SP CI L TT NTION s a írecten t0 cautíonary notíce on thís page that puh

-
ííshed ruííngs of the ureau do not hare the force and effect
of Treasury Decísíons and that they are appíícabíe oníy to facts presented ín the pubííshed case
Treasury Department : : : : : ureau of Internaí Revenue
Internaí Revenue uííetín
Cumuíatíve uííetín 1946-1
NU RY- UN 1916
IN T IS ISSU
Page
Introductory Notes € € I
Contents - I
Ruííngs Nos. 12201-12332 € ”
Ta Court of the Uníted States, The- formeríy Uníted
States oard of Ta ppeaís 1-5
Income Ta € ”
Part I ( . Internaí Revenue Code and . 193S
ct) 6-233
Part n (1937 and 1936 cts) 234-242
Part m (1935 and 1934 or Príor cts) .... 243-247
mpíoyment Ta es 24 -263
Mísceííaneous Ta es € ”
state Ta es 261-2 1
Saíes Ta es, etc 2 5-302
Mísceííaneous Ruííngs 303-322
Legísíatíon 323-34
Inde 349-35
The ruíínf reported ín (he I ííter mí Revenue uííetín íre for the ínformatíon of ta payers and theír counseí aa
showíng the trend of offícíaí opíníon ín the admínístratíon of (he uresa of Internaí Revenue the ruííngs other than
Treasury Decísíons have none of the force or effect of Treasury Decísíons and do not commít the Department to
any ínterpretatíon of the íaw whích has not been formaííy approved and promuígated by the Secretary of the
Treasury. ach ruííng embodíes the admínístratíve appíícatíon of the íaw and Treasury Decísíons to the entíre
state of facta upon whích a partícuíar case rests. It ís especíaííy to be noted that the same resuít wííí not neces-
sarííy be reached ín another case uníess aíí the materíaí facta are ídentícaí wíth those of the reported case. s ít ís
not aíways feasíbíe to pubíísh a compíete statement of the fads underíyíng each ruííng, there can be no assurance
that any sew case ís ídentícaí wíth the reported case. s bearíng out thís dístínctíon, ít may be observed that the
ruííngs pubííshed from tíme to tíme may appear to reverse ruííngs prevíousíy pubííshed.
Offícers of the ureau of Internaí Revenne are especíaííy cautíoned agaínst reachíng a concíusíon ín any case
mereíy oa the basís of símííaríty to a pubííshed ruííng, and shouíd base theír |udgment on the appíícatíon of aíí
pertínent provísíons of the taw and Treasury Decísíons to aíí the facta ín each case. These ruííngs shouíd be used
as aíds ín studyíng the íaw and íts formaí constructíon as made ín the reguíatíons and Treasury Decísíons pre-
víousíy íssued.
In addítíon to pubííshíng aíí Internaí Revenue Treasury Decísíons, ít ís the poíícy of the ureau of Internaí
Revenue to pubíísh aíí ruííngs and decísíons, íncíudíng opíníons of the Chíef Counseí for the ureau of Internaí
Revenue, whích, because they announce a ruííng or decísíon upon a noveí questíon or upon a questíon ín regard
to whích there e ísts no prevíousíy pubííshed ruííng or decísíon, or for other reasons, are of such ímportance as
to be of generaí ínterest It ís aíso the poíícy of the ureau to pubíísh aíí ruííngs or decísíons whích revoke,
modífy, amend, or affect ín any manner whatever any pubííshed ruííng or decísíon. In many ínstances opíníons
of the Chíef Counseí for the ureau of Internaí Revenue are not of generaí ínterest because they announce no
new ruííng or new constructíon of the revenue íaws but símpíy appíy ruííngs aíready made pubííc to certaín
sítuatíons of fact whích are wíthout specíaí sígnífícance. It ís not the poíícy of the ureau to pubíísh such opíníons.
Therefore, the numbers assígned to the pubííshed opíníons of the Chíef Counseí for the ureau of Internaí
Revenne are not consecutíve. No unpubííshed ruííng or decísíon wííí be cíted or reííed upon by any offícer or
empíoyee of the ureau of Internaí Revenue as a precedent ín the dísposítíon of other case . Uníess otherwíse
specífícaííy índícated, aíí pubííshed ruííngs and decísíons have receíved the consíderatíon and approvaí of tha
Chíef Connseí for the ureau of Internaí Revenne.
UNIT D ST T S GO RNM NT PRINTING O IC : W S INGTON : 1946
or soíe by Superíntendent of Documents, U. S. Government Príntíng Offíce, Washíngton 25, D C
See back of títíe for príces
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The Internaí Revenue uííetín servíce for 1946 wííí consíst of bí-
weekíy buííetíns and semíannuaí cumuíatíve buííetíns.
The bíweekíy buííetíns wííí contaín the ruííngs and decísíons to be
made pubííc and aíí Treasury Department Decísíons (known as Treas-
ury Decísíons) pertaíníng to Internaí Revenue matters. The semí-
annuaí cumuíatíve buííetíns wííí contaín aíí ruííngs and decísíons
(íncíudíng Treasury Decísíons) pubííshed duríng the prevíous 6 months.
The compíete uííetín servíce may be obtaíned, on a subscríptíon
basís, from the Superíntendent of Documents, Government Príntíng
Offíce, Washíngton 25, D. C, for 2.50 per year foreígn, 3.75. Síngíe
copíes of the bíweekíy uííetín, 10 cents each.
New subscríbers and others desíríng to obtaín the 1919, 1920, and
1921 Income Ta Servíce may do so from the Superíntendent of Docu-
ments at príces as foííows: Dígest of Income Ta Ruííngs No. 19
(contaíníng dígests of aíí ruííngs appearíng ín Cumuíatíve uííetíns
1 to 5, íncíusíve), 50 cents per copy Cumuíatíve uííetíns Nos. 1 to 5,
contaíníng ín fuíí aíí ruííngs pubííshed sínce príí, 1919, to and íncíud-
íng December, 1921, as foííows: No. 1, 30 cento No. 2, 25 cents No. 3,
30 cents No. 4, 30 cents: No. 5, 25 cents.
Persons desíríng to obtaín Saíes Ta Cumuíatíve uííetíns for
uíy-December, 1921, may procure- them from the Superíntendent of
Documents at 5 cents per copy.
Persons desíríng to obtaín the Internaí Revenue uííetín servíce for
the years 1922 to 1945, íncíusíve, may do so at príces as foííows:
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.
Cumuíatíve uííetín.
írst 6 months. Second 6 months.
1-1
II-í
III- í
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
Príce (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 bííía from October 3,1913, to Revenue
ct of 193 , Incíusíve and on amendments thereto.
Persons desíríngto obtaín the servíce ín dígest form may do so at
príces as foííows: Dígest No. 13 (1922-1924), 60 cents Dígest No. 17
(1925), 25 cents Dígest No. 21 (1926), 15 cents Dígest No. 22 (1925-
1927), 35 cents and Dígest (íncome ta ruííngs oníy, príí, 1919, to
December, 1930, íncíusíve), 1.50.
íí ínquíríes ín regard to these pubíícatíons and subscríptíons shouíd
be sent to the Superíntendent of Documents, Government Príntíng
Offíce, Washíngton 25, D. C.
(íí)
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INTRODUCTORY NOT S.
The Internaí Revenue Cumuíatíve uííetín 1946-1, ín addítíon to
aíí decísíons of the Treasury Department (caííed Treasury Decísíons)
pertaíníng to Internaí Revenue matters, contaíns opíníons of the
Chíef Counseí, and ruííngs and decísíons pertaíníng to íncome, estate,
gíft, saíes, capítaí stock, e cess profíts, empíoyment, socíaí securíty,
mísceííaneous ta es, and íegísíatíon affectíng the revenue statutes, as
índícated on the títíe page of thís uííetín, pubííshed ín the bíweekíy
uííetíns (1946, Nos. 1 to 12, íncíusíve) for the períod anuary 1 to
une 30, 1946. It aíso contaíns a cumuíatíve ííst of announcements
reíatíng to decísíons of The Ta Court of the Uníted States, formeríy
Uníted States oard of Ta ppeaís, pubííshed ín the Internaí
Revenue uííetín-Servíce from anuary 1 to une 30, 1946.
Income Ta ruííngs are prínted ín three parts. The ruííngs ín
Part I are prínted as Part I, (Internaí Revenue Code) and
(Revenue ct of 193 ), the íaw headíngs correspondíng wíth the
sectíons of the Code, as amended, and the 193 ct, respectíveíy, and
the reguíatíons headíngs correspondíng wíth the sectíon headíngs of
Reguíatíons 111 or 103 and the artícíe headíngs of Reguíatíons 101.
Ruííngs under the Revenue cts of 1937 and 1936 are prínted as Part
II, the íaw headíngs correspondíng wíth the sectíon headíngs of those
cts and the reguíatíons headíngs correspondíng wíth the artícíe head-
íngs of Reguíatíons 94. Ruííngs under the Revenue cts of 1935 and
1934 or príor cts are prínted as Part III, the íaw headíngs corre-
spondíng wíth the sectíon headíngs of the Revenue ct of 1934 and the
reguíatíons headíngs correspondíng wíth the artícíe headíngs of
Reguíatíons 6.
Ruííngs under Títíes III and I of the Socíaí Securíty ct and
undep Subchapters and C, Chapter 9, of the Internaí Revenue
Code ín force príor to anuary 1, 1940, are pubííshed under artícíe
headíngs of Reguíatíons 91 and 90, respectíveíy ruííngs under Sub-
chapters and C, Chapter 9, of the Code ín force on or after anuary
1, 1940. are pubííshed under the sectíon headíngs of Reguíatíons 106
and 107, respectíveíy ruííngs under the Carríers Ta íng ct of 1937
and under Subchapter , Chapter 9, of the Code, are pubííshed under
the artícíe headíngs of Reguíatíons 100 and ruííngs under Títíe III
of the Revenue ct of 1936 € ” Ta on un|ust enríchment € ” are coded
under the sectíons of that ct and the artícíe headíngs of Reguíatíons
95.
R I TIONS.
The foííowíng abbrevíatíons are used throughout the uííetín:
, , C, etc. € ” The names of índívíduaís.
. R. M. € ” Commíttee on ppeaís and Revíew memorandum.
R. R. € ” Commíttee on ppeaís and Revíew recommendatíon.
T. € ” ícohoí Ta Unít.
( I)
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I
. T. . € ” oard of Ta ppeaís.
C. € ” Cumuíatíve uííetín.
Ct. D € ” Court decísíon.
C. S. T. € ” Capítaí Stock Ta Dívísíon.
C. T. € ” Ta es on mpíoyment by Carríers.
D. C. € ” Treasury Department círcuíar. €
m. T. € ” Ta es Imposed by the Socíaí Securíty ct, the Carríers Ta íng ct
of 1937, and Subchapters , , and C of the Internaí Revenue Code.
. T. € ” state Ta Dívísíon.
0. C. M. € ” Generaí Counseí s, ssístant Generaí Counseí s, or Chíef Counseí s
memorandum.
1. R. . € ” Internaí Revenue uííetín.
I. R. C. € ” Internaí Revenue Code.
I. T. € ” Income Ta Unít.
M, N, , T, Z, etc. € ” The names of corporatíons, píaces, or busínesses, accord-
íng to conte t.
Mím. € ” Mímeographed íetter.
MS. or M. T. € ” Mísceííaneous Dívísíon.
O. or L. O. € ” Soíícítor s íaw opíníon.
O. D. € ” Offíce decísíon.
Op. , G. € ” Opíníon of the ttorney Generaí.
P. T. € ” Processíng Ta Dívísíon.
S. T. € ” Saíes Ta Dívísíon.
S1L € ” Sííver Ta Dívísíon.
S. M. € ” Soíícítor s memorandum.
Soí. Op. € ” Soíícítor s opíníon.
S. R. € ” Soíícítor s recommendatíon.
S. S. T. € ” Ta es on mpíoyment by others than carríers.
T. € ” Tobacco Dívísíon.
T. . M. € ” dvísory Ta oard memorandum.
T. . R. € ” dvísory Ta oard recommendatíon.
T. C € ” Ta Court of the Uníted States.
T. D. € ” Treasury Decísíon.
a and y are used to represent certaín numbers, and when used wíth the word
doííars 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 generaí pubííc may be ínformed
whether the Commíssíoner has acquíesced ín a decísíon of The Ta
Court of the Uníted States, formeríy known as the Uníted States
oard of Ta ppeaís, dísaííowíng a defícíency ín ta determíned by
the Commíssíoner to be due, announcement wííí be made ín the bí-
weekíy Internaí Revenue uííetín at the earííest practícabíe date.
Notíce that the Commíssíoner has acquíesced or nonacquíesced ín a
decísíon of The Ta Court reíates oníy to the íssue or íssues decíded
adverseíy to the Government. Decísíons so acquíesced ín shouíd be
reííed upon by offícers and empíoyees of the ureau of Internaí
Revenue as precedents ín the dísposítíon of other cases.
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CUMUL TI CONT NTS.
Ruííng 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
Ruííng.
1670.
1671
1672
1673
1674
Chíef Counseí s memoranda:
24742
24 10
24 23
24 49
24910
Ta Court of Uníted States:
96.
97...
9 ...
99..
100..
101
327...
1019..
11 5..
11 6..
11 7.
Ruííng.
Taí Court of Uníted States
Contínued.
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
Ruííng 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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#
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I
Ruííng.
Ta Court of Uníted States-
Contínued.
6090
61 0.
6376
6397
67 3
6906
6907
700
7502
77 4
394
41953
1049 0
109606
109913
110247
112051
112452
Offíce decísíons (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
Ruííng 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
Ruííng.
Offíce decísíons (I. T.) € ” Con.
3799
3 00 .
3 01
3 02
3 03
3 04
3 05
Offíce decísíons (MS.):
294
295
296
297
29
299
Offíce de ísíons (T.|:
152
153
154
155
156
167
15
159
160
161
162
163.
Mímeographs:
6967
6972
6972 (Suppí. 1)..
6976
69 7.
6020.
Círcuíar:
1 52
Ruííng 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-í, II-2, m-1, III-2, I -1, I -2. -í. -2, I-1, I-2. II-1. II-2, III-U
III-2, I -1. I -2. -í. -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.
Cumuíatíve uííetín.
Ruííng Nos.
Income Ta :
December, 1919 (No. 1)
anuarv- une, 1920 (No. 2)
uív-December, 1920 (No. 3)
anuarv- une, 1921 (No. 4)
uíy-December, 1921 (No. 5)
Saíes Ta :
1920 (S. T. 1-20)
anuary- une, 1921
uíy-December, 1921..
