue of the entre communty property. of
the consttutona questrons rased here were presented and decded n ernandez
. Wener.
ppeee, decedent s admnstrator, brought ths sut under the Tucker ct
(2 U. S. C., secton 761-705) to recover as an aeged overpayment so much of
the estate ta pad as s attrbutabe to the ncuson n decedent s gross estate
of the vaue of the wfe s share of the communty property.
The facts found by the dstrct court were stpuated and are not n dspute.
Decedent, a resdent of Te as, was marred ebruary 12, 1901, and ded on No-
vember 17, 1943, eavng hm survvng hs wfe, ther chd, and grandchdren.
rom the date of the marrage unt 1934 decedent s prncpa actvty was that
of rasng vestock on a ranch n Te as, acqured argey on credt, and pad for
out of savngs from the ranchng busness. Other savngs from the busness
were nvested from tme to tme. fter 1034 he receved rent from the ranch
property and ncome from oans and nvestments accumuated out of savngs.
Durng the marrage nether decedent nor hs wfe was ever empoyed by any
one at a wage or saary, and nether receved any commssons, fees or smar
compensaton for persona servces rendered. t the tme of decedent s death
Supreme Court of the Unted States.
December 10, 1945.
opnon.
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2 1
Regs. 105, 1.23.
the communty property conssted of the orgna ranch property, Investments
acqured from savngs from the ranch busness, rentas and other ncome from
nvestments.
In the estate ta return for decedent s estate ony one-haf of the vaue of the
communty property was reported. The Commssoner ncuded the fu vaue
of the communty property n the decedent s gross estate, and assessed a def-
cency accordngy, whch appeee pad. In ths sut whch foowed, the dstrct
court gave |udgment for appeee (59 ed. Supp., 4 3), hodng that the ta
voated the due process cause of the fourteenth amendment and the command
of rtce I, secton that a Dutes, Imposts and cses sha be unform
throughout the Unted States. The Court found t unnecessary to pass on other
consttutona contentons presented.
The ease cones here on drect appea under secton 2 of the ct of ugust
23, 1 37 (50 Stat., 751, 2 U. S. C secton 349a), appeant assgnng as
error the dstrct court s rung that the ta voates the due process cause of
the ffth amendment and the unformty cause of rtce I, secton of the
Consttuton, and the dstrct court s faure to hod that the ta s const-
tutona.
Communty property as been recognzed and defned by the aws of Te as
throughout ts hstory.1 Its aws governng communty property nterests are
smar n most respects to those of Lousana descrbed n our opnon n
the Wener case, supra. On the death of the husband, n Te as, as n Lousana,
the wfe s share of the communty s freed from the restrctons of hs e -
cusve management and contro, and the wfe acqures e cusve possesson
and en|oyment of the property consttutng her share, as we as mportant
new powers of contro and dsposton over t. On the death of the wfe, her
share passes to her hers, and hs share s freed from the mtatons whch
the e stence of the communty paces on hs contro of communty property.
Whe Te as does not have the statutory restrctons on gfts whch are to
be found n the Lousana Cv Code, Te as does pace some mtatons on
the husband s power to make gfts of communty property. s we sad of
Te as communty property n opcns v. acon (2 2 U. S., 122, 126 Ct. D. 260,
C. . I- -2, 201 (1930) ), the authortes hod that f the husband, as agent
of the communty, acts n fraud of hs wfe s rghts, she s not wthout remedy
n the courts. (Stramer v. Coe, 15 Te ., 211 Martn v. Moran, 2 S. W., 904
Watson v. arrs, 130 S. W., 237 Davs v. Davs, 1 6 S. W., 775.) ppeee
aso concedes that e cessve and caprcous donatons are vod, and that
macous or frauduent ntent need not be estabshed n order that the wfe
sha have the remedes referred to. ppeee does not queston that these
are the rues generay appcabe to communty property n Te as.
The death of ether the husband or the wfe of the Te as communty thus
effects suffcent ateraton n the spouses possesson and en|oyment and re-
cproca powers of contro and dsposton of the communty property as to
warrant the mposton of an e cse ta measured by the vaue of the entre
communty.
or the reasons fuy stated n our opnon n the Wener case we concude
that the ta amendment of secton 11 of the Interna Revenue Code authorzng
the ta as apped n ths case s not open to any of the consttutona ob|ectons
whch have been rased aganst t ether here or beow. The |udgment s
accordngy
Reversed.
Mr. ustce ackson took no part n the consderaton or decson of ths
ease.
Mr. ustce ack and Mr. ustce Dougas concur n the resut for the
reasons stated n the concurrng opnon of Mr. ustce Dougas n case No.
5 , oachm O. ernandez, Unted States Coector of Interna Revenue, v.
Samue . Wener ct a. Ct. D. 1657, page 270, ths uetn. nnouncement
of the Court on December 17, 1945.1
1 Speer, Law of Marta Rghts In Te as (1029), page 409 et seq.
703672 4 19
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Regs. 0 (1937), rt. 16. 2 2
S CTION 302 O T R NU CT O 1926, S M ND D
Y S CTION 401 O T R NU CT O 1934.
Reguatons 0 (1937), rtce 16: Transfers 1946-5-12257
n contempaton of death. Ct. D. 1667
ST T T R NU CT O 1926, S M ND D T R NU CT O
1934 D CISION O SUPU M COURT.
1. Gross state Transfers n Trust Revocaton of Power to
mend Contempaton of Death.
The decedent In 1925 estabshed spendthrft trusts for hs two
chdren, retanng the power to amend wth the consent of the trus-
tee and benefbary, enarged the trusts n 1934, and n 1937 re-
nounced the power to amend. The courts beow found that the
trusts were estabshed to meet the necesstes of the decedent s ch-
dren by gvng th m property, freed of a cams, ta or otherwse,
and that In 1937 he reeased the power to amend In order to accom-
psh hs orgna purpose, and concuded that nether the estabsh-
ment or the enargement of the trusts nor the reease of the power
to amend was made n contempaton of death. The fndngs make
pan that the steps taken by the decedent were parts of one Inte-
grated transacton. That Is a fndng of fact whch the Court s not
at berty to dsturb on ths record.
2. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, fth
Crcut (149 ed. (2d), 120), affrmng decson of the Dstrct Court,
M. D. Ga. (55 ed. Supp., 260), affrmed.
Supreme Court of the Unted States.
Maron . en, Coector of Interna Revenue, pettoner, v. Trust Co. of Georga
and ughes Spadng, ecutors of the state of ack . Spadng, Deceased.
On wrt of certorar to the Unted States Crcut Court of ppeas for the fth Crcut
anuary 2 , 1946.
opnon.
Mr. ustce Dougas devered the opnon of the Court.
The decedent, ack . Spadng, ded December , 193 , at the age of 2. In
1925 he estabshed two spendthrft trusts one for hs daughter Suzanne and one
for hs son ack and transferred to each trust securtes of the vaue of 50,000.
In 1934 he added securtes to each trust. e pad gft ta es on these transfers.
When he ded, the Commssoner ncuded the corpus of each trust n hs estate
and coected the estate ta on t. The e ecutors brought ths sut for a refund.
The dstrct court found that the trusts were estabshed under the foowng
crcumstances.
Suzanne and her husband, before 1925, had engaged n a busness venture
whch had ended In dsaster. oth had ost a ther property and were heaTy
ndebted. Suzanne s husband was wthout means to support her and ther fve
chdren. ack kewse had engaged n an unsuccessfu busness venture. e
was not earnng enough to support hs famy. The gfts were made by the
decedent to reeve the needs and to make secure the mantenance of hs chdren
and the educaton and support of hs grandchdren. The gfts were paced In
trust because Suzanne and ack had ost pror gfts n unsuccessfu pro|ects-
The decedent desred to protect them aganst ther own busness msadventures
and not to retan any beneft, drecty or ndrecty, to hmsef. e made the
gfts to meet ther necesstes and desred to set asde the trust property, freed
from a cams, ta or otherwse. The decedent, however, retaned under the
trusts a power to amend wth the consent of the trustee and benefcary.1 t the
1 Durng my fp, by the unanmous consent of the sad trustee, my sad daughter
son and of mysef, the terms of ths agreement may be amended, changed. ennr|w
or mted, but n no event sha the conveyance of sad stock to the party of the secoM
part be revoked.
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2 3 Regs. 0 (1937), rt. 16.
tme the trusts were estabshed n 1925 and enarged n 1934 he beeved that
the gfts were compete and absoute and ntended them to be such, e was a
awyer and beeved that under the edera aw the reservaton of such a power
to amend woud not requre the ncuson n hs gross estate at hs death of the
vaue of the corpus of each trust. ut n 1935 everng v. Ct/ ank armers
Trust Co. (290 U. S., 5 Ct. D. 1042, C. . I -2, 329 (1935) ) was decded,
hodng that the reservaton of a power to amend brought the corpus of the trust
nto the settor s estate, even though the power coud not be e ercsed by the
settor aone. Upon beng advsed n 1937 that the gfts remaned a part of
hs estate for estate ta purposes, decedent e ecuted an nstrument renouncng
the power to amend the trusts. Ths was done so that the trusts woud not bu
a part of hs estate for estate ta purposes. t that tme, as we as n 1925
and 1934, the decedent was n average good heath for a man of bs age. e
reeased the power to amend so as to put the trusts n the condton e had
thought they were n when be made them. The reease was desgned to carry
out hs orgna purpose n settng asde the property freed from a cams, ta
or otherwse. In 1925, 1934, and 1C37, he dd not entertan thoughts of death
e cept the genera e pectaton of death that a entertan.
The dstrct court concuded that nether the estabshment or the enargement
of the trusts, nor the reease of the power to amend was made n contempaton
of death. ccordngy, t rendered |udgment for respondents. (55 ed. Supp.,
269.) The crcut court of appeas sustaned the fndngs of the dstrct court and
affrmed the |udgment. (1-19 ed. (2d), 120.) The case s here on a petton
for a wrt of certorar whch we granted because of an apparent confct between
that decson and cases from other crcuts.
It s cear that the corpus of each trust was propery ncuded n decedent s
gross estate f he reeased the power to amend n contempaton of hs death.
nd there s a presumpton that he dd so because the reease was made ess
than two years before hs death.1
It was sad n Unted States v. Wes (2 3 U. S., 102, 117 Ct. D. 340, C. . -,
475 (1931) ) that a gft s made n contempaton of death wthn the meanng of
the estate ta aw f the motve whch nduces t s of the sort whch eads
to testamentary dsposton. Pettoner s argument s that a purpose to avod
the estate ta s such a motve. It s a motve whch woud cause a decedent
to make an nter vvos transfer rather than a w. Snce the purpose of the
contempaton of death provson was to reach substtutes for testamentary dspo-
Cf. armers Loan f Trust Co. v. owers (6 ed. (2 1), 910) armers Loan t Trust
Co. v. owers (9 ort. (2d), 794) : rst Trust tt Depost Co. v. Shaughnessv (134 ed.
(2d), 940) Commonweath Trust Co. v. Drsro (CO ed. Supp.. 949. affrmed. 137 ed.
(2(1), 053). nd see Pavenstedt, Ta aton of Transfers In Contempaton of Death (54
ae L. ourn.. 70) : arras. Gft Ta aton In the Unted States (1940). ch. II.
Secton 302(d) (1) of the Revenue ct of 1926 (44 Stat., 9), as amended by secton 401
of the Revenue ct of 1934 (4 Stat.. 6 0), rends 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
(d)(1) To the e tent of any nterest theren of whch the decedent has at any tme
made a transfer, by trust or otherwse, where the en|oyment thereof was snb|ect at the
date of hs death to any change through the e ercse of a power, ether by the decedent
aone or n con|uncton wth any person, to ater, amend, or revoke, or where the decedent
renqushed any such power n contempaton of hs death, e cept n case of a bona tde
sae for an adequate and fu consderaton n money or money s worth.
rtce 16 of Treasury Iteguatons 0 (1937 cd.) ns amended by T. D. 4966 (C. . 1940-1,
220) provdes n part:
The phrase contempaton of death. as used n the statute, does not mean, on the
one hand, that genera e pectaton of death such as a persons entertan, nor. on the
other, s ts meanng restrcted to an apprehenson that death s mmnent or near.
transfer In contempaton of death s a dsposton of property prompted by the thought
of death (though t need not be soey so prompted). transfer s prompted by the
thought of deat If t s made wth the purpose of avodng the ta . or as n substtute for
a testamentary dsposton of the property, or for nny other motve assocated wth death.
The body and menta condton of the decedent nnd a other attendant facts and crcum-
stances are to be scrutnzed to determne whether or not such thought prompted the
dsposton.
Secton 302(d)(3) provdes:
The renqushment of any such power, not admtted or shown to have been In con-
tempaton of the decedent s death, made wthn two years pror to hs death wthout,such
a consderaton and affectng the nterest or nterests (whether arsng from one or more
transfers or the creaton of one or more trusts) of nny one benefcary of a vaue or
aggregate vaue, at the tme of snch death, n e cess of 5 000. then, to the e tent of such
e cess, such renqushnent or renqushments sha, uness shown to the contrnry, be
deemed to have been made n contempaton of death wthn the meanng of ths tte.
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Regs. 0(1937), rt. 16.
2 4
stons n order to prevent evasons of the ta (Unted States v. We U, supra,
11 -117), the statute s satsfed, t Is sad, where for any reason the decedent
becomes concerned about what w happen to hs property at hs death and as
a resut takes acton to contro or n some manner affect ts devouton.
That s a correct statement of the governng prncpe for t presumes the
e stence of the requste motve. The transfer s made n contempaton of
death f the thought of death s the mpeng cause of the transfer. (Cty
ank armers Trust Co. v. McOowan, 323 U. S., 594, 599 Ct. D. 1629, C .
1945, 40 .) The transfer may be so motvated, even though the decedent had no
dea that he was about to de. Unted States v. Wes, supra, C. . 1915, 403 .)
On the other hand, every man makng a gft knows that what he gves away
to-day w not be ncuded In hs estate when he des. such gfts pany
are not made n contempaton of death In the statutory sense. Many gfts,
even to those who are the natura and approprate ob|ects of the donor s
bounty, are motvated by purposes assocated wth fe, rather than wth the
dstrbuton of property n antcpaton of death. (Unted States v. Wes.
supra, 11 .) Those motves cover a wde range. (Sae 1 Pau, edera state
Gft Ta aton (1942), sectons 6.09 et seq.) There may be the desre to
recognze speca needs or e gences or to dscharge mora obgatons. The
gratfcaton of such desres may be a more compeng motve than any thought
of death. (Unted States v. Wes, supra, 119.) Whether such a desre was
the domnant, controng or Impeng motve Is a queston of fact In each
case. We do not have here the type of probem presented n McCaughn v.
Rea state Land T. T. Co. (297 U. S., 606 Ct. D. 1111, C. . -1, 363
(1936) ), where the appeate court undertook to reverse the tra court on a
revew of the evdence. ere two courts have resoved that queston of fact
n favor of respondents. They have found, as we have sad, that Mr. Spad-
ng estabshed the trusts to meet the necesstes of hs chdren by gvng
them property, freed of a cams, ta or otherwse and that n 1937 he
reeased the power to amend to accompsh the purpose whch he orgnay
had, but whch he ater dscovered had not been acheved. Those fndngs
are suffcent to overcome the statutory presumpton that the gfts, beng
made wthn two years of Mr. Spadng s death, were made In contempaton
of death. Those fndngs, beng concurrent fndngs of the two ower courts,
w be accepted here wthout ree amnaton of the evdence. Sae Unted Statu
v. O Donne (303 T . S., 501, 50 ) and cases cted.
It s sad, however, that those fndngs rest on a msconcepton of the aw.
snce admttedy the decedent n 1 37 reeased the power to amend so as to
avod payng an estate ta on the property ncuded under the trusts. ut
that s to soate the reease from a that preceded and to treat It as a whoy
Independent transacton. Ths s not a case where a settor, havng made
one pan for the dsposton of hs property, ater makes a dfferent one to
avod death ta es. Mr. Spadng, n makng the reease, dd what he orgnay
ntended to do to make compete and absoute gfts to bs chdren, freed of
a cams, ncudng ta es. Retenton of the power to amend woud have
brought the trust property nto Mr. Spadng s estate and sub|ected It to
the estate ta en. s purpose to take care of hs chdren, come what may,
mght thus have been thwarted or mpared. e guessed wrong on the aw,
when he retaned the power to amend. When he rectfed the error, he was
n good fath, endeavorng to compete hs orgna pro|ect, not to gve hs
chdren more than he at frst ntended In order to save ta es. What he
dd n 1937 was merey to accompsh by an addtona step what he assumed
he had aready done. The fndngs make pan that the estabshment of the
trusts n 1925, ther enargement In 1934, and the reease of the power to
amend n 1937 were parts of one ntegrated transacton. That Is a fndng
of fact whch we are not at berty to dsturb on ths record. On these facts,
hs desre to avod death ta es does no more than estabsh that he dd not
want hs pan to underwrte the necesstes of hs chdren and grandchdren
eopardzed. s desre to make adequate provson for them remaned the
domnant motve, or so the trers of fact coud propery fnd.
ffrmed.
Mr. ustce ackson took no part In the consderaton or decson of ths
case.
Sec Interna Revenue Code secton 205 (63 Stat., 12 , 26 T . S. C, secton 27). It
was hed n gcy v. Commssoner (69 ed. (2d), 160) that the persona abty of
transferees dd not e tend to the benefcares under a trust.
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2 5 Msc.
M NU CTUR RS CIS T S.
S CTION 615. T ON SO T DRIN S. (1932)
1046-4-12215
Ct. D. 1662
manufacturers e cse ta revenue act of 1932 decson of
supreme court.
1. Ta on Soft Dbnks ottng and Sae of Mnera Waters
Immunty of State.
The State of New York Is not mmune from the ta on mnera
waters mposed by secton 615(a) (5) of the Revenue ct of 1932.
Congress may ta the States when they go nto the busness of
bottng water as others In the busness are ta ed even though a
State s sae of ts mnera waters has reaton to ts conservaton
pocy.
2. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Second
Crcut (140 ed. (2(1), G0 ), affrmng decson of the Dstrct
Court, N. D. N. Y. (4 ed. Supp., 15), affrmed.
Supreme Court of the Unted States.
Sate of New York and Saratoga Sprngs Commsson and Saratoga Sprngs
uthorty, pettoners, v. The Unted States of merca.
On wrt of certorar to the Unted States Crcut Court of ppeas for te Second Crcut.
anuary 14, 1946.
Mr. ustce rankfurter announced the |udgment of the Court and devered
an opnon n whch Mr. ustce Ruttedge |oned.
Secton C15(a) (5) of the 1932 Revenue ct (47 Stat., 169, 264) mposed a ta
on mnera water.1 The Unted States brought ths sut to recover ta es
assessed aganst the State of New York on the sae of mnera waters taken from
Saratoga Sprngs, N. Y. The State cams mmunty from ths ta on the ground
that n the bottng and sae of the sad waters the defendant State of New York
was engaged n the e ercse of a usua, tradtona and essenta governmenta
functon. The cfn was re|ected by the dstrct court and |udgment went for
the Unted States. (4 ed. Supp., 15.) The |udgment was affrmed by the Cr-
cut Court of ppeas for the Second Crcut. (140 ed. (2d), 60 .) The strong
urgng of New York for further carfcaton of the amenabty of States to the
ta ng power of the Uated States ed us to grant certorar. (322 U. S., 724.)
S C. 615. T ON SO T DRIN S,
(a) There s hereby mposed
(5) Upon a nnturu or artfca mnera waters or tabe waters, whether car-
bonated or not, and a mtatons thereof, sod by the producer, botter, or Importer
thereof, n bottes or other cosed contaners, at over 12 a cents per gaon, a ta of
2 cents per gaon.
The hstory of New York s reatons to the sprngs at Saratoga may bo brefy sum-
marzed. Under prevous prvate oeraton the fow of the sprngs had been substantay
dmnshed by e cessve pumpng. In 1911 the State of New York beganMo acqure tte to
a the ands on whch the mnera sprngs were ocated at Saratoga Sprngs. In order
to conserve the sprngs for benefca oeraton, the State took varous measures unt, n
1930, contro over the sprngs In the State reservaton was gven to the newy-created
Saratoga Sprngs Commsson. In 1933, the commsson ensed the sprngs factes and
deegated ther management to the Saratoga Sprngs uthorty, a pubc beneft corporaton
of New York.
Durng the years 1932 to 1934, for whch the ta s asserted, the commsson and the
authorty operated the reservaton as a heath resort and spa. There are recreaton
factes, bathhouses, drnk has, a research aboratory, and other budngs on the
grounds. Some of the mnera waters of the sprngs that have a medcna vaue are
botted nnd sod to dstrbutors, retaers, and drecty to consumers. The saes are
promoted by advertsng and customary yed a proft whch s apped to meetng n part
the e penses of operatng the other factes. The remander of those e penses s met by
annua egsatve appropratons.
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2 G
On the bass of authorty the case s qucky dsposed of. When States
sought to contro the quor traffc by gong nto the quor busness, they
were dened mmunty from edera ta es upon the quor busness. (South
Carona v. Unted States, 199 U. S., 437 Oho v. everng, 292 U. S., 3G0
Ct. D. 30, C. . III-1, 531 (1934) .) nd n re|ectng a cam of m-
munty from edera ta aton when Massachusetts took over the street ra-
ways of oston, ths Court a decade ago sad: We see no reasou for put-
tng the operaton of a street raway by a State n a dfferent category from
the sae of quors. ( everng v. Powers, 293 U. S., 214, 227 Ct. D. 900,
C. . III-2, 213 (1934) .) We certany see no reason for puttng soft
drnks n a dfferent consttutona category from hard drnks. (See aso en
v. Regents, 304 U. S., 439 Ct. D. 1344, C. . 193S-1, 530 .)
One of the greatest sources of strength of our aw s that t ad|udcates con-
crete cases and does not pronounce prncpes n the abstract. ut there comes
a tme when even the process of emprc ad|udcaton cas for a more ratona
dsposton than that the mmedate case s not dfferent from precedng cases.
The argument pressed by New York and the 45 other States who, as amd
curae, have |oned her deserves an answer.
nactments evyng ta es made In pursuance of the Consttuton are, as
other aws are, the supreme Law of the Land. ( rtce I, Consttuton of
the Unted States nt v. Stone Tracy Co., 220 U. S., 10 , 153.) The frst
of the powers conferred upon Congress s the power To ay and coect Ta es,
Dutes, Imposts and cses . ( rtce I, secton .) y ts terms
the Consttuton has paced ony one mtaton upon ths power, other than
mtatons upon methods of ayng ta es not here reevant: Congress can
ay no ta on artces e ported from any State. ( rtce I, secton 9.)
arrng ony e ports, the power of Congress to ta reaches every sub|ect.
(Lcense Ta Cases, 5 Wa., 462, 471.) ut the fact that ours s a edera
consttutona system, as e pressy recognzed n the tenth amendment, carres
wth t mpcatons regardng the ta ng power as n other aspects of gov-
ernment. (See, e. g., opkns Savngs ss n v. Ceary, 296 U. S., 315.) Thus,
for Congress to ta State actvtes whe eavng unta ed the same actvtes
pursued by prvate persons woud do voence to the presuppostons derved
from the fact that we are a Naton composed of States.
ut the fear that one government may crppe or obstruct the operatons
of the other eary ed to the assumpton that there was a recproca mmunty
of the nstrumentates of each from ta aton by the other. It was as-
sumed that there was an equvaence n the mpcatons of ta aton by a
State of the governmenta actvtes of the Natona Government and the
ta aton by the Natona Government of State nstrumentates. Ths as-
sumed equvaence was nourshed by the phrase of Chef ustce Marsha that
the power to ta nvoves the power to destroy. (McCuoch v. Maryand,
4 Wheat, 316, 431.) To be sure, t was uttered n connecton wth a ta
of Maryand whch pany dscrmnated aganst the use by the Unted States
of the ank of the Unted States as one of ts Instruments. What he sad
may not have been Irreevant n ts settng. ut Chef ustce Marsha spoke
at a tme when soca compe tes dd not so ceary revea as now the prac-
tca mtatons of a rhetorca absoute. (Sae omes, ., In Long v. Rock-
wood, 277 U. S., 142, 14 , and n Panhande O Co. v. Msssspp, 277 U. S..
21 , 223.) The phrase was sezed upon as the bass of a broad doctrne of
ntergovernmenta mmunty, whe at the same tme an e pansve scope was
gven to what were deemed to be nstrumentates of government for
purposes of ta mmunty. s a resut, mmunty was unt recenty accorded to
a offcers of one government from ta aton by the other, and t was further
assumed that the economc burden of a ta on any nterest derved from a
government mposes a burden on that government so as to Invove an nter-
ference by the ta ng government wth the functonng of the other govern-
ment. (-See Metcaf ddy v. Mtche, 269 U. S., 514 everng v. Pro-
ducers Corporaton, 303 U. S., 376 Ct. D. 1321, C. . 193 -1, 343 Graces v.
New York e re. O ccfe, 306 U. S., 46 , 4 0-4 1 Ct. D. 1390, C. . 1939-1
(Part 1), 129 .)
To press a |urstc prncpe desgned for the practca affars of government
to abstract e tremes s nether sound ogc nor good sense. nd ths Court s
under no duty to make aw ess than sound ogc and good sense. When ths
Court for the frst tme reeved State offcers from a nondscrmnatory Con-
gressona ta , not because of anythng sad In the Consttuton but because of
the supposed mpcatons of our edera system, Mr. ustce radey ponted
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out the nvadty of the noton of recproca ntergovernmenta mmunty. The
consderatons bearng upon ta aton by the States of actvtes or agences of
the edera Government are not correatve wth the consderatons bearng
upon edera ta aton of State agences or actvtes. The edera Govern-
ment s the Government of a the States, and a the States share n the eg-
satve process by whch a ta of genera appcabty s ad. The ta a-
ton by the State governments of the nstruments empoyed by the Genera
Government n the e ercse of ts powers, sad Mr. ustce radey, s a
very dfferent thng. Such ta aton nvoves an nterference wth the powers
of a government u whch other States and ther ctzens are equay nter-
ested wth the State whch mposes the ta aton. a Snce then we have moved
away from the theoretca assumpton that the Natona Government s bur-
dened f ts functonares, ke other ctzens, pay for the upkeep of ther State
governments, and we have dened the mped consttutona mmunty of ed-
era offcas from State ta es. (Graves v. Nctc York e re. O eefe, supra.
See Gespe v. Okahoma, 257 U. S., 501, crtczed n urnet v. Coorado
Coronado O Gas Co., 2 5 U. S., 303, 401 Ct. D. 4S5, C. . I-1, 2 5 (1932) ,
and e pcty overrued n cvcrng v. Producers Corporaton, 303 U. S., 370
Long v. Lockwood, 277 U. S., 142, overrued n o m Corporaton v. Doya,
2 6 U. S., 123 Coector v. Day, 11 Wa., 113, and Neto York e re. Rogers v.
Graves, 209 U. S., 401, overrued n Graves v. New York e re. O eefe. supra.)
In the meantme, cases came here, ns we have aready noted, n whch States
camed mmunty from a edera ta mposed generay on enterprses n whch
the State tsef was aso engaged. Ths probem dd not arse before the
present century, party because State tradng dd not actvey emerge unt
reatvey recenty, and party because of the narrow scope of e era ta a-
ton. In South Carona v. Unted States (190 U. S., 437), mmunty from
a edera ta on a dspensary system, whereby South Carona monopozed
the sae of nto catng quors, was dened by drawng a ne between ta aton
of the hstorcay recognzed governmenta functons of a State, and busness
engaged n by a State of a knd whch theretofore had been pursued by prvate
enterprse. The power of the edera Government thus.to ta a quor bus-
ness conducted by the State was derved from an appea to the Consttuton
n the ght of condtons surroundng at the tme of ts adopton. (South
Carona v. Unted States, supra, at 457.) That.there s a consttutona ne
between the State as government and the State as trader, was st more recenty
made the bass of a decson sustanng a quor ta aganst Oho. If a
State chooses to go nto the busness of buyng and seng commodtes, ts
rght to do so may be conceded so far as the edera Consttuton s concerned
but the e ercse of the rght s not the performance of a governmenta functon
. When a State enters the market pace seekng customers t dvests
tsef of ts quas soveregnty pro tanto, and takes on the character of a trader,
so far, at east, as the ta ng power of the edera Government s concerned.
The vews of Mr. ustce radey have been so vndcated by tme and e perence that
hs whoe compact opnon deserves to be recaed:
I dssent from the opnon of the Court n ths case, because, t seems to me that the
Genera Government has the sme power of ta ng the ncome of offcers of the State gov-
ernments as t has of ta ng that of ts own offcers. It s the common Government of a
ake and every ctzen Is presumed to trust hs own Government n the matter of ta aton.
No man ceases to be a ctzen of the Unted States by beng an offcer under the State
government. I can not accede to the doctrne that the Genera Government s to he re-
garded as In any sense foregn or antagonstc to the State governments, ther offcers, or
peope nor can I agree that a presumpton can be admtted that the Genera Government
w act In a manner hoste to the e stence or functons of the State governments, whch
are consttuent parts of the system or body potc formng the bass on whch the Genera
Government s founded. The a aton by the State governments of the nstruments em-
poyed by the Genera Government n the e ercse of Its powers, Is a very dfferent thng.