Internaí Revenue uííetín:
anuary- une, 1922 (No. 1-1)
uív-December, 1922 (No. 1-2)
anuarv- une, 1923 (No. II € ” 1)
uív-December, 1923 (No. 11-2)
anuarv- une, 1924 (No. III-í)
uíy-December, 1924 (No. 111-2)
anuary- une, 1925 (No. I -1)
uíy-December, 1925 (No. I -2)
anuarv- une, 1926 (No. -í)
uív-December, 1926 (No. -2).
anuary- une, 1927 (No. I-1)..
uív-December, 1927 (No. I-2)
anuary- une, 192 (No. II-1)
uíy-December, 192 (No. II-2)
anuarv- une, 1929 (No. III-1)
uíy-D ecember, 1929 (No. III-2)
anuary- une, 1930-(No. I -1).
uíy-December, 1930 (No. I -2)
anuary- une, 1931 (No. -í)_.
uíy-December, 1931 (No. -2)___
anuarv- une, 1932 (No. I-1)..
uív-December, 1932 (No. I-2).
anuary- une, 1933 (No. II-1)..
uív-December, 1933 (No. II-2)
anuarv- une, 1934 (No. III-1)
uíy-December, 1934 (No. III-2)
anuarv- une, 1935 (No. I -1).
uíy-December, 1935 (No. I -2) --
anuarv- une, 1936 (No. -1).
uíy-December, 1936 (No. -2)
anuarv- une, 1937 (1937-1)...
uív-December, 1937 (1937-2).
anuary- une, 193 (193 -1). - -
uíy-December, 193 (193 -2)
anuary- une, 1939 (1939-1 € ” Part 1 and Part 2).
uíy-December, 1939 (1939-2)
anuary- une, 1940 (1940-1)
uíy-December, 1940 (1940-2)
anuary- une, 1941 (1941-1)
uív-December, 1941 (1941-2)
anuarv- une, 1942 (1942-1).
uív-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 reíatíng to the acquíescence or nonacquíescence of the Commíssíoner In
decísíons of The Ta Court of tho Uníted States, formeríy the Uníted States oard of Ta
ppeaís, as prínted In the weekíy Internaí Revenue uííetíns from December 22. 192), to
December 31, 1931, íncíusíve, are pubííshed ín Cumuíatíve uííetín -2 (1931), pages 1-106.
Those prínted In weekíy uííetíns from anuary 1, 1932. to December 31, 1939, Incíusíve,
are pubííshed ín Cumuíatíve uííetín 1939-2, pares 1-73. Those prínted ín weekíy uíí-
etíns from anuary 1, 1940, to December 31, 1942, íncíusíve, and In semímonthíy uííetíns
from anuary 1, 1943, to December 31, 1944, Incíusíve, are pubííshed ín Cumuíatíve uííetín
1944, pages 1-51. Those prínted ín semímonthíy uííetíns duríng the caíendar year 1945 are
pubííshed ín Cumuíatíve uííetín 1945, pages 1-9. The ííst beíow, therefore, contaíns oníy
such announcements prínted In the bíweekíy uííetíns from anuary 1 to une 30, 1946,
íncíusíve.
1946-12-12326
The Commíssíoner acquíesces ín the foííowíng decísíons:
Ta payer.
Docket No.
oíume.
Page.
.
kers, íoyd D
ííen et u ., Lcíand
rmour, Phífíp D
ssocíated Patentees, Inc.1.
13.
oyd-Ríchardson Co
urke, Charíes
urke, Syívía
utíer Consoíídated Coaí Co.
Campbeíí et u ., N. Stuart
Cardeza, Charíotte D. M., estate of 1
Chapman, Samueí €
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 cquíescence reíates to resuít oníy.
1 cquíescence reíates oníy to the Issue whether the saíe by the ta payer of an Interest In Inheríted property
upon whích he cíaímed a deductíbíe íoss was a transactíon entered Into for profít.
1 state ta decísíon.
cquíescence reíates oníy to the foííowíng íssues: (a) s to the portíon of corpus producíng the 5,000
annuíty, when the oníy possíbíe remaíndermen were íssue yet to be begotten by a man 64 years oíd ín 1939,
chíídíess and havíng an ínvaííd wífe who díed soon thereafter, whether such property was Intestate property
of the creator of the trust and, as such, part of the gross estate of decedent, hís oníy chííd and heír. (6) s to
the two-thírds of the remaíníng corpus over whích decedent had and by her wííí e ercísed a power of appoínt-
ment ín favor of her son, when the oníy possíbíe íegatees ín defauít of appoíntment were íssue yet to be be-
gotten by a man 64 years oíd ín 1939, chíídíess and havíng an ínvaííd wífe who díed soon thereafter, whether
such property was íntestate property of the creator of the trust and, as such, part of the gross estate of dece-
dent, hís oníy chííd and heír, (c) s to the remaíníng one-thírd of the corpus, same íssue as In (a), above.
1 Un|ust enríchment ta decísíon.
(1)
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cquíescences € ” Contínued.
Ta payer.
Docket No. oíume. Page.
D.
Dade-Commonweaíth Títíe Co
Dana, Charíes
Davenport, Maícoím Cíífton
Deíp, rank
Dependabíe Packíng Provísíon Co., a Corporatíon .
Dependabíe Packíng Co., a Partnershíp
Dougherty Co. The P..
Draper Co., Inc -- –
.
ííís et u ., Oíín O
nnís et aí., Carríe Mae, e ecutors of estate of rank
G. nnís, Sr
nnís, Sr., rank G., estate of
.
aírfa Mutuaí Wood Products Co., aírfa , S. C
ederaí Uníon Insurance Co
ídeííty-Phííadeíphía Trust Co. et aí., e ecutors of
estate of Charíotte D. M. Cardeza
írst Natíonaí Dank ín Oshkosh, trustee of íbert W.
Príest Trust for the enefít of Itoía M. Ransom,
transferee
ouche, G. R
razer, oseph W. €
Generaí oods Corporatíon € ” € ”
Geyer, ertram
Geyer, Mary
Geyer, Mercedes G
Geyer, Corneíí Neweíí, Inc
Gever Co., The
Gíbbs et aí., Raíph ., e ecutors of estate of Louís .
oíb
Gííbert, oseph
Gííbert, íctor . -
Gíshoít Machíne 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 enríchment ta decísíon.
€ Order of dísmíssaí entered December 29, 1945, order of dísmíssaí vacated anuary 23, 1946, and decísíon
of no defícíency entered anuary 25, 1946.
1 state ta decísíon.
4 cquíescence reíates oníy to the foííowíng íssues: (o) s to the portíon of corpus producíng the 5.0ft
annuíty, when the oníy possíbíe remaíndermen were Issuo yet to be begotten by a man 64 years oíd ín 19 9,
chíídíess and havíng on Invaííd wífe who díed soon thereafter, whether such property was íntestate property
of the creator of the trust and, as such, part of the gross estate of decedent, hís oníy chííd and heír. (I) s
to the two-thírds of the remaíníng corpus over whích deqedent had and by her wííí e ercísed a power of
appoíntment ín favor of her son, when the oníy possíbíe íegatees In defauít of appoíntment were íssue yet
to be begotten by a man 64 years oíd ín 1939, chíídíess and havíng an ínvaííd wífe who díed soon thereafter,
whether such property was Intestate property of the creator of the trust and, as such, port of the gross estate
of decedent, bís oníy chííd and heír. (0 s to the remaíníng one-thírd of the corpus, same íssue as ín ( ).
above.
€ cquíescence reíates to resuít oníy.
Gíft to decísíon.
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cqotescences € ” Contínued.
Ta payer.
Docket No.
oíume.
.
arry Co., S. . -
ettíer, íízabeth S.
uber, rnst
.
oseph, rank
oseph et u ., rank
.
anawha aííey ank, The
níght, dward .
níght, Mííton
níght, Samueí
oíb, Louís ., estate of1
oppers Co.
raus, íd ward G
L.
Lantz ros. (Partnershíp)
LeRoy, Robert4
Lesííe, May ., estate of
Lesííe, Sr., Warren, índívíduaííy and as e ecutor of
estate of May . Lesííe.
Louísíana Land píoratíon Co
M.
Maííoy, veíyn € ”
Maííoy, rank R --
Maítíne Co., The --
Marshaíí, erbert
Mar , steííe G
Mcíntosh, íízabeth níght
Mítteíman et u ., Mauríce
Motor Products Corporatíon €
Murphy, Mary
Murphy, Wííííam R__ --
Myer, íma M
Myers, dward C
N.
ettíeton, íbert ., estate of
0.
Ohío attery Ignítíon 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 ppeaís.
1 Nonacquíescence pubííshed In Cumuíatíve uííetín I I (1927). page 7, wíthdrawn.
1 í(t ta decísíon.
1 Partíaí nonacquíescence pubííshed ín Cumuíatíve uííetín 1944, page 42, wíthdrawn.
Partíaí nonacquíescence pubííshed ín Cumuíatíve uííetín 1945, page , wíthdrawn.
– Nonacquíescence pubííshed ín Cumuíatíve uííetín 1943, page 37, wíthdrawn.
1 state ta decísíon.
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t |uT sc Nc S € ” Contínued.
Ta payer.
Parsons et u ., T. GrenvíUe
Patterson en|amín rankíín 1
Penczek, Charíes 1
Penczek, rank 1
Píper, Wííííam T
Príest ( íbert W.) Trust for the enefít of Itoía M.
Ransom, transferee
Purvín, Wííííam
R.
Rídgewood Provísíons, Inc.
Rogers, W.
Russeíí, Cíífton
S.
Sans, red - -
Santa uíaíía Míníng Co.1
Sínger Sewíng Machíne Co.4
Smíth, Robert L
Smíth, Wííííam W -
Southíand Ice Co., The
Spencer, Caroííne McCuííoch, estate of
Spencer et aí., ohn Mítcheíí, e ecutors of estate of
Caroííne McCuííoch Spencer €
Syracuse Trust Co., The, e ecutor of estate of íbert
. Nettíeton € –
Tayíor, W. L
Tayíor-Wharton Iron Steeí Co.
Thornton, íorence .
Townsend, va . :.
Tyíer, Steíía íkíns
W.
Wíeboídt, Pearí O...
Wíeboídt, 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
oíume.
6
21
5
5
5
oard of Ta ppeaís.
í Nonacquíescencc pubííshed In Cumuíatíve uííetín -2 (1931), page 97, wíthdrawn.
Un|ust enríchment ta decísíon.
Nonacquíescence pubííshed ín Cumuíatíve uííetín 1943, page 39, wíthdrawn.
cquíescence reíates oníy to the íssue whether amounts cíaímed as donatíons duríng the ta abíe yean
1934 and 1935 are aííowabíe as ordínary and necessary busíness e penses.
state ta decísíon.
€ cquíescence reíates to resuít oníy.
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5
The Commíssíoner does NOT acquíesce ín the foííowíng decísíons:
Ta payer.
Docket No.
oíume.
Page.
Campbeíí et u ., N. Stuart1
Cardeza, Charíotte D. M., estate of
Converse, dmund C
.
ídeííty-Phííadeíphía Trust Co. et aí., e ecutors of
estate of Charíotte D. M. Cardeza 1 --
.
Gray, Wííííam írkman
.
aííoweíí, oward T
M.
Maresí, Mar|oríe D., e ecutrí of estate of Pompeo
M. Maresí
Maresí, Pompeo M., estate of
Mc enna, Roy C
Mítcheíí, Cíarence .
Mutuaí ertííízer Co
s.
Sínger Sewíng Machíne Co. .
T.
Tower uíídíng Corporatíon..
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
Soí
125
Nonacquíescence reíates oníy to the Issue whether the íoss sustaíned by the ta payer upon the saíe o
an Interest Ln Inheríted property was a capítaí íoss or an ordínary íoss.
state ta decísíon.
– Nonacquíesceuoe reíates oníy to the foííowíng íssues: (o) s to the portíon of corpus producíng the 5,000
annuíty, whether that portíon of the corpus was dísposed of by the wííí or was íntestate property of dece-
dent s father as of the date of hís death and, as such, part of the gross estate of decedent, hís oníy chííd and
heír. (6) s to the two-thírds of the remaíníng corpus over whích decedent had and by her wííí e ercísed a
power of appoíntment ín favor of her son, whether renuncíatíon by the appoínteo prevented Incíusíon ín
gross estate of the property so appoínted, (c) s to the two-thírds of the remaíníng corpus mentíoned ín
It), ímmedíateíy above, when the appoíntment was eíercísed and renounced, whether íegatees ín defauít
of appoíntment couíd take the property so appoínted or whether ít was íntestate property of the creator
of the trust and, as such, a part of the grossestateof decedent, hís oníy chííd and heír, (íf) Whether a bequest
of 25,000 ín trust to maíntaín a mausoíeum ís deductíbíe from gross estate as funeraí e penses, (e) Whether
the e ecutors may deduct 6 per cent from gross estate for e ecutor s commíssíons when, for Pennsyívanía
ínherítance ta purposes, the Orphans Court íímíted the commíssíons to 3 per cent.
Oíft ta decísíon.
Nonacquíescence reíates oníy to the Issue concerníng the proper amount of ta payer s openíng ínventory
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.
Sectíon 19.22 (a) -1: What íncíuded ín gross 1946-7-12272
íncome. Ct. D. 166
INCOM T € ” INT RN L R NU COD € ” D CISION O SUPR M COURT.
1. Gboss Income € ” mbezzíed Monet € ” Reverbaí op Ta Court s
udgment Where Determínatíon Invoíved Místake of Law.
mbezzíed money does not constítute ta abíe Income to the em-
bezzíer under sectíon 22(a) of the Internaí Revenue Code. ta abíe
gaín ís condítíoned upon (1) the presence of a cíaím of ríght to the
aííeged gaín and (2) the absence of a defíníte, uncondítíonaí obíí-
gatíon to repay or return that whích wouíd otherwíse constítute a
gaín. The concíusíon that the ta payer receíved no ta abíe íncome
from the embezzíement Is unaítered by the fact that he subse-
quentíy díssípated aíí of such funds In gambííng houses. The Ta
Court s determínatíon that the embezzíed money constítuted ta abíe
Income to the embezzíer Invoíved a cíear-cut místake of íaw. The
court beíow was therefore |ustífíed ín reversíng that udgment
2. Decísíon ffírmed.
Decísíon of the Uníted States Círcuít Court of ppeaís, Nínth
Círcuít (14 ed. (2d), 933), reversíng memorandum opíníon of
The Ta Court of the Uníted States, affírmed.
Supreme Court of the Uníted States.
Commíssíoner of Internaí Revenue, petítíoner, v. Laírd Wííco and faud Wííco .
On wrít of certíorarí to the Uníted States Círcuít Conrt of ppeaís for the Nínth Círcuít
ebruary 25, 194a
opíníon.
Mr. ustíce Murphy deíívered the opíníon of the Court.
The soíe íssue here ís whether embezzíed money constítutes ta abíe Income to
the embezzíer under sectíon 22(a) of the Internaí Revenue Code.1
26 U. S. C € ž sectíon 22(a).
( )
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7
19.22(a)- .