Such ta aton nvoves an nterference wth the powers of a government n whch other
States and ther ctzens are equay nterested wth the State whch mposes the ta aton.
In my |udgment, the mtaton of the power of ta aton n the Genera Government, whch
the present decson estabshes, w be found very dffcut of contro. Where nre we to
atop n enumeratng the functons of the State governments whch w be nterfered wth
by edera ta aton If a State ncorporates a raroad to carry out ts purposes of
Interna government, or a bank to ad ts fnanca arrangements, reservng, perhaps, a per-
centage on the stock or profts, for the suppy of Its own treasury, w the bonds or stock
of such an nsttuton be free from edera ta aton ow can we now te what the
effect of ths decson w be I can not but regard t as founded on a faacy, and that
It w ead to mschevous consequences. I am as much opposed as anyone can be to
any nterference by the Genera Government wth the |ust powers of the state governments.
ut no concesson of any of the |ust powers of the Genera Government can easy be re-
caed. I. therefore, consder It my duty to at east record my dssent when such con-
cesson appears to be made. n e tended dscusson of the sub|ect woud answer no
usefu purpose. (Coector v. Day, 11 Wa., 113, 12 -129.)
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2SS
(Oho v. everng, supra, at 360.) When the Oho case was decded t was too
ate n the day not to recognze the vast e tenson of the sphere of Govern-
ment, both State and Natona, compared wth that wth whch the fathers
were famar. It coud hardy reman a satsfactory consttutona doctrne
that ony such State actvtes are mmune from edera ta aton as were
engaged n by the States n 17 7. Such a statc concept of Government denes
ts essentn nature. The scence of Government s the most abstruse of a
scences f, ndeed, that can be caed a scence whch has but few f ed prn-
cpes, and practcay conssts n tte more than the e ercse of a sound ds-
creton, apped to the e gences of the State as they arse. It s the scence
of e perment. ( nderson v. Dunn, 6 Wheat., 201, 226.)
When ths Court came to sustan the edera ta ng power upon a transporta-
ton system operated by a State, t dd so n ways famar n deveopng the aw
from precedent to precedent. It edged away from reance on a sharp dstncton
between the governmenta and the tradng actvtes of a State, by deny-
ng mmunty from edera ta aton to a State when t s undertakng a bus-
ness enterprse of a sort that Is normay wthn the reach of the edera ta ng
power and s dstnct from the usua governmenta functons that are mmune
from edera ta aton In order to safeguard the necessary ndependence of the
State. (Icverng v. Powers, supra, at 227.) ut ths kewse does not furnsh
a satsfactory gude for deang wth such a practca probem as the consttutona
power of the Unted States over State actvtes. To rest the edera ta ng
power on what Is normay conducted by prvate enterprse n contradcton
to the usua governmenta functons s too shftng a bass for determnng
consttutona power and too entanged n e pedency to serve as a dependabe
ega crteron. The essenta nature of the probem can not be hdden by an
attempt to separate manfestatons of ndvsbe governmenta powers. (See
Wambaugh, Present Scope of Government (1 97), 20 . . . ep., 307 rank-
furter, The Pubc and ts Government (1930).)
The present case ustrates the sterty of such an attempt. New York urges
that n the use t s makng of Saratoga Sprngs t s engaged n the dsposton of
ts natura resources. nd so It s. ut n dong so t s engaged n an enterprse
n whch the State ses mnera waters n competton wth prvate waters, the sae
of whch Congress has found necessary to tap as a source of Tevenue for carryng
on the Natona Government. To say that the States can not be ta ed for enter-
prses generay pursued, ke the sae of mnera water, because t s somewhat
connected wth a State s conservaton pocy, s to nvoke an rreevance to the
edera ta ng power. Lquor contro by a State certany concerns the most
mportant of a State s natura resources the heath and we-beng of ts peope.
(See Muffer v. ansas, 123 U. S., 623, 662 Crane v. Campbe, 245 U. S., 301.
307.) If In ts wsdom a State engages In the quor busness and may be ta ed by
Congress as others engaged n the quor busness are ta ed, so aso Congress
may ta the States when they go nto the busness of bottng water as others
n the mnera water busness are ta ed even though a State s sae of ts mnera
wnters has reaton to Its conservaton pocy.
In the oder cases, the emphass was on Immunty from ta aton. The whoe
tendency of recent cases reveas a shft n emphass to that of mtaton upon
Immunty. They aso Indcate an awareness of the mted roe of courts n
assessng the reatve weght of the factors upon whch mmunty Is based. ny
mped mtaton upon the supremacy of the edera power to evy a ta
ke that now before us, n the absence of dscrmnaton aganst State actvtes,
brngs fsca and potca factors Into pay. The probem can not escape ssues
that do not end themseves to |udgment by crtera and methods of reasonng
that are wthn the professona tranng and speca competence of |udges. In-
deed the cam of Imped mmunty by States from Tedera ta aton rases ques-
tons not whoy unke provsons of the Consttuton, such as that of rtce
I , secton 4, guaranteeng States a repubcan form of government (see Pae.
States Te. d T. Co. v. Oregon, 223 D. S., 11 ), whch ths Court has deemed not
wthn ts duty to ad|udcate.
We have aready hed that by engagng In the raroad busness a State can
not wthdraw the raroad from the power of the edera Government to reguate
commerce. (Unted States v. Caforna, 297 U. S., 175. See aso ntcrsty
of Inos v. Unted States, 2 9 U. S.. 4 .) Surey the power of Congress to ay
ta es has Impedy no ess a reach than the power of Congress to reguate con-
4 Ths method of sovng a probem Inherent In a edera consttutona system has been
found equay Inconcusve In Latn merca. (See madeo, rgentne Consttutons
Law (1943), 97-103.)
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merce. There are, of course. State actvtes and State-owned property that
partake of unqueness from the pont of vew of ntergovernmenta reatons.
These nherenty consttute a cass by themseves. Ony a State can own a state-
house ony a State can get ncome by ta ng. These coud not be ncuded for
purposes of edera ta aton n any abstract category of ta payers wthout
ta ng the State as a State. ut so ong as Congress generay taps a source
of revenue by whomsoever earned and not unquey capabe of beng earned ony
by a State, the Consttuton of the Unted States does not forbd t merey be-
cause ts ncdence fas aso on a State. If Congress desres, t may of course
eave unta ed enterprses pursued by S ates for the pubc good whe t ta es
ke enterprses organzed for prvate ends. (Cf. Sprngfed Gas Co. v. Sprngfed,
257 U. S.. 06 Unversty of Inos v. Unted States, supra, at 57 Puget Sound Co.
v. Seatte, 291 U. S., 019.) If Congress makes no such dfferentaton and, as n
ths case, ta es a vendors of mnera water ake, whether State vendors or
prvate vendors, t smpy says, n effect, to a State: You may carry out your
own notons of soca pocy n engagng n what s caed busness, but you must
pay your share n havng a Naton whch enabes you to pursue your pocy.
fter a, the representatves of a of the States, havng, as the appearance of
the attorneys genera of 46 States at the bar of ths Court shows, common nter-
ests, aone can pass such a ta ng measure and they aone n ther wsdom can
grant or wthhod mmunty from edera ta aton of such State actvtes.
The process of consttutona ad|udcaton does not thrve on con|urng up
horrbe possbtes that never happen n the rea word and devsng doctrnes
suffcenty comprehensve n deta to cover the remotest contngency. Nor
need we go beyond what s requred for a reasoned dsposton of the knd of
controversy now before the Court. The restrcton upon States not to make aws
that dscrmnate aganst nterstate commerce s a vta consttutona prncpe,
even though dscrmnaton s not a code of specfcs but a contnuous process
of appcaton. So we decde enough when we re|ect mtatons upon the ta ng
power of Congress derved from such untenabe crtera as propretary aganst
governmenta actvtes of the States, or hstorcay sanctoned actvtes of
Government, or actvtes conducted merey for proft,1 and fnd no restrcton
upon Congress to ncude the States n evyng a ta e acted equay from prvate
persons upon the same sub|ect matter.
udgment affrmed.
Mr. ustce ackson took no part n the consderaton or decson of ths case.
Mr. ustce Rut-edge, concurrng.
I |on n the opnon of Mr. ustce rankfurter and In the resut. I have no
doubt upon the queston of power. The shft from mmunty to ta abty has
gone too far, and wth too much reason to sustan t, as respects both State func-
tonares and State functons, for backtrackng to doctrnes founded n phoso-
phes of soveregnty more current and perhaps more reastc n an earer day.
Too much s, or may be, at stake for the Naton to permt reevng the States of
ther duty to support t, fnancay as otherwse, when they take over ncreasngy
the thngs men have been accustomed to carry on as prvate, and therefore ta -
abe, enterprse . Compettve consderatons unte wth the necessty for securng
the edera revenue, n a tme when the edera burden grows heaver propor-
tonatey than that of the States, to forbd that they be free to undermne rather
than obgated to sustan the Naton s fnanca requrements.
ttempts aong smar nes to sove kndred probems arsng under the Canndnn
and ustraan Consttutons have nso proved a barren process. (See I ond. Intergovern-
menta Immunty: Comparatve Study of the edera System (1941), 20 Iowa L. Rev.,
272 ennedy Wes. The Law of the Ta ng Tower n Canada (1931). 35-37.)
ven where the consttuton of a federa system e pcty deas wth the probem of
Intergovernmenta ta aton, as In raz, tgaton s not escaped and nce dstnctons
have to be made. (See cases arsng under artce 10 of the Consttuton of 1 91 and
under artce 32 of the Consttuton of 1937: ppeacSo cve, No. 2. 4, 13 Rvesta do
Supremo Trbuna, 203 (1917) : ppeacSo cve. No. 2.900, 14 Revsta do Supreme Trbuna.
44 (191 1 ppeaco cve. No. 2.530. 19 evsta do Suprema Trbuna, 76 (1919)
Recuso de nfndado de seguranca No. 017, 56 rchvo udcaro, 3 (1940) gravo de
petcfo. No. .024, 59 rchvo udcaro 5 (19411.) rtce 32 of the Consttuton of
1937. the present razan Consttuton, provdes: The Unon, the States, and the
Muncpates are forbdden: a) to ta goods, ncome, or servces of each
other. Speakng of the earer Consttuton, a commentator notes: These mtatons
on the edera ta ng power are a taken from our own ursprudence, ether by drect
transcrpton from the Consttuton of the Unted States or by the ncorporaton of prn-
cpes ad down In decsons of our the Unted States Supreme Court, as Is the case
wth the ast named prohbton The prohbton aganst ta ng property, revenues,
or servces of the States. ( ames, edera ass of the razan System (1923), 45.)
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290
agree that not a of the former Immunty s gone. or the present I assent
to the mtaton aganst dscrmnaton, whch I take to mean that State functons
may not be snged out for ta aton when others performng them are not ta ed
or for speca burdens when they are. What woud happen f the State shoud
take over a monopoy of tradtonay prvate, ncome-producng busness may
be eft for the future, n so far as ths has not been setted by South Carona v.
Unted States (199 U. S., 437). Perhaps there are other mtatons aso, apart
from the practca one mposed by the State s representaton n Congress. If the
way were open, I woud add a further restrctng factor, not of consttutona
mport, but of constructon.
Wth the passng of the former broad mmunty, I shoud thnk two consdera-
tons we mght be taken to requre that, before a edera ta can be apped to
actvtes carred on drecty by the States, the ntenton of Congress to ta them
shoud be stated e pressy and not drawn merey from genera wordng of the
statute appcabe ordnary to prvate sources of revenue. One of these s smpy
a refecton of the od mmunty, n the presence of whch, of course, t woud be
nconcevabe that genera wordng, such as the statute now n queston contans,
coud be taken as ntended to appy to the States. The other s that, qute apart
from refectons of that mmunty, I shoud e pect that Congress woud say so
e pcty, were ts purpose actuay to ncude State functons, where the ega
-dence of the ta fas upon the State. nd the concurrng opnon of Mr.
ustce radey n Unted States v. atmore f Oho R. R. Co. (17 Wa., 322,
333) ndcates that he may have been of ths genera vew.
Nevertheess, snce South Carona v. Unted States, supra, such a rue of
constructon seems not to have been thought requred. ccordngy, athough
I gravey doubt that when Congress ta ed every person t ntended aso to ta
every State, the rung has been made and I therefore acquesce n ths case.
Mr. Chef ustce Stone, concurrng.
Mr. ustce Reed, Mr. ustce Mukphy, Mr. ustce t|bton and I concur In
the resut. We are of the opnon that the ta here nvoved shoud be sustaned
and the |udgment beow affrmed.
In vew of our decsons n South Carona v. Unted States (190 T . S., 437).
Oho v. everng (292 U. S., 360), everng v. Powers (293 U. S., 214), and
en v. Regents (304 U. S., 439), we woud fnd t dffcut not to sustan the
ta n ths case, even though we regard as untenabe the dstncton between
governmenta and propretary nterests on whch those cases rest to
some e tent. ut we are not prepared to say that the Natona Government may
consttutonay ay a nondscrmnatory ta on every cass of property and actv-
tes of States and ndvduas ake.
Concededy a edera ta dscrmnatng aganst a State woud be an uncon-
sttutona e erton of power over a coe stng soveregnty wthn the same
framework of government. ut our dffcuty wth the formua, now frst sug-
gested as offerng a new souton for an od probem, s that a edera ta whch
s not dscrmnatory as to the sub|ect matter may nevertheess so affect the State,
merey because t s a State that s beng ta ed, as to nterfere unduy wth the
State s performance of ts soveregn functons of government. The counterpart
of such undue nterference has been recognzed snce Marsha s day as the mped
mmunty of each of the dua soveregntes of our consttutona system from
ta aton by the other. McCuoch v. Maryand, 4 Wheat., 316.) We add nothng
to ths formua by sayng, In a new form of words, that a ta whch Congress
appes generay to the property and actvtes of prvate ctzens may not be In
some nstances consttutonay e tended to the States, merey because the
States are ncuded among those who pay ta es on a ke sub|ect of ta aton.
To gve remova of the mmunty the effect of Invertng the Intenton of Congress, n
Its ater use of the same formua, s a eap n constructon onger than seems reasonabe
to make.
Cf. 20 U. S. C. secton 22(a) where Congress has specfcay provded that compensaton
for persona servce, ncudbe n gross ncome, ncudes compensaton for persona servce
as an offcer or empoyee of a State, or any potca subdvson thereof, or any agency or
nstrumentaty of any one or more of the foregong.
Unventu of Inos v. Unted States (2 9 U. S., 4 ) : Oho v. everng (292 . S..
300). (See Manhattan Co. v. make, 14 U. S., 412.) In Oravet v. Sctc York t rtL
O ec c ( 00 U. S., 400. 479, 4S0), the Court sad, n another connecton: It s trw
that the sence of Congress, when t has authorty to speak, may sometmes gve rse t
an Impcaton as to the Congressona purpose. ut there s tte scope for toe
appcaton of that doctrne to the ta mmunty of governmenta Instrumentates.
See Oho v. Icverng, supra.
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291
Mso
If the phrase nondscrmnatory ta s to be taken In Its ong accepted
meanng as referrng to a ta ad on a ke sub|ect matter, wthout regard to
the personaty of the ta payer, whether a State, a corporaton or a prvate
ndvdua, t s pan that there may be nondscrmnatory ta es whch, when
ad on a State, woud nevertheess mpar the soveregn status of the State qute
as much as a ke ta mposed by a State on property or actvtes of the Natona
Government. (Mayo v. Unted Mates, 319 U. S., 441, 447 44 .) Ths s not
because the ta can be regarded as dscrmnatory but because a soveregn
government s the ta payer, and the ta , even though nondscrmnatory, may ba
regarded as nfrngng ts soveregnty.
State may, ke a prvate ndvdua, own rea property and receve ncome.
ut n vew of our former decsons we coud hardy say that a genera non-
dscrmnatory rea estate ta (apportoned), or an ncome ta ad upon
ctzens and States ake coud be consttutonay apped to the State s capto,
ts statehouse, ts pubc schoohouses, pubc parks, or ts revenues from ta es or
schoo ands, even though a rea property and a ncome of the ctzen s
ta ed. If t be sad that prvate ctzens do not own statehouses or pubc
schoo budngs or receve ta revenues, t may equay be sad that prvate
ctzens do not conduct a State-owned quor busness or derve revenue from a
State-owned athetc fed. Obvousy Congress, n ta ng property or ncome
generay, s not ta ng a State as a State because the State happens to own
rea estate or receve ncome. Whether a State or an ndvdua s ta ed, n each
nstance the ta abe occason s the same. The ta reaches the State because
of the Congressona purpose to ay the ta on the sub|ect matter chosen,
regardess of who pays t. To say that the ta fas because the State happens
to be the ta payer s ony to say that the State, to some e tent undefned,
s consttutonay mmune from edera ta aton. Ony when and because
the sub|ect of ta aton s State property or a State actvty must we consder
whether such a nondscrmnatory ta unduy nterferes wth the performance of
the State s functons of government. If t does, then the fact that the ta s non-
dscrmnatory does not save t. If we are to treat as Invad, because dscrmna-
tory, a ta on State actvtes and State-owned property that partake of
unqueness from the pont of vew of ntergovernmenta reatons, t s pan
that the nvadty s due whoy to the fact that t s a State whch s beng
ta ed so as unduy to nfrnge, n some manner, the performance of ts func-
tons as a government whch the Consttuton recognzes as soveregn.
It s enough for present purposes that the Immunty of the State from edera
ta aton woud, n ths case, accompsh a wthdrawa from the ta ng power of
the Naton a sub|ect of ta aton of a nature whch has been tradtonay wthn
that power from the begnnng. Its e ercse now, by a nondscrmnatory ta ,
does not curta the busness of the State government more than t does the ke
busness of the ctzen. It gves merey an accustomed and reasonabe scope to
the edera ta ng power. Such a wthdrawa from a nondscrmnatory edera
ta , and one whch does not bear on the State any dfferenty than on the ctzen,
s tsef an mparment of the ta ng power of the Natona Government, and
the actvty ta ed s such that ts ta aton does not unduy mpar the State s
functons of government. The nature of the ta mmunty reqnres that t be so
construed as to aow to each government reasonabe scope for ts ta ng power.
(Metoaf d ddy v. Mtche, 269 U. S., 514, 524.) The Natona ta ng power
woud be unduy curtaed f the State, by e tendng ts actvtes, coud wthdraw
from t sub|ects of ta aton tradtonay wthn t. (Icyerng v. Pocers, supra,
225 Oho v. everng, supra South Carona v. Unted States, supra, and see
Murray v. Wson Dstng Co., 213 U. S., 151, 173, e panng South Carona v.
Unted States, supra.)
The probem s not one to be soved by a formua, but we may ook to the
structure of the Consttuton as our gude to decson. In a broad sense, the
ta ng power of ether government, even when e ercsed n a manner admttedy
necessary and proper, unavodaby has some effect upon the other. The burden
of edera ta aton necessary sets an economc mt to the practca operaton
of the ta ng power of the States, and vce versa. Ta aton by ether the State
or the edera Government affects n some measure the cost of operaton of
the other.
ut nether government may destroy the other nor curta n any substan-
ta manner the e ercse of ts powers. ence the mtaton upon the ta ng
power of each, so far as It affects the other, must receve a practca constructon
whch permts both to functon wth the mnmum of nterference each wth the
other and that mtaton can not be so vared or e tended as serousy to
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292
Impar ether the ta ng power of the government mposng the ta
or the approprate e ercse of the functons of the government affected hy It.
(Metcaf d ddy v. Mtche, supra, 523-524.)
Snce a ta es must be ad by genera, that Is, workabe, rues, the effect of the
mmunty on the Natona ta ng power s to be determned not quanttatvey but
by ts operaton and tendency n wthdrawng ta abe property or actvtes from
the reach of edera ta aton. Not the e tent to whch a partcuar State engages
In the actvty, but the nature and e tent of the actvty by whomsoever performed
s the reevant consderaton.
Regarded n ths ght we can not say that the Consttuton ether requres or
permts Immunty of the State s mnera water busness from edera ta aton,
or denes to the edera Government power to ay the ta .
Mr. ustce Dougas, wth whom Mr. ustce -ack concurs, dssentng.
L
If South Carona v. Unted States (199 U.S., 437) s to stand, the present
|udgment woud have to be affrmed. or I agree that there s no essenta
dfference between a edera ta on South Carona s quor busness and a ed-
era ta on New York s mnera water busness. Whether South Carona v.
Unted Sates reaches the rght resut s another matter.
Mr. ustce rundes stated that Stare decss s usuay the wse pocy, be-
cnuse n most matters t s more mportant that the appcabe rue of aw be
setted than that t be setted rght. ( urnet v. Coronado O f Oas Co., 2S5
. S., 393, 406.) Rut throughout the hstory of the Court stare decss has had
ony a mted appcaton n the fed of consttutona aw. nd t Is a wse pocy
whch argey restrcts t to those areas of the aw where correcton can be had
by egsaton. Otherwse the Consttuton oses the fe bty necessary f t
s to serve the needs of successve generatons.
I do not beeve South Carona v. Unted States states the correct rue.
State s pro|ect s as much a egtmate governmenta actvty whether t Is trad-
tona, or akn to prvate enterprse, or conducted for proft. (Cf. evcrng v.
Gerhardt. 304 U. ., 405, 426-427 Ct. D. 1343, C. . 1933-1, 246 .) State may
deem t ns essenta to ts economy that t own and operate a raroad, a m, or an
Irrgaton system ns t does to own and operate brdges, street ghts, or a sewage
dsposa pant. What mght have been vewed n an earer day as an mprovdent
or even dangerous e tenson of State actvtes may to-day be deemed ndspens-
abe. ut as Mr. ustce Whte sad n hs dssent n South Carona v. Unted
States, any actvty n whch a State engages wthn the mts of ts poce power
s a egtmate governmenta actvty. ere a State s dsposng of some of ts
natura resources. To-morrow t may ssue securtes, se power from ts pubc
power pro|ect, or manufacture fertzer. ach s an e ercse of ts power of
soveregnty. Must t pay the edera Government for the prvege of e ercsng
that nherent power If the Consttuton grants It mmunty from a ta on the s-
suance of securtes, on what grounds can t be forced to pay a ta when t ses
power or dsposes of other natura resources
n.
One vew, |ust announced, purports to re|ect the dstncton whch South Carona
v. Unted States drew between those actvtes of a State whch are and those
whch are not strcty governmenta, usua, or tradtona. ut t Is sad that a
edera tn on a State w be,sustaned so ong as Congress does not attempt
to ta a State because t s a State. Yet f that means that a edera rea estate
tn of genera appcaton (apportoned) woud be vad If apped to a power
dam owned by a State but nvad f apped to a statehouse, the od doctrne has
merey been poured Into a new contaner. If, on the other hand, any edera ta
on any State actvty were sustaned uness t dscrmnated aganst the State,
then n consttutona rue woud be fashoned whch woud undermne the sov-
eregnty of the States as It has been understood throughout our hstory. ny
such change shoud be accompshed ony by consttutona amendment. The doc-
trne of State mmunty Is too Intrcatey Invoved In pro|ects whch have been
aunched to be whtted down by |udca fat
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293
Msc.
I
Woodrow Wson stated the startng pont for me when he sad10 that the
States of course possess every power that government as ever anywhere e er-
csed, e cept ony those powers whch ther own consttutons or the Consttuton
of the Unted States e pcty or by pan nference wthhod. They are the
ordnary governments of the country the edera Government s ts nstrument
ony for partcuar purposes. The supremacy cause, rtce I, cause 2, appes
to edera aws wthn the powers deegated to Congress by the States. ut t
s antagonstc to the very mpcatons of our edera system to say that the
power of Congress to ay and coect ta es ( rtce I, secton ), ncudes the
power to ta any State actvty or functon so ong as the ta does not dscrmnate
aganst the States. s stated n Unted States v. Raroad Co. (17 Wa., 322,
327-32 ),
The rght of the States to admnster ther own affars through ther egsa-
tve, e ecutve, and |udca departments, n ther own manner through ther own
agences, s conceded by the unform decsons of ths Court and by the practce of
the edera Government from ts organzaton. Ths carres wth t an e empton
of those agences and nstruments, from the ta ng power of the edera Govern-
ment. If they may be ta ed ghty, they may be ta ed heavy f |usty, oppres-
svey. Ther operaton may be mpeded and may be destroyed, f any nter-
ference s permtted.
Can t be that a genera edera ta on the ssuance of securtes woud be
consttutona f apped to the ssuance of muncpa securtes or of State bonds
or of the securtes of pubc utty dstrcts organzed by the States Coud the
States be cassfed wth farmers, busness men, ndustra workers, |udges, and
other ordnary ctzens and requred to pay an ncome ta to the edera Gov-
ernment It s sad that a edera ncome ta on the ta revenues of a State
woud not be sustaned because such a ta woud nterfere wth a soveregn
functon of the State. ut can t be that a edera ncome ta on State revenues
derved not from ta es but from the sae of mnera water, quor, umber and
the ke, woud be sustaned
ta s a powerfu reguatory nstrument. Loca government n ths free and
does not e st for tsef. The fact that oca government may enter the doman of
prvate enterprse and operate a pro|ect for proft does not put t n the cass of
prvate busness enterprse for ta purposes. Loca government e sts to provde
for the wefare of ts peope, not for a mted group of stockhoders. If the ed-
era Government can pace the oca governments on ts ta coector s st, ther
capacty to serve the needs of ther ctzens s at once hampered or curtaed. The
fed of edera e cse ta aton aone s practcay wthout mts. Many State
actvtes are n margna enterprses where prvate capta refuses to venture.
dd to the cost of these pro|ects a edera ta and the soca program may be
destroyed before t can be aunched. In any case, the repercussons of such a
fundamenta change on the credt of the States and on ther programs to take care
of the needy and to bud for the future woud be consderabe. To say the present
ta w be sustaned because t does not mpar the State s functons of govern-
ment s to concude ether that the sae by the State of ts mnera water s not a
functon of government or that the present ta s so sght as to be no burden.
The former obvousy s not true. The atter overooks the fact that the power to
ta ghty Is the power to ta severey. The power to ta s ndeed one of the
most effectve forms of reguaton. nd no more powerfu nstrument for cen-
trazaton of government coud be devsed. or wth the edera Government
mmune and the States sub|ect to ta , the economc abty of the edera Govern-
ment to e pand ts actvtes at the e pense of the States s at once apparent.
That s the resut whether the rue of South Carona v. Unted States be perpetu-
ated or a new rue of dscrmnaton be adopted.
The noton that the soveregn poston of the States must fnd ts protecton n
the w of a transent ma|orty of Congress s foregn to and a negaton of our
Consttutona Government n the Unted States (190 ), pages 1 3-1 4.
s stated n Unted States v. Caforna (297 U. S., 175, 1 4, 1 5), the Immunty of
State nstrumentates from edera ta aton s mped from the nature of our edert
system and the reatonshp wthn t of State and Natona Governments, and s equay
a restrcton on ta aton by ether of the nstrumentates of the other. It went on to
say n |ustfcaton of makng State actvtes sub|ect to the e ercse by Congress of the
commerce power, ut there Is no such mtaton upon the penary power to reguate
commerce. The State can no more deny the power f ts e ercse has been authorzed by
Congress than can an ndvdua.
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294
consttutona system. There w often be vta regona nterests represented by
no ma|orty In Congress. The Consttuton was desgned to keep the baance
between the States and the Naton outsde the fed of egsatve controversy.
The mmunty of the States from edera ta aton s no ess cear because t s
Imped. The States on enterng the Unon surrendered some of ther soveregnty.
It was further curtaed as varous amendments were adopted. ut the tenth
amendment provdes thnt The powers not deegated to the Unted States by th
Consttuton, nor prohbted by t to the States, are reserved to the States respec-
tvey, or to the peope. The Consttuton s a compact between soveregns. The
power of one soveregn to ta another s an Innovaton so startng as to requre
e pct authorty f t s to be aowed. If the power of the edera Government
to ta the States s conceded, the reserved power of the States guaranteed by the
tenth amendment does not gve them the ndependence whch they have aways
been assumed to have. They are reegated to a more serve status. They
become sub|ect to nterference and contro both n the functons whch they e er-
cse and the methods whch they empoy. They must pay the edera Government
for the prvege of e ercsng the powers of soveregnty guaranteed them by the
Consttuton,11 whether, as here, they are dsposng of ther natura resources, or
to-morrow they ssue securtes or perform any other acts wthn the scope of ther
poce power.
Of course, the evyng of the present ta does not curta the busness of the
State government more than t does the ke busness of the ctzen. ut the same
mght be true n the case of many State actvtes whch have ong been assumed to
be mmune from edera ta aton. When a muncpaty acqures a water system
or an eectrc power pant and transmsson factes, t wthdraws pro|ects from
the fed of prvate enterprse. Is the ta mmunty to be dened because a ta on
the muncpaty woud not curta the muncpaty more than t woud the pror
prvate owner Is the muncpaty to be ta ed whenever t engages n an actvty
whch once was n the fed of prvate enterprse and therefore was once ta abe
very e panson of State actvty snce the adopton of the Consttuton mts the
reach of edera ta aton If State Immunty s recogned. Yet none woud con-
cede that the soveregn powers of the States were mted to those whch they
e ercsed n 17 7. Nor can It be sad that f the present ta s not sustaned there
w be wthdrawn from the ta ng power of the edera Government a sub|ect of
ta aton whch has been tradtonay wthn that power from the begnnng. Not
unt South Carona v. Unted States was t hed that so-caed busness actvtes
of a State were sub|ect to edera ta aton. That was after the turn of the pres-
ent century. Thus the ma|or ob|ecton to the suggested test s that t dsregards
the tenth amendment, paces the soveregn States oh the same pane as prvate
ctzens, and makes the soveregn States pay the edera Government for the
prvege of e ercsng the powers of soveregnty guaranteed them by the Consttu-
ton.