The facts are stípuíated. The ta payer was empíoyed as a bookkeeper by a
transfer and warehouse company In Reno, Nev., from 1937 to 1942. e was paíd
hís saíary promptíy each month when due, ít not beíng the custom to aííow hím
to draw hís saíary ín advance. In une, 1942, the company s books were audíted
and ít was díscovered for the fírst tíme that the ta payer had converted 12,74 .60
to hís own use duríng 1941.1 Thís amount was composed of mísceííaneous sums
of money beíongíng to the company whích he had receíved and coííected at
varíous tímes ín hís capacíty as bookkeeper. e faííed to deposít thís money to
the credít of the company. Instead he pocketed and wíthdrew payments ín cash
made to hím by customers, negíectíng to credít the customers accounts or
the company s accounts receívabíe wíth the funds receíved.
The ta payer íost practícaííy aíí of thís money ín varíous gambííng houses
ín Reno. The company never condoned or forgave the takíng of the money
and stííí hoíds hím ííabíe to restore ít. The ta payer was convícted In a Nevada
State court ín 1942 of the críme of embezzíement. e was sentenced to serve
from 2 to 14 years ín príson and was paroíed ín December, 1913.
The Commíssíoner determíned that the ta payer was requíred to report the
12,74 .60 embezzíed ín 1941 as Income receíved ín that year and asserted a ta
defícíency of 2,97 .09. The Ta Court sustaíned the Commíssíoner but the court
beíow reversed. (14 ed. (2d), 933.) We granted certíorarí because of a
confííct among círcuíts as to the ta abíííty of embezzíed money.
Sectíon 22(a) of the Internaí Revenue Code defínes gross íncome to Incíude
gaíns, profíts and íncome deríved from deaííngs ín property € €
growíng out of the ownershíp or use of or ínterest ín such property aíso
from the transactíon of any busíness carríed on for gaín or profít, or
gaíns or profíts and íncome deríved from any source whatever. The questíon
thus ís whether the wrongfuí acquísítíon of funds by an embezzíer shouíd be
íncíuded ín the statutory phrase gaíns or profíts and Income deríved from any
source whatever, thereby constítutíng ta abíe íncome to the embezzíer.
The Commíssíoner reííes upon the estabííshed príncípíe that orthodo con-
cepts of ownershíp faíí to refíect the outer boundaríes of ta atíon. s thís
Court has stated, ta ííabíííty may rest upon the en|oyment by the ta payer of
prívííeges and benefíts so substantíaí and ímportant as to make ít reasonabíe
and ust to deaí wíth hím as íf he were the owner, and to ta hím on that basís.
( urnet v. Weíís, 2 9 U. S., 670, 67 Ct. D. 6 , C. . II-1, 261 (1933) . See
eíveríng v. Cíífford, 309 U. S., 331 Ct. D. 1444, C. . 1940-1, 105 eíveríng t.
orst, 311-U. S., 112 Ct. D. 1472, C. . 1940-2, 206 .) ppíyíng that ruíe to thís
case, the Commíssíoner urges that the act of appropríatíng the property of another
to one s own use Is an e ercíse of a ma|or power of ownershíp even though the
act ís conscíousíy and entíreíy wrongfuí. s agaínst aíí the woríd e cept the
true owner the embezzíer Is the íegaí owner, at íeast whííe he remaíns In posses,
síon. The money or property acquíred ín thís uníawfuí manner, ít ís saíd, shouíd
therefore be treated as ta abíe íncome to the wrongdoer under sectíon 22(a).
We can not agree.
Sectíon 22(a) ís cast ín broad, sweepíng terms. It índícates the purpose
of Congress to use the fuíí measure of íts ta íng power wíthín those defínabíe
categoríes. ( eíveríng v. Cíífford, supra, 334.) The very essence of ta abíe
íncome, as that concept ís used ín sectíon 22(a), ís the accruaí of some gaín,
profít or benefít to the ta payer. Thís requírement of gaín, of course, must be
read ín íts statutory conte t. Not every benefít receíved by a ta payer from hís
íabor or ínvestment necessarííy renders hím ta abíe. Nor ís mere domíníon
over money or property decísíve ín aíí cases. In fact, no síngíe, concíusíve crí-
teríon has yet been found to determíne ín aíí sítuatíons what ís a sufíícíent gaín
to support the ímposítíon of an Income ta . No more can be saíd ín generaí than
that aíí reíevant facts and círcumstances must be consídered. (See Magííí,
Ta abíe Income (1945).)
or present purposes, however, ít ís enough to note that a ta abíe gaín Is
condítíoned upon (1) the presence of a cíaím of ríght to the aííeged gaín and
(2) the absence of a defíníte, uncondítíonaí obíígatíon to repay ov return that
whích wouíd otherwíse constítute a gaín. Wíthout some bona fíde íegaí or
equítabíe cíaím, even though ít be contíngent or contested In nature, the ta payer
€ The sum of 110,147.41 waa embezzíed daríng 1942 but that amount ía not In Issue
ín thís case.
€ The decísíon beíow Is ín accord wíth Mc níght v. Commíssíoner (127 ed. (2d), 072
(C. C. . 5)). but ía ín confííct wíth urríe v. eíveríng (126 ed. (2d), 723 (C. C. . )).
See aíso oston Consoí. os Co. v. Commíssíoner (12 ed. (2d), 47 , 476-477 (C. C. .
1, concurríng opíníon)).
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19.22(a)- .
6
can not be saíd to have receíved any gaín or profít wíthín the reach of sectíon
22(a). (See North merícan Oíí v. urnet, 2 6 U. S., 417, 424 Ct. D. 499, C. .
I-1, 293 (1932) .) Nor can ta abíe Income accrue from the mere receípt of
property or money whích one Is obííged to return or repay to the ríghtfuí owner,
as ín the case of a íoan or credít Ta abíe íncome may aríse, to be sure, from the
use or ín connectíon wíth the use of such property. Thus If the ta payer uses
the property hímseíf so as to secure a gaín or profít therefrom, he may be ta abíe
to that e tent. nd íf the uncondítíonaí índebtedness ís canceíed or retíred
ta abíe íncome may adhere, under certaín círcumstances, to the ta payer. ut
apart from such factors the bare receípt of property or money whoííy beíongíng
to another íacks the essentíaí characterístícs of a gaín or profít wíthín the meaníng
of sectíon 22(a).
We faíí to perceíve any reason for appíyíng dífferent príncípíes to a sítuatíon
where one embezzíes or steaís money from another. Moraí turpítude ís not a
touchstone of ta abíííty. The questíon, rather, ís whether the ta payer ín fact
receíved a statutory gaín, profít or benefít. That the ta payer s motíve may
have been reprehensíbíe or the mode of receípt Iííegaí has no bearíng upon the
appíícatíon of sectíon 22(a).
It ís obvíous that the ta payer ín thís Instance, In embezzííng the 12,74 .60,
receíved the money wíthout any sembíance of a bona fíde cíaím of ríght. nd
he was at aíí tímes under an unquaíífíed duty and obíígatíon to repay the money
to hís empíoyer. Under Nevada íaw the críme of embezzíement was compíete
whenever an appropríatíon was made the empíoyer was entítíed to repíevy the
money as soon as ít was appropríated or to have ít summarííy restored by a
magístrate. The empíoyer, moreover, at aíí tímes heíd the ta payer ííabíe to
return the fuíí amount. The debtor-credítor reíatíonshíp was defíníte and un-
condítíonaí. íí ríght, títíe and ínterest ín the money rested wíth the empíoyer.
The ta payer thus receíved no ta abíe íncome from the embezzíement.
Thís concíusíon ís unaítered by the fact that the ta payer subsequentíy díssí-
pated aíí of the embezzíed funds In gambííng houses. The íoss or díssípatíon of
money can not create ta abíe íncome here any more than the ínsoívency or bank-
ruptcy of an ordínary borrower causes the íoans to be treated as ta abíe Income
to the borrower. (See Mc níght v. Commíssíoner, 127 ed. (2d), 572, 573-574.)
In each ínstance the ta abíííty Is determíned from the círcumstances surroundíng
the receípt and hoídíng of the money rather than by the dísastrous use to whích
ít ís put. Líkewíse, the fact that a theft or íoan may gíve ríse to a deductíbíe
íoss to the owner of the money does not create íncome to the embezzíer or the
borrower. Such deductíons, íackíng any necessarííy correspondíng reíatíonshíp
to gaíns and beíng a matter of íegísíatíve grace, faíí to demonstrate the e ístence
of ta abíe íncome.
ad the ta payer used the embezzíed money and obtaíned profíts therefrom
such profíts míght have been ta abíe regardíess of the íííegaííty ínvoíved. Or
had hís empíoyer condoned or forgíven any part of the uníawfuí appropríatíon
the ta payer míght have been sub|ect to ta ííabíííty to that e tent ut neíther
sítuatíon ís present ín thís proceedíng and we need not e píore such possíbííítíes.
Sanctíoníng a ta under the círcumstances before us wouíd serve oníy to gíve
the Uníted States an un|ustífíed preference as to part of the money whích ríght-
fuííy and compíeteíy beíongs to the ta payer s empíoyer.
The Ta Court s determínatíon that the embezzíed money constítuted ta abíe
íncome to the embezzíer, a resuít In accord wíth íts príor decísíons on the íssue,
ínvoíved a cíear-cut místake of íaw. The court beíow was therefore |ustífíed
ín reversíng that |udgment. (Cf. Commíssíoner v. Scottísh merícan Co., 323
State v. Troíson (21 Ncv., 41 , 32 P., 930).
€ Nevada Compííed Laws (1929), sectíon 6S1 Perkíns v. orne (3 Nev., 557) Stude-
boker Co. v. Wítcher (44 Nev., 46 . 199 P., 477).
€ Nevada Compííed Laws 1929), sectíons 11243-11246.
See ohnson v. Uníted States (31 D. S., 1 9 Ct. D. 1576, C. . 1943, 10421) : Uníted
States v. Suííívan (274 U. S., 259 T. D. 402 , C . I-2, 177 (1927) ) CaUíceíí v.
Commíssíoner (135 ed. (2d), 4 ) Chadíck v. Uníted States (77 ed. (2d), 961)
Natíonaí Cíty ank v. eíveríng (9 ed. (2d), 93 Ct. D. 13 6, C. . 1939-1 (Part 1),
2111). See aíso Uann v. Nash 1932 (1 . € ž 752) Southern v. . . 1933 (1 . .,
71 .
€ See pruance . Commíssíoner (43 . T. ., 221), reversed sub nom. Mc níght v. Com-
míssíoner (127 ed. (2d), 572) urríe v. Commíssíoner (Prentíce- aíí 1941 . T. .
Memorandum Decísíons, par. 41.0 5, affírmed, 126 ed. (2d), 723). The admínístratíve
ínterpretatíon ís to the same effect as The Ta Court s decísíons. (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. Commíssíoner, 320 U. S., 4 0
Ct D. 1597, C. . 1944, 56 Trust of íngham v. Commíssíoner, 325 U. S., 365
Ct. D. 1643, I. R. . 1945-13, 6 .)
ffírmed.
Mr. ustíce ackson took no part In the consíderatíon or decísíon of thís case.
Díssentíng opíníon by Mr. ustíce urton.
Sectíon 19.22(a)-í: What íncíuded ín gross 1946-7-12273
íncome. Ct. D. 1669
( íso Sectíon 1 1, Sectíon 19.1 1-1.)
INCOM T € ” INT RN L R NU COD € ” D CISION OP SUPR M COURT.
1. Gross Income € ” Partnershíp € ” usband and Wífe € ” Ta Court s
índíngs Supported by vídence.
In order to reduce Income ta es the ta payer e ecuted a bííí of saíe
to hís wífe by whích he purported to seíí her an undívíded haíf ín-
terest ín hís busíness. The wífe e ecuted a partnershíp agreement
under whích she undertook to share profíts and íosses wíth her hus-
band. She paíd for her ínterest wíth money gíven her by the hus-
band and by notes payabíe from the profíts of the busíness ascríbed to
the wífe after the partnershíp was formed. The wífe contínued to
heíp ín the stores as she had before, but the husband retaíned fuíí
controí of the management of the busíness, and for the year here In-
voíved fííed socíaí securíty ta returns as owner of the busíness. The
wífe couíd not draw checks on the busíness bank account, and whííe
profíts were determíned annuaííy and credíted equaííy, no wíth-
drawaís thereof couíd be made uníess both partners agreed. eíd:
The evídence supported the fíndíng of The Ta Court that the part-
nershíp arrangements were mereíy superfícíaí and díd not resuít In
. changíng the husband s economíc ínterest ín the busíness, and that
the wífe was not a genuíne partner thereín.
2. Decísíon ffírmed. €
Decísíon of the Uníted States Círcuít Court of ppeaís, Thírd
Círcuít (149 ed. (2d), 232), affírmíng decísíon of The Ta Court of
the Uníted States (3 T. C, 540), affírmed.
Supreme Court of the Uníted States.
. L. Lusthaus, petítíoner, v. Commíssíoner of Internaí Revenue.
On wrít of certíorarí to the Uníted States Círcuít Court of ppeaís for the Thírd Círcuít.
ebruary 25, 1946.
OPINION.
Mr. ustíce íack deíívered the opíníon of the Court.
The questíon In thís case ís the same as ín Commíssíoner v. Tower, No. 317,
decíded thís day Ct D. 1670, page 11, thís uííetín . ere, too, the Commís-
síoner made a defícíency assessment agaínst the husband, petítíoner, for pur-
ported partnershíp earníngs reported In hís wífe s return for 1940 and not reported
by the petítíoner. The Commíssíoner s actíon was based on a determínatíon,
made after an Investígatíon, that for íncome ta purposes no partnershíp e ísted
between the petítíoner and hís wífe. The foííowíng are the controíííng facts:
Petítíoner has operated a furníture busíness sínce 191 and sínce 1933 he has
conducted a retaíí furníture busíness at two stores íocated ín Uníontown, Pa.
ís wífe heíped out at the stores whenever she was needed wíthout receívíng
compensatíon. In 1939 the petítíoner found hímseíf confronted wíth the pros-
pect of íarge profíts and correspondíngíy íarge íncome ta es. Thís caused hím
concern and he caííed ín hís accountant and attorney. Together they worked
out a pían for the supposed husband-wífe partnershíp here ínvoíved. The wífe
703672 € ” 46 2
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519.22(a)-í. 10
had ííttíe to do wíth the whoíe transactíon, and testífíed when asked about the
detaíís that on the advíce of counseí I díd what he toíd me to do. In accord-
ance wíth the pían the petítíoner e ecuted a bííí of saíe to hís wífe by whích
he purported to seíí her an undívíded haíf Interest In the busíness for 105,253. 1.
t the same tíme the wífe e ecuted a partnershíp agreement under whích she
undertook to share profíts and íosses wíth her husband. The wífe paíd for her
undívíded haíf ínterest ín the foííowíng way. Petítíoner borrowed 25,000 from
a bank and gave hís wífe a check for 50,000 drawn agaínst the amount bor-
rowed and further funds whích he had wíthdrawn from the busíness and de-
posíted wíth the bank for that purpose. The wífe then gave petítíoner her
check for 50,255. 1 and the petítíoner repaíd the 25,000 to the bank. Petítíoner s
wífe aíso gave hím 11 notes ín the amount of 5,000 each of whích accordíng to
an understandíng were to be paíd from the profíts to be ascríbed to the wífe
under the partnershíp agreement.1 Petítíoner reported ín a 1040 gíft ta return
that he had made a gíft of 50,000 to hís wífe. Pennsyívanía íssued petítíoner
and hís wífe a certífícate authorízíng them to carry on the busíness as a partner-
shíp. When the partnershíp was formed petítíoner s wífe owned her home,
vaíued at twenty-fíve to thírty-thousand doííars and securítíes worth up to
25,000.
fter the partnershíp was formed the wífe contínued to heíp out In the storea
whenever she was needed |ust as she had aíways done. ut petítíoner retaíned
fuíí controí of the management of the busíness. ís wífe was not permítted to
draw checks on the eusíness bank account. Duríng the ta abíe year here In-
voíved the husband fííed socíaí securíty ta returns as owner of the busíness.
Neíther partner couíd seíí or assígn the Interest ascríbed by the partnershíp
agreement wíthout the other s wrítten consent. Though, at the cíose of each
year the profíts of the busíness were credíted on the books to petítíoner and hís
wífe equaííy, no wíthdrawaís were to be made under the partnershíp agreement
uníess both partners agreed. The husband drew no saíary. Duríng 1940, whích
ís the ta year here ínvoíved, the busíness net profíts were ín e cess of 0,000,
from whích the respondent wíthdrew about 4,500 and hís wífe wíthdrew oníy
59.01. The foííowíng year they wíthdrew appro ímateíy 16,000 and 19,900
respectíveíy, the wífe s wíthdrawaí beíng used íargeíy to pay back some of the
5,000 notes gíven as part of her aííeged contríbutíon to the partnershíp capítaí.
On thís evídence The Ta Court found that the wífe acquíred no separate Interest
ín the partnershíp by turníng back to her husband the 50,000 whích he had
gíven her condítíoned upon her turníng ít back to hím and that the partnershíp
arrangements were mereíy superfícíaí, and díd not resuít In changíng the hus-
band s economíc ínterest ín the busíness. It concíuded that whííe the partner-
shíp was cíothed In the outer garment of íegaí respectabíííty Its e ístence
couíd not b9 recognízed for íncome ta purposes. (3 T. C, 540.) The círcuít
court of appeaís affírmed. (149 ed. (2d), 232.) The petítíoner chaííenges The
Ta Court s fíndíng that the wífe was not a genuíne partner on the ground that
the evídence díd not support It. We hoíd that ít díd.
or the reasons set out ín our opíníon ín Commíssíoner v. Tower, No. 17,
decíded thís day, the decísíon of the círcuít court of appeaís ís affírmed.
ffírmed.
Mr. ustíce ackson took no part ín the consíderatíon or decísíon of thís ease.
Díssentíng opíníon by Mr. ustíce Reed, In whích the Chíef ustíce |oíns.
1 The Tní Court found as foííows on thís phase:
e the husband wouíd make her a gíft of a part of the purchase príce and take
her promíssory notes for the baíance. She couíd pay off the notes from her share of
her profíts of the busíness. part of the testímony supportíng thís fíndíng was gíven
by the husband as foííows:
. nd what were the terms of that oraí agreement
. ust as I stated, that she the wífe wouíd pay me 50,000 ín cash and the baíance
to be paíd ín notes.
. Payabíe yearíy 1
. Payabíe yearíy In notes.
. In the amount of 5,000 each for 11 years
. Yes.
. Where was she to get the amount to be paíd off yearíy t
. rom the profíts of the busíness.
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11 19.22(a)-í.

Sectíon 19.22(a)-í: What íncíuded ín gross 1946-7-12274
íncome. Ct. D. 1670
( íso Sectíon 1 1, Sectíon 19.1 1-1.)
INCOM T € ” INT RN L R NU COD € ” D CISION O SUPR M COURT.
1. Gross Income- -Partnershíp € ” usband and Wífe € ” Ta Court s
índíngs Supported by vídence.
In order to reduce íncome ta es a corporatíon of whích the ta -
payer was presídent and príncípaí stockhoíder was díssoíved and a
íímíted partnershíp was formed, the ta payer gívíng to hís wífe stock
ín the corporatíon bn the condítíon that she contríbute the vaíue of
the donated stock to the partnershíp. Under the partnershíp agree-
ment the ta payer contínued to have the controíííng voíce In the
busíness, the wífe takíng part ín neíther the management nor oper-
atíon of the busíness and contríbutíng no vítaí addítíonaí servíce.
eíd: udged by the actuaí resuít achíeved, The Ta Court was
ustífíed In fíndíng that the partnershíp brought about no reaí change
In the economíc reíatíon of the husband and wífe to the íncome
ín questíon. There was more than ampíe evídence to support the
court s fíndíng that no genuíne uníon for partnershíp busíness
purposes was ever Intended and that the husband earned the Income.
The fact that the wífe míght be consídered a partner under State
íaw ís ímmateríaí.
2. Decísíon Reversed.
Decísíon of the Uníted States Círcuít Court of ppeaís, Sí th
Círcuít (14 ed. (2d), 3 ), reversíng decísíon of The Ta Court of
the Uníted States (3 T. C, 390), reversed.
Supreme Court of the Uníted States.
Commíssíoner of Internaí Revenue, petítíoner, v. rancís . Tower.
On wrít of certíorarí to the Uníted States Círcuít Court of ppeaís for the Sí th Círcuít.
ebruary 25, 1946.
OPINION.
Mr. ustíce íack deíívered the opíníon of the Court.
The Commíssíoner of Internaí Revenue determíned that respondent s wífe had
ín her íncome ta returns for 1940 and 1941 reported as her earníngs, íncome that
actuaííy had been earned by her husband but had not been reported ín hís returns.
defícíency assessment was consequentíy íevíed agaínst the respondent by the
Commíssíoner. The partícuíar earníngs ínvoíved were a portíon of net Income
attríbuted to a partnershíp, to whích, accordíng to íts records, 0 per cent of the
capítaí bad been contríbuted by respondent and hís wífe, of thís, 51 per cent had
been contríbuted by the respondent and 39 per cent by hís wífe. If as respondent
asserts, the círcumstances surroundíng the formatíon and operatíon of thís part-
nershíp were such as to bríng ít wíthín the meaníng of sectíons 1 1 and 1 2 of
Títíe 26 of the Uníted States Code, then the respondent and hís wífe are ííabíe
oníy for theír respectíve índívíduaí share of the busíness Income. These sectíons
províde that partners are ííabíe for ta es on partnershíp íncome oníy ín theír
índívídnaí capacíty, and that each partner shaíí report hís dístríbutíve share
of the ordínary net íncome € of the partnershíp. ut sectíon 11 of
Títíe 26 of the Uníted States Code íevíes a ta on the net íncome of every índí-
víduaí, and the net Income Is requíred to be computed on the basís of gross
Income as defíned In sectíon 22(a), whích brondíy íncíudes aíí earníngs of any
índívíduaí from any source whatever. nd we have heíd that the domínant
purposes of aíí sectíons of the revenue íaws, íncíudíng these, ís the ta atíon of
íncome to those who earn or otherwíse create the ríght to receíve It and en|oy
the benefít of It when paíd. ( eíveríng v. orst, 11 U. S., 112, 119 Ct. D.
1472, C. . 1940-2, 206 .) The basíc questíon ín decídíng whether the Commís-
síoner s defícíency assessment was proper, ís: Was the íncome attríbuted to the
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19.22(a)-í.
12
wífe as a partner íncome from a partnershíp for whích she aíone was ííabíe In
her Indívíduaí capacíty, as províded by 26 U. S. C, sectíons 1 1 and 1 2, or
díd the husband, despíte the cíaímed partnershíp actuaííy create the ríght to
receíve and en|oy the benefít of the íncome, so as to make ít ta abíe to hím under
sectíons 11 and 22(a)
The respondent asked The Ta Court to revíew and redetermíne the Commís-
síoner s defícíency assessment, ínsístíng that the íncome ín questíon was not the
respondent s but hís wífe s share ín a partnershíp. Tíre Commíssíoner urged ín
The Ta Court that the wífe had contríbuted neíther servíces nor capítaí to the
partnershíp and that her aííeged membershíp ín the partnershíp was a sham.
Respondent admítted that she had not contríbuted her servíces, but contended
that she had made a contríbutíon of capítaí as shown by the amount attríbuted
to her on the partnershíp books and that she was a bona fíde partner. er aííeged
contríbutíon consísted .of assets whích the husband cíaímed to have gíven to
her throe days before the formatíon of the partnershíp.
The Ta Court concíuded that the respondent had never e ecuted a compíete
gíft of the assets whích hís wífe íater purportedíy contríbuted to the partnershíp
that after the partnershíp was formed respondent contínued to manage and
controí the busíness as he had done for many years before that hís economíc
reíatíon to the portíon of the partnershíp íncome whích was attríbuted to hís
wífe was such that ít contínued to be avaííabíe to be used for the same purposes
as before, íncíudíng ordínary famííy purposes that the effect of the whoíe part-
nershíp arrangement, so far as ít ínvoíved respondent and hís wífe was a mere
reaííocatíon of respondent s busíness íncome wíthín the famííy group and that
the díssoíutíon of the corporatíon and the subsequent formatíon of the partner-
shíp fuífíííed no busíness purpose other than a reductíon of the husband s íncome
ta . The Ta Court concíuded that thís famííy partnershíp íncome was In fact
earned by the husband that there was no reaí partnershíp between petítíoner
and hís wífe for purposes of carryíng on a busíness enterpríse that the wífe
receíved a portíon of the íncome oníy by reason of her marítaí reíatíonshíp,
and heíd that the entíre íncome was, therefore, ta abíe to the respondent under
26 U. S. C, sectíon 22(a) (3 T. C, 396). The Círcuít Court of ppeaís for the
Sí th Círcuít reversed. (14 ed. (2d), 3 .) The Círcuít Court of ppeaís
for the Thírd Círcuít Court sustaíned a hoídíng by The Ta Court, based on facts
ín aíí materíaí respects símííar to the ones ín thís case, that aíí the íncome from
a husband-wífe partnershíp was ta abíe íncome of the husband under 26 U. S. O.
sectíon 22(a). (Lusthaus v. Commíssíoner, 149 ed. (2d), 232.) Other círcuít
courts of appeaís have aíso sustaíned símííar hoídíng by The Ta Court1 s
Is índícated by numerous Ta Court decísíons, attempts to escape surta es by
dívídíng one earned Income ínto two or more through the devíce of famííy part-
nershíps have recentíy created an acute probíem. ecause of the varíous víews
e pressed as to controíííng íegaí príncípíes ín the decísíons díscussíng such
arrangements, we granted certíorarí both ín thís and the Lusthaus case.
statement of some of the pertínent facts shown by the record and on whích
The Ta Court based íts concíusíon wííí cast some ííght on the probíem. roadíy
speakíng, these facts foííow a generaí pattern found ín many of the famííy
partnershíp cases. The busíness here ínvoíved, It. . Towers Iron Works, ía
íocated ín Greenvíííe, Mích., and has manufactured and soíd sawmííí machínery
and wood and metaí stampíngs. Respondent s partícípatíon ín the busíness dates
back 2 years. e has managed and controííed the company sínce the death of
hís father ín 1927. Duríng the ta years ín questíon the busíness had 40 to 60
empíoyees on íts pay roíí. rom 1933 to 1937 the busíness was operated as a
corporatíon. The respondent was the presídent of the corporatíon and owned
445 out of the 500 shares outstandíng, hís wífe was více presídent and owned 5
shares, and one Mr. mídon was the secretary, owníng 25 shares. These three
aíso constítuted the board of dírectors, and whííe Towers managed the corporate
affaírs, mídon acted as bookkeeper. Mrs. Towers performed no busíness servíces.
In 1937 substantíaí profíts poínted to íncreased ta es. Respondent s attorney
and hís ta accountant advísed hím that díssoíutíon of the corporatíon and for-
matíon of a partnershíp wíth hís wífe as a príncípaí partner, wouíd resuít In
ta savíngs and eíím ínate the necessíty of fíííng varíous corporate returns. The
suggested change was put ínto effect. ugust 25, 1937, respondent transferred
arí v. ones (131 ed. (2d), 292 (C. C. . 10)) Mead v. Commíssíoner (1 1 ed.
(2d), 323 (C. C. . 51) rgo v. Commíssíoner (150 ed. (2d), 67 (C. C. . 5)) Lorcm
. Commíssíoner (14 ed. (2d). 527 (C. C. . 6)).
ee cases coííected ín Pauí, Partnershíps In Ta voídance (13 . W. L. Revíew, 121).
or about sí months ímmedíateíy foííowíng íncorporatíon the respondent owned oní|

425 shares.
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13 19.22(a)-í.
190 shares of the corporatíon s stock to hís wífe on the condítíon that she píace
the corporate assets represented by these shares ínto the new partnershíp.
Respondent, treatíng the stock transfer to hís wífe as a gíft vaíued at 57,000,
íater paíd a gíft ta of 213.44. Three days after the stock transfer the corpora-
tíon was ííquídated, a íímíted partnershíp was formed and a certífícate of part-
nershíp was duíy fííed for record as requíred by Míchígan íaw. ccordíng to
the books, the vaíue of the donated stock became the wífe s contríbutíon to the
partnershíp. The formatíon of the partnershíp díd not In any way aíter the
conduct of the busíness, e cept that both mídon and Tower ceased to draw
saíaríes. y an agreement made shortíy thereafter, a read|ustment was made
ín the amount of profíts each partner was to receíve, under whích mídon a
share became the equívaíent of, íf not more than, the amount of the saíary he
had prevíousíy drawn. Under the partnershíp agreement the respondent con-
tínued to have the controíííng voíce ín the busíness, as to purchases, saíes,
saíaríes, the tíme of dístríbutíon of íncome, and aíí other essentíaís. Respondent s
wífe, as a íímíted partner, was prohíbíted from partícípatíon In the conduct of
the busíness. So far as appears, the part of her purported share of the partner-
shíp busíness she actuaííy e pended was used to buy what a husband usuaííy buys
for hís wífe such as cíothes and thíngs for the famííy or to carry on actívítíes
ordínarííy of ínterest to the famííy as a group.