That ths dea Is hoste to the vew of the framers of the Consttuton Is evdent
from amton s dscusson of the ta ng power of the edera Government n The
ederast, Nos. 30-36 (Sesqucentenna d., 1C37), pages 1 3-224. e repeatedy
stated that the ta ng powers of the States and of the edera Government were
to be concurrent the ony admssbe substtute for an entre subordnaton,
n respect to ths branch of power, of the State authorty to that of the Unon.
(Pages 202-203.) e aso stated, The Conventon thought the concurrent |urs-
dcton preferabe to that subordnaton and t s evdent that t has at east the
mert of reconcng an ndefnte consttutona power of ta aton n the edera
Government wth an adequate and ndependent power n the States to provde for
ther own necesstes. (Page 209.) On such assurances coud t possby be
thought that the States were so subordnate that ther actvtes coud be ta ed
by the edera Government
In McCuoch v. Maryand (4 Wheat, 316), the Court hed unconsttutona a
State ta on notes of the ank of the Unted States. The statement of Chef
That fact dstngushes those eases where a ctzen seeks ta Immunty because hs
Income was derved from a State or the edera Government. Recognton of such a cam
woud create a prveged cass of ta payers ( everng v. Gerhardt, supra, 416) and
e tend the ta mmunty of the States or the edera Government to prvate ct2ens.
It was In protest to the recognton ot such a dervatve mmunty that Mr. ustce radey
dssented n Coector v. Day (11 Wa., 113, 12 ), where the Court hed unconsttutona
a edera ta on the saary of a |udca offcer of a State. s Mr. ustce radey stated.
No man ceases to be a ctzen of the Unted States by beng an offcer under the State
government. (11 Wa., 12 .) nd see Graves v. O ec e (306 U. S., 466), horfn
thnt .saares of edera empoyees may be consttutonay Incuded n a nondscrmnatory
State Income ta .
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295
Regs. 46 (1932), rt. 15.
ustce Marsha (pages 429-430) s adequate to sustan the case for the recpro-
ca mmunty of the State and edera Governments:
If we measure the power of ta aton resdng n a State, by the e tent of
soveregnty whch the peope of a snge State possesses, and can confer on ts
government, we have an ntegbe standard, appcabe to every case to whch
the power may be apped. We have a prncpe whch eaves the power of ta ng
the peope and property of a Sate unmpared whch eaves to a State the
command of a ts resources, and whch paces beyond ts reach, a those powers
whch arc conferred by the peope of the Unted States on the government of
the Unon, and a those means whch are gven for the purpose of carryng
those powers nto e ecuton. We have a prncpe whch s safe for the States,
and safe for the Unon. We are reeved, as we ought to be, from cashng
soveregnty from nterferng powers from a repugnancy between a rght n one
government to pu down what there s an acknowedged rght n another to
bud up from the ncompatbty of a rght n one government to destroy what
there s a rght n another to preserve. We are not drven to the perpe ng
nqury, so unft for the |udca department, what degree of ta aton s the
egtmate use, and what degree may amount to the abuse of the power.
I .
Those who agreed wth South Carona v. Unted States had the fear that
an e pandng program of State actvty woud dry up sources of edera revenues
and thus crppe the Natona Government. (199 U. S., 454-455.) That was n
1905. That fear s e pressed agan to-day when we have the edera ncome ta ,
from whch empoyees of the States may not cam e empton on consttutona
grounds. everng v. Gernardt, supra.) The fear of deprvng the Natona
Government of revenue f the ta mmunty of the States Is sustaned has no more
pace n the present decson than the specter of socasm, the fear of whch, sad
omes was transated nto doctrnes that had no proper pace n the Const-
tuton or the common aw. 14
There s no showng whatsoever that an e pandng fed of State actvty even
fanty promses to crppe the edera Government n ts search for needed
revenues. If the truth were known, 1 suspect t woud show that the actvty
of the States n the feds of housng, pubc power and the ke have ncreased
the eve of ncome of the peope and have rased the standards of margna or
submargna groups. Such condtons affect favoraby, not adversey, the ta
potenta of the edera Government.
S CTION 619. S L S PRIC . (1932)
Reguatons 46 (1932), rtce 15: ar market 1946-4-12246
prce n case of reta saes, consgnments, etc. Ct. D. 1663
manufacturers e cse ta revenue act of 1032 decson of court.
Toet Preparatons Sae by Manufactures to Parent and Sub-
sdares ar Market Prce Commssoner s Method of De-
termnng Prce ase Deemed Reasonabe.
The ta payer sod ts products to ts parent and two whoy owned
subsdares of the atter at prces ower than those formery charged
by the parent to the trade, and pad ta es on such ower prces.
The Commssoner, actng under the provsons of secton 019(b) (3)
of the Revenue ct of 1932, determned that such saes were at ess
than the far market prce and were not made through an arm s-
ength transacton, and assessed addtona ta es based on prces for
whch such artces were sod n the ordnary course of busness
by the manufacturers or producers thereof. ed: The Comms-
soner dd not err n determnng that 55.5 per cent of the reta prce
s the Soctor Genera of New York ponts out, In the year when South Carona t.
Unted State was decded over one-fourth of the entre annua Income of the edera
Government was derved from ta es on sprts and fermented quors. See nnua Report,
Secretary of the Treasury (1905), panes 7, 2 .
u omes, Coected Lega Papers (1021), 29S.
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Regs. 46 (1932), rt. 15.
296
was the prce at whch such artces are sod by manufacturers or
producers In the ordnary course of trade nor n fang to reduce the
prce base by certan statutory e cusons. When ta es are deter-
mned upon the prce base estabshed by the ta payer Itsef and
such prce refects the far market prce, the ad|ustments requred
by secton 619(a) of the Revenue ct of 1932 are mandatory, but
when the ta payer s own saes prces are ess than the far mnrket
prce and are not the resut of arm s-ength transactons, the Com-
mssoner must use the prce for whch the artces are sod n the
ordnary course of trade, under secton 619(b). The formua used
by the Commssoner n determnng the prce base was far and
reasonabe.
Unted States Crcut Court of ppeas fob the Second Crcut.
. R. Laboratores, Inc., pantff-appeant, v. The Unted States of merca and
oseph T. ggns, Indvduay and an Coector of Interna Revenue for the
Thrd Dstrct of New York, defendants-appeees.
151 ed. (2d), 11 .
ppea from a |udgment of the Dstrct Court for the Southern Dstrct of New York
dsmssng the compant on the merts In a sut to recover e cse ta es pad.
ffrmed.
ugust 20, 1915.
OPINION.
Chase, Crcut udge: When the e cse ta on saes of toet preparatons by
manufacturers took effect on une 21, 1932, eena Rubnsten, Inc., a New
Tork corporaton, became ta abe on Its saes of them by vrtue of secton 603
of the Revenue ct of 1932. or a short tme t added the amount of the ta es
to ts nvoces but then decded to emnate that practce and rembursed ts
customers for the ta es thus passed on by deverng to them addtona goods
whose prce equaed the ta es for whch they had been charged.
ut n ugust, 1932, the corporaton attempted to mnmze ths ta burden.
The pantff was organzed under the aws of New York and eena Rubn-
sten, Inc., transferred to t, n e change for a ts capta stock, the manu-
facturng part of the busness of the parent corporaton. rom September 1,
1(532, throughout the perod nvoved n ths sut the pantff manufactured
and sod to the parent corporaton and to two whoy-owned subsdares of the
atter, eena Rubnsten, Inc., of Washngton and eena Rubnsten, Inc., of
Caforna, products whose saes were ta abe under the above statute. These
saes were made at prces ower than those whch the parent corporaton had
formery charged to the trade, and the e cse ta es on those saes were com-
puted and pad by the pantff on such ower prces.
The Commssoner, actng under the provsons of secton 619(b) (3) of the
1932 ct, determned that those saes by the pantff were at ess than the far
market prce and were not made through an arm s-ength transacton. c-,
cordngy, he assessed addtona ta es computed on prces whch he determned
to e the prces for whch such artces were sod In the ordnary course of
busness by the manufacturers or producers thereof. The pantff pad those
addtona ta es. parta rebate was aowed, but the pantff fed fonf
tmey cams for refund whch together covered the perod from anuary 1,
1934, to ude 30, 1939, and whch were re|ected n fu. Thereafter ths sut
was brought to recover wth Interest from defendant ggns. coector of In-
terna revenue for the thrd dstrct of New York, the sum of 115,203. 2 and
from the Unted States 413,23 .55 whch had been pad to another coector
who thereafter ded.
The pantff orgnay contended both that the Commssoner acked a proper
bass for Invokng secton 619(b) for the assessment of addtona ta es and
that, even f the ta es were assessabe under that secton, not a the e cu-
sons whch shoud have been made under secton 619(a) had been gven effect
n estabshng the prce base for the computaton of the ta es. mong those
Items were e penses whch t camed shoud have been e cuded by vrtue of
the phrase or other charge In the statute but whch were hed n . W. tch
Co. v. Unted States (323 U. S., 5 2 Ct. D. 1625, C. . 1945, 433 ), not to be
e cudbe. The pantff then reduced Its cam accordngy and sought to
recover the remander of 255,347.33 pus Interest at the tra beow, whch was
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Regs. 46 (1932), rt. 15.
by the court wthout a ury. fter fndng the facts the court concuded that no
cause of acton had been proved and dsmssed the compant on the merts.
Ths appea s from that |udgment
The present ssues are (1) whether the prce base for the computaton of
the ta es was erroneousy determned (2) whether evdence was erroneousy
e cuded at the tra (3) whether the pantff proved that t had not passed
on the ta es sought to be recovered and (4) whether the puntff shoud
have been permtted to ntroduce at the tra evdence whch t had not pre-
sented for consderaton by the Commssoner.
The ast pont mentoned s rased by the appeees, who contend here, as
they dd beow, that our decsons n Samara v. Unted States (129 ed. (2d),
504) and Lous . a Co. v. Unted States (14 ed. (2d), 274) are appcabe.
The error, f any, n admttng evdence offered by the appeant for the frst
tme n the court beow Is now urged merey to show the futty of a remand
for another tra de novo and need not be consdered uness the appeant has
shown error whch woud otherwse requre a reversa of the udgment and a
remand. (De Non Cgar Co. v. Unted States, 2 Cr., 146 ed. (2d), 556.)
The appeant does not now contend that saes of ts products to ts parent
and the atter s two subsdares were made ether at the far market prce or
through arm s-ength transactons. In other words, t concedes that the Com-
mssoner propery nvoked the provsons of secton 619(b) n makng the ad-
dtona assessments but cams that In so dong he acted arbtrary and faed
to e cude certan tems of e pense whch secton 019(a) requres to be e -
cuded n determnng the prce ta base under secton 619(b).
The secton ast mentoned reads as foows n so far as now pertnent:
(b) If an artce s (3) sod (otherwse than through an arm s-
cDgth transacton) at ess than the far market prce the ta under ths
tte sha (f based on the prce for whch the artce s sod) be computed on
the prce for whch such artces are sod, n the ordnary course of trade, by
manufacturers or producers thereof, as determned by the Commssoner.
rtce 15 of Treasury Reguatons 46 (1932 d.) provded n part that Where,
for any reason, a manufacturer s sae prce does not propery refect the prce for
whch smar artces are sod at the prce of manufacture or producton n the
ordnary course of trade by manufacturers and the sae Is not an arm s-ength
transacton, the ta sha be computed upon a far market prce.
Purportng to act under the above quoted statute and reguaton, the Comms-
soner consuted manufacturers of ke products as we as the Toet Goods
ssocaton, and aso hed a hearng n Washngton. e determned that t was
the practce n the trade for manufacturers of such products to aow trade ds-
counts of 33 per cent from the Indcated reta prces of the artces and then
an addtona obber s dscount of 16 per cent. s these two dscounts together
were the equvaent of one dscount of 44.5 per cent from the suggested reta
prce, he determned tbat-55.5 per cent of that reta prce was the prce at whch
such artces are sod by the manufacturers or producers thereof, n the ordnary
course of trade. That s caed n ths record the 55.5 formua and t was apped
n assessng the pantffs addtona ta es.
Though the average dscount of the Rubnsten group on outsde saes dd not
Incude any dscount to obbers, snce t made no saes to them, and was 37
per cent off suggested reta prces, the Commssoner gave the pantff the
beneft of the 44.5 per cent dscount whch obtaned generay In the trade, and,
as the tra court found on adequate evdence, made the defcency assessments
n the foowng way:
(1) rom the saes as refected by the books he e cuded nonta abe saes and
the estabshed ta abe saes he reduced by certan statutory deductons but dd
not make any deducton for seng, advertsng and genera or admnstratve
seng e pense as such.
(2) fter determnng that the pantff s estabshed whoesae prce was 63
per cent, or thereabouts, of ts suggested reta prce, he revaued the net ad|usted
ta abe whoesae saes fgures to ICO per cent to ascertan the reta saes vaue
of same.
(3) rom the reta saes vaue thus ascertaned he deducted 44 per cent,
representng dscounts of 33 per cent as average trade dscount and 16 per cent
as average |obber s dscount, thereby estabshng the whoesae far market
vaue of the saes, namey at 55.5 per cent of the suggested reta vaue of the
ta abe saes.
703672 46 20
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Regs. 46 (1932), rt. 15.
29
(4) e computed the ta by appyng the stntntory rates of 10 per cent and
5 per cent.
The appeant, now represented by counse retaned snce the tra beow,
nssts that the Commssoner erroneousy faed to reduce the prce base by
what It cas certan mandatory statutory e cusons, deductons and ad|ustments
whch It desgnates as part of the amount of e cse ta mposed by the ct from
ugust, 193 , to une 30, 1939, transportaton charges, devery charges, bona fde
cash dscounts, rebates, and some aowances. The appeees dspute appeant s
rght to rase those ssues here because they were not put n ssue by the refund
cams or tgated n the court beow. Perhaps they mght be dsposed of on that
technca ground, but we prefer to dea wh them otherwse as they rase an
mportant queston reatng to the admnstraton of ths ta and we thnk the
appeant has msconceved ts rghts as a ta pnyer abe for the ta es assessabe
on the prce base determned under secton 019(b).
The scheme of the statute s to have the ta es ordnary determned upon the
prce base estabshed by the ta payer tsef whenever that prce base refects the
far market prce of the artces. Then the ad|ustments requred by secton
619(a) are ndeed mandatory and must be made as the statute and reguatons
provde. When, however, the ta payer s own saes prces are ess than the far
market prce of the goods sod and are not the resut of arm s-ength transactons,
the Commssoner must use another prce base for computng the ta and that s
the prce for whch such artces are sod, n the ordnary course of trade, by
manufacturers or producers therof, as determned by the Commssoner. (Secton
619(b).) The statute does not undertake to prescrbe how the Commssoner
sha make that determnaton or what factors sha be gven consderaton n
determnng the partcuar manufacturng e penses of the ta payer. When a
ta payer makes t mpossbe for the Commssoner to assess the ta es n accord-
ance wth secton 019(a), they become assessabe not on the ta payer s own
ad|usted prce base but on that of the trade n genera and f the two concde
t s ony by happenstance. To be sure, the Commssoner must determne the
prce base under secton 619(b) (3) fary and wth due consderaton gven to a
thngs requred to enabe hm to arrve at a |ust determnaton. ut uness t
nppears that he has not done so a ta payer can not compan that e cusons whch
secton 619(a) woud have requred to be made, had the saes been at far prces,
were not specfcay made.
The cosmetc ndustry presented the Commssoner wth dffcut ta probems
when t began to make ntergroup changes n ts seng practces after ths e cse
ta took effect. We have prevousy had occason to consder some of them.
(See our|oa, Inc.. v. Me ownn. 2 Cr., 5 ed. (2d), 510 fCt. D. 1242, C. .
1937-2, 502 , certorar dened, 300 U. S., 6 2 Concentrate Mfg. Corporaton v.
ggns, 2 Cr., 90 ed. (2d), 439, certorar dened, 302 U. S., 714 L. T. Prcr.
Inc., v. ocy, 2 Cr., 101 ed. (2d), 6 .) e propery made use of the frst saes
outsde the group as a factor In determnng the prce base for ta aton. ( rtur-
|oa. Inc., v. MvOowan, supra.) e appears to have adopted a far and reason-
abe method for ad|ustng those prces by means of a formua refectng the
genera practce n the trade to arrve at the prce base of secton 619(b). The
tra udge found that the prce as determned by the Commssoner was a far
market prce wthn the meanng of secton 619(b), and we thnk the record on
ths appea bears hm out.
On the merts, therefore, the decson beow was wthout error uness the
fndng |ust mentoned was erroneous because of the e cuson of evdence whch
the appeant sought to ntroduce. It caed an nterna revenue agent to the
stand and, after dentfyng hm as one of the agents who had been engaged n
makng the defcency assessments n sut, nqured of hm as to what he had
done and how the assessments had been made. e was aowed to testfy to
that, but when he referred to the 55.5 formua and was asked to e pan what
ths formua reay means, he reped that he had ony secondary knowedge on
ths, because t was a done n the Commssoner s fnce. fter he further
reped that the 55.5 was determned after we had sent n numerous cases nvov-
ng ths revauaton, and the Commssoner contacted the Toet Goods ssoca-
ton and had numerous conferences wth other ta payers havng the same pont
nvoved, hs answer was nterrupted by the court because the testmony was
hearsay. I pon nqury by the pantff s attorney the |udge nterpreted hs rung
to mean that the wtness coud te what he dd but that hs superor shoud be
caed f you want to fnd out how the formua was arrved at. Nevertheess
the wtness afterwards e paned, n reatng what he had done whe usng the
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299
Regs. 46 (1932), rt. 15.
formua, how the atter was evoved and what was accompshed by ts use as
prevousy stated. pparenty the appeant s tra counse was satsfed wth the
e panaton of the formua thus gven and there s nothng to show that he
attempted to ca any superor of the wtness to prove more about t. Whether
the court was rght or wrong when at frst the evdence was e cuded, the error,
f any, must be consdered harmess after the e panaton of the formua ater
made. We can not assume that the wtness knew more about how t was deve-
oped and used than he was thus permtted to te.
The appeant aso rees on the e cuson of the answer to the foowng ques-
ton put to the same wtness: Now, do you know whether snce that formua
was adopted any other formua was used n ths dstrct n determnng ta es
ut here too the error, f any, was harmess for the cross-e amnaton began
after the e cuson of that answer, nnd after haf a dozen questons had been
answered the wtness was asked f the formua was unform throughout the
trade or unform as apped to unque products manufactured and sod by doube
enttes and hs repy made t cear that t had been unformy apped n makng
defcency assessments ke those n sut.
ccordngy, we fnd no reversbe error and aso fnd t unnecessary to decde
whether or not the fndng that the appeant faed to prove that t had not
passed on the tn : 3 sought to be recovered was aso supported hy the record.
udgment affrmed.
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Regs. 113, 143.30. 300
T ON TR NSPORT TION O PROP RTY.
INT RN L R NU COD .
S CTION 3475, S DD D Y S CTION 620 O T R NU CT
O 1942.
Reguatons 113, Secton 143.30: Transports- 1946-6-12269
ton of property beyond the boundares of Mm. 59 7
the Unted States.
Ta on the transportaton of property Shpments consgned to
rmy and Navy offcers at port or e portaton.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C, ebmary 26, D f.
Coectors of Interna Revenue and Others Concerned:
In some cases the War and Navy Departments requre the ncuson
of the ta on transportaton of property n the prce f ed by a prme
contract (ncudng reated subcontracts) n respect of an e port shp-
ment made under a commerca b of adng consgned to an rmy
or Navy offcer at a port of e portaton. In other cases, the transpor-
taton ta s e pressy e cuded from the contract prce by the terms
of the contract.
n e port shpment made on a commerca b of adng consgned
to an rmy or Navy offcer at a port of e portaton s not e empt
from the transportaton ta where the shpment s made pursuant
to a contract of the War or Navy Department whch e pressy provdes
for ncuson of such ta n the contract prce. In such case, the ta
appes to the amount pad for transportaton of the property and
a. temporary e empton certfcate, orm 79 , may not be fed n eu of
payng the ta .
owever, an e port shpment made on a commerca b of adng
consgned to an rmy or Navy offcer at a port of e portaton s e empt
from the transportaton ta where the shpment s made pursuant to
a contract of the War or Navy Department whch e pressy provdes
for the e cuson of such ta from the contract prce. In that case,
the person payng the transportaton charge may, n eu of payng
the ta , fe wth the carrer an e empton certfcate on orm 79S,
provded the orm 79 s modfed by enterng across the bottom
thereof the foowng statement:
Shpped under prme contract No. whch e cudes transpor-
taton ta .
Where the shpment s made-under a subcontract, ony the number
of the prme contract need be entered on the modfed orm 79 .
The fng of a certfcate of e portaton, orm 799, w not be
requred where a modfed orm 79 s fed pursuant to the provsons
of ths mmeograph.
So much of paragraph No. 3 of the nstructons on orms 79 and
799 (revsed ebruary, 1944) as s nconsstent herewth s revoked,
as of the date of ths mmeograph.
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301
Regs. 113, 143.30.
The provsons of ths mmeograph do not affect the e empton app-
cabe to amounts pad for the transportaton of property shpped on
a Unted States Government b of adng.
Ths mmeograph supersedes Mmeograph 5 77, dated une , 1045
C. . 1945, 444 . prevous rungs nconsstent wth the prov-
sons of ths mmeograph are hereby revoked.
correspondence n reference to ths mmeograph shoud refer
to the symbos MT: M.
os r D. Nunan, r.,
Commssoner.
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Regs. , 319.33. 302
T ON IR RMS.
INT RN L R NU COD .
S CTION 272 . IMPORT TION.
Reguatons , Secton 319.33: Importaton. 1946-7-122 2
T. D. 5501
TITL 26 INT RN L R NU . C PT R I, SU C PT R C, T RT 319
T S R L TING TO M C IN GUNS ND C RT IN OT R IR RMS.
Importaton of frearms Reguatons amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Dstrct Supervsors and Others Concerned:
Secton 319.33 of Reguatons (1941 edton) Part 319, Tte
2(, Code of edera Reguatons, 1941 Supp. s hereby amended to
read as foows:
Sec. 319.33. Importaton. The burden of proof s affrmatvey on any person
mportng or brngng a frearm nto the contnenta Unted States, or, on or
after March 15, 1946, Puerto Rco, the rgn Isands, awa, or aska, to show
to the satsfacton of the Secretary, pror to mportaton (see secton 319.1 d) ,
that the frearm s to be awfuy used and s unque or of a type unobtanabe
wthn the Unted States or such Terrtory or possesson. One desrng to
mport or brng a frearm nto the contnenta Unted States, or, on or after
March 15, 1940, Puerto Rco, the rgn Isands, awa, or aska sha fe
appcaton n dupcate on orm 6 ( rearms) wth the Commssoner of In-
terna Revenue. The appcaton sha show the ntended port or pace of
mportaton and descrbe the frearm ntended for mportaton accuratey and
n deta, ncudng, as far as practcabe, the data Indcated by secton 319.32.
The reasons for the proposed mportaton and the purposes for whch the fre-
arm s ntended must be ceary shown. To |ustfy mportaton t must be sats-
factory demonstrated that the desred frearm s unque or of a type unob-
tanabe wthout Importaton. If unqueness s camed, It must be specfcay
ndcated n what partcuars the frearm s unque. If the appcaton s based
on aeged unobtanabty, the dfferences between the desred frearm and other
frearms of the same genera character obtanabe wthout mportaton must
be ceary shown. The appcant w be notfed of the approva or dsapprova
of the appcaton. If t s approved, the certfcate w be returned to the
appcant to be fed wth the coector of customs at the port of mportaton.
Coectors of customs w not permt reease of the frearm from customs cus-
tody, e cept for e portaton, uness covered by an approved appcaton.
The mportaton of frearms nto the terrtory or possessons of the Unted
States other thnn contnenta Unted States, and, on and after March 15, MI
Puerto Rco, the rgn Isands, awa, and aska w be under the contro of
the governng authortes of such terrtory or possessons. (See secton 319.36.)
ny person Importng or brngng a frearm nto the contnenta Unted States
Is sub|ect to ta upon the subsequent transfer of such frearm, whch ta s add-
tona to any duty upon the mportaton of the frearm. n mporter (see secton
2733(d), I. R. C.) of frearms Is sub|ect to the requrements as to forms nnd
records, the same as a domestc manufacturer.
oseph D. Nunan, r.,
Commssoner of Interna Revenue.
pproved March 14, 1946.
oseph . O Conne, r.
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster March 14, 1946, 3.52 p. m.)
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MISC LL N OUS RULINGS.
S L RY ST ILIZ TION.
1946-9-12302
T. D. 5506
TITL 29 L OR. C PT R III, P RT 1002.1 ST ILIZ TION O S L RI S.
Suppementary reguatons.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
On March , 1946, the Drector of conomc Stabzaton promu-
gated Suppementary Wage and Saary Reguatons pursuant to the
authorty vested n hm by the Stabzaton ct-of 1942, as amended,
and by ecutve Order No. 9250 of October 3, 1942 (7 . R. 7 71),
ecutve Order No. 932 of pr , 1943 ( . R. 46 1), ecutve
Order No. 9599 of ugust 1 ,1945 (10 . R. 10155), ecutve Order
No. 9651 of October 30, 1945 (10 . R. 134 7), ecutve Order No.
9697 of ebruary 14, 1946 (11 . R. 1691), and ecutve Order No.
9699 of ebruary 21,1946 (11 . R. 1929). The purpose of such Sup-
pementary Wage and Saary Reguatons s to carry out the poces
estabshed n ecutve Order No. 9599, ecutve Order No. 9651,
and ecutve Order No. 9697 wth respect to ncreases n wages and
saares and ther reatonshp to prce and rent cengs and costs to the
Unted States. Such Suppementary Wage and Saary Reguatons
desgnate the Commssoner of Interna Revenue as a stabzaton
agency wth respect to saares over whch he e ercsed |ursdcton
on ugust 17, 1945. In the e ercse of the authorty so conferred on
the Commssoner of Interna Revenue, the foowng suppementary
reguatons reatng to saares are hereby promugated to supersede,
n the manner and to the e tent herenafter ndcated, the reguatons
reatng to saares, ssued on September 4. 1943 (T. D. 5295 C. .
1943,1193 , . R. 12429), as amended on September 26, 1944 (T. D.
5406 C. . 1944, 715 ), November 3, 1944 (T. D. 5416 C. . 1944,
717 ), ebruay 2, 1945 (T. D. 5435 C. . 1945, 471 ), pr 5,
1945 (T. D. 5450 C. . 1945, 472 ), uy 9, 1945 (T. D. 5462 C. .
1945,473 ), and anuary 3,1946 (T. D. 54 9 page 30 , ths uetn ).
SU P RT . O N R L PRO ISIONS.
Secton.
1002.101. pproved and unapproved saary Increases.
1002.102. What saary Increases are awfu.
(303)
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Msc.| . 304
SU P RT a TTN PP O I S L RY INCR S S.
Secton.
1002.103. Rght to seek approva after makng ncrease.
SU P RT O. PPRO L O S L RY INCR S S.
1C02.104. Saary ncreases approved wthout appcaton.
1002.105. Saary ncreases approvabe ony on appcaton.
1002.1( . Increases consstent wth ndustry or oca area pattern.
1002.107. Increases to correct gross nequtes.
1( 2.10 . Cost of vng ncreases.
1002.109. Increases to correct substandards of vng.
1002.110. Increases fang wthn standards n effect pror to ugust IS, 1945.
1002.111. greements for condtona saary ncreases.
1002.112. ppcabty.
uthorty: Sectons 1002.101 to 1002.112, ncusve, ssued under 56 Stat., 7Go,
as amended by 57 Stat., 63 5 Stat., 632 and Pubc, No. 10 , Seventy-nnth
Congress, frst sesson: . O. 9250, 7 .It. 7 71, . O. 932 , . It. 96S1, . O. 95.19,
10 . . 10155, . O. 9651, 10 . R. 134 7, . O. 9697, 11 . R. 1691. . O. 9660.
11 . R. 1 )29, Reguatons of the Drector of conomc Stabzaton, dated March
, 1946, 11 . R. 2517.
SU P RT . G N R L PRO ISIONS.
Sec. 1002.101. pproved and Unapproved Saary Increases. s used n
these reguatons, an approved saary ncrease means an ncrense approved n
accordance wth the provsons of Subpart C of these reguatons. n unap-
proved saary ncrease means any other saary ncrease.
Sec. 1002.102. What Saary Increases are Lawfu. Whe the makng of an
unapproved saary ncrease on or after ebruary 14, 1916, s sub|ect to the con-
dtons stated n Subpart of these reguatons, the makng or payment of such
an ncrease s not unawfu, e cept n the foowng case:
(a) The estabshment or payment of a new saary rate n a new pant or
n a new department n an e stng pant n e cess of a saary rate deemed
approved n accordance wth the provsons of subsecton (c) of secton
1002.104 of these reguatons.