We are of the opíníon that the foregoíng facts were suffícíent to support The
Ta Court s fíndíng that the wífe was not a partner ín the busíness. partner-
shíp ís generaííy saíd to be created when persons oín together theír money, goods,
íabor, or skííí for the purpose of carryíng on a trade, professíon, or busíness and
when there ís communíty of ínterest ín the profíts and íosses. When the e íst-
ence of an aííeged partnershíp arrangement ís chaííenged by outsíders, the ques-
tíon aríses whether the partners reaííy and truíy íntended to oín together for
the purpose of carryíng on busíness and sharíng ín the profíts or íosses or both.
nd theír íntentíon In thís respect ís a questíon of fact, to be determíned from
testímony díscíosed by theír agreement, consídered as a whoíe, and by theír
conduct ín e ecutíon of íts provísíons. (Drennen v. London ssurance Co., 113
U. S., 51, 50 Co v. íckman, . L. Cas., 26 .) We see no reason why thís
generaí ruíe shouíd not appíy ín ta cases where the Government chaííenges
the e ístence of a partnershíp for ta purposes.9 ere The Ta Court, actíng
pursuant to íts authoríty In connectíon wíth the enforcement of ederaí íaws,
has found from testímony before ít that respondent and hís wífe díd not íntend
to carry on busíness as a partnershíp. Thís fíndíng of fact, sínce supported by
evídence, ís fínaí. (Commíssíoner v. dnínger, 20 U. ., 467, 475 Ct. D. 1596,
C. . 1944, 4 4 Dohson v. Commíssíoner, 20 U. S., 4 9 Ct. D. 1597, C. . 1944,
66 .) The decísíon of The Ta Court was therefore correct uníess, as respondent
contends, The Ta Court erroneousíy dísregarded or ímproperíy appííed certaín
íegaí príncípíes.
Respondent contends that the partnershíp arrangement here In questíon wouíd
have been vaííd under Míchígan íaw and argues that The Ta Court shouíd
consequentíy have heíd ít vaííd for ta purposes aíso. ut The Ta Court In
matíng a fínaí authorítatíve fíndíng on the questíon whether thís was a reaí
partnershíp ís not governed by how Míchígan íaw míght treat the same cír-
cumstances for purposes of State íaw. Thus, Míchígan couíd and míght decíde
that the stock-transfer here was suffícíent under State íaw to pass títíe to the
wífe, so that ín the event of her death ít wouíd pass to whatever members of
her famííy wouíd be entítíed to receíve ít under Míchígan íaw of descent and
dístríbutíon. ut Míchígan can not by íts decísíons and íaws governíng ques-
tíons over whích It has fínaí say, aíso decíde íssues of ederaí ta íaw and
thus hamper the effectíve enforcement of a vaííd ederaí ta íevíed agaínst
earned íncome. The contentíon was re|ected ín Lucas v. arí (2 1 U. S., 111).
There husband and wífe made an agreement for oínt ownershíp of the hus-
band s future íncome. ssumíng that the husband s future earníngs were
under Caíífornía íaw consídered as partíy owned by the wífe, thís Court refused
Sínce the Commíssíoner had determíned that the wífe was not reaííy a partner, the
harden rested upon the respondent to produce suffícíent evídence to convínce The Ta Court
that the Commíssíoner s determínatíon was wrong. (Weích v. eíveríng, 290 U. S., Iíí
Ct. D. 755, C. . II-2, 112 (1933) Commíssíoner v.- eínínger, 320 D. ., 467, 475
Ct. D. 159 , C. . 1944, 4 4 .)
Ward v. Thompson (22 ow., 330, 33, 334) ííeehan v. aíentíne (145 U. S., 611, 61 ).
€ What wouíd be the effect for ta purposes shouíd ta payers after hoídíng themseíves
out as a partnershíp íater chaííenge the e ístence of the partnershíp. Is a questíon not
here presented. (See íggíns v. Smíth, 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 whích wouíd have
reduced the ederaí ta on Income actuaííy earned by the husband. nd In
eíveríng v. Cíífford (309 U. S., 331, 334-335 Ct. D. 1444, C. . 1940-1, 105 ),
we heíd that the purpose of 26 U. S. C. sectíon 22(a) to ta aíí íncome agaínst
the person who controííed íts dístríbutíon couíd not be frustrated by famííy
group arrangements, even though the dístríbutíon arrangements were vaííd for
State íaw purposes. The statutes of Congress desígned to ta Income actuaííy
earned because of the capítaí and efforts of each índívíduaí member of a |oínt
enterpríse are not to be frustrated by State íaws whích for State purposes
prescríbe the reíatíons of the members to each other and to outsíders. (Cf.
urke-Waggoner ssn. v. opkíns, 269 U. S., 110, 114 T. D. 3790, C. . -í, 147
(1926) .)
Respondent contends that The Ta Court s hoídíng that he ís ta abíe for the
profíts from the partnershíp Is contrary to a príncípíe íong recognízed by thís
Court that The íegaí ríght of a ta payer to decrease the amount of what wouíd
otherwíse be hís ta es, or aítogether avoíd them, by means whích the íaw
permíts, can not be doubted. (Gregory v. eíveríng, 293 U. S., 465, 469 Ct. D.
911, C. . I -í, 193 (1935) .) We do not re|ect that príncípíe. It wouíd
cíearíy appíy, for e ampíe, In a sítuatíon where a member of a partnershíp,
In order to keep from payíng future ta es on partnershíp profíts and ín order
to get ínto a íower íncome ta bracket seíís hís Interest to a stranger, reíínquísh-
íng aíí controí of the busíness. ut the sítuatíon ís díffíerent where the ta -
payer draws a paper purportíng to seíí hís partnershíp Interest even to a
stranger, though actuaííy he contínues to controí the busíness to the e tent
he hnd before the saíe and channeís the Income to hís wífe. Then a show-
íng that the arrangement was made for the e press purpose of reducíng ta es
símpíy íends further support to the Inference that the husband stííí controís
the íncome from hís partnershíp ínterest, that no partnershíp reaííy e ísts
and that earníngs are reaííy hís and are therefore ta abíe to hím and not to
hís wífe. The arrangement we are here consíderíng was of the type where proof
of a motíve to reduce íncome ta es símpíy íent further strength to the ínference
drawn by The Ta Court that the wífe was not reaííy a partner. (See Pauí,
Seíected Studíes In ederaí Ta atíon, 2d seríes, pages 293-300.) To ruíe other-
wíse wouíd mean orderíng The Ta Court to shut íts eyes to the reaíítíes of ta
avoídance schemes.
Respondent urges further that The Ta Court erroneousíy concíuded that the
gíft was íneffectíve for ta purposes because ít was condítíonaí and therefore
Incompíete. The Government defends The Ta Court s concíusíon. We do not
fínd ít necessary to decíde thís Issue. The questíon here ís not símpíy who
actuaííy owned a share of the capítaí attríbuted to the wífe on the partnershíp
books. person may be ta ed on profíts earned from property, where he neíther
owns n r controís ít. (Lucas v. aríe, supra.) The íssue Is who earned the
íncome and that íssue depends on whether thís husband and wífe reaííy Intended
to carry on busíness as a partnershíp. Those íssues can not be decíded símpíy
by íookíng at a síngíe step In a compíícated transactíon. To decíde who worked
for, otherwíse created or controííed the íncome, aíí steps ín the process of
earníng the profíts must be tnken ínto consíderatíon. (See Commíssíoner .
Court oídíng Co., 324 U. S., 331, 334 Ct D. 1636, I. R. . 1945-7, 3 .) Of
course, the questíon of íegaí ownershíp of the capítaí purportedíy contríbuted
by a wífe wííí frequentíy throw ííght on the broader questíon of whether an
aííeged partnershíp Is reaí or pretended. ut here The Ta Court s fíndíngs
were supported by a suffícíent number of other factors ín the transactíon,
so that we need not decíde whether íts hoídíng as to the compíeteness of the
gíft was correct. (Cf. eíveríng v. aííock, 309 U. S., 106, 117, 11 Ot. D. 1440.
O. . 1940-1, 223 urnet v. Weíís, 2 9 U. S., 670, 677 Ct. D. 6 , O. . -1, 261
(1933) .)
There can be no questíon that a wífe and a husband may, under certaín
círcumstances, become partners for ta , as for other, purposes. If she eíther
ínvests capítaí orígínatíng wíth her or substantíaííy contríbutes to the controí
and management of the busíness, or otherwíse performs vítaí addítíonaí servíces,
or does aíí of these thíngs she may be a partner as contempíated by 26 U. S. C. sec-
tíons 1 1, 1 2. The Ta Court has recognízed that under such círcumstances
the Income beíongs to the wífe wífe may become a generaí or a íímíted
Under some círcumstances Income has been heíd ta abíe to a person even when hedoea
not own or controí It. (Uníted tateí v. oUet d Chíoago R. Co., 15 D. ., 44, 46 Ct D.
1540, C. . 1942-1, 19 .)
€ See e. g. Croft v. Commíttíoner (T. C No. 14 2, decíded ebruary 9, 1944)
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15
29.22 (a)-í
partner wíth her husband. ut when she does not share In the management and
controí of the busíness, contríbutes no vítaí addítíonaí servíce, and where the
husband purports In some way to have gíven her a partnershíp ínterest, The Ta
Court may properíy take these círcumstances Into consíderatíon ín determíníng
whether the partnershíp Is reaí wíthín the meaníng of the ederaí revenue íaws.
It Is the command of the ta payer over the Income whích ís the concern of
the ta íaws. ( arrtíon v. Schaffner, 312 U. S., 579, 5 1, 5 2 Ct. D. 1503, C. .
1941-1, 321 .) nd Income earned by one person ís ta abíe as hís, íf gíven to
another for the donor s satísfactíon. ( eíveríng v. orst, 311 U. S., 112, 119.)
It Is for thís reason, among others, that we saíd ín eíveríng v. Cíífford, supra,
335, that transactíons between husband and wífe caícuíated to reduce famííy
ta es shouíd aíways be sub|ected to specíaí scrutíny. or If under círcum-
stances such as those now before us, the end resuít of the creatíon of a husband-
wífe partnershíp, though vaííd under State íaws, ís that íncome produced by the
husband s efforts contínues to be used for the same busíness and famííy purposes
as before the partnershíp, faííure to ta ít as the husband s íncome wouíd frustrate
the purpose of 26 U. S. C. sectíon 22(a). y the símpíe e pedíent of drawíng
up papers, síngíe ta earníngs can not be dívíded ínto two ta uníts and surta es
can not be thus avoíded.
udged by the actuaí resuít achíeved. The Ta Court was |ustífíed ín fíndíng
that the partnershíp here brought about no reaí change ín the economíc reíatíon
of the husband and hís wífe to the íncome ín questíon. efore the partnershíp
the husband managed, controííed, and díd a good deaí of the work Invoíved ín
runníng the busíness, and he had funds at hís dísposaí whích he eíther used ín
the busíness or e pended for famííy purposes. The wífe díd not contríbute her
servíces to the busíness and receíved money from her husband for her own and
famííy e penses. fter the partnershíp was formed the husband contínued
to controí and manage the busíness e actíy as he had before. The wífe agaín
took no part In the management or operatíon of the busíness. If ít be saíd that as
a íímíted partner she couíd not share ín the management wíthout becomíng a
generaí partner the resuít ís the same. No capítaí not avaííabíe for use In the
busíness before was brought Into the busíness as a resuít of the formatíon of the
partnershíp. nd the wífe drew on íncome whích the partnershíp books attríb-
uted to her oníy for purposes of buyíng and payíng for the type of thíngs she
had bought for herseíf, home and famííy before the partnarshíp was formed.
Consequentíy the resuít of the partnershíp was a mere paper reaííocatíon of
íncome among the famííy members. The actuaíítíes of theír reíatíon to the
íncome díd not change. There was, thus, more than ampíe evídence to support
The Ta Court s fíndíng that no genuíne uníon for partnershíp busíness purposes
was ever Intended and that the husband earned the Income. Whether the eví-
dence wouíd have supported a dífferent fíndíng by The Ta Court ís a questíon
not here presented.
Reversed.
Concurríng opíníon by Mr. ustíce Rutíedoe.
The Chíef ustíce and Mr. ustíce Reed díssent for the reasons stated ín theír
díssentíng opíníon In Lusthaut v. Commíssíoner, No. 263, decíded to-day Ct. D.
166 , page 9, thís uííetín .
Mr. ustíce ackson took no part In the consíderatíon or decísíon of thís case.
Sectíon 20.22(a)-í: What íncíuded ín gross 1946- -12295
íncome. I. T. 3795
( íso Sectíon 23(a), Sectíon 29.23(a)-6
Sectíon 23(e), Sectíon 29.23(e)-í.)
INT RN L R NU COD .
Treatment for ederaí íncome ta purposes of the grantíng to
an empíoyee of an optíon to purchase stock of the empíoyer cor-
poratíon, or an affíííate of the empíoyer corporatíon, and the sub-
sequent e ercíse, transfer, or íapse of such an optíon.
dvíce has been requested as to the íncome ta consequences whích
attach to the grantíng to an empíoyee of an optíon to purchase stock
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29.22(a)- .
16
of the empíoyer corporatíon, or of an affíííate of the empíoyer cor-
poratíon as set forth ín sectíon 141(d) of the Internaí Revenue Code,
and the subsequent e ercíse, transfer, or íapse of such an optíon.
Sectíon 22(a) of the Internaí Revenue Code íncíudes ín an em-
píoyee s ta abíe íncome any economíc or fínancíaí benefít conferred
on hím as compensatíon, whatever the form or mode by whích ít ís
effected. (See Commíssíoner v. ohn . Smíth, 324 U. S., 177, Ct. D.
1633, C. . 1945, 49 Oíd Coíony Trust Co. v. Commíssíoner, 279
U. S., 716, Ct. D. 0, C. . III-2,222 (1929).)
Sectíon 29.22(a)-í of Reguíatíons 111, as amended by Treasury
Decísíon 5507, approved príí 12, 1946 (page 1 , thís uííetín), ap-
pííes to optíons granted to empíoyees on or after ebruary 26, 1945,
the date of the Supreme Court s decísíon ín Commíssíoner v. ohn
. Smíth, supra, and provídes ín part as foííows:
If property ís transferred by an empíoyer to an empíoyee for an amount íess
than íts faír market vaíue, regardíess of whether the transfer Is ín the form
of a saíe or e change, the dífference between the amount paíd for the property
and the amount of íts faír market vaíue ís ín the nature of compensatíon and
shaíí be íncíuded ín the gross íncome of the empíoyee. In computíng the gaín
or íoss from the subsequent saíe of such property íts basís shaíí be the amount
paíd for the property, íncreased by the amount of such dífference íncíuded ín
gross íncome.
In víew of the foregoíng, íf an empíoyee receíves an optíon on or
after ebruary 26, 1945, to purchase stock of the empíoyer corpora-
tíon, or of an affíííate of the empíoyer corporatíon as set forth ín
sectíon 141(d) of the Internaí Revenue Code, and the empíoyee
e ercíses such optíon, the empíoyee reaíízes ta abíe íncome by way
of compensatíon on the date upon whích he receíves the stock to the
e tent of the dífference between the faír market vaíue of the stock
when ít ís receíved and the príce paíd therefor.
If the empíoyee transfers such optíon for consíderatíon ín an arm s
íength transactíon, the empíoyee reaíízes ta abíe íncome by way of
compensatíon on the date he receíves such consíderatíon to the e tent
of the vaíue of such consíderatíon.
If the empíoyee transfers such optíon ín a transactíon other than
at arm s íength and the transferee thereafter e ercíses the optíon, the
empíoyee reaíízes ta abíe íncome by way of compensatíon on the date
upon whích the transferee receíves the stock to the e tent of the díf-
ference between the faír market vaíue of the stock at that tíme and
the príce paíd therefor íess the vaíue of any consíderatíon prevíousíy
receíved by the empíoyee for the transfer of the optíon, whích íatter
vaíue ís ta abíe when receíved by the empíoyee.
No deductíon ís aííowed to the empíoyee by reason of the íapse of
such optíon e cept to the e tent of any consíderatíon ín money or
property prevíousíy paíd by the empíoyee for the optíon and not
recovered by hím, such unrecovered consíderatíon beíng deductíbíe,
pursuant to sectíon 23(e) of the Internaí Revenue Code, ín the year
ín whích the optíon e píres.
If such optíon ís granted to the empíoyee by the empíoyer corpora-
tíon, the amount of compensatíon reaíízed by the empíoyee under the
foregoíng príncípíes ís deductíbíe by the empíoyer corporatíon, ín the
year ín whích the empíoyee reaíízes such compensatíon, to the e tent
set forth ín sectíon 23(a) (1) of the Internaí Revenue Code.
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| 29.22(a)- .
Treasury Decísíon 5507, supra, does not appíy to the case of the
e ercíse or transfer, at whatever date, of an optíon whích was granted
to an empíoyee príor to ebruary 26, 1945, to purchase stock of the
empíoyer corporatíon, or of an affíííate of the empíoyer corporatíon as
set forth ín sectíon 141(d) of the Internaí Revenue Code.
ccordíngíy, ín víew of the príor deveíopment of the reguíatíons
and ínterpretatíons reíatíve to empíoyee stock optíons (see T. D. 3435,
C. . II-í, 50 (1923) L T. 3204, C. . 193 -2, 126 T. D. 4 79, C. .
1939-1 (Part 1), 159), as respects an optíon granted to an empíoyee
príor to ebruary 26, 1945, uníess at the tíme such optíon was granted
there was a substantíaí dífference between the faír market vaíue of the
stock and the optíon príce therefor, or, wíthín the purvíew of sectíon
29.22(a)-í of Reguíatíons 111 príor to the amendments made by
Treasury Decísíon 5507, supra, the empíoyee wouíd otherwíse cíearíy
reaííze íncome by way of compensatíon through the e ercíse or trans-
fer of the optíon, thís offíce wííí hoíd that the e ercíse or transfer of
such optíon, as the case may be, does not resuít ín íncome to the em-
píoyee by way of compensatíon under the príncípíes enuncíated ín the
precedíng paragraphs, províded, however, that on or before uíy 1,
1946, the empíoyee to whom such optíon ís granted and any trans-
feree thereof, and the empíoyer corporatíon or any other ta payer
who granted such optíon to the empíoyee, fííe ín dupíícate wíth the
Commíssíoner of Internaí Revenue at Washíngton, D. C, wrítten
consents (1) agreeíng that the basís to the empíoyee, and to any
transferee of the optíon, for the stock acquíred or to be acquíred
pursuant to the optíon shaíí be the actuaí príce paíd therefor and
that no deductíon shaíí at any tíme be cíaímed attríbutabíe to any
aspect of the optíon arrangement, under sectíon 23(a)(1) or any
other subsectíon of the Internaí Revenue Code, by the empíoyer
corporatíon or the ta payer who granted the optíon, and (2) índemní-
fyíng the Commíssíoner agaínst the fíííng of a cíaím for credít or
refund, or any other actíon by any ta payer concerned, ínconsístent
wíth the consents fííed.
or purposes of the precedíng paragraph, ín determíníng what
constítutes a substantíaí dífference between the faír market vaíue of
the stock and the optíon príce ín any partícuíar case, consíderatíon
wííí be gíven, among other thíngs, to the number of shares sub|ect to
the optíon, to the prevíous varíatíons ín faír market vaíue of the stock,
and to tíe type oí busíness and hístory of the empíoyer corporatíon
and íts affíííates.
oseph D. Nunan, r.,
Commíssíoner of Internaí Revenue,
pproved príí 12, 1946.
oseph . O Conneíí, r.,
ctíng Secretary of the Treasury.
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29.22(a)- .
1
Sectíon 29.22(a)-í: What íncíuded ín gross 1946- -12296
íncome. 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.
Reguíatíons 111 amended € ” Property transferred for an amount
íess than íts faír market vaíue.
Treasury Department,
Offíce of Commíssíoner of Internaí Revenue,
Washíng ton, D. O.
To Coííectors of Internaí Revenue and Others Concerned:
Paragraph 1. Sectíon 29.22(a)-í of Reguíatíons 111 Part 29,
Títíe 26, Code of ederaí Reguíatíons, Cum. Sup. ís amended by
stríkíng out the second paragraph and ínsertíng ín ííeu thereof the
foííowíng:
If property ís transferred by a corporatíon to a sharehoíder, for an amount
íess than íts faír market vaíue, regardíess of whether the transfer ís ín the
form of a saíe or e change, such sharehoíder shaíí Incíude ín gross íncome
the dífference between the amount paíd for the property and the amount of íts
faír market vaíue to the e tent that such dífference ís ín the nature of a
dístríbutíon of earníngs or profíts ta abíe as a dívídend. In computíng the
gaín or íoss from the subsequent saíe of such property íts basís shaíí be the
amount paíd for the property, íncreased by the amount of such dífference
íncíuded ín gross íncome. Thís paragraph does not appíy, however, to the
íssuance by a corporatíon to íts sharehoíders of the ríght to subscríbe to Its
stock, as to whích see artícíe 22(a)- .
If property ís transferred by an empíoyer to an empíoyee for an amount íess
than íts faír market vaíue, regardíess of whether the transfer ís ín the form
of a saíe or e change, the dífference between the amount paíd for the property
and the amount of íts faír market vaíue ís ín the nature of compensatíon and
shaíí be íncíuded ín the gross íncome of the empíoyee. In computíng the gaín
or íoss from the subsequent saíe of such property íts basís shaíí be the amount
paíd for the property, Increased by the amount of such dífference íncíuded In
gross íncome.
Par. 2. In the case of property transferred by an empíoyer to an
empíoyee pursuant to the e ercíse of an optíon granted to the empíoyee
before ebruary 26, 1945, the provísíons of these reguíatíons príor to
the amendment made by thís Treasury Decísíon shaíí appíy.
(Thís Treasury Decísíon ís íssued under the authoríty contaíned
ín sectíons 62 and 3791 of the Internaí Revenue Code (53 Stat., 32,
467 26 U. S. C, 62, 3791).)
oseph D. Nunan, r.,
Commíssíoner of Internaí Revenue.
pproved príí 12, 1946.
oseph . O Conneíí, r.,
ctíng Secretary of the Treasury.
( ííed wíth the Dívísíon of the ederaí Regíster príí 12, 1946,11.42 a. m.)
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29.22(a)-21.
Sectíon 29.22 (a)-21: Trust íncome ta abíe to
the grantor as substantíaí owner thereof.
( íso Sectíon 29.22(a)-22 Sectíon 161, Sectíon
29.161-1 Sectíon 162, Sectíon 29.162-1
Sectíon 166, Sectíons 29.166-1 and 29.166-2
Sectíon 167, Sectíons 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.
Reguíatíons 111 amended € ” Ta abíííty of Income of certaín trusts.
Treasury Department,
Offíce of Commíssíoner of Internaí Revenue,
Washíngton 25, D. C.
To Coííectors of Internaí Revenue and Others Concerned:
In order to conform Reguíatíons 111 Part 29, Títíe 26, Code of
ederaí Reguíatíons, Cum. Sup. to the príncípíes set forth ín the decí-
síon of the Supreme Court ín the case of eíveríng v. Cíífford (309
U. S., 331 Ct. D. 1444, C. . 1940-1, 105 ), such reguíatíons are
amended as foííows:
Paragraph 1. The foííowíng new sectíons are added ímmedíateíy
foííowíng sectíon 29.22(a)-20:
Sec. 29.22(a)-21. Trust Income Ta abíe to thb Grantor as Substantíaí
Owner Thereof. € ” (a) Introductíon. € ” Income of a trust ís ta abíe to the grantor
under sectíon 22(a) aíthough not payabíe to the grantor hímseíf and not to be
appííed ín satísfactíon of hís íegaí obíígatíons íf he has retaíned a controí of the
trust so compíete that he ís stííí In practícaí effect the owner of íts íncome.
( eíveríng v. Cíífford, 309 U. S., 331.) In the absence of precíse guídes suppííed
by an appropríate reguíatíon, the appíícatíon of thís príncípíe to varyíng and
díversífíed factuaí sítuatíons has íed to consíderabíe uncertaínty and confusíon.
The provísíons of thís sectíon accordíngíy resoíve the present díffícuítíes of appíí-
catíon by defíníng and specífyíng those factors whích demonstrate the retentíon
by the grantor of such compíete controí of the trust that he ís ta abíe on the
íncome therefrom under sectíon 22(a). Such factors are set forth ín generaí
ín subsectíon (6) and ín detaíí ín subsectíons (c), (d), and (e), beíow.
(b) In generaí. € ” In conformíty wíth the príncípíe stated ín subsectíon (a)
above, the íncome of a trust ís attríbutabíe to the grantor (e cept where such
íncome ís ta abíe to the grantor s spouse or former spouse under sectíon 22(k)
or 171) íf € ”
(1) the corpus or the íncome therefrom wííí or may return after a reía-
tíveíy short term of years (see subsectíon (c))
(2) the benefícíaí en|oyment of the corpus or the Income therefrom ís sub-
|ect to a power of dísposítíon (other than certaín e cepted powers), whether
by revocatíon, aíteratíon, or otherwíse, e ercísabíe by the grantor, or another
person íackíng a substantíaí adverse ínterest ín such dísposítíon, or both
(see subsectíon (d)) or
(3) the corpus or the Income therefrom Is sub|ect to admínístratíve controí,
e ercísabíe prímarííy for the benefít of the grantor (see subsectíon (e)).
(c) Reversíonary ínterest after a reíatíveíy short term. € ” Income of a trust
ís ta abíe to the grantor where the grantor has a reversíonary ínterest In
the corpus or the íncome therefrom whích wííí or may reasonabíy be e pected
to take effect ín possessíon or en|oyment € ”
(1) wíthín 10 years commencíng wíth the date of the transfer, or
(2) wíthín 15 years commencíng wíth the date of the transfer íf the
íncome ís or may be payabíe to a benefícíary other than a donee de-
scríbed In sectíon 23(o) and íf any one or more of the foííowíng powers
of admínístratíon over the trust corpus or íncome are e ercísabíe soíeíy
by the grantor, or spouse íívíng wíth the grantor, or both, whether
€ or not e ercísabíe as trustee: a power to vote er dírect the votíng of
stock or other securítíes, a power to controí the ínvestment of the trust
funds eíther by dírectíng ínvestments or reínvestments or by vetoíng
1946-2-12210
T. D.54
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29.22(a)-21.
20
proposed ínvestments or reínvestments, and a power to reacquíre the
trust corpus by substítutíng other property, whether or not of an equíva-
íent vaíue.
Where the grantor s reversíonary Interest Is to take effect In possessíon
or en|oyment by reason of some event other than the e píratíon of a specífíc
term of years, the trust íncome ís nevertheíess attríbutabíe to hím íf such
event ís the practícaí equívaíent of the e píratíon of a períod íess than or
equaí to 10 or 15 years, as the case may be. or e ampíe, a grantor ís
ta abíe on the íncome of a trust íf € ”
( ) the corpus ís to return to hím or hís estate on the death of a
person whose íífe e pectancy ís sí years at the date of the transfer
ín trust or
( ) the corpus ís to return to hím or hís estate on the graduatíon
from coííege or príor death of hís son, who ís 1 years of age at the
date of the transfer In trust.
In, generaí, a reversíonary ínterest may reasonabíy be e pected to take
effect ín possessíon or en|oyment wíthín 10 or 15 years, as the case may
be, where the corpus or the Income therefrom Is to be reacquíred If the
grantor survíves any stated contíngency whích ís of an ínsubstantíaí char-
acter. Thus, the grantor ís ta abíe where the trust íncome ís to be paíd
to the grantor s - wífe for three years, and the corpus ís then to be returned
to the grantor íf he survíves such períod, or to be paíd to the grantor s wífe
íf he ís aíready deceased.
ny postponement of the date specífíed for the reacquísítíon of possessíon
or en|oyment of the reversíonary ínterest ís consídered a new transfer ín
trust commencíng wíth the date on whích the postponement ís effected and
termínatíng wíth the date prescríbed by the postponement ut Income for
any períod shaíí not be ta abíe to the grantor by reason of the precedíng
sentence íf such íncome wouíd not be ta abíe to hím ín the absence of such
postponement.
ampíe. píaces property ín trust for the benefít of hís son . Upon
the e píratíon of 12 years or the earííer death of the property Is to be
paíd over to or hís estate. Neíther nor hís wífe has any power of
admínístratíon over the trust corpus or Income. fter the e píratíon of
níne years e tends the term of the trust for an addítíonaí two years
ís consídered to have made a new transfer ín trust for a term of fíve years.
e ís not ta abíe on the Income for the fírst three years of such term
because he wouíd not be ta abíe thereon íf the term of the trust had not been
e tended. Is ta abíe, however, on the Income for the remaíníng two years.
(d) Power to determíne or controí benefícíaí en|oyment of íncome or corpus. € ”
Income of a trust Is ta abíe to the grantor where, whatever the duratíon of the
trust, the benefícíaí en|oyment of the corpus or the íncome therefrom Is sub|ect
to a power of dísposítíon (e cept as províded ín sectíon 167(c) and as hereafter
províded ín e ceptíons (1) to (5), íncíusíve), whether by revocatíon, aíteratíon,
or otherwíse, e ercísabíe (ín any capacíty and regardíess of whether such e er-
císe ís sub|ect to a precedent gívíng of notíce or ís íímíted to some future date)
by the grantor, or any person not havíng a substantíaí adverse Interest In the
benefícíaí en|oyment of the corpus or Income, whíchever Is sub|ect to the power,
or both. The grantor ís not ta abíe, however, If the power, whether e ercísabíe
wítíí respect to corpus or íncome, may oníy affect the benefícíaí en|oyment of the
íncome for a períod commencíng more than 10 years from the date of the
transfer (or 15 years where any power of admínístratíon specífíed ín subsectíon
(c) ís e ercísabíe soíeíy by the grantor, or spouse íívíng wíth the grantor, or
both, whether or not as trustee). or e ampíe, If a trust created on anuary 1,
19- 0, provídes for the payment of íncome to the grantor s wífe, and the grantor
does not reserve any such admínístratíve power but reserves the power to substí-
tute other benefícíaríes In ííeu of hís wífe.on or after anuary 1, 1050, the grantor
ís not ta abíe on the trust íncome for the períod príor to anuary 1,1950. ut the
íncome wííí be attríbutabíe to the grantor for the períod begínníng on such date
uníess the power ís reíínquíshed. If the begínníng of such períod Is postponed,
such postponement ís consídered a new transfer ín trust commencíng wíth the
date on whích the postponement ís effected and termínatíng wíth the date pre-
scríbed by the postponement. ut íncome for any períod shaíí not be ta abíe to
the grantor by reason of the precedíng sentence íf such Income wouíd not be ta -
abíe to hím ín the absence of such postponement Where the Income affected by
the power ís for a períod begínníng by reason of some event other than the e píra-
tíon of a specífíc term of years, the grantor wííí be ta abíe íf such event Is the
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21
29.22(a)-21.
practícaí equívaíent of the e píratíon of a períod íess than or equaí to 10 or 15
years, as the case may be, In accordance wíth the crítería stated ín subsectíon (c).