The Commssoner of Interna Revenue wth the approva of the Drector of
conomc Stabzaton may, by amendment to ths secton, defne further casses
of saary ncreases whch w be unawfu uness made wth pror approva.
SU P RT . UN PPRO D S L RY INCR S S.
Sec. 1002.103. Rgft to Seek pprova fter Makng Increase. ny empoyer
may make a saary ncrease wthout the pror approva of the Commssoner and
wthout pre|udce to hs rght of appyng for approva of the ncrease thereafter
(and usng t, to the e tent that t s approved, as a bass for seekng an ncrease
n prce cengs or for any other of the purposes descrbed n secton 202 of the
Suppementary Wage and Saary Reguatons of the Drector of conomc Stab-
zaton) f ether:
(a) The empoyer has no present ntenton of usng the ncrease as a bass
for seekng an ncrease n prce cengs or for any other of the purposes
descrbed n secton 202 of the Suppementary Wage and Saary Reguatons
of the Drector of conomc Stabzaton, and so states n a notce descrb-
ng the ncrease fed n dupcate wth the approprate regona offce of the
Saary Stabzaton Unt wthn 30 days after the ncrease s frst refected
n current pay ros or
(6) The ncrease was put nto effect pror to March 15, 1946, or a frm
ngreement or defnte commtment was made by the empoyer before such
date to put t nto effect as of the begnnng of the frst pay-ro perod foow-
ng the date of the agreement, and appcaton for approva s fed wth the
approprate regona offce of the Saary Stabzaton Unt wthn 30 days
after the ncrense s frst refected n current pay ros.
SU P RT C PPRO L O S L RY INCR S S.
Sec. 1002.104. Saary Increases Whch are pproved Wthout urther pp-
caton. cept as provded In secton 1002.102, any saary ncrease of a knd
descrbed n ths secton sha be deemed to be approved for the purposes of these
reguatons wthout the-necessty of fng an appcaton:
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(a) ny saary ncrease whch, pror to ebruary 14, 1946, was approved or
awfuy made wthout approva. saary ncrease w, for purposes of ths
subsecton, be deemed awfuy made wthout approva pror to ebruary 14,
1916, where there was a frm agreement or a defnte commtment by the empoyer
before such date to put a saary Increase nto effect and such ncrease was actuay
put Into effect pror to March 15,1946.
(6) ny ndvdua or other saary ncrease made n accordance wth the terms
and condtons of a saary rate schedue or pan (ncudng a bonus pan) whch
was awfuy In effect before ugust 1 ,1945.
(c) ny saary ncrease made n accordance wth those provsons of sectons
1002.13 and 1002.14 of Treasury Decson 5295, as amended, whch authorzed
ncreases to be made wthout approva.
( t) ny saary ncrease made at any tme n accordance wth and pursuant
to the terms of a governmenta recommendaton n a wage controversy announced
before ebruary 14, 19- 6.
(e) ny saary ncrease made on or after ebruary 14, 1946, by an empoyer
who at the tme the ncrease was put nto effect empoyed not more than eght
empoyees In a snge busness: Provded, however, That the Commssoner of
Interna Revenue may, by amendment to ths subsecton of the reguatons, make
such e cusons from ths e cepton as he may deem necessary to carry out the
purposes of ecutve Order No. 9697.
(f) ny saary ncrease made on or after ebruary 14, 1946, resutng from
the nsttuton of a pan whch provdes for (1) not more than s pad hodays
per year, or (2) e tra payments for nght work, to the e tent that such e tra
payments do not e ceed 5 cents per hour for work on a second shft or 10 cents
per hour for work on a thrd shft, or (3) pad vacatons to empoyees, to the
e tent that such pad vacatons do not e ceed one week for any empoyee havng
competed one year or more of empoyment wth the empoyer and two weeks for
any empoyee havng competed fve or more years of empoyment wth the
empoyer.
(g) ny saary ncrease made In order to correct ntracompany nequtes
occasoned by the grantng of wage or saary ncreases under the terms of a
reguaton or genera order ssued by the Natona Wage Stabzaton oard
under secton 30 (a) of the Suppementary Wage and Saary Reguatons of
the Drector of conomc Stabzaton to the e tent that:
(1) The ncrease n saary of any ndvdua empoyee s not n e cess of
the doars and cents ncrease under such reguaton or genera order of an
equa amount of wages or saary, or, f there be no equa amount of wages
or saary, the ncrease s not n e cess of the doars and cents ncrease of
the ne t ower wages or saary n whch an ncrease s permssbe under
such reguaton or genera order: Provded, however, That any ncrease here-
under sha be reduced by the amount of any genera saary ncrease made
by the empoyer snce ugust 17,1945.
(2) The ncrease s not granted to an empoyee whose saary s In e cess
of 7,500 per annum, and
(3) The Increase n the saary of any ndvdua empoyee s not effectve
pror to the effectve date of such reguaton or genera order.
Increases made under ths subsecton may be apped to saary rate schedues
to the e tent that the mnmums, ma mums, and contro ponts are ncreased
In the same doar amounts as s provded for above n the ense of ndvdua
saary rates.
(h) ny saary ncrease made n accordance wth the provsons of a regua-
ton or genera order Issued by the Commssoner pursuant to secton 30 (a) of
the Suppementary Wage and Saary Reguatons of the Drector of conomc
Stabzaton.
Seo. 1002.105. Saary Increases ppbovabe Ony on ppcaton . saary
Increase whch does not fa wthn one of the casses sted n secton 1002.104
may be approved ony on appcaton. Such an ncrease sha be approved ony
If It fas wthn one or more of the casses of cases descrbed n sectons 1002.106
to 1002.110 and ony to the e tent to whch t s found approvabe under the
terms of those sectons. Upon the approva of a saary ncrease by the Com-
mssoner, such Increase sha be deemed to be approved aso by the conomc
Stabzaton Drector.
Sec. 1002.106. Increases Consstent Wth Industry or Loca rea Pattern.
saary Increase sha be approved whch s found to be consstent wth the
genera pattern of saary ad|ustments whch has been estabshed In a partcuar
ndustry, or In a partcuar ndustry or reated ndustres wthn a partcuar oca
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30G
abor market area, durng the perod betwesn ugust 1 , 1945, and ebruary 14,
1946.
Sec. 1002.107. Increases to Correct Gross Inequtes. In any case n whch t
s found that no appcabe pattern of saary ad|ustments was estabshed durng
the perod between ugust 1 ,1945, and ebruary 14, 1946, a saary ncrease sha
be approved whch s found necessary to emnate a gross nequty between
saares n reated ndustres, reated pants n the same ndustry or ocaty,
or reated |ob cassfcatons n the same pant and whch woud nterfere wth
the effectve transton to a peacetme economy. In determnng whether there
e sts a gross nequty between reated ndustres, wthn the meanng of ths
secton, consderaton sha be gven to the e tent to whch the take-home pay
of the empoyees n the ndustres nvoved has been reduced as a resut of the
transton to n peacetme economy.
Sec 1102.10 . Cost of Lvng Increases. s used n ths secton, the fo-
owng terms sha have the meanngs ndcated:
pproprate unt means a personne of a partcuar empoyer whose sa-
ares are under the |ursdcton of the Commssoner, and whose saares do not
e ceed 10,000 per annum.
Saary means the rate of compensaton per annum, reguary pad, before
deductons of any knd, ncudng bonuses or other addtona compensaton regu-
ary pad, but does not ncude addtona compensaton contngent upon added
hours of work, shft dfferentas, or the ke.
verage saary means the aggregate of a saares, as defned above, of
empoyees n an approprate unt dvded by the number of such empoyees.
ase perod ordnary means the frst pay-ro perod ended n the month
of anuary, 1941.
Comparson perod means the pay-ro perod endng nearest the date of
an appcaton fed under ths secton.
or the purpose of ths secton, t s determned that the cost of vng between
anuary 1, 1941, and September, 1945, has ncreased 33 per cent. Therefore,
n any case n whch t s found that no appcabe pattern of saary ad|ust-
ments was estabshed durng the perod between ugust 1 , 1945, and ebruary
14, 1946, a cost of vng Increase may be approved where the average saary
of the approprate unt has not ncreased by as much as 33 per cent snce anu-
ary, 1941: Provded, That such ncrease s necessary to correct a maad|ustment
whch woud nterfere wth the effectve transton to a peacetme economy.
The fact that the average saary for an approprate unt n the comparson
perod s ess than 133 per cent of such average saary n the base perod w
ordnary, but not necessary, be deemed to estabsh the e stence of the
maad|ustment referred to n ths paragraph.
or e ampe: If the average saary for the base perod s 3,000 and the
average saary for the comparson perod s 3,100, the average saary approv-
abe under ths secton woud be 3,000 1.33, or 3,990. rom 3,990 sub-
tract 3,100 (the comparson perod average saary), eavng S90, whch woud
be the amount of ncrease n the average saary aowabe to brng such average
to the eve comparabe to the ncrease n cost of vng.
In cases where t s necessary to substtute a base perod ater than anuary,
1941, the amount approvabe as a cost of vng saary ncrease w be a saary
ncrease whch resuts n rasng the average saary for the comparson perod
by some percentage ess than 33 per cent above the average saary pad n the
substtute base perod. The amount of the appcabe maad|ustment aowance
to be used n such cases (whch corresponds wth the proportonate amount
of the rse n the cost of vng between any gven substtute base perod and
September, 1945) s ndcated n the tabe set forth at the end of ths secton.
or e ampe: In a case where the substtute base perod fas wthn the month
of pr, 1944, the appcabe maad|ustment aowance w be 4 per cent
nstead of 33 per cent. If the average saary for the substtute base perod s
3,000 and the average saary for the comparson perod s 3,100. the average
saary approvabe under ths secton w be 3,0C0 1.04, or 3,120. rom
3,120 subtract 3,100 (the comparson perod average saary), eavng 20,
whch woud be the amount of ncrease n the average saary aowabe to
brng such average to the eve comparabe to the ncrease n cost of vng.
n appcant for ncreases under ths secton sha submt nformaton to
show the average saary for the base perod and the comparson perod. There
sha aso be submtted, as a part of the appcaton, a statement settng forth
the method under whch the Increase, f approved, w be dstrbuted among
empoyees n the approprate unt.
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307
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pan of dstrbuton whch woud resut n the creaton of nequtes be-
tween empoyees n the approprate unt or between empoyees In that unt and
other empoyees of the partcuar empoyer w not be approved.
No ad|ustment made under ths secton sha be used as a bass for approva
of any other saary ncrease.
Tabe.
ase perod.
ppcabe
maad|ust-
ment
aowance.
anuarv-March, 1941..
pr- une, 1941
uy-September, 1941
October-December, 1941
anuary-March, 1942
pr- une, 1942 -
uy-September, 1942
October-December, 1942
anuary-March, 1943
pr- une, 1943
uy-September, 1943
October-December, 1943
anuary-March, 1944
pr- une, 1944
uv-September, 1944
October-December, 1944
anuary-March, 1945
pr- une, 1945
uy-September, 1945
33
29
25
21
17
14
13
10

6
5
5
5
4
3
2
2
1
0
Sec. 10O2.103. Increases to Coubect Substandards of Lvng. saary In-
crease may be approved whch s found necessary to correct substandards of
vng.
Sec. 1002.110. Increases ang Wthn Standards n ffect Pror to
ugust 1 , 1945. saary ncrease may be approved whch fas wthn one of
the standards n effect on ugust 17, 1945 (e cept the standards reatng to rare
and unusua cases) under whch appcatons for saary ncreases were approved.
Sec 1002.111. greements for Condtona Saary Increases. No consdera-.
ton w be gven to or acton taken upon an appcaton for approva of any
saary ncrease whch appears to be condtoned n whoe or n part upon the
grantng of an ncrease n prce or rent cengs. Ths provson, however, sha
not be a bar to consderaton of an ncrease whch s condtoned upon approva
by the Commssoner, or of an ncrease whch Is not to be put nto effect unt
a determnaton has been made by the Offce of Prce dmnstraton as to whether
an ncrease n prce or rent cengs s requred.
Sec. 1002.112. ppcabty. The reguatons n Subparts , and C super-
sede a prevous reguatons of the Commssoner of Interna Revenue set forth
n Treasury Decson 5295, as amended by Treasury Decson 5406, Treasury
Decson 5416, Treasury Decson 5435, Treasury Decson 5450, Treasury Dec-
son 54( 2, and Treasury Decson 54 9 to the e tent that such prevous reguatons
are nconsstent herewth.
oseph D. Nuna , r.,
Com nssoner of Interna Revenue.
pproved pr 11,1946.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster pr 12,1940,11.42 a. m.)
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30
1946-9-12304
T. D. 5511
tte 20 abor. chapter v, part 1002. stabzaton of saares.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
ffectve as of March 1, 194C, the Deputy Commssoner of the
Saary Stabzaton Unt was desgnated as ead, Saary Stabza-
ton Unt, wthout change n dutes and responsbtes.
ccordngy, wherever the words Deputy Commssoner of the
Saary Stabzaton Unt or words of ke mport appear n the regu-
atons of the Commssoner of Interna Revenue reatng to the stab-
zaton of saares under the ct of October 2, 1942, as amended, en-
tted n ct to amend the mergency Prce Contro ct of 1942,
to ad n preventng nfaton, and for other purposes (Pubc, No. 729,
Seventy-seventh Congress, second sesson 5Gth Stat., 765), n mmeo-
graphs, or n any other memoranda, orders, or forms ssued under
the above-mentoned reguatons, such words sha, on and after March
1, 1946, be read: ead, Saary Stabzaton Unt.
oseph D. Nunan, r.,
Commssoner of Interna Revenue.
pproved pr 26, 1946.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster pr 29, 1946, 4 p.m.)
1946-2-1-2217
T. D. 54 9
tte 29 abor. chapter v. part 1002. stabzaton of saares.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Coectors of Interna Revenue and Other Concerned:
Treasury Decson 5295 C. P . 1943,1193 Part 1002, Tte 29, Code
of edera Reguatons reatng to the stabzaton of saares under
the ct of October 2,1942, s amended as foows:
Paragraph 1. The frst sentence of the frst paragraph of secton
1002.31 s amended to read as foows:
The provsons of these reguatons sha not appy n the case of an empoyer
who empoys eght or ess Indvduas n a snge busness: Provded, however.
That for the effectve admnstraton of the natona wage and saary stabzaton
program, the provsons of these reguatons may be e tended to empoyers of
eght or ess ndvduas and to such e tent as may be deemed necessary.
Par. 2. The second sentence of secton 1002.10 s amended by subst-
tutng a semcoon for the perod at the end thereof, mmedatey
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309
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after the words Genera Reguatons, and addng the foowng,
ndentng the frst ne:
(3) Provded, however, That on and after uy 31,1945, the Commssoner
sha have no authorty to make determnatons of contraventon wth respect
to any saary payments made to personne, both reef and reguar crews,
empoyed on a shps ncudng dry cargo, tankers, barges and towboats
engaged In offshore, coastwse, harbor and nand waterways actvtes
(outsde of the Great Lakes area).
oseph D. Nunan, r.,
Commssoner of Interna Revenue.
pproved anuary 3,1946.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster anuary 3,1946, 3.42 p. m.)
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Regs. 24, 1 0.47, etc.
310
LCO OL T .
Reguatons 24, Sectons 1 0.47,1 0.4 ,
and 1 0.49.
194G-9-12303
T. D. 5505
TITL 26 INT RN L R NU . C PT R I, SU C PT R C, P RT ISO.
LI UORS ND RTICL S ROM PU RTO RICO, IRGIN ISL NDS, ND P ILIP-
PIN ISL NDS.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Dstrct Supervsors and Others Concerned:
Pursuant to the provsons of secton 3360, Interna Revenue Code,
sectons 1 0.47, 1 0.4 , and 1 0.49 of Reguatons 24 (26 C R, Part
ISO) are hereby amended to read as foows:
Sec. 1 0.47. ppcaton, orm 4 7- . ppcaton for permt to shp ta -pad
quors and artces sha be made by the shpper for each consgnment on orm
4 7- , n septupe. the nformaton requred by these reguatons and caed
for by the form sha be furnshed. In addton thereto, the shpper sha note
separatey In Part 1 of such forms the amounts of the basc nterna revenus ta
and rectfcaton ta pad on the merchandse. copes of the form sha b
devered to the nsuar nterna revenue agent who w e ecute hs certfcate
of ta payment thereon and forward a copes to the treasurer wthn suffcent
tme to aow for the ssuance of permt and customs nspecton as provded by
secton 1 0.4 .
Sec. 1 0.4 . Issuance of Permt, orm 4 7- , and Customs Inspecton. If the
appcaton has been propery e ecuted and the treasurer s satsfed that a n-
terna revenue ta es due on the quors or artces covered thereby have been pad,
e w e ecute hs permt on a copes thereof, retan one copy of the form, re-
turn two copes to the shpper and send four copes to the coector of customs
n Puerto Rco. The shpper w submt the two copes of the orm 4 7- to
the coector at east s hours pror to the ntended adng of the merchandse.
The coector w then nspect the merchandse covered by the orm 4 7- after
whch he w e ecute hs certfcate on Part 4 of each copy of orm 4 7- , ndcat-
ng a e ceptons. If dscrepances appear ndcatng dfferences between the
quantty covered by orm 4 7- and the quantty actuay contaned n the shp-
ment or the mproper ta payment of the merchandse, he w wthhod reease of
the shpment and notfy the treasurer of such dscrepances. Thereupon, such ds-
crepances must be corrected n the shppng documents and addtona ta pad,
f requred, pror to reease of the merchandse.
The coector, upon reease of the merchandse for shpment, w retan one
copy of the orm 4 7- , return two copes to the shpper, and forward one
copy to the deputy coector of Interna Revenue at San uan, P. R. e w aso
send two copes to the coector of customs at the port of arrva n the Unted
States, one of whch shoud be maed and the other dspatched on the vesse
concerned for the gudance of the nspector who w hande the cargo. fter
the shpment has been ceared by the coector of customs In Puerto Rco, the
shpper sha retan one copy of the orm 4 7- and send one copy thereof, wth
other shppng documents, to the coector of customs at the port of arrva.
Sec. 1 0.49. cton by Coector of Customs at Port of rrva. Upon re-
cept of orm 4 7- , appcaton and permt to shp ta -pad quors or artces
to the Unted States, bsarng the sworn affdavt of the shpper and the certfca-
ton of the nsuar nterna revenue agent that a the nterna revenue ta es
due on the quors or artces covered thereby have been pad and the copes of
orm 4 7- from the coector of customs n Puerto Rco, the coector of customs
at the port of arrva w nspect the merchandse to determne whether the
mendment of Reguatons 24.
Note. The astersk at the end of sectons refers to secton 3360, Interna Revenue Code.
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311
Regs. 24, 1 0.47, etc.
quantty specfed on the orm 4 7- s contaned n the shpment. e w
e ecute hs certfcate on Part 5 of each copy of orm 4 7- receved and nd-
cate thereon any e ceptons found at the tme of dscharge. If he fnds that the
fu amount of the ta es due has not been pad, he w requre the dfference due
to be pad pror to reease of the merchandse n accordance wth the appcabe
provsons of these reguatons. When the proper nspecton of the merchandse
has been effected and any addtona ta es found to be due on the quors or
artces coected, the merchandse w be reeased. Two of the three copes of
orm 4 7- w be retaned by the coector of customs and w be avaabe
for nspscton by nterna revenue offcers. The other copy w be forwarded to
the deputy coector of nterna revenue at San uan, P. R. The carrer of the
merchandse specfed heren sha at the tme of unadng at the port of arrva
n the Unted States segregate and arrange the cases of quors or artces for
convenent customs e amnaton and w assume any e pense ncurred n
connecton therewth.
oseph D. Nunan, r.,
Commssoner of Interna Revenue.
W. . ohnson,
Commssoner of Customs.
pproved pr 9,1946.
oseph . O Conne, r.,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster pr 10,1940,11.13 a. m.)
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#
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Msc.
312
OL OM RG RIN
1946-2-1221
MS. 291
Schedue of oeomargarne produced and materas used durng the month o
November, 19S, as compared rth November, 19 .
November,
1945.
November.
1944.
Pounds.
39, 242.904
Pounds.
Tota producton of uncoored oeomarparne
52. 0S.S2
Inpredent schedue of uncoored oeomargarne:
39,749, 272
51, f
74
60
160
659,434
200
MS
4 .424
15, 67,444
540
60,303
45
22,709,775
134
6,050
77
.9T
(5LI51
9,21 ,961
Mk
f 10. 12
4 ,543
6, 645. 76
2 ,t 63
1 2.576
276.734
295,29
30.625
1,035,932
1,243.309
25,410
14.05 ,565
4,320
2.700
.116
am
Oeo o
711.529
623.
22 , (ft
56,1
603.4
1.622,4
Sat
Soya hean o
17,125,9
12.105
Taow
9.1 ,
Tota
40. rot, 267
M. 0 5, IN
0.7 3, 25
.2.463.049
Ingredent schedue of coored oeomarcarne:
1,314.116
1, 3.430
utter favor
9

Coor
3,517
176
615.030
10, 374
11
2
5.102
1.103.375
1.319
62,0 7
171,945
MS
Paeety
1,701
606. OW
stcarne
S3
1.215
Lecthn
Ma
Mk
Monostcarne
urn
Oeo o
12,447
222.936
4.045
4,643, 62
1, 106
51.674
37,634
400
401
Pat
mm
urn
Tota
6, 57. 375
1.236.533

fgures are sub|ect to revson unt pubshed In tho Commssooer s annua report.
Of the amount produced, 1 ,361 pounds were reworked.
1 Of the amount produced, 5,621 pounds were reworked.
Of the amount produced, 96 pounds were reworked.
Of the amount produced, 9,003 pounds were reworked.
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313
Msc.
1946-3-12234
MS. 295
Schedue of oeomargarne produced and materas used durng the month of
December, 1945, as compared cth December, 1944.
December,
1945.
Tota producton of uncoorcd oeomargarne..
Tota wthdrawn ta -pad
Pounds.
41, 101,9 2
41. 3 , 957
Ingredent schedue of uncoorcd oeomargarne:
utter favor
Ctrc acd
Corno
Cottonseed o
Cottonseed stearne --
Dervatve of gycerne
Dacety:
stearne
Lecthn
Mk
Mononstearne
Neutra ard -
Oeo o
Ceo stearne..
Oeo stock
Peanut o -
at
Soda (henoate of)
Soya bean o
Soya bean stearne
Taow
tamn concentrate
Tota
Tota producton of coored oeomargarne.
Tota wthdrawn ta -pad
Ingredent schedue of coored oeomargarne:
utter favor
Coor.
Corn o. ..1 ..
Cottonseed o.
Dervatve of gycerne.
Daocty
stearne
Lecthn
Mk
Monostearne..
Neutra ard
Oeo o
Oeo stearne
Oeo stock -
Peanut o -
St
Soda (benoate of)
Soya bean o -
Soya fakes
tamn concentrate
Tota
679
U
615,330
14,415,335
655
S4, 142
74
,5 2
49,674
6, 4, 45
26,139
233.426
22 , 129
290,792
13, 610
1,290,453
1.266,6 5
26,252
16, 331, 10
1, 00
9,596
1,61 ,602
2,500
311
626, 717
4,776
12
510
2,333
535. 570
602
112,566
306, 639
12,940
104, 4.54
1, 20
1,637, 966
1. 0 2
3,350, 25
1 Of the amount produced, 6 277 pounds were reworked.
Of the amount produced, 9,727 pounds were reworked.
Of the amount produced, 24 pounds were reworked.
703672 46 21
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Msc.
314
1946-6-12270
MS. 296
Schedue of oeomargarne produced and matera used durng the month o/
anuary, 1946, as compared wth anuary, 1945.
anuary,
1
Tota producton of uncoored oeomargarne..
Tota wthdrawn ta-pad
Pounds.
45. 521. 26
45.400, 673
Ingredent schedue of uncoored oeomargarno:
utter cuture
utter favor
Ctrc acd
Coor
Corn o
Cottonseed of -
Dervatve o( gycerne
)acety
stearne
Leethn
Mk
Monostearne
Neutra ard
Oeo o
Oeo stcarne
Oeo stock
Peanut o
Sat -
Soda (benoate of)
Soya bean o-
Soya bean stearne
Soya fakes -
Sunfower o
Taow
tamn concentrate
54
434
216
50.SO1
1 , 111. |2
f 5
,620
51, 00
7, 574,190
30,261
154.012
1 3,324
161, 1 4
16.305
1,67 ,1
1,3 9,9 9
20,603
15,7 3.9 4
2.700
9, 54
Tota -
Tota producton of coored oeomargarne.
Tota wthdrawn ta-pad
46,146
2. 577.625
2,243,2 2
Ingredent schedue of coored oeomargarne:
uter favor
Coor
Corn o
Cottonseed fakes
Cottonseed o
Dervatve of gycerne
Daeety
stearne
ecthn
Mk
Monostearne -
Neutra ard -
Oeo o
Oeo stock
Peanut o
Sat
Soda ( enzo te of)
Soya bean o
Soya fakes
tamn concentrate
1.905
959
1,950
6 1.50
4,07
16
97
1,419
441,946
5
19,296
44.524
15,776
1,4 1
70
1,297,9 5
Tota.
Of the amount produced, 3,167 pounds were reworked.
Of the amount produced, 36,902 pounds were reworked.
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315
Msc.
1946- -12294
MS. 297
Schedue of oeomargarne produced and materas used durng the month of
ebruary, 1946, as compared wth ebruary, 1945.
ebruary,
1946.
Tota producton o uncoored oeomargarne
Tota wthdrawn ta -pad _.
Ingredent schedue of uncoored oeomargarne:
utter cuture
utter favor
Ctrc acd
Corn o
Cottonseed o
Dervatve of gycerne.
Pounds.
43, 203, 21
41, 19, 1 2
Oeo o..
Oeo stearne
Oeo stock
Peanut o-
Sat -
Soda (benzoate of)--.
bean o
bean stearne..
7
3 3
205
02(5,
17,394,990
3,245
93
10.52
51,216
7,315,50
30,934
222, 55
24 , 747
1 5, 005
27,674
1,960.021
1,341,193
2 ,54
14, 455,633
tamn concentrate
Tota.
1, 00
,006
Tota producton of coored oeomargarne.
Tota wthdrawn ta -pad
44,009.610
I 2, 299, 355
1. 16. 700
Ingredent schedue of coored oeomargarne:
utter favor
Coor -
Com o
Cottonseed fakes
Cottonseed o
Dervatve of gycerne
Dacety
stearne..-
Lecthn -
Mk
Monostearne -
Neutra ard
Oeo o
Oeo stearne
Oeo stock
Peanut o
Sat
Soda (benzoate oO
Soya bean o
oya bean stearne
Soya fakes
tamn concentrate
22
1, 71
1,7 7
950
63 ,760
3,404
1
3 5
1,646
379, 615
7 4
25, 331
15,066
20. 032
72,90
62
1,149,965
Tota.
2, 320, 465
1 Of the amount produced. 665 pounds were reworked.
1 Of the amount produced, 3,349 pounds were reworked.
1 Of the amount produced, 33 pounds were roworked.
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#
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Msc.
316
1946-10-12313
MS. 29
Schedue of oeomargarne produced and materas used durng the month o/
March, 1946, as compared wth March, 1945.
March, 1946. March, 1945.
Tota producton of uncoored oeomargarne-.
Tota wthdrawn ta-paM
Pounds.
43,675,9 0
43. 423, 75
Ingredent schedue of uncoored oeomargarne:
utter cuture
utter favor
Ctrc acd
Corn o
Cottonseed o
Dervatve of g|cermc
Dseety
stearne
Lecthn -
Mk
Monostearne -
Neutra ard
Oeo o
Oeostearne -
Oeo stock |
Peanut o
at
Soda (benzoate of)
Soya bean o -
Soya bean stearnc -
Soya fakes
Taow -
tamn concentrate
Tota.
Tota producton of coored oeomargarne -
Tota wthdrawn ta -pad
Ingredent schedue of coored oeomargarne:
uter favor
Coor
Corn o.
Cottonseed o
Dervatve of gycerne
Daeety
stenrne
ecthn _
Mk ....
Monostnarno
Neutra ard
Oeo o
Oeo stearno -
Oeo stock
Peanut o _
Sat
Soda (benmate of)
oya bean o
Soya fakes
tamn concentrate...
1 ta.
272
320
220
790.970
17,956,9 2
102,094
91
10.46
63.554
7,495,012
6,2 1
137,243
191,646
10 ,397
25,625
1, 11,594
1,342.355
30.661
14,30 ,332
1, 00
7,520
44,501. 437
3,qp0, 31
1,5 9. 14
11
3.051
,461
533. 570
, 31
2
242
3,667
496,544
S36
30.531
20,065
96,663
1.902
1, 07,95
430
Of the amount produced, 6,030 pounds were reworked.
Of the amount produced, 19,446 pounds were reworked.
Of the amount produced. 30 pounds were reworked.
G
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#
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317
Msc.
1946-12-12330
MS. 299
Schedue of oeomargarne produced and materas used durng the month of pr,
1946, as compared wth pr, 1945.
pr, 1946.
Tota producton of oncoored oeomargarne-
Tota wthdrawn ta -pad.
Ingredent schedue of uncoored oeomargarne:
utter cuture
utter favor
Ctrc acd
Com o...
Cottonseed fakes...
Cottonseed o
Dervatve of gycerne
Dacety..
Mk.
Monostcarne
Neutra ard
Oeo o...
Oeo stearne
Oeo stock
Peanut o..
Sat
Soda (benzoateof)
Soya bean o
Soya bean stearne
Taow
tamn concentrate.
Tota
Tota producton of coored oeomargarne.
Tota wthdrawn ta -pad..
Ingredent schedue of coored oeomargarne:
utter favor _
Coor
Corn o
Cottonseed fakes _
Cottonseed o
Dervatve of gycerne
Dacety
Oeo o
Oeo stearne..
Oeo stock..
Peanut o
Sat
Soda (benzoate of).
Soya bean o
concentrate
Tota..
Pounds.
41,402,650
40, 247,100
1,
551,
16,017,
72,
7,
50.
6,940,
34,
139,
162,
155,
17,
932,
1.2S0,
2 ,
15,944,
42,347, 77
2, 092, 5 5
1,5 9,902
16
1,651
647
3,350
524, 129
3,406
4
291
1,545
333, 295
704
16, 9 9
,492
1 , 14
67, 61
590
1,129, 452
2, 111, 2G3
1 Of the amount produced, ,100 pounds were reworked.
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Regs. , rt. 129. 3.1
TO CCO, SNU , CIG RS, CIG R TT S, TC.
Reguaton s , rtce 129: Customs nspec- 1946-9-12305
ton stamp Cgars. T. D. 5509
TITL 26 INT RN L R NU . C PT R I, SU C PT R C, P RT UN-
T S ON TO CCO, SNU , CIG RS, CIG R TT S, CIG R TT P P RS ND
TU S, ND PURC S ND S L O L TO CCO.
Reguatons amended to conform to the Customs Reguatons
of 1943, as amended by Treasury Decson 51395.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Interna Revenue Reguatons No. Part 140,
Tte 26, Code of edera Reguatons , reatng to the ta es on tobacco,
snuff, cgars, and cgarettes, aso on cgarette papers and tubes and
purchase and sae of eaf tobacco, to secton 11.1 (b) and (c) of Cus-
toms Reguatons of 1943 Part II, Tte 19, Code of edera Regu-
atons, Cum. Sup. , as amended by (Customs) Treasury Decson
51395, approved anuary 25, 1946, but ony as prescrbed and made
appcabe to the Interna Revenue Code by Treasury Decson 4 5,
approved ebruary 11,1939 C. . 1939-1 (Part 1), 396 Chapter I.
note, Tte 26, Code of edera Reguatons, Cum. Sup. , such Interna
Revenue Reguatons are amended as foows:
rtce 129 secton 140.129 of such Tte 26 s amended to read as
foows:
rt. 129. Customs Inspecton Cgars and Coarettes. No cgars or cga-
rettes are aowed to be removed from customs pubc store or bonded warehouse
n whch they are requred to be paced on mportaton unt they have been n-
spected. Customs nspecton stamps sha not be aff ed, e cept n the case of
cgars and cgarettes entted to entry as returned domestc products, as provded
n artce 133.
(Ths Treasury Decson s ssued under the authorty contaned n
secton 3791 of the Interna Revenue Code (53 Stat., 467 26 U. S. C.
1940 ed., 3791).)
oseph D. Nunan, r.,
Commssoner of Interna Revenue.
pproved pr 22, 1946.
oseph . O Conne, r.,
ctng Secretary of the Trtasury.
( ed wth the Dvson of the edera Regster pr 23, 1946,11.09 a. m.)
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319 Msc.
TO CCO.
1946-2-12219
T. 153
Statement of manufactured tobacco produced, by casses, durng the month of
October, 1945, as compared wth October, 1944-
October, 1945.
October, 1944.
Pug _
Pounds.
5, 606.151
634,094
373.510
3.624,567
16. 49,14
4.00 ,973
Pounds.
5,365.1 2
609, 13
347,590
6,014,670
15,490.617
3, 0 , 35
Twst
Scrap chewng
Snuff.
Tota
31.090,443
30,636,707
1946-2-12221
T. 154
Statement of manufactured tobacco produced, hu casses, durng the month of
November, 1945, as compared wth November, 1944-
November,
1945.
November,
1944.
Pug.
Pounds.
4,702.663
513.294
391.735
2,957,364
14.615.503
3.427,237
Pounds.
5,6 7,205
566,641
370.62
4,720.304
16, 973.140
3. 49,754
Twst
Tota
26,607.796
32,167,672
1946-5-1225
T. 156
Statement of manufactured tobacco produced, by casses, durng the month of
December, 1945, as compared wth December, 1944-
December,
1945.
December,
1944.
Pug
Pounds.
3,065, 15
334.764
27 ,633
,0 0,319
6,953, 36
2,952, 03
Pounds.
4, 776.167
499,4 3
341, 326
4,207,457
13.933,506
3,2 0,915
Twst -
Snuff
Tota
16, 655,170
27,03 , 54
fgures are sub|ect to revson unt pubshed n the Commssoner s annua report.
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Msc.
320
1946-7-122 3
T.153
Statement of manufactured tobacco produced, by casses, durng the month of
anuary, 1946, as compared wth anuary, 1945.
anuary,
anuary,
1946.
1945.
Pounds.
Pounds.
4,106,42
5,114 . O
422, 91
2.209
331,055
37ZS5
3,975, 36
4.531.S54
7.979. 352
15.095.743
3,705,653
4,072,536
20, 521, 215
29.769,500
Pug
Twst
no-cnt chewng
Scrap chewng
Smokng
6nuf
Tota
1946-10-12314
T. 160
Statement of manufactured tobacco produced, by casses, durng the month of
ebruary, 1946, as compared wth ebruary, 1945.
ebruary,
194 .
ebruary,
1945.
Pounds.
4,317, 259
465,933
261, 14
3,94 ,370
5.943,6 2
3,127.632
Pounds.
pug
4,449.921
625,73
309.2S
Twst -
4,216.235
13.404.1SS
3.516.03S
1 ,064,690
26,421.452
Statement of manufactured tobacco produced, by casses, durng the month o
March, 1946, as compared wth March, 1945
1940-12-12331
T. 162
March, 1946.
March. 1945.
Pug
Pounds.
4,372,7 3
507,651
2 1,904
4,099.100
6.3 6.133
3, 419,146
Pounds.
5,416,450
623.617
329,565
4,563.7 2
14,757, S
4.213.S34
Twst
Snu
Tota
19,066,716
29.904.S31
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321
Msc.
CIG R TT S
1946-1-1220
T. 152
Premnary statement of sma cgarettes removed for consumpton durng the
month of November, 1045, as compared wth removas for the same month of
Removas.
November, 1945.
November, 1944.
Ta-pad
Tun 6 r.
24,99 , 9 ,770
1, 34 . 423, 7 4
Number.
20, 461, 6 . 51
9,35 . 727, 29
Tota
26, 347, 322, 554
29, 20,595, 16
1946-2-12222
T. 155
Premnary statement of sma cgarettes removed for consumpton durng the
month of December, 1945, as compared wth removas for the same month of
1944.
Removas.
December, 1945.
December, 1944.
T -pad
Number.
17,049,377, 20
1. 466, 454, 943
Number.
17,3 7,713.573
. 03,414,7 3
Tu-free _
Tota
1 ,515, 32,151
26.191,12 , 353
1946-5-12259
T. 157
Premnary statement of sma cgarettes removed for consumpton durng the
month of anuary, 1946, as compared wth removas for the same month of
1945.
Removas.
anuary, 1940.
anuary, 1945.
Ta-pad
Number.
24,75 ,402,242
2,2 2.721,162
Number.
20,419,9.3 ,567
9,507, 0), 960
Ta-tree
Tota
27,041,123, 404
29,927,74 ,527
fgures are sub|ect to revson unt pubshed In the Commssoner s annua report.
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Msc.
322
1946-7-122 4
T. 159
Premnary statement of smat cgarettes removed for consumpton durng te
month of ebruary, 191)6, as compared wth, removas for the same month
of 1945.
Removas.
ebruary, 1946.
ebruary, IMS.
Ta -pnd
Number.
23,922,477. S16
1,737,467, 0
vmber.
16,705.096,6 5
10,067,711, 34
Tota
25,059,945,390
26 792, 0 ,51
1946-10-12315
T. 161
Premnary statement of sma cgarettes removed for consumpton durng the
_ month of March, 1946, as compared wth removas for the same month of 19)5.
Removas.
March, 1946.
March, 1945.
Ta -pad
Number.
26,251, 109,644
2,396,170,342
Number.
1 , 164.656,5
11.59 ,367.919
Tota
2 ,047,369,936
29,763,024,50
1946-12-12332
T.163
Premnary statement of sma cgarettes removed for consumpton durng the
month of pr, 1946, as compared wth removas for the same month of 1945.
Removas.
pr, 1940.
pr, 1915.
Number.
25, 5 6, 52 , 29
3.3 ,249, 67
Number.
17,512,345,3 4
9,501,979, 9
Tota
2 ,974,77 ,696
27,014,325,276
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323
L GISL TION.
1946-2-12220
. R. 44 9. PU LIC L W 291, S NTY-NINT CONGR SS
C PT R 652, IRST S SSION .
n ct To e tend certan prveges, e emptons, and Immuntes
to nternatona organzatons and to the offcers and empoyees
thereof, 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
Secton 1. or the purposes of ths tte, the term nternatona
organzaton means a pubc nternatona organzaton n whch the
Unted States partcpates pursuant to any treaty or under the
authorty of any ct of Congress authorzng such partcpaton or
makng an appropraton for such partcpaton, and whch sha have
been desgnated by the Presdent through approprate ecutve
order as beng entted to en|oy the prveges, e emptons, and
mmuntes heren provded. The Presdent sha be authorzed, n
the ght of the functons performed by any such nternatona
organzaton, by approprate ecutve order to wthhod or wth-
draw from any such organzaton or ts offcers or empoyees any
of the prveges, e emptons, and mmuntes provded for.n ths
tte (ncudng the amendments made by ths tte) or to condton
or mt the en|oyment by any such organzaton or ts offcers or
empoyees of any such prvege, e empton, or mmunty. The
Presdent sha be authorzed, f n hs |udgment such acton shoud
be |ustfed by reason of the abuse by an nternatona organzaton
or ts offcers and empoyees of the prveges, e emptons, and m-
muntes heren provded or for any other reason, at any tme to
revoke the desgnaton of any nternatona organzaton under ths
secton, whereupon the nternatona organzaton n queston sha
cease to be cassed as an nternatona organzaton for the purposes
of ths tte.
Sec. 2. Internatona organzatons sha en|oy the status, mmun-
tes, e emptons, and prveges set forth n ths secton, as foows:
(a) Internatona organzatons sha, to the e tent consstent wth
the nstrument creatng them, possess the capacty
() to contract
() to acqure and dspose of rea and persona property
() to nsttute ega proceedngs.
(b) Internatona organzatons, ther property and ther assets,
wherever ocated, and by whomsoever hed, sha en|oy the same
mmunty from sut and every form of |udca process as s en-
|oyed by foregn governments, e cept to the e tent that such organ-
zatons may e pressy wave ther mmunty for the purpose of
any proceedngs or by the terms of any contract.
(c) Property and assets of nternatona organzatons, wherever
ocated and by whomsoever hed, sha be mmune from search, uness
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324
such mmunty be e pressy waved, and from confscaton. The
archves of nternatona organzatons sha be nvoabe.
(d) Insofar as concerns customs dutes and nterna-revenue ta es
mposed upon or by reason of mportaton, and the procedures n
connecton therewth the regstraton of foregn agents and the
treatment of offca communcatons, the prveges, e emptons, and
mmuntes to whch nternatona organzatons sha be entted sha
be those accorded under smar crcumstances to foregn governments.
Sec. 3. Pursuant to reguatons prescrbed by the Commssoner
of Customs wth the approva of the Secretary of the Treasury, the
baggage and effects or aen offcers and empoyees of nternatona
organzatons, or of aens desgnated by foregn governments to
serve as ther representatves n or to such organzatons, or of the
fames, sutes, and servants of such offcers| empoyees, or repre-
sentatves sha be admtted (when mported n connecton wth the
arrva of the owner) free of customs dutes and free of nterna-
revenue ta es mposed upon or by reason of mportaton.
Sec. 4. The Interna evenue Code s hereby amended as foows:
(a) ffectve wth respect to ta abe years begnnng after De-
cember 31, 1943, secton G(c), reatng to the e cuson from gross
ncome of ncome of foregn governments, s amended to read as
foows:
(c) Income of oregn Governments and of Intebnatona, Organzatons
The ncome of foregn governments or nternatona organzatons receved
from nvestments n the Unted States n stocks, bonds, or other domestc
securtes, owned by such foregn governments or by nternatona organzatons,
or from nterest on deposts n banks In the Unted States of moneys beongng
to such foregn governments or nternatona organzatons, or from any other
source wthn the Unted States.
(b) ffectve wth respect to ta abe years begnnng after De-
cember 31, 1943, secton 116(h)(1), reatng to the e cuson from
gross ncome of amounts pad empoyees of foregn governments, s
amended to read as foows:
(1) Rue fob e cuson. Wages, fees, or saary of any empoyee
of a foregn government or of an nternatona organzaton or of the
Commonweath of the Phppnes (Incudng a consuar or other offcer,
or a nondpomatc representatve), receved as compensaton for offca
servces to such government, nternatona organzaton, or such Common-
weath
( ) If such empoyee s not a ctzen of the Unted States, or s a
ctzen of the Commonweath of the Phppnes (whether or not a ctzen
of the Unted States) and
( ) If, n the case of an empoyee of a foregn government or of the
Commonweath of the Phppnes, the servces are of a character smar
to those performed by empoyees of the Government of the Unted States
n foregn countres or n the Commonweath of the Phppnes, as the
case may be. and
(C) If, n the case of an empoyee of a foregn government or the
Commonweath of the Phppnes, the foretgn government or the Common-
weath grants an equvaent e empton to empoyees of the Government of
the Unted States performng smar servces In such foregn country or
such Commonweath, as the case may be.
(c) ffectve anuary 1, 1946, secton 1426(b), defnng the term
empoyment for the purposes of the edera Insurance Contrbu-
tons ct, s amended (1) by strkng out the word or at the end
of paragraph (14), (2) by strkng out the perod at the end of para-
graph (15) and nsertng n eu thereof a semcoon and the word
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u or , and (3) by nsertng at the end of the subsecton the foowng
new paragraph:
(1C) Sen-ce performed n the empoy of an nternatona organzaton.
(d) ffectve anuary 1, 1946, secton 1607(c), defnng the term
empoyment for the purposes of the edera Unempoyment Ta
ct, s amended (1) by strkng out the word or at the end of
paragraph (14), (2) by strkng out the perod at the end of paragraph
(15) and nsertng n eu thereof a semcoon and the word or , and
(3) by nsertng at the end of the subsecton the foowng new para-
graph:
(16) Servce performed n the empoy of an nternatona organzaton.
(e) Secton 1621(a)(5), reatng to the defnton of wages for
the purpose of coecton of ncome ta at the source, s amended by
nsertng after the words foregn government the words or an
nternatona organzaton .
(f) Secton 3466(a), reatng to e empton from communcatons
ta es s amended by nsertng mmedatey after the words the Ds-
trct of Coumba a comma and the words or an nternatona
organzaton .
(g) Secton 3469(f)(1), reatng to e empton from the ta on
transportaton of persons, s amended by nsertng mmedatey after
the words the Dstrct of Coumba a comma and the words or
an nternatona organzaton
(h) Secton 3475(b)(1), reatng to e empton from the ta on
transportaton of property, s amended by nsertng mmedatey after
the words the Dstrct of Coumba a comma and the words or
an nternatona organzaton .
() Secton 3797(a), reatng to defntons, s amended by addng
at the end thereof a new paragraph as foows:
(1 ) Internatona organzaton. The term nternatona organza-
ton means a pubc nternatona organzaton entted to en|oy prveges,
e emptons, and mmuntes as an nternatona organzaton under the
Internatona Organzatons Immuntes ct.
Sec. 5. (a) ffectve anuary 1, 1946, secton 209(b) of the Soca
Securty ct, defnng the term empoyment for the purposes of
tte II of the ct, s amended (1) by strkng out the word or at
the end of paragraph (14), (2) by strkng out the perod at the end of
paragraph (15) and nsertng n eu thereof a semcoon and the
word or , and (3) by nsertng at the end of the subsecton the
foowng new paragraph:
(16) Servce performed n the empoy of an Internatona organzaton
entted to en|oy prveges, e emptons, and mmuntes as an nternatona
organzaton under the Internatona Organzatons Immuntes ct.
(b) No ta sha be coected under tte III or I of the Soca
Securty ct or under the edera Insurance Contrbutons ct or
the edera Unempoyment Ta ct, wth respect to servces ren-
dered pror to anuary 1,1946, whch are descrbed n paragraph (16)
of sectons 1426(b) and 1607(c) of the Interna evenue Code, as
amended, and any such ta heretofore coected (ncudng penaty
and nterest wth respect thereto, f any) sha be refunded n accord-
ance wth the provsons of aw appcabe n the case of erroneous
or ega coecton of the ta . No nterest sha be aowed or pad
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326
on the amount of any such refund. No payment sha be madd under
tte II of the Soca Securty ct wth respect to servces rendered
pror to anuary 1, 194G, whch are descrbed n paragraph (1C) of
secton 209 (b) of such ct, as amended.
Sec. 6. Internatona organzatons sha be e empt from a prop-
erty ta es mposed by, or under the authorty of, any ct of Congress,
ncudng such cts as are appcabe soey to the Dstrct of Coumba
or the Terrtores.
Sec. 7. (a) Persons desgnated by foregn governments to serve a
ther representatves n or to nternatona organzatons and the
offcers and empoyees of such organzatons, and members of the mme-
date fames of such representatves, offcers, and empoyees resd-
ng wth them, other than natonas of the Unted States, sha, nsofar
as concerns aws reguatng entry nto and departure from the Unted
States, aen regstraton and fngerprntng, and the regstraton of
foregn agents, be entted to the same prveges, e emptons, and
mmuntes as are accorded under smar crcumstances to offcers
and empoyees, respectvey, of foregn governments, and members of
ther fames.
(b) Representatves of foregn governments n or to nternatona
organzatons and offcers and empoyees of such organzatons sha
be mmune from sut and ega process reatng to acts performed by
them n ther offca capacty and fang wthn ther functons as
such representatves, offcers, or empoyees e cept nsofar as such
mmunty may be waved by the foregn government or nternatona
organzaton concerned.
(c) Secton 3 of the Immgraton ct approved May 26, 1924, as
amended (U. S. C, tte , sec. 203), s hereby amended by strkng
out the perod at the end thereof and nsertng n eu thereof a comma
and the foowng: and (7) a representatve of a foregn govern-
ment n or to an nternatona organzaton entted to en|oy prv-
eges, e emptons, and mmuntes as an nternatona organzaton
under the Internatona Organzatons Immuntes ct, or an aen
cffcer or empoyee of such an nternatona organzaton, and the
famy, attendants, servants, and empoyees of such a representatve,
offcer, or empoyee
(d) Secton 15 of the Immgraton ct approved May 26, 1924, as
amended (U. S. C, tte , sec. 215), s hereby amended to read as
foows:
Sec. 15. The admsson to the Unted States of an aen e cepted from the
cass of mmgrants by cause (1), (2), (3), (4), (5), (C), or (7) of secton 3.
or decared to be a nonquota mmgrant by subdvson (e) of secton 4, sha
be for such tme and under such condtons as may be by reguatons prescrbed
(ncudng, when deemed necessary for the casses mentoned In cause (2), (3),
(4). or (G) of secton 3 and subdvson (e) of secton 4, the gvng of bond wth
suffcent surety, n such sum and contanng such condtons ns may be by
reguatons prescrbed) to nsure that, at the e praton of such tme or upon
faure to mantan the stntus under whch admtted, he w depart from the
Unted States: Provded. That no aen who has been, or who may hereafter
be, admtted nto the Unted States under cause (1) or (7) of secton 3. as
an offca of a foregn government, or ns a member of the famy of such ffca.
or as a representatve of a foregn government n or to an nternatona organza-
ton or nn offcer or empoyee of an nternatona organzaton, or as a member
of the famy of such representatve, offcer, or empoyee, sha be requred to
depart from the Unted States wthout the approva of the Secretary of State.
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Sec. . (a) No person sha be entted to the benefts of ths tte
uness he (1) sha have been duy notfed to and accepted by the
Secretary of State as a representatve, offcer, or empoyee or (2)
sha have been desgnated by the Secretary of State, pror to forma
notfcaton and acceptance, as a prospectve representatve, offcer, or
empoyee or (3) s a member of the famy or sute, or servant, of
one of the foregong accepted or desgnated representatves, offcers,
or empoyees.
(b) Shoud the Secretary of State determne that the contnued
presence n the Unted States of any person entted to the benefts of
ths tte s not desrabe, he sha so nform the foregn government
or nternatona organzaton concerned, as the case may be, and after
such person sha have had a reasonabe ength of tme, to be deter-
mned by the Secretary of State, to depart from the Unted States,
he sha cease to be entted to such benefts.
(c) No person sha, by reason of the provsons of ths tte, be
consdered as recevng dpomatc status or as recevng any of the
prveges ncdent thereto other than such as are specfcay set forth
heren.
Sec. 9. The prveges, e emptons, and mmuntes of nternatona
organzatons and of ther offcers and empoyees, and members of
ther fames, sutes, and servants, provded for n ths tte, sha be
granted notwthstandng the fact that the smar prveges, e emp-
tons, and mmuntes granted to a foregn government, ts offcers,
or empoyees, may be condtoned upon the e stence of recprocty
by that foregn government: Provded, That nothng contaned n
ths tte sha be construed as precudng the Secretary of State from
wthdrawng the prveges, e emptons, and mmuntes heren pro-
vded from persons who are natonas of any foregn country on the
ground that such country s fang to accord correspondng prveges,
e emptons, and mmuntes to ctzens of the Unted States.
Sec. 10. Ths tte may be cted as the Internatona Organzatons
Immuntes ct .
TITL II
Sec. 201. tenson of Tme for Camng Credt or Refund
Wth Respect to War Losses.
If a cam for credt or refund under the nterna revenue aws
reates to an overpayment on account of the deductbty by the ta -
payer of a oss n respect of property consdered destroyed or sezed
under secton 127(a) of the Interna Revenue Code (reatng to war
osses) for a ta abe year begnnng n 1941 or 1942, the three-year
perod of mtaton prescrbed n secton 322(b) (1) of the Interna
Revenue Code sha n no event e pre pror to December 31, 194C.
In the case of such a cam fed on or before December 31, 1946, the
amount of the credt or refund may e ceed the porton of the ta pad
wthn the perod provded n secton 322(b) (2) or (3) of such code,
whchever s appcabe, to the e tent of the amount of the overpay-
ment attrbutabe to the deductbty of the oss descrbed n ths
secton.
Sec. 202. Contrbutons to Penson Trusts.
(a) Deductons for the Ta abe Year 1942 Under Pror Income
Ta cts. Secton 23(p) (2) of the Interna Revenue Code s
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amended by strkng out the words anuary 1,1943 and nsertng n
eu thereof anuary 1.1942 , and by strkng out the words Decem-
ber 31,1942 and nsertng n eu thereof December 31,1941 .
(b) ffectve Date. The amendment made by ths secton sha
be appcabe as f t had been made as a part of secton 162(b) of
the Revenue ct of 1942.
Sec. 203. Petton to The Ta Cofrt of the Unted States.
(a) Tme for ng Petton. The second sentences of sectons
272(a)(1), 732(a), 71(a)(1), and 1012(a)(1), respectvey, of the
Interna Revenue Code are amended by strkng out the parenthetca
e presson appearng theren and nsertng n eu thereof the foow-
ng: (not countng Saturday, Sunday, or a ega hoday n the
Dstrct of Coumba as the nneteth day) .
(b) ffectve Date. The amendments made by khs secton sha
take effect as of September ,1945.
pproved December 29,1945.
. 1946-7-122 5
. R. 234S. PU UC L W 320, S NTY-NINT CONGR SS
C PT R 1, S COND S SSION .
n ct To provde for the coverage of certan drugs under the
edera narcotc aws.
e t enacted by the Senate and ome of Representatves of the
Unted States of merca n Congress assembed, That secton 322
of the Interna Revenue Code (contanng defntons of terms used
for purposes of certan provsons reatng to narcotcs) s amended
by addng the foowng new subsecton (f) at the end thereof:
(f) Opate. The word opate as used n ths part and subchapter of
chapter 23 sha mean any drug (as denned n the edera ood, Drug, and Cos-
metc ct) found by the Secretary of the Treasury, after due notce nnd oppor-
tunty for pubc hearng, to have an addcton-formng or addcton-sustanng
abty smar to morphne or cocane, and procamed by the Presdent to have
been so found by the Secretary. The Secretary Is authorzed to ssue nec-
essary rues and reguatons for carryng out the provsons of ths subsecton,
and to confer or mpose upon any offcer or empoyee of the Treasury Department,
as he sha desgnate or appont, the duty of conductng any hearng authorzed
hereunder.
Sec. 2. Secton 2550(a) of the Interna Revenue Code (ta on
certan substances) s amended by nsertng after the phrase eved,
assessed, coected, and pad upon opum, sonpecane, coca eaves,
the word opate, .
Sec. 3. Paragraphs 5 and 6 of secton 2557(b) (penates for vo-
atons of certan provsons reatng to narcotcs) are hereby
amended by nsertng n each mmedatey foowng the wo ds or
consprng to se, mport, or e port, opum, coca eaves, cocane,
sonpecane, the word opate, by deetng n each the word or
from the phrase preparaton of opum, coca eaves, cocane, or
sonpecane, and by nsertng n each mmedatey foowng such
phrase the words or opate, .
Sec. 4. The frst sentence of secton 255 (b) of the Interna Reve-
nue Code (provdng for confscaton and dsposa of sezed nar-
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329
cotcs) s hereby amended by nsertng mmedatey after the words
opum, coca eaves, sonpecane, the word opates, and by
deetng the word and before the word sonpecane n the phrase
a sats, dervatves, and preparatons of opum, coca eaves, and
sonpecane, and nsertng mmedatey foowng such phrase the
words and opates, .
Sec. 5. Secton 2565 of the Interna Revenue Code (cross-refer-
ence to defntons) s hereby amended by addng at the end thereof
the foowng:
Opate.
Subsecton (f).
Sec. 6. The frst paragraph of secton 3220 of the Interna Reve-
nue Code (occupatona ta es) s hereby amended by strkng out the
word or n the phrase gves away opum, coca eaves, or sonpe-
cane, and nsertng mmedatey foowng such phrase the words
or opate, .
Sec. 7. Secton 1(a) of the Narcotc Drugs Import and port
ct, as amended (U. S. C, 1940 edton, tte 21, sec. 171), s amended
by nsertng after the phrase The term narcotc drugs means opum,
coca eaves, cocane, sonpecane, the word opate, by deetng
the word or from the words preparaton of opum, coca eaves,
cocane, or sonpecane and nsertng the words or opate : and by
strkng out the perod at the end thereof and nsertng the foowng:
and the word opate as used heren sha have the same meanng
as defned n secton 322 (f) of the Interna Revenue Code.
Sec. . Sectons 1 and 2 of the ct of ugust 12,1937, as amended,
entted n ct to ncrease the punshment of second, thrd, and
subsequent offenders aganst the narcotc aws (ch. 59 , 50 Stat. 627
U. S. C, 1940 edton, tte 21, sees. 200 and 200a), are hereby amended
by nsertng n each mmedatey foowng the words or consprng
to se, mport, or e port, opum, coca eaves, cocane, sonpecane,
the word opate, by deetng n each the word or from the phrase
preparaton of opum, coca eaves, cocane, or sonpecane, and by
nsertng n each mmedatey foowng such phrase the words or
opate, and by addng a new sentence at the end of each secton to
read as foows: The word opate as used n ths secton sha have
the same meanng as defned n secton 322 (f) of the Interna Reve-
nue Code.
Sec. 9. The second paragraph of secton 5 4 of the Tarff ct of
1930, as amended (U. S. C, 1940 edton, tte 19, sec. 15 4), s hereby
amended by deetng n the frst sentence the word or from the
phrase If any of such merchandse so found conssts of heron, mor-
)hne, cocane, or sonpecane, and by nsertng mmedatey fo-
owng such phrase the words or opate, and by nsertng n the
ast sentence of the paragraph mmedatey foowng the word
sonpecane the word , opate and nsertng mmedatey fo-
owng the reference sectons 322 (e) the foowng: , 322 (f) .
M NDM NTS R L TING TO M RI U N .
Sec. 10. (a) empton for Certan Transfers to Mers.
Secton 2591 of the Interna Revenue Code s amended by addng at
the end thereof a new subsecton (e) to read as foows:
703672 10 22
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(e) empton for Certan Transfers to Mers. Nothng n ths secton
sha appy to a transfer of the pant Cannabs satva L. or any parts thereof
from any person regstered under secton 3231 to a person who s aso regstered
under secton 3231 as a ta payer requred to pay the ta mposed by secton
230(a) (G).