Thís subsectíon shaíí not appíy to any one or more of the foííowíng e cepted
powers:
(1) a power e ercísabíe oníy by wííí, other than a power ín the grantor to
appoínt the íncome of the trust where the íncome ís accumuíated for such
dísposítíon by the grantor, or may be so accumuíated In the díscretíon of
the grantor, or any person not havíng a substantíaí adverse ínterest In the
dísposítíon of such íncome, or both. or e ampíe, If a trust provídes that
the íncome ís to be accumuíated duríng the grantor s íífe and that the grantor
may appoínt the accumuíated íncome by wííí, the grantor Is ta abíe on the
trust íncome
(2) a power to determíne the benefícíaí en|oyment of the corpus or the
íncome therefrom If such corpus or íncome, as the case may be, ís írrevocabíy
payabíe for the purposes and ín the manner specífíed ín sectíon 23(o)
(3) a power whích mereíy enabíes the grantor or another person to dís-
tríbute or appíy íncome to or for a current íncome benefícíary or to accumu-
íate such íncome for hím, províded that any accumuíated Income must uí-
tímateíy be payabíe to the benefícíary from whom dístríbutíon or appíícatíon
ís wíthheíd, or, íf payabíe upon the compíete termínatíon of the trust or In
con|unctíon wíth a dístríbutíon of corpus whích dístríbutíon ís augmented
by such accumuíated íncome, Is uítímateíy payabíe to the current Income
benefícíaríes In shares whích have been írrevocabíy specífíed ín the trust
Instrument. ccumuíated Income haíí be consídered so payabíe aíthough
ít Is províded that íf any benefícíary does not survíve the date of dístríbutíon,
the share of such deceased benefícíary Is to be paíd to a desígnated aíternate
taker, other than the grantor or hís estate, If such date may reasonabíy be
e pected to occur wíthín the benefícíary s íífetíme, and If the share of such
aíternate taker has been Irrevocabíy specífíed In the trust Instrument
(4) a power whích mereíy enabíes the grantor or another person to pay
out corpus to or for a current Income benefícíary, províded that any such
payment of corpus must be chargeabíe agaínst the proportíonate share of
corpus heíd ín trust for the payment of íncome to such benefícíary as íf such
corpus constítuted a separate trust, or províded that the power Is íímíted
by some reasonabíy defíníte e ternaí standard. or the requírements of
such standard, see e ceptíon (5) €
(5) a power to apportíon Income (whether by dístríbutíon or accumu-
íatíon) to or wíthín a cíass of benefícíaríes íf such power ís e ercísabíe
e cíusíveíy by a trustee other than the grantor or spouse íívíng wíth the
grantor and Its e ercíse Is not sub|ect to the approvaí or consent of any
person other than such trustee and Is íímíted by some reasonabíy defíníte
e ternaí standard. Such standard must be set forth ín the trust Instrument,
must consíst of the needs and círcumstances of the benefícíaríes wíthín
the cíass, and must be susceptíbíe of enforcement by a court of equíty. or
e ampíe, a provísíon authorízíng the payment of Income to members of
a cíass ín such amounts as the trustee shaíí determíne wíse and proper In
the e ercíse of hís honest díscretíon, or ín such amounts as the trustee
determínes to be ín the best ínterests of the benefícíaríes, does not meet the
requírements of the e ternaí standard contempíated by t|íís e ceptíon. Nor
does a power to appoínt wíthín a cíass of benefícíaríes faíí wíthín thís
e ceptíon íf the trustee ís enabíed to add to or eíímínate from the cíass
of benefícíaríes desígnated to receíve the íncome e cept ín so far as provísíon
may be made for after-born chíídren.
The appíícatíon of thís e ceptíon may be Iííustrated by the foííowíng e ampíes,
In whích ít Is assumed that the trustee ís neíther the grantor nor hís wífe:
ampíe (1). transfers property to as trustee to pay the íncome ín equaí
shares to , C, and D, the grantor s, three sísters. In any year, however, may
dístríbute to any one síster an amount not to e ceed 60 per cent of the íncome
for that year, províded that the needs of such síster ín the partícuíar year, due
to Iííness or poor fínancíaí círcumstances, are proportíonateíy greater than those
of the other sísters. The íncome of the trust Is not ta abíe to the grantor by
reason of such íímíted power ín the trustee. Such íncome, however, wouíd be
ta abíe íf the e ercíse by of hís power of dístríbutíon were not dependent
upon the needs of the sísters.
ampíe (2). transfers property to as trustee to pay to s wífe such
part of the Income as may consíder wíse and proper for the comfort and
happíness of the wífe and to pay the baíance of the Income to s son. The
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29.22(a)-21.
22
íncome ís ta abíe to the grantor sínce the power to apportíon Income ís not
íímíted by any reasonabíy defíníte e ternaí standard.
mere power to aííocate receípts as between corpus and íncome, eyen though
e pressed ín broad íanguage, ís not deemed a power oyer benefícíaí en|oyment
wíth respect to íncome or corpus.
(e) dmínístratíve controí. € ” Income of a trust, whatever íts duratíon, ís ta -
abíe to the grantor where, under the terms of the trust or the círcumstances
attendant on íts operatíon, admínístratíve controí ís e ercísabíe prímarííy for
the benefít of the grantor rather than the benefícíaríes of the trust. dmínístra-
tíve controí ís e ercísabíe prímarííy for the benefít of the grantor where € ”
(1) a power e ercísabíe by the grantor, or any person íackíng a substantíaí
adverse ínterest ín íts e ercíse, or both, whether or not ín the capacíty of
trustee, enabíes the grantor or any person to purchase, e change, or otherwíse
deaí wíth or díspose of the corpus or the Income therefrom for íess than
an adequate and fuíí consíderatíon ín money or money s worth or
(2) a power e ercísabíe by the grantor, or spouse íívíng wíth the grantor,
or both, whether or not ín the capacíty of trustee, or e ercísabíe by any other
person ín a nonfíducíary capacíty, or by such person and eíther of the
foregoíng, or both, enabíes the grantor to borrow such corpus or íncome,
dírectíy or índírectíy, whether wíth or wíthout adequate securíty or ínterest
or
(3) a power e ercísabíe ín a fíducíary capacíty by a person other than the
grantor or spouse íívíng wíth the grantor enabíes the grantor to borrow such
corpus or íncome, dírectíy or índírectíy, and such power has been e ercísed
and the grantor has not compíeteíy repaíd the íoan, íncíudíng any ínterest,
before the begínníng of the ta abíe year or
(4) any one of the foííowíng powers of admínístratíon over the trust
corpus or íncome ís e ercísabíe by any person In a nonfíducíary capacíty: a
power to vote or dírect the votíng of stock or other securítíes, a power to
controí the ínvestment of the trust funds eíther by dírectíng ínvestments
or reínvestments or by vetoíng proposed Investments or reínvestments, and
a power to reacquíre the trust corpus by substítutíng other property, whether
or not of an equívaíent vaíue.
If a power ís e ercísabíe by a person as trustee, It ís presumed that the power
Is e ercísabíe ín a fíducíary capacíty prímarííy ín the ínterests of the benefícíaríes.
Such presumptíon may be rebutted oníy by cíear and convíncíng proof that the
power ís not e ercísabíe prímarííy ín the Interests of the benefícíaríes. If a power
ís not e ercísabíe by a person as trustee, ít ís presumed that the power ís e er-
císabíe ín a nonfíducíary capacíty. ut such presumptíon may be rebutted íf ít
appears, from aíí the terms of the trust and the círcumstances surroundíng íts
creatíon and admínístratíon, that the power Is e ercísabíe prímarííy In the
ínterests of the benefícíaríes.
The mere fact that a power e ercísabíe by the trustee ís descríbed ín broad
íanguage does not índícate that the trustee ís authorízed to purchase, e change,
or otherwíse deaí wíth or díspose of the trust property or íncome for íess than an
adequate and fuíí consíderatíon ín money pr money s worth. On the other hand,
such authoríty may be índícated by the actuaí admínístratíon of the trust.
(/) Límítatíons of sectíon. € ” Despíte the íímítatíons of thís sectíon, the grantor
of a trust dírectíng the payment or appíícatíon of the íncome therefrom ín satís-
factíon of the grantor s íegaí obíígatíons shaíí contínue to be ta abíe on the
íncome. The grantor may aíso be ta abíe on the Income of a trust on the ground
that such íncome ís attríbutabíe to hím ín a capacíty unreíated to domíníon and
controí over the trust as such as defíned In subsectíons (c), (d), and (e) of
thís sectíon. Thus, the provísíons of thís sectíon do not affect the príncípíes
governíng the ta abíííty of future Income to the assígnor thereof whether or not
the assígnment ís by means of a trust Nor, for e ampíe, do the provísíons of
thís sectíon affect the appíícabíííty of sectíon 22(a) to the creator of a famííy
partnershíp. See further sectíons 166 and 167.
Sectíon 22(a) shaíí be appííed ín the determínatíon of the ta abíííty of trust
Income for ta abíe years begínníng príor to anuary 1, 1946, wíthout reference to
thís sectíon.
Sec. 29.22(a)-22. Trust Income Ta abíe to Person Other Than Grantor. € ”
Where a person other than the grantor of property transferred ín trust has a power
e ercísabíe soíeíy by hímseíf to vest the corpus or the íncome therefrom ín
hímseíf, the íncome therefrom shaíí be íncíuded ín computíng the net Income
of such person. ven though such a power has been partíaííy reíeased or
otherwíse modífíed so that the person hoídíng ít can no íonger vest the corpus
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23
29.22(a)-21.
or the íncome of the trust ín hímseíf, the íncome shaíí contínue to be ta abíe to
such person íf, after such reíease or modífícatíon, he has retaíned such controí
of the trust as wouíd, wíthín the príncípíes of sectíon 29.22(a)-21, sub|ect a
grantor of such a trust to ta on the íncome thereof. Thís sectíon shaíí not
appíy wíth respect to a power over Income, as orígínaííy granted or thereafter
modífíed, íf the grantor ís otherwíse ta abíe under sectíon 20.22 (a)-21. See aíso
sectíon 29.166-2.
Sectíon 22(a) shaíí be appííed ín the determínatíon of the ta abíííty of trust
Income for ta abíe years begínníng príor bo anuary 1, 194 , wíthout reference
to thís sectíon.
Par. 2. Sectíon 29.161-1 ís amended as foííows:
( ) y stríkíng out the fourth paragraph of subsectíon (a) and
ínsertíng ín ííeu thereof the foííowíng:
The provísíons of sectíons 161, 162, and 163 (reíatíng to estates and trusts,
fíducíaríes, and benefícíaríes) contempíate that the corpus of the trust, or the
Income therefrom, ís, wíthín the meaníng of the Internaí Revenue Code, no íonger
to be regarded as that of the grantor. If, by vírtue of the nature and purpose
of the trust, the corpus or íncome therefrom remaíns attríbutabíe to the grantor,
these provísíons do not appíy. Thus, the provísíons of sectíons 166 and 167 deaí
wíth certaín trusts whích are e cíuded from the scope of sectíons 161, 162, and
163. Other trusts not specífíed In sectíons 166 and 167 where the Income ís at-
tríbutabíe to the grantor are ííkewíse e cíuded from the scope of sectíons 161,
162, and 163. or e ampíe, a grantor ís ta abíe under sectíon 22(a) on the Income
of a trust If he ís stííí ín practícaí effect the owner of the Income. See sectíon
29.22 (a)-21. grantor Is aíso ta abíe under sectíon 22(a) on the íncome of
a trust provídíng for the payment and appíícatíon of such íncome ín satísfactíon
of hís íegaí obíígatíons. So-caííed aíímony trusts to whích sectíon 22(k) or sectíon
171 appííes may be of a type to whích the provísíons of sectíons 161, 162, and 163
aíso appíy, or of a type whích Is e cíuded from the provísíons of sectíons 161,162,
and 163. cept to the e tent that sectíon 22 (k) or sectíon 171 governs the ta -
abíííty of amounts paíd, credíted, or to be dístríbuted attríbutabíe to trust
property, the treatment of such trusts under sectíons 161, 162, and 163 or under
sectíons 22(a), 166, and 167 ís not affected by sectíon 22(k) or sectíon 171. See
sectíon 165 as to the e emptíons of empíoyees trusts.
( ) y stríkíng out the fírst sentence of subsectíon ( ) and ínsert-
íng ín ííeu thereof the foííowíng:
The fíducíary ís requíred to make and fííe the return and pay the ta on the net
Income of the estate or trust e cept as otherwíse províded ín sectíons 22(a), 165,
166, and 167, and sectíons 29.22(a)-21, 29.22(a)-22, 29.166-1, 29.166-2, and
29.167-1.
Pah. 3. Sectíon 29.162-1, as amended by Treasury Decísíon 545 ,
approved une 15,1945 C. . 1945,45 , ís further amended as foííows:
( ) y stríkíng out the íntroductory cíause at the begínníng of the
fourth paragraph thereof whích reads as foííows:
There ís Incíuded In the íncome of the estate or the trust, uníess ít Is íncíuded In
the íncome of the grantor of the trust (see sectíons 29.163-1 and 29.167-1) € ”
and by ínsertíng ín ííeu thereof the foííowíng:
There Is íncíuded ín the íncome of the estate or the trust, uníess It ís Incíuded
ín the íncome of the grantor of the trust, or ín the íncome of some other person
granted the power e ercísabíe soíeíy by hímseíf to vest the property ín hímseíf
(see sectíons 29.166-1, 29.166-2, 29.167-1, 29.22(a)-21, and 29.22(a)-22) € ”
( ) y stríkíng out the íast sentence of the fourth paragraph and
ínsertíng ín ííeu thereof the foííowíng:
In aíí such cases the ta wíth respect to such Income Incíuded ín the Income of
the estate or trust for Its ta abíe year Is payabíe by the fíducíary, e cept where
the Income ís deductíbíe by the estate or trust for such ta abíe year (and ís In-
cíudíbíe ín the íncome of the íegatee or benefícíary).
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29.22(a)-21.