(b) Speca Ta on Mers. Secton 3230 of the Interna Reve-
nue Code s hereby amended by addng at the end of subsecton (a)
a new subdvson (G) to read as foows:
(6) Mers. ny person who at a m manufactures or produces from
tho pant Cannabs satva L. any fber or fber products, 1 per year or frac-
ton thereof durng whch he engages n such actvtes.
(c) Regstraton of Mers. Secton 3231 of the Interna Reve-
nue Code s hereby amended by nsertng at the begnnng thereof,
before the word ny the foowng: (a) In Genera. and by
addng at the end of such secton a new subsecton to read as foows:
(b) Speca Requrements for Mers. The Secretary sha not permt the
regstraton of any person under ths secton as a person requred to pay the
ta mposed by secton 3230(a) (6), uness n the opnon of the Secretary such
person (or f a corporaton, each offcer thereof) s a person of good mora
character and uness n the opnon of the Secretary such person s a person of
sutabe fnanca standng, ntends to engage n good fath In the busness of
manufacturng or producng fber or fber products from the pant Cannabs
satva L. on a comneca bass, and s not seekng regstraton under ths secton
for the purpose of factatng the unawfu dverson of marhuana. ny per-
son who s regstered under ths secton and has pad the ta mposed by secton
3230(a) (() sha afford agents of the ureau of Narcotcs ready access at a
tmes to any part of the premses of the m or other premses of such person
and the rght to nspect any and a books, papers, records, or documents con-
nected wth the actvtes of such person n deang n, manufacturng, and
processng Cannabs satva L. and fber or fber products thereof, and the han-
dng of marhuana. The Secretary may cance or may refuse to renew, after
notce and opportunty for hearng, tho regstraton of any such person f he
fnds that such person has not comped or s not compyng wth the requre-
ments of ths subsecton, or If he fnds that grounds e st whch woud |ustfy
the refusa to permt the orgna regstraton of such person under ths secton.
pproved March ,1946.
1946-7-122 6
. R. 4571. PURLIC L W 322. S NT -NINT CONGR SS
C PT R 3, S COND S SSION .
n ct To amend the rst War Powers ct, 1941.
e t enacted by the Senate and ouse of Representatves of the
Unted States of merca n Congress assembed, That the rst War
Powers ct, 1941 (55 Stat. 3S), s hereby amended by addng at
the end of tte III thereof the foowng:
Sec. 304. The Tradng wth the nemy ct of October C. 1017 (40 Stat. 411),
as amended, s hereby further amended by addng at the end thereof the fo-
owng secton:
Sec. 32. (a) The Presdent, or such offcer or agency as he may desgnate, may
return any property or nterest vested n or transferred to the en Property
Custodnn (other than any property or nterest ncqured by the Unted States
pror to December IS, 19 1), or the net proceeds thereof, whenever the Presdent
or such offcer or agency sha determne

(b) Notwthstandng the mtaton prescrbed n the Renegotaton ct
upon the tme wthn whch pettons may be fed n The Ta Court of the Unted
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States, any person to whom any property or Interest or proceeds are returned
hereunder sha, for a perod of nnety days (not countng Sunday or a ega
hoday In the Dstrct of Coumba as the ast day) foowng return, have the
rght to fe such a petton for a redetermnaton n respect of any fna order of
the War Contracts Prce d|ustment oard determnng e cessve profts, made
aganst the en Property Custodan, or of any determnaton, not emboded
In an agreement, of e cessve profts, so made by or on behaf of a Secretary.

pproved March ,1946.
1946-7-122 7
. R. 3603. PU LIC L W 21, S NTY-NINT CONGR SS
C PT R 2, S COND S SSION .
n ct To provde for the sae of surpus war-but vesses, and for
other purposes.
e t enacted by the Senate and ouse of Representatves of the
Unted States of merca n Conqress assembed, That ths ct may
be cted as the Merchant Shp Saes ct of 1946 .

D USTM NT OR PRIOR L S TO CITIZ NS
Sec. 9. (a) ctzen of the Unted States who on the date of the
enactment of ths ct
(1) owns a vesse whch he purchased from the Commsson
pror to such date, and whch was devered by ts buder after
December 31, 1940 or
(2) s party to a contract wth the Commsson to purchase
from the Commsson a vesse, whch has not yet been devered
to hm or
(3) owns a vesse on account of whch a constructon-dfferen-
ta subsdy was pad, or agreed to be pad, by the Commsson
under secton 504 of the Merchant Marne ct. 1936, as amended,
and whch was devered by ts buder after December 31,
1940: or
(4) s party to a contract wth a shpbuder for the constructon
for hm of a vesse, whch has not yet been devered to hm, and
on account of whch a constructon-dfferenta subsdy was
agreed, pror to such date, to be pad by the Commsson under
secton 504 of the Merchant Marne ct, 1936, as amended
sha, e cept as herenafter provded, be entted to an ad|ustment n
the prce of such vesse under ths secton f he makes appcaton
therefor, n such form and manner as the Commsson may prescrbe,
wthn s ty days after the date of pubcaton of the appcabe
prewar domestc costs n the edera Regster under secton 3(c) of
ths ct. No ad|ustment sha be made under ths secton n respect
of any vesse the contract for the constructon of whch was made after
September 2, 1945, under the provsons of tte (ncudng secton
504) or tte II of the Merchant Marne ct, 1936, as amended.
(b) Such ad|ustment sha be made, as herenafter provded, by
treatng the vesse as f t were beng sod to the appcant on the
date of the enactment of ths ct, and not before that tme. The
amount of such ad|ustment sha be determned as foows:
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(1) The Commsson sha credt the appcant wth the e cess
of the cash payments made upon the orgna purchase prce of
the vesse over 25 per centum of the statutory saes prce of the
vesse as of such date of enactment. If such payment was ess
than 25. per centum of the statutory saes prce of the vesse, the
appcant sha pay the dfference to the Commsson.
(2) The appcant s ndebtedness under any mortgage to the
Unted States wth respect to the vesse sha be ad|usted.
(3 Tc ad|usted mortgage ndebtedness sha be n an amount
equa to the e cess of the statutory saes prce of the vesse as of the
date of the enactment of ths ct over the sum of the cash payment
retaned by the Unted States under paragraph (1) pus the read-
|usted trade-n aowance (determned under paragraph (7)) wth
respect to any vesse e changed by the appcant on the orgna
purchase. The ad|usted mortgage ndebtedness sha be payabe
n equa annua nstaments thereafter durng, the remanng fe
of such mortgage wth nterest on the porton of the statutory saes
prce remanng unpad at the rate of Z /2 Per centum per annum.
(4) The Commsson sha credt the appcant wth the e cess,
f any, of the sum of the cash payments made by the appcant
upon the orgna purchase prce of the vesse pus the read|usted
trade-n aowance (determned under paragraph (7)) over the
statutory saes prce of the vesse as of the date of the enactment
of ths ct to the e tent not credted under paragraph (1).
(5) The Commsson sha aso credt the appcant wth an
amount equa to nterest at the rate of Sy2 per centum per annum
(for the perod begnnng wth the date of the orgna devery
of the vesse to the appcant and endng wth the date of the
enactment of ths ct) on the e cess of the orgna purchase prce
of the vesse over the amount of any aowance aowed by the
Commsson on the e change of any vesse on such purchase the
amount of such credt frst beng reduced by any nterest on the
orgna mortgage ndebtedness accrued up to such date of enact-
ment and unpad. Interest so accrued and unpad sha be
canceed.
(6) The appcant sha credt the Commsson wth a amounts
pad by the Unted States to hm as charter hre for use of the
vesse (e cusve of servce, f any, requred under the terms of
the charter) under any charter party made pror to the date of
the enactment of ths ct, and any charter hre for such use accrued
up to such date of enactment and unpad sha be canceed and
the Commsson sha credt the appcant wth the amount that
woud have been pad by the Unted States to the appcant as
charter hre for bare-boat use of vesses e changed by the appcant
on the orgna purchase (for the perod begnnng wth date on
whch the vesses so e changed were devered to the Commsson
and endng wth the date of the enactment of ths ct).
(7) The aowance made to the appcant on any vesse
e changed by hm on the orgna purchase sha be read|usted so as
to mt such aowance to the amount provded for under secton S.
( ) There sha be subtracted from the sum of the credts n
favor of the Commsson under the foregong provsons of ths
subsecton the amount of any overpayments of edera ta es by
the appcant resutng from the appcaton of subsecton (c) (1),
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333
and there sha be subtracted from the sum of the credts n favor
of the appcant under the foregong provsons of ths subsecton
the amount of any defcences n edera ta es of the appcant
resutng from the appcaton of subsecton (c)(1). If, after
makng such subtractons, the sum of the credts n favor of the
appcant e ceeds the sum of the credts n favor of the Comms-
son, such e cess sha be pad by the Commsson to the appcant.
If, after makng such subtractons, the sum of the credts n favor
of the Commsson e ceeds the sum of the credts n favor of the
appcant, such e cess sha be pad by the appcant to the Com-
msson. Upon such payment by the Commsson or the appcant,
such overpayments sha be treated as havng been refunded and
such defcences as havng been pad.
or the purposes of ths subsecton, the purchase prce of a vesse on
account of whch a constructon-dfferenta subsdy was pad or agreed
to be pad under secton 504 of the Merchant Marne ct, 1936, as
amended, sha be the net cost of the vesse to the owner.
(c) n ad|ustment sha be made under ths secton ony f the app
cant enters nto an agreement wth the Commsson bndng upon the
ctzen appcant and any affated nterest to the effect that
(1) deprecaton and amortzaton aowed or aowabe wth
respect to the vesse up to the date of the enactment of ths ct for
edera ta purposes sha be treated as not havng been aowabe
amounts credted to the Commsson under subsecton (b) (6)
sha be treated for edera ta purposes as not havng been
receved or accrued as ncome amounts credted to the appcant
under subsecton (b) (5) and ( ) sha be treated for edera
ta purposes as havng been receved and accrued as ncome n
the ta aDe year n whch fas the date of the enactment of ths
ct
(2) the abty of the Unted States for use (e cusve of serv-
ce, f any, requred under the terms of the charter) of the vesse
on or after the date of the enactment of ths ct under any charter
party sha not e ceed 15 per centum per annum of the statutory
saes prce of the vesse as of such date of enactment and the
abty of the Unted States under any such charter party for
oss of the vesse sha be determned on the bass of the statutory
saes prce as of the date of the enactment of ths ct, deprecated
to the date of oss at the rate of 5 per centum per annum and
(3) n the event the Unted States, pror to the termnaton of
the e stng natona emergency decared by the Presdent on
May 27, 1941, uses such vesse pursuant to a takng, or pursuant
to a bare-boat charter made, on or after the date of the enactment
of ths ct, the compensaton to be pad to the purchaser, hs
recevers, and trustees, sha n no event be greater than 15 per
centum per annum of the statutory saes prce as of such date.
(d) Secton 506 of the Merchant Marne ct, 1936, as amended, sha
not appy wth respect to (1) any vesse whch s egbe for an
ad|ustment under ths secton, or (2) any vesse descrbed n cause
(1), (2), (3) or (4) of subsecton (a) of ths secton, the contract for
the constructon of whch s made after September 2, 1945, and pror
to the date of enactment of ths ct.

pproved March , 1946.
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1946-11-12325
. R. 5 56. PU LIC L W 371, S NTY-NINT CONGR SS
C PT R 244, S COND S SSION .
n ct To provde for trade reatons between the Unted States
and the Phppnes, 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 S ORT TITL ND D INITIONS.
S CTION 1. S ORT TITL .
Ths ct may be cted as the Phppne Trade ct of 1946 .
S C. 2. D INITIONS..
(a) or the purposes of ths ct
(1) The term person ncudes partnershps, corporatons, and asso-
catons.
(2) The term Unted States , when used In a geographca sense, means
the States, the Dstrct of Coumba, the Terrtores of aska and awa,
and Puerto Rco.
(3) The term ordnary customs duty means n customs duty based on
the artce as such (whether or not such duty Is aso based n any manner
on the use, vaue, or method of producton of the artce, or on the amount
of ke artces mported, or on any other factor) but does not Incude
( ) a customs duty based on an act or omsson of any person wth
respect to the mportaton of the artce, or of the country from wheh the
artce s e ported, or from whch t comes or
( ) a countervang duty mposed to offset a subsdy, bounty, or
grant or
(C) an ant-dumpng duty mposed to offset the seng of merchandse
for e portaton at a prce ess than the prevang prce In the country
of e port or
(D) any ta , fee, charge,-or e acton, Imposed on or n connecton
wth mportaton uness the aw of the country mposng t desgnates or
Imposes t ns a customs duty or contans a provson to the effect that
It sha be treated as a duty mposed under the customs taws or
( ) the ta mposed by secton 2401(c) of the Interna Revenue Code
wth respect to an artce, merchandse, or combnaton, 10 per centum
or more of the quantty by weght of wheh conssts of, or s derved
drecty or ndrecty from, one or more of the os, fatty acds, or sats
specfed n secton 2470 of the Interna Revenue Code or the tas
Imposed by secton 3500 of the Interna Revenue Code.
(4) The term Phppne artce means an artce wheh Is the product
of the Phppnes, uness, n the case of an artce produced wth the use
of materas mported nto the Phppnes from any foregn country (e cept
the Unted States) the aggregate vaue of such mported materas at the
tme of mportaton nto the Phppnes was more than 20 per centum of the
vaue of the artce mported nto the Unted States, the vaue of such artce
to he determned n accordance wth, and as of the tme provded by, the
customs aws of the Unted States n effect at the tme of Importaton of
such artce. s used n ths paragraph the term vaue , when used n
reference to a matera mported nto the Phppnes, ncudes the vaue
of the matera ascertaned under the customs aws of the Phppnes n
effect at the tme of Importaton nto the Phppnes, and, f not ncuded n
such -vaue, the cost of brngng the matera to the Phppnes, but does not
Incude the cost of andng t at the port of Importaton, or customs dutes
coected n the Phppnes. or the purposes of ths paragraph any Im-
ported matera, used n the producton of an artce n the Phppnes, sha
be consdered ns havng been used n the producton of an artce subsequenty
produced n the Phppnes, whch s the product of a chan of producton n
the Phppnes n the course of whch an artce, whch s the product of
one stage of the chan, s used by ts producer or another person, In a sub-
sequent stage of the chan, as a matera In the producton of another artce.
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(5) The term Unted States artce means an artce whch Is the prod-
uct of the Unted States, uness, In the case of an artce produced wth the
use of materas mported nto the Unted States from any foregn country
(e cept the Phppnes) the aggregate vaue of such mported materas at
the tme of Importaton nto the Unted States was more than 20 per centum
of the vaue of the artce mported Into the Phppnes, the vaue of such
artce to be determned n accordance wth, and as of the tme provded by,
the customs aws of the Phppnes In effect at the tme of mportaton of
such artce. s used n ths paragraph the term vaue , when used n
reference to a matera mported nto the Unted States, ncudes the vaue
of the matera ascertaned under the customs aws of the Unted States n
effect at the tme of Importaton Into the Unted States, and, f not ncuded
n such vaue, the cost of brngng the matera to the Unted States, but does
not ncude the cost of andng It at the port of mportaton, or customs dutes
coected n the Unted States. or the purposes of ths paragraph any
mported matera, used In the producton of an artce n the Unted States,
sha be consdered as havng been used n the producton of an artce sub-
sequenty produced In the Unted States, whch s the product of a chan of
producton n the Unted States In the course of whch an artce, whch
s the product of one stage of the chan, s used by ts producer or another
person, n a subsequent stage of the chan, as a matera n the producton
of another artce.
(6) The term Unted States duty means the rate or rates of ordnary
customs duty whch (at the tme and pace of entry, or wthdrawa from
warehouse, n the Unted States for consumpton, of the Phppne artce)
woud be appcabe to a ke artce f mported from that foregn country
whch s entted to the owest rate, or the owest aggregate of rates, of ord-
nary customs duty wth respect to such ke artce.
(7) The term Phppne duty means the rate or rates of ordnary
customs duty whch (at the tme and pace of entry, or wthdrawa from ware-
house, n the Phppnes for consumpton, of the Unted States artce) woud
be appcabe to a ke artce If Imported from that foregn country whch s
entted to the owest rate, or the owest aggregate of rates, of ordnary
customs duty wth respect to such ke artce.
( ) The term nterna ta ncudes an Interna fee, charge, or e acton,
and ncudes
( ) the ta mposed by secton 2491(c) of the Interna Revenue Code
wth respect to an artce, merchandse, or combnaton, 10 per centum
or more of the quantty by weght of whch conssts of, or Is derved
drecty or ndrecty from, one or more of the os, fatty acds, or sats
specfed n secton 2470 of the Interna Revenue Code and the ta
Imposed by secton 3500 of the Interna Revenue Code and
( ) any other ta , fee, charge, or e acton, mposed on or In connec-
ton wth Importaton uness the aw of the country mposng t desg-
nates or mposes t as a customs duty or contans a provson to the
effect that t sha be treated as a duty mposed under the customs aws.
(b) or the purposes of sectons 221(b) and 321 (b), any matera, used n the
producton of an artce, sha be consdered as havng been used n the produc-
ton of an artce subsequenty produced, whch Is the product of a chan of
producton In the course of whch an artce, whch s the product of one stage of
the chan, s used by ts producer or another person, n a subsequent stage of the
chan, as a matera In the producton of another artce.
(c) or the purposes of paragraphs (6) and (7) of subsecton (a) of ths
secton
(1) If an artce Is entted to be Imported from a foregn country free of
ordnary customs duty, that country sha be consdered as the country
entted to the owest rate of ordnary customs duty wth respect to such
artce and
(2) a reducton In ordnary customs duty granted any country, by aw,
treaty, trade agreement, or otherwse, wth respect to any artce, sha be
converted nto the equvaent reducton In the rate of ordnary customs duty
otherwse appcabe to such artce.
(d) The terms ncudes -and ncudng when used In a defnton contaned
n ths ct sha not be deemed to e cude other thngs otherwse wthn the
meanng of the term defned.
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TITL II L WS ND PROPOS D O LIG TIONS O UNIT D ST T S.
Part I Customs Dutes.
S C. 201. R NTRY O P ILIPPIN RTICL S.
Durn:: the perod from the day after the date of the enactment of ths ct to
uy 3, 1954, both dates ncusve, Phppne artces entered, or wthdrawn from
warehouse, In the Unted States for consumpton sha be admtted nto the
Unted States free of ordnary customs duty.
S C. 202. ORDIN RY CUSTOMS DUTI S ON P ILIPPIN RTICL S.
(a) uy 4, 1954- uy 3, 1974. The ordnary customs duty to be coected on
Phppnes artces, whc durng the foowng portons of the perod from uy
4, 1954, to uy 3, 1974, both dates ncusve, are entered, or wthdrawn from
warehouse, n the Unted States for consumpton, sha be determned by appyng
the foowng percentages of the Unted States duty:
( ) uy 4 to December 31, 1034. Durng the perod from uy 4, 1951,
to December 31, 1954, both dates Incusve, 5 per centum.
(2) Caendar tear 1955. Durng the caendar year 1955, 10 per centum.
(3) Caendar teaks 1050-1972. Durng each caendar year after the
caendar year 1955 unt nnd ncudng the caendar year 1972, a percentage
equa to the percentage for the precedng caendar year ncreased by 5 per
centum of the Unted States duty.
(4) Percentage after 11172. Durng the perod from anuary 1, 1973, to
uy 3,1974, both dates ncusve. 100 per centum.
(5) ceptons to above rues. The provsons of ths subsecton sha
not be appcabe to the casses of artces referred to n secton 214(a) of
Part 2 of ths tte (reatng to quotas).
(b) Perod fter uy 3, 1974. The ordnary customs duty to be coected on
Phppne artces whch after uy 3, 1974, are entered, or wthdrawn from
warehouse, n the Unted States for consumpton, sha be determned wthout
regard to the provsons of subsecton (a) of ths secton or of secton 214.
S C. 203. CUSTOMS DUTI S OT R T N ORDIN RY.
Customs dutes on Phppne artces, other than ordnary customs dutes,
sha be determned wthout regard to the provsons of sectons 201 and 202(a),
but sha be sub|ect to the provsons of secton 204.
S C. 204. U LITY IN SP CI L IMPORT DUTI S, TC.
(a) Wth respect to Phppne artces mported nto the Unted States, no
duty on or n connecton wth mportaton sha be coected or pad n an amount
n e cess of the duty mposed wth respect to ke artces whch are the product
of any other foregn country, or coected or pad n any amount f the duty s not
mposed wth respect to such ke artces.
(b) s used n ths secton the term duty Incudes ta es, fees, charges, or
e actons, mposed on or n connecton wth Importaton but does not ncude
nterna ta es or ordnary customs dutes.
S C. 205. U LITY IN DUTI S ON PRODUCTS O P ILIPPIN S.
(a) Wth respect to products of the Phppnes, whch do not come wthn
the defnton of Phppne artces, mported Into the Unted States, no duty
on or n connecton wth mportaton sha be coected or pad n an amount n
e cess of the duty mposed wt respect to ke artces whch are the product
of any other foregn country (e cept Cuba), or coected or pad n any amount
f the duty s not mposed wth respect to such ke artces whch are the product
of any other foregn country (e cept Cuba).
(b) s used n ths secton the term duty ncudes ta es, fees, charges,
or e actons, mposed on or n connecton wth mportaton but docs not n-
cude nterna ta es.
Part 2 uotas.
S C. 211. SOLUT UOT ON SUG RS.
(a) Defnton of Phppne Sugars. or the purpose of ths secton, an
artce sha not be consdered Phppne sugars uness t s a Phppne
artce.
(b) Df.fntt on of Refnfd Sugars. s used n ths secton the term refned
sugars has the same meanng as the term drect-consumpton sugar as de-
fned In secton 101 of the Sugar ct of 1937.
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337
(c) mount of uota. Durng the perod from anuary 1, 1046, to uy 3,
1974, both dates ncusve, the tota amount of a Phppne sugars whch, In
any caendar year, may be entered, or wthdrawn from warehouse, n the Unted
States for consumpton, sha not e ceed 952,000 short tons (the equvaent of
30,000 ong tons), of whch not to e ceed 5(5,000 short tons (the equvaent of
50,000 ong tons) may be refned sugars e cept that durng the perod from
anuary 1, 1974, to uy 3, 1974, both dates ncusve, such tota amount sha
not e ceed 476,000 short tons (the equvaent of 425,000 ong tons), of whch
not to e ceed 2 ,000 short tons (the equvaent of 25,000 ong tons) may be re-
fned sugars.
(d) ocaton of uotas fob Unrefned Suoaes. The quota for unrefned
sugars, ncudng that requred to manufacture the refned sugars, estabshed
by ths secton, sha be aocated annuay to the sugar-producng ms and
pantaton owners n the Phppnes n the caendar year 1940 whose sugars
were e ported to the Unted States durng such caendar year, or ther suc-
cessors n nterest, proportonatey on the bass of ther average annua pro-
ducton (or n the case of such a successor n nterest, the average annua pro-
ducton, of hs predecessor n nterest) for the caendar years 1931, 1932, and
1933, and the amount of sugars whch may be so e ported sha be aocated n
each year between each m and the pantaton owners on the bass of the pro-
porton of sugars to whch each m and the pantaton owners are respectvey
entted, n accordance wth any mng agreements between them, or any e -
tenson, modfcaton, or renewa thereof.
(e) ocaton of uotas for Refned Sugars. The quota for refned sugars
estabshed by ths secton sha be aocated aunuay to the manufacturers of
refned sugars n the Phppnes n the caendar year 1940 whose refned sugars
were e ported to the Unted States durng such caendar year, or ther suc-
cessors n nterest, proportonatey on the bass of the amount of refned sugars
produced by each such manufacturer (or n the ease of such successor n nterest,
the amount of refned sugars produced by hs predecessor n nterest) whch was
e ported to the Unted States durng the caendar year 1940.
S C. 212. SOLUT UOT ON CORD G .
(a) Defnton of Cordage . s used n ths secton the term cordage
ncudes yarns, twnes (ncudng bndng twne descrbed n paragraph 1622 of the
Tarff ct of 1930, as amended), cords, cordage, rope, and cabe, tarred or untar-
red, whoy or n chef vaue of mann (abaca) or other hard fber.
(b) Defnton of Phppne Cordage . or the purpose of ths secton,
an artce sha not be consdered Phppne cordage uness t s a product
of the Phppnes.
(c) mount of uota. Durng the perod from anuary 1, 1946, to uy 3,
1974, both dates ncusve, the tota amount of a Phppne cordage whch, n
any caendar year, may be entered, or wthdrawn from warehouse, In the Unted
States for consumpton, sha not e ceed 6,000,000 pounds e cept that durng
the perod from anuary 1, 1974, to uy 3, 1974, both dates ncusve, such tota
amount sha not e ceed 3,000,000 pounds.
(d) ocaton of uotas. The quota for cordage estabshed by ths secton
sha be aocated annuay to the manufacturers of cordage n the Phppnes
n the caendar year 1940 whose tordage was e ported to the Unted States durng
such caendar year, or ther successors n nterest, proportonatey on the bass
of the amount of cordage produced by each such manufacturer (or n the case
of such successor n nterest, the amount of the cordage produced by hs prede-
cessor n nterest) whch was e ported to the Unted States durng the tweve
months mmedatey precedng the nauguraton of the Commonweath of the
Phppnes.
S C. 213. SOLUT UOT ON RIC .
(a) Defnton of Rce. s used n ths secton the term rce ncudes
rce mea, four, posh, and bran.
(b) Defnton of Phppne Rce, or the purposes of ths secton, an
artce sha not be consdered Phppne rce uness t s a Phppne artce.
(c) mount of uota. Durng the perod from nmary 1, 1946, to uy 3,
1974, both dates Incusve, the tota amount of a Phppne rce whch, n any
caendar year may be entered, or wthdrawn from warehouse, n the Unted States
for consumpton, sha not e ceed 1,040,000 pounds e cept that durng the
perod from anuary 1, 1974. to uy 3, 1974, both dates ncusve, such tota
amount sha not e ceed 520,000 pounds.
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S C. 214. SOLUT ND DUTY- R UOT S ON C RT IN RTICL S.
(a) bsoute uotas.
mount of quota. Durng the perod from anuary 1,1946, to uy 3,1974,
both dates ncusve, the tota amount of the foowng artces whch are
Phppne artces, and whch, n any caendar year, may be entered, or
wthdrawn from warehouse, n the Unted States for consumpton, sha
not e ceed the amounts specfed as to each:
(1) Cgars (e cusve of cgarettes, cheroots of a knds, and paper cgars
and cgarettes, ncudng wrappers), two hundred mon cgars
(2) Scrap tobacco, and stemmed and unstemmed fer tobacco descrbed
n paragraph G02 of the Tarff ct of 1030, as amended, s mon fve hun-
dred thousand pounds
(3) Coconut o, two hundred thousand ong tons and
(4) uttons of pear or she, eght hundred and ffty thousand gross.
Durng the perod from anuary 1, 1974, to uy 3, 1974, both dates ncusve,
such tota amount sha not e ceed one-haf of the amount above specfed
wth respect to each cass of artces, respectvey.
(b) Duty- ree uotas.
(1) In genera. Phppne artces fang wthn one of the casses
specfed n subsecton (a) of ths secton, whch durng the perod from
anuary 1, 1946, to uy 3, 1974, both dates ncusve, are entered, or wth-
drawn from warehouse, n the Unted States for consumpton, sha be free
of ordnary customs duty, n the quanttes and for the perods set forth In
the foowng tabe:
Perods (caendar year
mount of duty-free uotas
Cfrars referred
to In subsec-
ton (a) (1)
number
ach n Caendar Years 1946-1954
1955 -
1956 -
1957
195
1959
I960
1961
1962
1963
1964
1965
1960
1967
196S
1969
1970.
1971
1972
1973
1974
200, 000.000
190,000.000
ISO. 000, 000
170,000.000
160.000.000.
150,000,000
140.000,000
130,000,000
120.000,000
110.000,000
100,000,000
90,000,000
0.000.000
70,000,000
60,000,000
50.000,000
40.000.000
30.000.000
20,000,000
10,000,000
0
Tobacco re-
ferred to n
subsecton
(a) (2)
6.500.000
6,175,000
5. 50.000
5. 525.000
6. 200.000
4. 75,000
4,550,000
4,225.000
3.900,000
3,575.000
3,250,000
2.925.000
2,600.000
2,275,000
1,950.000
1, 625,000
1,300,000
975,000
650,000
325,000
0
Coconut O
ong tons
aoo, mg
m, 0 D
a t dd
170.000
160,000
150.000
140,000
130,000
120.000
110,000
100.000
90.000
0.000
70,000
60.000
50,000
40,000
30,000
20,000
10,000
o
uttons of
pear or
she gross
ss oos
07, SO
m
722,500
6S0, 000
dd, m
595. on
552.500
510,000
457,500
425.000
m
S40.M
297.500
nam
212.500
170, Otn
127..
5.000
42.500
0
(2) Duty on mports n e cess of duty-free quota, ny such Phppne
artce so entered or wthdrawn from warehouse n e cess of the duty-free
quota provded n paragraph (1) sha be sub|ect to 100 per centum of the
Unted States duty, despte the provsons of secton 202 of ths tte (whch
provdes rates of ess than 100 per centum of the Unted States duty wth
respect to Phppne artces). Nothng In ths subsecton sha be construed
as enargng the absoute quotas provded In subsecton (a) of ths secton,
(c) ocaton of uotas. ach of the quotas estabshed by ths secton
sha be aocated annuay to the manufacturers n the Phppnes n the
caendar year 1940 of products of a cass for whch such quota Is estabshed,
and whose products of such cass were e ported to the Unted States durng
such year, or ther successors In nterest, proportonatey on the bass of the
amount of the products of such cass produced by each such manufacturer (or
n the case of such successor In nterest, the amount of the products of such
cass produced by hs predecessor n nterest) whch was e ported to the UDted
States durng the caendar year 1940.
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S C. 215. L WS PUTTING INTO CT LLOC TIONS O UOT S.
The necessary aws and reguatons for puttng nto effect the aocaton of
quotas on the bass provded for n sectons 211, 212, and 214, respectvey, sha
not be enacted by the Unted States, t beng the purpose of ths tte that such
aws and reguatons sha be enacted by the Phppnes.
S C. 21G. TR NS RS ND SSIGNM NTS O UOT LLOTM NTS.
The hoder of any aotment under e stng aw, ncudng hs successor n
nterest, and the hoder of any aotment under any of the quotas estabshed
by sectons 211, 212, or 214, may transfer or assgn a or any amount of such
aotment on such terms as nmy be agreeabe to the partes n nterest. If, after
the frst nne months of any caendar year, the hoder of any aotment, for that
year, under any of the quotas estabshed by such sectons, s or w be unabe
for any reason to e port to the Unted States a of hs aotment, n tme to
fuf the quota for that year, that amount of such aotment whch t s estab-
shed by suffcent evdence cannot be so e ported durng the remander of the
caendar year may be apportoned by the Phppne Government to other hoders
of aotments under the same quota, or n such other manner as w nsure
the fufment of the quota for that year: Provded, That no transfer or assgn-
ment or reaocaton under the provsons of ths secton sha dmnsh the
aotment to whch the hoder may be entted n any subsequent caendar year.
Part 3 Interna Ta es.
_ S C. 221. U LITY IN INT RN L T S.
(a) Wth respect to artces whch are products of the Phppnes comng
Into the Unted States, or wth respect to artces manufactured In the Unted
States whoy or n part from such artces, no nterna ta sha be
(1) coected or pad n an amount n e cess of the nterna ta Imposed
wth respect to ke artces whch are the product of the Unted States, or
coected or pad n any amount f the Interna ta s not mposed wth
respect to such ke artces
(2) coected or pad n an amount In e cess of the nterna ta Imposed
wth respect to ke artces whch are the product of any other foregn
country, or coected or pad n any amount f the nterna ta s not Imposed
wth respect to such ke artces.
(b) Where an nterna ta Is mposed wth respect to an artce whch s
the product of a foregn country to compensate for an Interna ta Imposed (1)
wth respect to a ke artce whch s the prodnet of the Unted States, or (2)
wth respect to materas used n the producton of a ke artce whch s the
product of the Unted States, f the amount of the nterna ta whch s coected
and pad wth respect to the artce whch s the product of the Phppnes s
not n e cess of that permtted by paragraph (2) of subsecton (a) such coec-
ton and payment sha not be regarded as n voaton of subsecton (a).
(c) Ths secton sha not appy to the ta es mposed under secton 2306,
2327, or 235G of the Interna Revenue Code.
S C. 222. MPTION ROM T O M NIL IN R.
No processng ta or other nterna ta sha be mposed or coected In the
Unted States wth respect to mana (nbaca) fber not dressed or manufactured
n any manner.
S C. 223. PRO I ITION O PORT T S.
No e port ta sha be Imposed or coected by the Unted States on artces
e ported to the Phppnes.
S C. 224. MPTION ROM T S O RTICL S OR O ICI L US .
No processng ta or other nterna ta sha be mposed or coected n the
Unted States wth respect to artces comng nto the Unted States for the
offca use of the Phppne Government or any department or agency thereof.
Part 4 Immgraton.
S C. 231. C RT IN P ILIPPIN CITIZ NS GR NT D NON- UOT
ST TUS.
(a) ny ctzen of the Phppnes who actuay resded n the Unted States
for a contnuous perod of three years durng the perod of forty-two months
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340
endng November SO, 1941, If enterng the Unted States durng the perod from
uy 4, 1946, to uy 3, 1951, both dates Incusve, for the purpose of resumng
resdence n the Unted States, sha, for the purposes of the mmgraton aws,
be consdered a non-quota Immgrant and sha not be e cuded from entry nto
the Unted States by reason of secton 13(c) of the Immgraton ct of 1924,
or by reason of so much of secton 3 of the Immgraton ct of 1917 as provdes
for the e cuson from admsson nto the Unted States of natves of a theren
specfed geographca area.
(b) fter such admsson as a non-quota Immgrant he sha, for the purposes
of the mmgraton and naturazaton aws, be consdered as awfuy admtted
to the Unted States for permanent resdence.
(c) The benefts of ths secton sha aso appy to hs wfe, f a ctzen of
the Phppnes or egbe to Unted States ctzenshp, and to hs unmarred
chdren under 1 years of age, f such wfe or chdren are accompanyng or
foowng to |on hm durng such perod.
(d) Ths secton sha not appy to a ctzen of the Phppnes admtted to the
Terrtory of awa, wthout an mmgraton or passport vsa, under the pro-
vsons of paragraph (1) of secton (a) of the ct of March 24, 1934 (4 Stat
456, ch. 4).
TITL III O LIG TIONS O P ILIPPIN S.
Part 1 Purposes of Tte.
S C. 301. ST T M NT O PURPOS S O TITL .
(a) Perod Unt uy 4,194C. The foowng Parts and sectons of ths tte,.
nsofar as they are appcabe to the perod from the date of the enactment of ths
ct to uy 3, 1946, both dates ncusve, are ntended to, and sha, operate as
statutes of the Unted States, bndng on one of ts possessons.
(b) Perod uy 4, 1946- uy 3, 1974. The foowng Parts and sectons of
ths tte, athough e pressed n statutory form, are not n any manner ntended,
Insofar as they are appcabe to the perod after uy 3, 1946, as an attempt on
the part of the Congress of the Unted States to egsate for the Repubc of the
Phppnes as a soveregn naton, but consttute a statement n precse terms
of provsons
(1) whch the Government of the Phppnes, on the takng effect of the
e ecutve agreement provded for n Tte I of ths ct, w be obgated to
observe and e ecute as the aw of the Repubc of the Phppnes durng
the effectveness of the agreement e cept that the observance of such part
of the provsons of secton 341 as s n confct wth the Consttuton of the
Phppnes w not be requred under such agreement for the perod pror
to the amendment to the consttuton referred to n secton 402(b) and
(2) whch, between the procamaton of the ndependence of the Php-
pnes and the date of the takng effect of such e ecutve agreement, w, ac-
cordng to the pocy and e pectatons of the Congress of the Unted States,
be observed and e ecuted by the Government of the Phppnes.
Part 2 Customs Dutes.
S C. 311. R NTRY O UNIT D ST T S RTICL S.
Durng the perod from the day after the date of the enactment of ths ct
to uy 3, 1954, both dates ncusve, Unted States artces entered, or wth-
drawn from warehouse. In the Phppnes for consumpton sha be admtted
Into the Phppnes free of ordnary customs duty.
S C. 312. ORDIN RY CUSTOMS DUTI S ON UNIT D ST T S RTICL S.
(a) uy 4, 1954- u.y 3, 1974. The ordnary customs duty to be coected
on Unted States artces, whch durng the foowng portons of the perod
from uy 4,1954, to uy 3, 1974, both dates ncusve, are entered, or wthdrawn
from warehouse, In the Phppnes for consumpton, sha be determned by
appyng the foowng percentages of the Phppne duty:
(1) uy 4, to d| kmbf.r s, 1954. Durng the perod from uy 4, 1954,
to December 31, 1954, both dates ncusve, 5 per centum.
(2) Caendar year 1955. Durng the caendar year 1955, 10 per centum.
(3) Caendar years 1950-1072. Durng each caendar year after the
caendar year 1955 unt and ncudng the caendar year 1972, a percentage
equa to the percentage for the precedng caendar year ncreased by 5 per
centum of the Phppne duty.
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341
(4) Pfbtentage after 1972. Durng the perod from anuary 1, 1973. to
uy 3,1074, both dates ncusve, 100 per centum,
(b) 1 erod after uy 3, 1074. The ordnary customs duty to be coected
on Unted States artces whch after uy 3, 1074, are entered, or wthdrawn
from warehouse, n the Phppnes for consumpton, sha be determned wthout
regard to the provsons of subsecton (a) of ths secton.
S C. 313. CUSTOMS DUTI S OT R T N ORDIN RY.
Customs dutes on Unted States artces, other than ordnary customs dutes,
sha be determned wthout regard to the provsons of sectons 311 and 312(a),
but sha be sub|ect to the provsons of secton 314.
S C. 314. U LITY IN SP CI L IMPORT DUTI S, TC.
(a) Wth respect to Unted States artces mported Into the Phppnes, no
duty on or n connecton wth mportaton sha e coected or pad n nn
amount n e cess of the duty mosed wth respect to ke artces whch are the
product of any other foregn country, or coected or pad n any amount f the
duty s not mposed wth respect to such ke artces.
(b) s used n ths secton the term duty ncudes ta es, fees, charges,
or e actons, mposed on or n connecton wth mportaton but does not ncude
nterna ta es or ordnary customs dutes.
S C. 315. U LITY IN DUTI S ON PRODUCTS O UNIT D ST T S.
(a) Wth respect to products of the Unted States, whch do not come wthn
the defnton of Unted States artces, mported nto the Phppnes, no duty
on or n connecton wth mportaton sha be coected or pad n an amount
n e cess of the duty mposed wth respect to ke artces whch are the product
of any other foregn country, or coected or pad n any amount f the duty s
not mposed wth respect to such ke artces whch are the product of any other
foregn country.
(b) s used n ths secton the term duty Incudes ta es, fees, charges, or
e actons, mposed on or In connecton wth mportaton but does not ncude
Interna ta es.
Part 3 Interna Ta es.
S C. 321. U LITY IN INT RN L T S.
(a) Wth respect to artces whch are products of the Unted States comng
nto the Phppnes, or wth respect to artces manufactured n the Phppnes
whoy or n part from such artces, no nterna ta sha be
(1) coected or pad n an amount n e cess of the nterna ta mposed
wth respect to ke artces whch are the product of the Phppnes, or
coected or pad n any amount f the nterna ta s not mposed wth
respect to such ke artces
(2) coected or pad n an amount In e cess of the Interna ta mposed
wth respect to ke artces whch are the product of any other foregn
country, or coected or pad n any amount f the nterna ta s not mposed
wth respect to such ke artces.
(b) Where an nterna ta s mposed wth respect to an artce whch s the
product of a foregn country tn compensate for af Interna ta mposed (1) wth
respect to a ke artce whch Is the product of the Phppnes, or (2) wth
respect to materas used n the producton of a ke artce whch s the product
of the Phppnes, f the amount of the nterna ta whch s coected and pad
wth respect to the artce whch s the product of the Unted States s not n
e cess of that permtted by paragraph (2) of subsecton (a) such coecton and
payment shu not be regarded as n voaton of subsecton (a).
S C. 322. PRO I ITION O PORT T S.
No e port ta sha he mposed or coected by the Phppnes on artces
e ported to the Unted States.
S C. 323. MPTION ROM T S O RTICL S OR O ICI L US .
No processng ta or other nterna ta sha be mposed or coected n the
Phppnes wth respect to artces comng nto the Phppnes for the offca
use of the Unted States Government or any department or agency thereof.
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Part 4 Immgraton.
S C. 331. C RT IN UNIT D ST T S CITIZ NS GI N NON UOT
ST TUS.
ny ctzen of the Unted States who actuay resded In the Phppnes for
a contnuous perod of three years durng the perod of forty-two months endng
November 30, 1941, f enterng the Phppnes durng the perod from uy 4,
1946, to uy 3, 1 61, both dates ncusve, for the purpose of resumng resdence
n the Phppnes, sha, for the purposes of the mmgraton aws, be consdered
a non-quota mmgrant. fter such admsson as a non-quota mmgrant he sha,
for the purposes of the mmgraton and naturazaton aws, be consdered as
awfuy admtted to the Phppnes for permanent resdence. The benefts of
ths secton sha aso appy to hs wfe, f a ctzen of the Unted States, and to
hs unmarred chdren under 1 years of age, f such wfe or chdren are accom-
panyng or foowng to |on hm durng such perod.
S C. 332. IMMIGR TION O UNIT D ST T S CITIZ NS INTO T
P ILIPPIN S.
Ctzens of the Unted States, admssbe to the Phppnes under the prov-
sons requred by secton 402(e) to be Incuded as a part of the e ecutve agree-
ment made under Tte I , sha be entted to enter the Phppnes, n the
numbers and durng the perods of years, and to reman theren for the tme,
specfed n that part of the agreement whch embodes the provsons of secton
402(e).
Part 5 Msceaneous.
S C. 341. RIG TS O UNIT D ST T S CITIZ NS ND USIN SS N-
T RPRIS S IN N TUR L R SOURC S.
The dsposton, e potaton, deveopment, and utzaton of a agrcutura,
tmber, and mnera ands of the pubc doman, waters, mneras, coa, petro-
eum, and other mnera os, a forces and sources of potenta energy, and other
natura resources of the Phppnes, and the operaton of pubc uttes, sha,
If open to any person, be open to ctzens of the Unted States and to a forma
of busness enterprse owned or controed, drecty or ndrecty, by Unted
States ctzens.
S C. 342. CURR NCY. ST ILIZ TION.
The vaue of Phppne currency n reaton to the Unted States doar sha
not be changed, the convertbty of pesos nto doars sha not be suspended,
and no restrctons sha be Imposed on the transfer of funds from the Php-
pnes to the Unted States, e cept by agreement wth the Presdent of the Unted
States.
S C. 343. LLOC TION O UOT S.
The aocaton, reaocaton, transfer, and assgnment of quotas estabshed by
sectons 211, 212, and 214, respectvey, of Part 2 of Tte II, sha be on the bass
provded for n such Part.
TITL I CUTI GR M NT TW N UNIT D ST T S
ND P ILIPPIN S.
S C. 401. UT ORIZ TION O GR M NT.
The Presdent of the Unted States s authorzed (e cept as herenafter n
ths tte otherwse provded) to enter nto an e ecutve agreement wth the Pres-
dent of the Phppnes provdng for the acceptance on the part of each country
of the provsons of Tte II and of Tte III (e cept Part 1) of ths ct. The
Presdent of the Unted States s not authorzed by ths secton to enter nto such
agreement uness t contans a provson that t sha not take effect
(a) Uness and unt the Congress of the Phppnes accepts t by aw and
(b) Uness and unt the Congress of the Phppnes (In the act of accept-
ance, or separatey) has enacted such egsaton as may be necessary to make a
the provsons of Parts 2, 3, 4, and 5 of Tte III take effect as aws of the Php-
pnes, e cept (durng the perod pror to the amendment to the Consttuton of the
Phppnes referred to n subsecton (b) of secton 402) such provsons of
secton 341 as are In confct wth such consttuton.
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S C. 402. O LIG TIONS O P ILIPPIN S.
The Presdent of the Unted States s not authorzed by secton 401 to enter
Into such e ecutve agreement uness n the agreement the Government of the
Phppnes agrees
(a) That the Repubc of the Phppnes w contnue n effect as aws of the
Phppnes, durng the effectveness of the agreement, the provsons of Parts
2, 3, 4, and 5 of Tte III, e cept (for the perod pror to the amendment of
the Consttuton of the Phppnes referred to n subsecton (b) of ths secton)
such part of the provsons of secton 341 as s n confct wth such consttuton.
(b) That the Government of the Phppnes w prompty take such steps as
are necessary to secure the amendment of the Consttuton of the Phppnes so as
to permt the takng effect as aws of the Phppnes of such part of the provsons
of secton 341 as s n confct wth such consttuton before such amendment.
(c) That the Repubc of the Phppnes w prompty enact, and-keep n effect
durng the effectveness of the agreement, such egsaton as may be necessary
(1) to suppement the egsaton referred to n secton 401(b), and to
mpement the provsons of Parts 2, 3, 4, and 5 of Tte III and
(2) to put and keep n effect durng the effectveness of the agreement, the
aocaton, reaocaton, transfer, and assgnment of quotas on the bass
provded for n Part 2 of Tte II.
(d) That the Unted States sha have the rght to provde the bass for the
aocaton of the quotas estabshed under that porton of the agreement whch
sets forth the provsons of secton 403(e) of ths ct, and that, f the Unted
States e ercses such rght, the Repubc of the Phppnes w prompty enact,
and keep n force durng the perod for whch ench such quota s estabshed, such
egsaton as s necessary to put and keep n effect, on the bass provded by the
Unted States, the aocaton of such quotas.
(e) That there sha be permtted to enter the Phppnes, wthout regard to
any numerca mtatons under the aws of the Phppnes, n each of the years
of a specfed pered of years, a specfed number of ctzens of the Unted States.
The number of years (whch sha not be ess than fve) the number of ctzens
of the Unted States (whch sha rbt be ess thnn one thousand) entted to be so
admtted n each year, and the ength of tme each sha be entted to reman
In the Phppnes, sha be stated n the agreement.
(f) That the vaue of Phppne currency n reaton to the Unted States doar
ha not be changed, the convertbty of pesos nto doars sha not be sus-
pended, and no restrctons sha be mposed on the transfer of funds from the
Phppnes to the Unted States, e cept by agreement wth the Presdent of the
Unted States.
S C. 403. O LIG TIONS O UNIT D ST T S.
The Presdent of the Unted States s not authorzed by secton 401 to enter
Into such e ecutve agreement uness n such agreement the Government of the
Unted States agrees
(a) That upon the takng effect of the agreement the provsons of Tte II
(1) f n effect as aws of the Unted States at the tme the agreement
takes effect, sha contnue n effect as aws of the Unted States durng the
effectveness of the agreement or
(2) f not so n effect at the tme the agreement takes effect (because
suspended under secton 502 of Tte ) sha take effect and contnue n
effect as aws of the Unted States durng the effectveness of the agreement.
(b) That the Unted States w prompty enact, and keep n effect durng the
effectveness of the agreement, such egsaton as may be necessary to suppement
and Impement the provsons of Tte II so contnued n effect, or so made to take
effect, as aws of the Unted States.
(c) That wth respect to quotas on Phppne artces (other than the quotas
estabshed In Part 2 of Tte II, and other than quotas estabshed n con|unc-
ton wth quanttatve mtatons, appcabe to products of a foregn countres,
on mports of ke artces), the Unted States w not estabsh any such quota
for any perod before anuary 1, 194 and that, for any part of the perod from
anuary 1,194 , to uy 3,1974, both dates ncusve, t w estabsh such a quota
ony f
1) the Presdent of the Unted States, after Investgaton, fnds that such
Phppne artces are comng, or are key to come, nto substanta compe-
tton wth ke artces the product of the Unted States and
(2) the quota estabshed for any Phppne artce for any tweve-month
perod s not ess than the amount determned by the Presdent as the tota
amount of Phppne artces of such cass whch (durng to tweve mouths
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ended on the Inst day of the month precedng the month In whch occurs the
date procamed by the Presdent as the date of the begnnng of the nvest-
gaton) was entered, or wthdrawn from warehouse, n the Unted States
for consumpton or, f the quota s estabshed for any perod other than a
tweve-month perod, s not ess than a proportonate amount,
(d) That durng the effectveness of the agreement the Unted States w
not reduce the preference of 2 cents per pound provded n secton 2470 of the
Interna Revenue Code (reatng to processng ta es on coconut o, etc.) wth
respect to artces whoy the producton of the Phppne Isands or artces
produced whoy from materas the growth or producton of the Phppne
Isands e cept that t may suspend the provsons of subsecton (a)(2) of
such secton durng any perod as to whch the Presdent of the Unted States,
after consutaton wth the Presdent of the Phppnes, fnds that adequate
suppes of nether copra nor coconut o, the product of the Phppnes, are
ready avaabe for processng n the Unted States.
S C. 404. T RMIN TION OP GR M NT.
The Presdent of the Unted States s not authorzed by secton 401 to enter
nto such e ecutve agreement uness t provdes
(a) Termnaton n Genera. That the agreement sha have no effect after
uy 3, 1974 and
(b) Termnaton by thfr Party.
(1) that the agreement may be termnated by ether party at any tme,
upon not ess than fve years notce and
(2) that f the Presdent of the Unted States or the Presdent of the
Phppnes determnes and procams that the other country has adopted
or apped measures or practces whch woud operate to nufy or mpar
any rght or obgaton provded for n such agreement, then the agreement
may be termnated upon not ess than s months notce and
(c) Termnaton or Suspenson by te Unted States.
(1) that f the Presdent of the Unted States determnes that a reason-
abe tme for the makng of the amendment to the Consttuton of the
Phppnes referred to n secton 402(b) has eapsed, but that such amend-
ment has not been made, he sha so procam and the e ecutve agreement
sha have no effect after the date of such procamaton and
(2) that f the Presdent of the Unted States determnes and procams
after consutaton wth the Presdent of the Phppnes, that the Repubc
of the Phppnes or any of ts potca subdvsons or the Phppne
Government Is n any manner dscrmnatng aganst ctzens of the Unted
States or any form of Unted States busness enterprse, then the Unted
States sha have the rght to suspend the effectveness of the whoe or any
porton of the agreement and
(3) that f the Presdent of the Unted States determnes and procams,
nfter consutaton wth the Presdent of the Phppnes, that the dscrm-
naton whch was the bass for the suspenson under paragraph (2) of ths
subsecton
( ) has ceased, the suspenson effected under pnragraph (2) sha
end or
( ) has not ceased after the apse of a tme determned by the
Presdent of the Unted States to be reasonabe, then the Unted States
sha have the rght to termnate the agreement upon not ess than s
months notce.
C. 405. CT O T RMIN TION O GR M NT.
Upon the termnaton of the agreement as provded n secton 404, the pro-
vsons of Tte II sha cease to have effect as aws of the Unted States.
S C. 406. INT RPR T TION O GR M NT.
The Presdent of the Unted States s not authorzed by secton 401 to enter
Into such e ecutve agreement uness t provdes that the acceptance of the
provsons of Ttes II and III s on the understandng that the defntons, and
provsons In the nature of defntons, contaned n secton 2 of Tte I, sha
appy n the nterpretaton of the provsons so accepted.
S C. 407. T RMIN TION O UT ORITY TO M GR M NT.
Whenever the Presdent of the Unted States determnes that a reasonabe
tme for the enterng nto, acceptance and takng effect, of the e ecutve agree-
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345
ment has eapsed, but that such agreement has not taken effect, he sha so pro-
cam, and thereupon hs authorty to enter nto such e ecutve agreement sha
termnate, and the provsons of Tte II sha cease to have effect as aws of the
Unted States.
S C. 40 . CTI D T O GR M NT.
When the Presdent of the Unted States determnes that the e ecutve agree-
ment entered nto under secton 401 has been accepted by the Congress of the
Phppnes by aw and that the Congress of the Phppnes has enacted the
egsaton the enactment of whch s, under secton 401, a condton precedent
to the takng effect of the agreement, he sha so procam, and n hs procamaton
specfy the effectve date of the agreement.
TITL MISC LL N OUS.
S C. 501. SUSP NSION ND T RMIN TION O GR M NT IN C S
O DISCRIMIN TION.
(a) Suspenson. If the Presdent of the Unted States determnes, after
consutaton wth the Presdent of the Phppnes, that the Repubc of the
Phppnes or any of Its potca subdvsons or the Phppne Government s
n any manner dscrmnatng aganst ctzens of the Unted States or any form
of Unted States busness enterprse, he sha so procam, and thereupon the
effectveness of the agreement, or such part thereof as he may n the procama-
ton specfy as necessary n order adequatey to protect the Interests of the
Unted States, sha be suspended.
(b) Termnaton of Suspenson. If the Presdent of the Unted States, after
consutaton wth the Presdent of the Phppnes, determnes that the dscrm-
naton whch was the bass for the suspenson under subsecton (a) of ths
secton has ceased, he sha so procam, and thereupon the suspenson effected
under subsecton (a) sha end.
(c) Termnaton of greement. If the Presdent of the Unted States, after
consutaton wth the Presdent of the Phppnes, determnes that such ds-
crmnaton has not ceased, after the apse of a tme determned by hm to be
reasonabe, he sha so procam and gve to the Phppne Government notce
of the ntenton of the Unted States to termnate the agreement.
(d) Laws of the Unted State
(1) In case of suspenson. If the effectveness of the agreement s sus-
pended under subsecton (a) of ths secton, the provsons of Tte II of
ths ct sha cease to have effect as aws of the Unted States durng the
perod of the suspenson. If the suspenson Is of the effectveness of ony
part of the agreement, then such provsons of Tte II as the Presdent may
n hs procamaton under subsecton (a) specfy as necessary adequatey to
, protect the nterests of the Unted States, sha cease to have effect as aws
of the Unted States durng the perod of ths suspenson.
(2) In case of termnaton. If the agreement s termnated under sub-
secton (c) of ths secton, the provsons of Tte II of ths ct sha cease
to have effect as aws of the Unted States.
S C. 502. SUSP NSION O TITL II.
If the Presdent fnds that, durng the perod after uy 3, 1946, and before
the takng effect of the e ecutve agreement provded for n Tte I , the Gov-
ernment of the Phppnes s not puttng nto effect, or makng every effort to
put nto effect, to the fuest e tent possbe under ts Consttuton, the provsons
of Tte III of ths ct, or s not provdng for the aocaton of quotas on the
bass provded n secton 211, 212, or 214, respectvey, he sha so procam. On
the day foowng the date of such procamaton, such provsons of Tte II
sha be suspended as he may n the procamaton specfy as necessary n order
adequatey to protect the nterests of the Unted States. Such suspenson sha
contnue unt the takng effect of the e ecutve agreement provded for n Tte
I , whereupon the suspenson sha termnate and the suspended provsons sha
asan take effect and contnue n effect as aws of the Unted States durng the
effectveness of the agreement.
S C. 5C3. CUSTOMS DUTI S ON IMPORT TIONS ROM P ILIPPIN S.
rtces comng or mported nto the Unted States from the Phppnes, and
Phppne products comng or mported nto the Unted States, sha, e cept as
703672 46 2
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otherwse provded wth respect to Phppne artces by Tte II of ths ct
durng the perod such tte s n effect
(1) f entered, or wthdrawn from warehouse, n the Unted States for
consumpton, durng the perod from the day after the date of the enactment
of ths ct to uy 3, 1940, both dates Incusve, be sub|ect to the same dutes
as ke artces comng or mported nto the Unted States from foregn coun-
tres, e cept Cuba and
(2) f so entered or wthdrawn durng the perod after uy 3, 15)46, be
sub|ect to the same dutes as ke artces comng or mported nto the Unted
Stntes from other foregn countres, e cept Cuba.
S C. 504. UOT S ON P ILIPPIN RTICL S.
(a) stabshment by Presdent. fter the e ecutve agreement referred
to n Tte I has taken effect, then whenever the Presdent of the Unted States,
nfter the nvestgaton by the Unted States Tarff Commsson provded for n
subsecton (d), fnds, wth respect to any Phppnes artces (other than those
for whch quotas are estabshed by Part 2 of Tte II), that they are comng,
or key to come, nto substanta competton wth ke artces whch are tbe
product of the Unted States, he sha so procam, and In hs procamaton sha
estabsh the tota amount of such Phppne artces whch may n each of spec-
fed perods be entered, or wthdrawn from warehouse, n the Unted States for
consumpton. If he fnds that the aocaton of any quota so estabshed s neces-
sary to make the appcaton of the quota |ust and reasonabe between the Unted
Stntes and the Phppnes, he sha, n such procamaton or a subsequent
procamaton, provde the bass for such aocaton.
(b) Ma mum and Mnmum uotas. No quota sha be estabshed under
subsecton (a), wth respect to a Phppne artce, whch Is greater than the
amount of such artce whch n each of such specfed perods the Presdent
determnes may be so entered or wthdrawn from warehouse wthout comng
nto substanta competton wth ke artces whch are the product of the
Unted States e cept that In no case sha the quota be ess than the mnmnm
amount provded n that porton of such e ecutve agreement whch sets forth
the provsons of secton 403(c) (2) of ths ct.
(c) Duraton of uotas. ny quota estabshed pursuant to ths secton
sha become effectve at such tme as the Presdent sha desgnate (but not
before anuary 1, 194 ), and sha contnue n effect unt the Presdent, after
nvestgaton, fnds and procams that the condtons whch gave rse to the
estabshment of such quota no onger e st, but no such quota sha contnue
n effect after the termnaton of the e ecutve agreement provded for n Tte I .
(d) Investgaton by Tarff Commsson. The Unted States Tarff Comms-
son sha at the request of the Presdent, upon resouton of ether ouse of Con-
gress or concurrent resouton of both ouses of Congress, upon ts own moton,
or when n ts |udgment there Is good reason therefor, upon appcaton of any
nterested party, make an nvestgaton to ascertan (1) whether mports of a
Phppne artce (other than an artce for whch a quota s estabshed by Part 2
of Tte II) are comng, or are key to come, nto substanta competton wth
ke artces whch are the product of the Unted States (2) what s the greatest
amount of such artce whch may be entered, or wthdrawn from warehouse, n
the Unted States for consumpton, wthout comng nto substanta competton
wth ke artces whch are the product of the Unted States and (3) the tota
amount of such artce whch (durng the tweve months ended on the ast day
of the month precedng the month n whch occurs the date of the begnnng of
the nvestgaton) was entered or wthdrawn from warehouse, n the Unted
States for consumpton. Durng the course of the nvestgaton the Commsson
sha hod a pubc hearng, of whch reasonabe pubc notce sha be gven and
at whch partes Interested sha be afforded reasonabe opportunty to be present,
to produce evdence, and to be heard. The Commsson sha gve precedence to
such nvestgatons. The Commsson sha report the resuts of ts nvestga-
tons to the Presdent, and sha send copes of such report to each ouse of the
Congress.
S O. 505. PROC SSING T ON COCONUT OIL.
(a) empton for Phppnes. Secton 2470(a) (2) of the Interna Revenue
Code s amended by strkng out the word other wherever t appears n causes
( ) and ( ) thereof and by nsertng at the end of the paragraph a new sen-
tence to read as foows: The ta mposed by ths paragraph sha not appy to
any domestc processng after uy 3, 1974.
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347
(b) Suspenson of Secton 2470(a) (2) of Interna Revenue Code. When-
ever the Presdent, after consutaton wth the Presdent of the Phppnes, fnds
that adequate suppes of nether copra nor coconut o, the product of the Php-
pnes, are ready avaabe for processng In the Unted States, he sha so pro-
cam, and after the date of such procamaton the provsons of secton 2470(a)
(2) of the Interna Revenue Code sha be suspended unt the e praton of 30
days after he procams that, after consutaton wth the Presdent of the Php-
pnes, he has found that such adequate suppes are so ready avaabe.
S C. 506. T RMIN TION O P YM NTS INTO P ILIPPIN TR SURY.
(a) Notwthstandng the provsons of secton 4 of the ct of March , 1902
(32 Stat. 54, ch. 140), or of secton 19 of the ct of March 24, 1934 ( 4 Stat. 456,
ch. 4), as added to such ct by secton 6 of the ct of ugust 7, 1939 (53 Stat.
1232, ch. 502), or of the ct of November , 1945 ( 59 Stat. 577, ch. 454), or of any
other provson of aw, the proceeds of any dutes or ta es, coected subsequent to
uy 3, 1946, whch but for the enactment of ths ct woud be requred to be pad
nto the genera funds of the Treasury of the Phppnes or woud be hed n
separate or speca funds and pad nto the Treasury of the Phppnes, sha be
covered nto the genera fund of the Treasury of the Unted States.
(b) Sectons 2476 and 3343 of the Interna Revenue Code are repeaed, effec-
tve uy 4, 1946.
S C. 507. SP CI L CIS PRO ISIONS R L TING TO T P ILIP-
PIN S R P L D.
(a) Secton 2 00(a) (4) of the Interna Revenue Code s amended by amend-
ng the headng to read:
(4) cohoc Compounds from Puerto Rco and rgn Isands.
and by amendng subparagraph ( ) to read as foows:
( ) rgn Isands. or provsons reatng to ta on acohoc com-
pounds from the rgn Isands, see secton 3350.
(b) Sectons 3340, 3341, and 3342 of the Interna Revenue Code are repeaed,
effectve uy 4, 1946.
(c) Subchapter of Chapter 2 of the Interna Revenue Code s amended as
foows:
(1) y amendng the headng of such subchapter to read as foows:
SU C PT R PRO ISIONS O SP CI L PPLIC TION TO T
IRGIN ISL NDS ND PU RTO RICO.
(2) y strkng out the headng:
Part I Phppne Isands.
(3) y renumberng Parts II and III of such subchapter as Part I and
Part II , respectvey.
5 C. 50 . TR D GR M NTS WIT T P ILIPPIN S.
Unt uy 4,1974, no trade agreement sha be made wth the Phppnes under
secton 350, as amended, of the Tarff ct of 1930, uness, pror to such tme, the
Presdent of the Unted States has made the procamaton provded for n secton
407 of ths ct, or the e ecutve agreement provded for n Tte I of ths ct
has been termnated.
S C. 509. RIG TS O T IRD COUNTRI S.
The benefts granted by ths ct, and by the e ecutve agreement provded for
n Tte I , to the Phppnes, Phppne artces or products, and Phppne
ctzens, sha not, by reason of any provson of any e stng treaty or agree-
ment wth any thrd country, be e tended to such country or ts products, ctzens,
or sub|ects.
S C. 510. DMINISTR TION O TITL II.
(a) The provsons of Parts 1, 2, and 3 of Tte II sha be admnstered as
parts of the customs and nterna revenue aws of the Unted States.
(b) The provsons of Part 4 of Tte II sha be admnstered as a part of
the mmgraton aws of the Unted States.
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34
S C. 511. R P LS.
The foowng parts of cts are repeaed, effectve on the day foowng the
date of the enactment of ths ct:
(1) secton 301 of the Tarff ct of 1930
(2) secton 6 (e cept subsecton (g)) of the ct of March 24, 1934 (4
Stat. 450, ch. 4), as amended by the ct of ugust 7, 1939 (53 Stat. 122S,
ch. 502) and
(3) so much of secton 13 of such ct of March 24, 1934, as amended
by the ont resouton of une 29, 1944 (5 Stat. 626, ch. 323), as reads as
foows: fter the Phppne Isands have become a free and ndependent
naton there sha be eved, coected, and pad upon a artces comng nto
the Unted States from the Phppne Isands the rates of duty whch are
requred to be eved, coected, and pad upon ke artces mported from
other foregn countres: .
S C. 512. CTI D T .
Ths ct sha take effect on the day after the date of ts enactment, e cept
Part 2 of Tte II, whch sha tnke effect as of anuary 1,1946.
S C. 513. PPLIC TION O INT RN L R NU L WS TO PU RTO
RICO.
Secton 9 of the ct of March 2,1917 (39 Stat. 951, ch. 145) s amended to read
as foows:
Sec. 9. That the statutory aws of the Unted States not ocay nappcabe,
e cept as herenbefore or herenafter otherwse provded, sha have the same
force and effect n Puerto Rco as n the Unted States, e cept the nterna
revenue aws other than those contaned n the Phppne Trade ct of 1946:
Provded, however, That hereafter a ta es coected under the nterna revenue
aws of the Unted States on artces produced n Puerto Rco and transported
to the Unted States, or consumed n the sand sha be covered nto the Treasury
of Puerto Rco.
pproved pr 30,1946.
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ccrued pay of retred Unted States rmy offcer, treatment-
ct, Internatona Organzat ons Immuntes (Pubc Law 291)
ffated corporatons, eecton to fe separate ncome and e -
cess profts ta returns
coho ta , quors and artces from Puerto Rco, Phppne
Isands, and rgn Isands, Reguatons 24 amended -
mendments:
Court decson:
1GG0 (page 191, ths uetn).
Offce decson
I. T. 62 (C. . 3, 124 (1920)), revoked
Reguatons 116, sectons 405.201, 405.202 , 405.203,
405.205, 405.206, 405.209, and 405.501 ..
Reguatons 112
Sectons 35.710-1, 35.710-3, 35.710-4
Sectons 35.710-5, 35.7 0-(a), 35.7 1-(a), 35.7 1-1
(6), 35.7 3-1, 35.7 3-1(6), 35,7 3-2(a), 35.7 3-3,
35.7 3-3(c), 35.7 4-1 (added)
Secton 35.71 (a)-2.
Secton 35.732-1
Secton 35.742-3(6)
Reguatons 111
Secton 29.22 (a)-
Sectons 29.22(a)-21, 29.22(a)-22 (added), 29.161-1,
29.162-1, 29.166-1, 29.166-2 (added), 29.167-1,
29.167-2
Secton 29.22(b) (1)-1
Secton 29.22(b)(13)- -
Secton 29.22(d)-2
Sectons 29.23(a)-5(6), 29.24-2 -.-
Secton 29.124-10 (added) --
Secton 29.207-1
Sectons 29.273-1, 29.322-7
Secton 29.275-1
Secton 29.294-2 (added)
Secton 29.322-7
Sectons 29.3 0 -1, 29.3 0 -2, 29.3 0S-3, 29.3 0
(added)
Reguatons 110
Sectons 33.19 (added), 33.31
Secton 33.31 ---
Reguatons 109/
Secton 30.711 (a)-2..-
Secton 30.732-1
Sectons 30.7 0-1 (a), 30.7 1-1 (a)
Reguatons 10 , sectons 6.39, 6.43
Reguatons 107, sectons 403.203, 403.213, 403.227
Reguatons 106
Sectons 402.203, 402.213, 402.227
Sectons 402.302, 402.402, 402.705
Rung No.
(1231
12321
12220
/1222G
12237
12303
12243
12263
12244
12322
12230
12267
122 0
12256
12296
12210
12324
1229
12277
12317
1227
12264
122 0
12329
1226
12329
1229
12242
12310
12267
122 0
12230
122 0
122 1
122 1
12207
(349)
G
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350
mendments Contnued.
Reguatons 105
Secton 1.17 .
Sectons 1.73, 1.93
Reguatons 104
Secton 23.19 (added)
Secton 23.31
Reguatons 103
Secton 19.22(b)
Secton 19.22(b)(13)- .
Sectons 19.23(a)-15(ft), 19.24-2
Secton 19.124-10 (added)
Sectons 19.273-1, 19.322-7
Sectons 19.3 0 -1, 19.3 0 -2, 19.3 0 -3, 19.3 0 -4
(added)
Reguatons 101, artce 22(b)(1)-1
Reguatons 94, 6, 77, 74, 09, 65, 62, 45, 33
Reguatons , secton 319.33
Reguatons 24, sectons 1 0.47, 1 0.4 , 1 0.49
Reguatons , artce 129
Saary stabzaton, suppementary reguatons
Treasury Decson 5237 (C. . 1943, 62 )
mortzaton, appcaton for tentatve ad|ustment of deduc-
tons, reguatons amended
nnutes, retrement, contrbutons pad towardp urchase of,
treatment
rmed forces of Unted States, provsons of Revenue ct of
1945 reatng to
Mm. 5972 page 44, ths uetn carfed
rmy offcer, Unted States, accrued retrement pay, ta abty..
ad debts recovery, reguatons amended
usness e penses:
mounts pad n compromse of sut for aeged voaton of
State anttrust aws, deductbty
ttornes s fees, defense of sut under mergency Prce
Contro ct of 1942
Payments to Unted States on account of actons nsttuted
by Prce dmnstrator, deductbty
Caforna, payment made to State by Caforna corporaton n
compromse of sut, capta e pendture
Capta e pendture, payment by Caforna corporaton to
State n compromse of sut
Capta gan dvdends, when so desgnated, not sub|ect to wth-
hodng of ta at source -
Capta gans and osses, I. T. 3336 (C. . 1939-2, 1 9) and I. T.
3600 (C. . 1943, 369), revoked
Carry-backs:
ffated corporatons, reguatons amended
Perod of mtaton n case of, Reguatons 111 amended...
Cgarettes:
Reguatons amended
Statement of remova of, for consumpton
November, 1945 and 1944
December, 1945 and 1944
anuary, 1946 and 1945
ebruary, 1946 and 1945
March, 1946 and 1945....:
pr, 1946 and 1945
Rung No.
12311
122 0
12242
12310
12324
1229
12317
1227
122 0
1229
12324
12317
122 2
12303
12305
12302
12266
1227
12327
12224
12275
1231
12321
12267
12249
12250
12307
12262
12262
1232
12320
12310
12329
12305
1220
12222
12259
122 4
12315
12332
G
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351
Rung No.
12254
153
12300
99
12239
5
122 9
6
12237
4
12279
14
12309
109
1229
27
12224
44
12275
49
12276
50
12240
90
12277
52
12291
114
12261
72
12327
74
12265
134
12290
96
12256
177
12242
115
12291
114
12226
112
12227
113
12310
11
12292
244
1226
209
12240
90
12214
234
12257
2 2
12323
237
12293
22
12323
237
12236
69
12292
244
12225
57
12214
234
12231
266
12243
190
12229
191
Ctzens of Puerto Rco, status of, for Unted States ncome ta
purposes
Ctzens of Unted States, bona fde resdents of a foregn
country, ncome earned theren, ta abty
Communty property:
awa .
awa, ncome of varous types, treatment for edera
ncome ta purposes
Okahoma
(See aso state ta : Communty property.)
Compensaton:
rmy offcers ncome from Unted States and possessons,
treatment
Lump-sum payment to wdow of deceased nava offcer,
ta abty
Mtary and nava forces
Members of, Reguatons 111 and 103 amended
Provsons of Revenue ct of 1945 reatng to
Musterng-out payments to armed forces of Unted States,
ta abty
Computaton of corporaton ncome and e cess profts ta es,
fsca year ta payer
Computatons, eectve method, reguatons amended
Consodated returns of affated corporatons for subsequent
years, eecton to fe
Contrbutons:
mpoyer to empovees trust or annuty pan,, deduct-
bty .
Pad toward purchase of retrement annutes, deductbty
Conventon between Unted States and rance, ta , effectve
anuary 1, 1945.
Converson, nvountary, dan aes awarded essee on condemna-
ton of eased property, gan or oss
Corporatons:
cqurng, acquston of stock may occur, when
ffated
Consodated e cess profts ta returns, Reguatons
110 and Reguatons 104 amended
Consodated returns for subsequent years, eecton to
fe
ecton to fe separate ncome and e cess profts ta
returns
Reguatons amended
arnngs and profts, dstrbuton of stock as dvdends,
ta abty
pectng carry-backs, e tenson of tme for payment of
ta es, reguatons
Corporaton ncome and e cess profts ta es, computaton of,
fsca year ta payer
Credts, undstrbuted profts ,
Court decsons:
en, coector, v. Trust Co. of Georga et at., e ecutors
urton-Suton O Co., Inc., v. Commssoner
Cherry Cotton Ms, Inc., v. Unted States
Commssoner urton-Suton O Co., Inc., v
Commssoner v. Crawford
Commssoner v. sher et a., e ecutors
Commssoner v. owers
Commssoner ercues Gasone Co., Inc., v
Commssoner v. omes
Commssoner eey Co. v
Commssoner eey Co. and Tabot Ms v
G
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352
Rung No.
Court decsons Contnued.
Commssoner rby Petroeum Co. v
Commssoner v. Longhorn Portand Cement Co
Commssoner Lusthaus v
Commssoner v. San ntono Portand Cement Co
Commssoner Tabot Ms
Commssoner v. Tower
Commssoner v. Wco
Crawford Commssoner v
ernandez v. Wener
sher e a., e ecutors Commssoner v
owers Commssoner v .
ercues Gasone Co., Inc., v. Commssoner
omes Commssoner v
ohnson Unted States v
eey Co. v. Commssoner
eey Co. and Tabot Ms v. Commssoner
rby Petroeum Co. v. Commssoner
Laboratores, Inc., II. R., v. Unted States et a
Longhorn Portand Cement Co. Commssoner v
Lusthaus v. Commssoner
Peope of the Stae of Inos, etc., v. Unted States
Rompe Unted States v
San ntono Portand Cement Co. Commssoner v
Sommers et a. Unted Staes v
State of New York et a. v. Unted States -
Tabot Ms v. Commssoner
Tower Commssoner v
Trust Co. of Georga et a., e ecutors en, coector, v
Unted States Cherry Cotton Ms, Inc., v -
Unted States v. ohnson
Unted Sates ct a. II. R. Laboratores, Inc., v
Unted States Peope of the Stae of Inos, etc., v
Unted States v. Rompe
Unted States v. Sommers et a
Unted States Stae of New York et a. v
Wener ernandez v
Wco Commssoner v
Credt for ta es, cuadoran not profts ta
Credt for ta es pad:
cuadoran net profts ta
Me co
Credts:
Corporaton, contract restrctng payment of dvdends
oregn ta es, dvdends from foregn subsdary, pad from
profts of dfferent years, segregaton
12236
12249
12273
12249
12243
12274
12272
12236
12215
12292
12225
12214
12231
12255
12243
12229
12236
12246
12249
12273
12312
12216
12249
12255
12245
12243
12274
12257
12293
12255
12246
12312
12216
12255
1224
12215
12272
12213
12213
12253
12214
12204
Deductons:
mortzaton, appcaton for tentatve ad|ustments, regu-
atons amended
mount pad n compromse of sut for aeged voaton of
of State anttrust aws
Contrbutons pad toward purchase of retrement annutes,
treatment
mpoyer s contrbutons to empoyees trust or annuty
pan, treatment
Nontrade or nonbusness e penses, reguatons amended..
O and gas eases, percentage depeton
Payments made to hoders of corporate obgatons, treat-
ment
1227
12249
12327
12261
12317
12236
G
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353
Deductons Contnued.
Payments on account of voatons of 0. P. . reguatons,
accrua date
Payments to Unted States on account of voatons of
O. P. . reguatons
Standard, eecton to take
Defcences attrbutabe to carry-backs, etc., cams for refund,
Reguatons 111 amended
Depeton, o and gas wes, short-ved n-o payment rghts..
Deprecaton, bass for, o n pace, sae or assgnment
Dstrbutons:
Reorganzaton pan, wthhodng at source
Stock of corporaton, dvdend from earnngs and profts,
ta abty
Dstrct of Coumba, husband and wfe, property hed as ten-
ants by the entrety, ncome from, treatment
Dvdends:
Capta gan, pad to nonresdent aen ndvdua and
nonresdent foregn corporaton, wthodng ta at source
Restrctng payment, credts of corporatons
.
conomc stabzaton, wages and saares, reguatons amended
cuador, profts ta , credt for
mpoyment ta es:
Interna Revenue Code
mpoyees
onneve Power dmnstrator
Uncompensated offcers
cepted servces
Martme servces
Offcers and members of crews empoyed by
War Shppng dmnstraton
Offcers and members of crews of vesses
edera Insurance Contrbutons ct, rate ncrease
postponed, reguatons amended
Wages, servces performed for War Shppng dmns-
traton or onneve Power dmnstrator
Reguatons 106 amended
Reguatons 107 amended
Unpad ta es, prorty of Unted States cam
state ta :
Communty property
Lousana
Te as
Reguatons 10 and 105 amended
Transfers ntended to take effect after death, Reguatons
105 amended
Transfers n trust
Power to ater, amend, or revoke
Revocaton of power to amend
cess profts net ncome f ncome credt s used, reguatons
amended
cess profts net ncome or defct, e ceptons and mtaton of
amounts to be ncuded n average base perod net ncome
cess profts ta :
Decared vaue, termnaton
Post-war refund, reguatons amended
Reguatons 112 and 109 amended
Ta abe years begnnng after December 31, 1941, Regua-
tons 112 amended
Rung No.
1230
12307
12202
12329
12251
12323
1222
12292
12299
1232
12214
12217
12213
122 1
12232
122 1
12233
12207
122 1
122 1
122 1
12312
12215
12216
122 0
12311
12231
12257
12267
12256
12266
12230
122 0
12322
G
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0
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354
penses:
ttorney s fees, deductbty
Certan nontrade or nonbusness, deductbty, reguatons
amended
Medca, denta, etc., deductbty
Traveng, deductbty
tenson of tme for payment of ta es by corporatons e pect-
ng carry-backs
.
ees, attorneys , defense of sut under mergency Prce Contro
ct of 1942
gure to be used n determnng reserve and other pocy
abty credt, fe nsurance companes
rearms, mportaton, Reguatons amended
sca year ta payers, computaton of corporaton ncome and
e cess profts ta es
oor stocks ta es, recovery of refunds
oregn country, ctzens of Unted States bona fde resdents of,
ncome earned theren, ta abty
oregn government, whoy owned corporatons, ta abty of
ncome
orm W-2, 1946, rues for reproducng (C. . 1945, 329), car-
fed
rance, ta conventon between Unted States and, effectve
anuary 1, 1945
G-
Gan or oss:
Damages awarded essee for condemnaton of eased prop-
erty, treatment
Property, rea or persona, sod by reason of forecosure,
etc., treatment
Resdenta property, sae of
Sae of property, Mnnesota, bass
Gross ncome:
ppcaton of pocy stated n T. D. 54
Compensaton of rmy offcers, ta abty
Corporaton whoy owned by foregn government, ta a-
bty of ncome
Deducton, standard, eecton to take
conomc nterest n o n pace, sae or assgnment.- ...
mbezzed money, ta abty
Income earned from sources wthout Unted States,
ta abty
Lfe nsurance pad by reason of death of the nsured,
deductbty
Lump-sum payment to wdow of deceased nava offcer,
ta abty
O and gas eases
Partnershp, husband and wfe, ncome, ta abty
Property transferred for an amount ess than ts far
market vaue
Resdenta property, sae of
Tte nsurance company, New York, porton of premums
estabshed as rensurance reserve
Traveng and vng e penses, ta abty
Rung No.
12250
12317
12252
12225
1226
12250
12205
122 2
12240
12293
12300
12263
12206
12265
Page.
12290
96
12319
101
12203.
65
12241
9
12211
25
12279
14
12263
100
12202
76
12323
237
12272
6
12300
99
12324
26
12309
109
12309
109
32236
69
12273
9
12274
11
12295
15
12296
IS
12203
6o
12301
127
12225
57
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.
awa:
Communty property
Communty property, ncomes of varous types, treatment
for edera ncome ta purposes
usband and wfe:
Communty property
awa
Okahoma
Dstrct of Coumba, property hed as tenants by the
entrety, ncome from, treatment
awa, fng of returns
Partnershp, ta abty of ncome
Tenants by the entrety, Pennsyvana
L
Income of certan trusts, ta abty, Reguatons 111 amended..
Inspecton of returns, War Contracts Prce d|ustment oard-
Insurance companes:
Lfe, fgure to be used n computng reserve and other
pocy abty credt
Mutua, other than fe, etc., Reguatons 111 amended
New York tte, porton of premums estabshed as rensur-
ance reserve
Insurance, fe, amounts pad by reason of death of the nsured,
e cuson from gross ncome, reguatons amended
Interest, perod of mtaton n case of carry-backs and defcen-
ces resutng from carry-backs
Inventores, eectve method, reguatons amended
L.
Leases, o and gas, ncome from, treatment
Legsaton:
Seventy-nnth Congress
Pubc Law 291
Pubc Law 320
Pubc Law 321
Pubc Law 322
Pubc Law 371 --
Lmtaton, perod of, n case of carry-backs, and to nterest n
connecton wth defcences resutng from carry-backs
Lousana, communty nterests, vadty of ta
M.
Manufacturers e cse ta es:
Soft drnks, sae of, by States, ta abty
Toet preparatons, far market prce, method of determn-
ng...
Medca e penses, traveng e penses of mnor chd and parent
Me co, credt for ta es pad
Mtary forces:
Compensaton. (See Compensaton.)
Musterng-out payments, ta abty
Mtary forces, compensaton. (See Compensaton.)
Mnera waters, bottng and sae of by States, ta abty
Mnnesota, sae of property, bass for gan or oss
Msceaneous ta es:
rearms, mportaton of, Reguatons amended
Transportaton of property
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Mssour, rea property ta , accrua date for ncome ta pur-
poses
Money, embezzed, ta abty
N.
Narcotc aws, certan drugs covered by (P. L. 320)
Nava forces:
Compensaton. (See Compensaton.)
Lump-sum payment to wdow of deceased offcer, treat-
ment for edera ncome ta purposes
Musterng-out payments, ta abty
New York, tte nsurance company, porton of premums
estabshed as rensurance reserve
Nonresdent aens, ta conventon between rance and Unted
States, effectve anuary 1, 1945
Nonresdent aen stockhoders, dstrbutons to, n rcogranza-
ton pan, wthhodng
O.
Offce of Prce dmnstraton:
ccrua date of payments on account of voatons of
O. P. . reguatons
Payments to Unted States on account of voatons of
reguatons, deductbty
O and gas wes, depeton, short-ved n-o payment rghts. _
O n pace, economc nterest n, sae or assgnment, bass for
aowance of deprecaton and depeton .... ...
Okahoma, communty property
Oeomargarne:
Schedue of producton and materas used
November, 1945 and 1944
December, 1945 and 1944
anuary, 1946 and 1945 :.
ebruarv, 1946 and 1945.
March, 1946 and 1945 ..
pr, 1946 and 1945
Organzatons, nternatona, etc., e tenson of certan prv-
eges, e emptons, and mmuntes to
P.
Partnershp, husband and wfe, ncome of, ta abty
Penates, crcut court of appeas revew, fndngs of fact n a
crmna proceedng
Pennsyvana, tenants by the entrety, ncome from property...
Phppne Isands:
Lquors and artces from, Reguatons 24 amended
Trade reatons between Unted States and, ct to provde
for (P. L. 371)
Premums, New York tte nsurance company, porton of
premums estabshed as rensurance reserve
Prveges, e emptons, and mmuntes, e tenson of certan,
to nternatona organzatons, etc
Processng ta es, recovery of aowed refund
Property:
Condemnaton of eased, damages awarded essee, gan or oss
usband and wfe n Dstrct of Coumba hodng as
tenants by the entrety, ta abty of ncome
Rea or persona,.sod by reason of forecosure, gan or oss
Sae of, Mnnesota, bass for computng gan or oss
Transferred for an amount ess than ts far market vaue..
Rung No.
12212
12272
122 5
12309
12276
12301
12265
1222
1230
12307
12251
12323
12237
1221
12234
12270
12294
12313
12330
12220
12273
9
12274
11
12255
122
1223
4
12303
310
12325
334
12301
127
12220
323
12293
22
12290
96
12299

12319
101
12241
9
15
12295
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Puerto Rco:
Ctzens of, status of, for Unted States ncome ta purposes
Lquors and artces from, Reguatons 24 amended.-,
R.
Refund:
Post-war, e cess profts ta , reguatons amended
Processng and foor stocks ta es under grcutura d|ust-
ment ct - --
Refunds, cams for, based on carry-backs and to defcences
attrbutabe to carry-backs
Reguatons: mendments. (See mendments: Reguatons.)
Reguatons reatng to saary stabzaton, amended
Saary Stabzaton, suppementary
Reserve and other pocy abty credt, fe nsurance compa-
nes, fgure to be used
Returns:
Consodated, affated corporatons, reguatons amended.
Consodated, subsequent years, eecton to fe
Inspecton of, by War Prce Contracts d|ustment oard-
Separato ncome and e cess profts ta , eecton of affated
corporatons to fe
Royaty, advance, o and gas eases, treatment
S.
Saares and wages, stabzaton of, reguatons amended
Saary stabzaton, suppementary reguatons
Saary Stabzaton Unt, change n desgnaton of head of
Saes, resdenta property, gan or oss
Soft drnks, bottng and sae of by States, ta abty
Standard deducton, eecton to take
States:
Immunty from ta on sae of soft drnks, etc
Prorty of cam of Unted States for unpad unempoy-
ment compensaton ta es
Stock of empoyer corporaton, e ercse, transfer, etc., of em-
poyee s opton to purchase, treatment
T.
Ta Court of the Unted States, The, formery Unted States
oard of Ta ppeas:
Decsons of, st of acquescences and nonacquescences
Ta es:
cuadoran net profts, credt for
oregn
Credt for
Dvdends from foregn subsdary, pad from
profts of dfferent years, segregaton
Me co
Rea property, Mssour, accrua date for edera ncome
ta purposes...
Te as, communty nterests, vadty of ta
Tobacco:
Reguatons amended
Statement of manufactured, produced, by casses
October, 1945 and 1944
November, 1945 and 1944
December, 1945 and 1944
anuary, 1946 and 1945.
ebruary, 1946 and 1945 - -
March, 1946 and 1945 -
ung No.
12254
12303
12230
12293
12329
12217
12302
12205
12242
12291
12247
12226
12227
12236
12217
12302
12304
12203
12245
12202
12245
12312
12295
12326
12213
12204
12253
12212
12216
12305
12219
12221
1225
122 3
12314
12331
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Toet preparatons. (See Manufacturers e cse ta es.)
Trade reatons between Unted States and Phppne Isands,
ct to provde for (P. L. 371)
Transportaton of property, shpment beyond boundares of
Unted States 1
Traveng e penses, mnor chd and parent, deductbty as
medca e penses
Treaty, ta , rance and Unted States
Trust ncome, certan, ta abty
Trusts:
ppcabty of pocy ad down n T. D. 54
mpoyees , or annuty pan, contrbutons by empoyer,
deductbty
Spendthrft, revocaton of power to amend
U.
Unted States possessons, Puerto Rco, status of ctzens of, for
Unted States ncome ta purposes
.
esses, sae of surpus war-but (P. L. 321)
rgn Isands, quors and artces from, Reguatons 24
amended
W.
Wages, coecton of ncome ta at source, Reguatons 116
amended
Wages and saares, stabzaton of, reguatons amended
War Contracts Prce d|ustment oard, nspecton of returns
by.
War oss recoveres, computaton of ta , reguatons amended-.
War Powers ct, 1941, rst, amended (P. L. 322)
Wthhodng of ta at source, f ed or determnabe ncome,
treatment
Wthhodng of ta at source on wages, Reguatons 116 amended.
Wthhodng statement for 1946, rues for reproducng orm
W-2 carfed ---
Rung No.
12325
12269
12252
12265
12210
12211
12261
12257
12254
122 7
12303
12214
12217
12247
12266
122 6
1222
12244
12206
Pase.
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