24
Par. 4. Sectíon 29.166-1 ís amended by changíng the headíng thereof
to read as foííows:
Trusts Wíth Respect to the Corpus of Whích the Grantor Is Regarded as
Remaíníng ín Substance the Owner Ta abíe Years egínníng Príor to an-
uary 1, 1946. € ”
Par. 5. There ís added ímmedíateíy after sectíon 29.166-1 the foí-
íowíng new sectíon:
Sec. 29.166-2. Trusts Wíth Power to Revest Corpus ín the Grantor Ta abíí
Years egínníng fter December 31, 1945. € ” (a) Scope. € ” Where the power to
revest ín the grantor títíe to any part of the corpus of a trust Is vested ín the
grantor or ín any person not havíng a substantíaí adverse ínterest ín the dís-
posítíon of such part of the corpus or the íncome therefrom, or both, the Income
of that part of the corpus sub|ect to the power to revest ís not ta abíe In accord-
ance wíth the provísíons of sectíons 161, 162, and 163 but remaíns attríbutabíe
and ta abíe to the grantor, e cept as províded ín sectíons 22(k) and 171. Thís
sectíon deaís wíth the ta atíon of such íncome. s used ín thís sectíon the term
corpus means any part or the whoíe of the property, reaí or personaí, con-
stítutíng the sub|ect matter of the trust.
or ruíes appíícabíe to trusts the Income of whích ís ta abíe to the grantor
under sectíon 22(a) because the grantor has retaíned a controí of the trust so
compíete that he ís stííí In practícaí effect the owner of íts Income, see sectíon
29.22 (a)-21.
or ruíes appíícabíe to trusts the Income of whích ís ta abíe under sectíon
22(a) to a person other than the grantor because of a power, e ercísabíe soíeíy
by such other person, to vest the property or the íncome therefrom In hímseíf,
see sectíon 29.22(a)-22.
(6) Test of ta abíííty to grantor. € ” Sectíon 166 provídes for ta abíííty of In-
come to the grantor by reason of the fact that he has retaíned power to revest
the corpus ín hímseíf. or the purposes of thís sectíon the grantor ís deemed
to have retaíned such power íf he or any person not havíng a substantíaí ínterest
ín the corpus or the Income therefrom adverse to the grantor, or both, may cause
the títíe to the corpus to revest ín the grantor. bare íegaí ínterest, such as
that of a trustee, ís never substantíaí and never adverse. If the títíe to the
corpus wííí revest In the grantor upon the e ercíse of such power, the íncome of
the trust ís attríbuted and ta abíe to the grantor (e cept as províded ín sectíon
22 (k) or 171) regardíess of € ”
(1) whether such power or abíííty to retake the trust corpus to the
grantor s own use Is effected by means of a power to revoke, to termínate,
to aíter or amend, or to appoínt
(2) whether the e ercíse of such power ís condítíoned on the precedent
gívíng of notíce or on the eíapsíng of a períod of years, or on the happeníng
of a specífíc event
(3) the tíme at whích the títíe to the corpus wííí revest ín the prantor ín
possessíon and en|oyment, whether such tíme Is wíthín the ta abíe year or
not. or whether such tíme be fí ed, determínabíe, or certaín to come
(4) whether the power to revest ín the grantor títíe to the corpus ís ín the
grantor, or ín any person not havíng a substantíaí ínterest ín the corpus or
íncome therefrom adverse to the grantor, or ín both
(5) when the trust was created.
person may have an Interest that ís both substantíaí and adverse to the
grantor ín the dísposítíon of oníy part of the corpus or the íncome therefrom.
If the power to revest títíe In the grantor ís vested ín hím ín con|unctíon wíth
such person, or ís vested soíeíy ín such person, there ís to be e cíuded ín com-
putíng the net íncome of the grantor oníy the Income of such part
(c) Income and deductíon . € ” If íncome from the corpus of a trust Is Incíuded
In the gross Income of the grantor under thís sectíon because of a power to
revest such corpus In the grantor, he shaíí be aííowed those deductíons wíth
respect to such corpus as he wouíd have been entítíed to had the trust not been
created.
Par. 6. There ís added at the end of the fourth paragraph of sectíon
29.167-1(6), as amended by Treasury Decísíon 5392, approved uíy
15,1944 rC. . 1944, 32 1, the foííowíng sentence:
See sectíon 29.22(a)-21.
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25 29.22(a)-21
Par. 7. There ís added at the end of the fourth paragraph of sectíon
29.167-2, as amended by Treasury Decísíon 5392, the foííowíng
sentence:
See sectíon 29.22(a)-21.
(Thís Treasury Decísíon ís íssued under authoríty contaíned ín
sectíon 62 of the Internaí Revenue Code (53 Stat., 32 26 U. S. C,
1940 ed., 62).)
oseph D. Nunan, r.,
Commíssíoner of Internaí Revenue.
pproved December 29, 1945.
oseph . O Conneíí, r.,
ctíng Secretary of the Treasury.
( ííed wíth the Dívísíon of the ederaí Regíster December 29, 1945, 4.10 p. m.)
Sectíon 29.22(a)-21: Trust íncome ta abíe to 1040-2-12211
the grantor as substantíaí owner thereof. Mím. 596
( íso Sectíon 29.22(a)-22.)
Poíícy regardíng e tent of appíícatíon of Treasury Decísíon 51
fpage 19, thís uííetín reíatíng to ta abíííty of íncome of certaín
trusts.
Treasury Department,
Offíce of Commíssíoner of Internaí Revenue,
Washíngton 25, D. C, anuary 046.
Coííectors of Internaí Revenue, Internaí Revenue gents ín Charge,
and Others Concerned:
Reference ís made to Treasury Decísíon 54S , approved December 29,
1945 page 19, thís uííetín , whích amends Reguíatíons 111 so as to
íncíude thereín a statement of those factors whích demonstrate that
the grantor of a trust has retaíned such controí that he ís ta abíe on
the íncome therefrom under sectíon 22(a) of the Internaí Revenue
Code wíthín the príncípíes of Iíeíveríng v. George . Cíífford, r.
(309 U. S., 331, Ct. D. 1444, C. . 1940-1,105).
The Treasury Decísíon provídes that sectíon 22(a) of the Code shaíí
be appííed ín determíníng the ta abíííty of trust íncome for ta abíe
years begínníng príor to anuary 1, 1946, wíthout reference to the
amendment to the reguíatíons made by the Treasury decísíon. ow-
ever, ín cases not yet fínaííy determíned for such ta abíe years, ít wííí
be the poíícy of the ureau, where no ínconsístent cíaíms pre|udícíaí
to the Government are asserted by trustees or benefícíaríes, not to
assert ííabíííty of the grantor under the generaí provísíons of sectíon
22(a) of the Code, íf the trust íncome wouíd not be ta abíe to the
grantor under the amendment to the reguíatíons.
Correspondence ín regard to thís mímeograph shouíd refer to íts
number and the symboís IT: C .
Wm. T. Sherwood,
ctíng Commíssíoner.
pproved anuary 4,1946.
oseph . O Conneíí, r.,
ctíng Secretary of the Treasury.
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f 29.22(b) CD € ” 1-1 26
Sectíon 29.22 (a)-22: Trust íncome ta abíe to person
other than grantor.
INT RN L R NU COD .
Reguíatíons 111 amended. (See T. D. 54 , page 19.)
Sectíon 29.22(a)-22: Trust íncome ta abíe to person
other than grantor.
INT RN L revenue code.
Ta abíííty of trust íncome for ta abíe years begínníng príor to
anuary 1,1946. (See Mím. 596 , page 25.)
S CTION 22(b). € ” GROSS INCOM : CLUSIONS
ROM GROSS INCOM .
Sectíon 29.22(b) (1)-1: Lífe ínsurance € ” mounts 1946-11-12324
paíd by reason of the death of the ínsured. T. D. 5515
íso Sectíon 19.22(b) (1)-1, Reguíatíons 103
rtícíe 22(b) (1)-1, Reguíatíons 101 rtícíe
22(b) (1)-1, Reguíatíons 94 and rtícíe 22
(b) (1)-1, Reguíatíons 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.
Reguíatíons 111, 103, 101, 94, and 0 amended € ” mounts receíved
under a íífe ínsurance poíícy paíd by reason of the death of the
Insured.
Treasury Department,
Offíce of Commíssíoner of Internaí Revenue,
Washíngton, D. G.
To Coííectors of Internaí Revenue and Others Concerned:
Paragraph 1. Sectíon 29.22(b) (1)-1 of Reguíatíons 111 Part 29,
Títíe 26, Code of ederaí Reguíatíons, Cum/Sup. ís amended to read
as foííows:
Lífe Insurance € ” mounts Paíd bt Reason of the Deatíí of the Insured. € ”
The proceeds of íífe ínsurance poíícíes, paíd by reason of the death of an Insured
to hís estate or to a benefícíary (índívíduaí, partnershíp, or corporatíon), dírectíy
or ín trust, are e cíuded from the gross íncome of the benefícíary, e cept ín the
case of certaín transferees as províded ín sectíon 29.22(b) (2)-3 and ín the case
of a spouse to whom such payments are Income under sectíon 22(k). It ís
ímmateríaí whether the proceeds are receíved ín a síngíe sum or otherwíse. If,
however, such proceeds are heíd by the ínsurer under an agreement to pay ínterest
thereon, the ínterest payments must be íncíuded ín gross íncome.
Par. 2. Sectíon 19.22(b) (1)-1 of Reguíatíons 103 Part 19, Títíe 26,
Code of ederaí Reguíatíons, 1940 Sup , as amended by Treasury De-
císíon 5271, approved une 14,1943 C. . 1943,92 , ís further amended
to read as foííows:
Lífe Insurance € ” mounts Paíd by Reason of the Death of the Insured. € ”
The proceeds of íífe ínsurance poíícíes, paíd by reason of the death of an ínsured
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27
29.22(b) (13)-1.
to hís estate or to a benefícíary (Indívíduaí, partnershíp, or corporatíon), dí-
rectíy or ín trust, are e cíuded from the gross íncome of the benefícíary, e cept
ín the case of certaín transferees as províded ín sectíon 19.22(b) (2) ( )-3 and
ín the case of a spouse to whom such payments are Income under sectíon 22(k).
It ís ímmateríaí whether the proceeds are receíved In a síngíe sum or otherwíse.
If, however, such proceeds are heíd by the Insurer under an agreement to pay
ínterest thereon, the ínterest payments must be íncíuded ín gross Income.
Par. 3. rtícíe 22(b) (1)-1 of Reguíatíons 101 sectíon 9.22(b)
(1)-1, Títíe 26, Code of ederaí Reguíatíons, 1939 Sup. , as amended
by Treasury Decísíon 5231, approved ebruary 22, 1943 C. . 1943,
9 , artícíe 22(b) (1)-1 of Reguíatíons 94 sectíon 3.22(b) (1)-1, Títíe
26, Code of ederaí Reguíatíons , as amended by such Treasury De-
císíon, and artícíe 22(b) (1)-1 of Reguíatíons 6, as amended by such
Treasury Decísíon, are each amended to read as foííows:
Lot Insurance € ” mounts Paíd by Reason op the Death of the Insured. € ”
The proceeds of íífe ínsurance poíícíes, paíd by reason of the death of an ínsured
to hís estate or to a benefícíary (índívíduaí, partnershíp, or corporatíon), dírectíy
or ín trust, are e cíuded from the gross íncome of the benefícíary, e cept ín the
case of a transferee for vaíuabíe consíderatíon. It ís ímmateríaí whether the
proceeds are receíved ín a síngíe sum or otherwíse. If, however, such proceeds
are heíd by the Insurer under an agreement to pay ínterest thereon, the Interest
payments must be Incíuded ín gross Income.
(Thís Treasury Decísíon ís íssued under the authoríty contaíned ín
sectíons 22(b) and 02 of the Internaí Revenue Code (53 Stat., 10, 32
26 U. S. C, 22(b), 62), and sectíons 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.,
Commíssíoner of Internaí Revenue.
pproved May 16, 1946.
oseph . O Conneíí, r.,
ctíng Secretary of the Treasury.
( ííed wíth the Dívísíon of the ederaí Regíster May 17, 1946, 12.23 p. m.)
Sectíon 29.22(b) (13)-1: Compensatíon of
members of mííítary and navaí forces.
( íso Sectíon 19.22(b) (13)-1, Reguíatíons 103
Sectíon 3 0 , Sectíons 29.3 0 -1, 29.3 0 -2,
29.3 0 -3, and 29.3 0 -4, Reguíatíons 111
Sectíons 19.3 0 -1, 19.3 0 -2, 19.3 0 -3, and
19.3 0 , Reguíatíons 103.)
TITL 26 € ” INT RN L R NU . € ” C PT R I, SU C PT R , P RT 1 ND
P RT 29.
Reguíatíons 111 and 103 amended to conform to sectíons 141 and
142 of the Revenue ct of 1945, reíatíng to veterans and servícemen.
Treasury Department,
Offíce of Commíssíoner of Internaí Revenue,
Washíngton 5, D. C.
To Coííectors of Internaí Revenue and Others Concerned:
In order to conform Reguíatíons 111 Part 29, Títíe 26, Code of
ederaí Reguíatíons, Cum. Sup. and Reguíatíons 103 Part 19, Títíe
1946-9-1229
T. D. 550
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5 29.22(b) (13)- .
2S
26, Code of ederaí Reguíatíons, 1940 Sup. to sectíons 141 and 142
of the Revenue ct of 1945 (Pubííc Law 214, Seventy-nínth Con-
gress), approved November , 1945, such reguíatíons are amended as
foííows:
R GUL TIONS 111.
Paragraph 1. There ís ínserted ímmedíateíy precedíng sectíon
29.22(b) (13)-1 the foííowíng:
S C. 141. DDITION L LLOW NC OR MILIT RY ND
N L P RSONN L. (R NU CT O 1945.)
(a) In Generaí. € ” Sectíon 22(b) (13) (reíatíng to the e cíusíon from
gross íncome for mííítary and navaí personneí) ís amended to read as
foííows:
(13) ddítíonaí aííowance fob mííítary and navaí person-
neí. € ”
( ) In the case of compensatíon receíved duríng any ta -
abíe year and before the termínatíon of the present war as
procíaímed by the Presídent, for actíve servíce as a commís-
síoned offícer (or a commíssíoned warrant offícer) ín the mííí-
tary or navaí forces of the Uníted States duríng such war, or,
ín the case of a cítízen or resídent of the Uníted States, as a
member of the mííítary or navaí forces of any of the other
Uníted Natíons duríng such war, so much of such compensatíon
as does not e ceed 1,500.
( ) Compensatíon receíved duríng any ta abíe year and
before the termínatíon of the present war as procíaímed by the
Presídent, for actíve servíce as a member beíow the grade of
commíssíoned offícer (or commíssíoned warrant offícer) ín the
mííítary or navaí forces of the Uníted States duríng such war.
(b) Ta abíe Years to Whích ppíícabíe. € ” Subparagraph ( ) of
sectíon 22(b) (13), as amended by subsectíon (n) of thís sectíon, shaíí
be appíícabíe wíth respect to ta abíe years begínníng after December
31, 1942 subparagraph ( ) thereof shaíí be appíícabíe wíth respect to
ta abíe years begínníng after December 31, 1940.
(c) Crkdíts oh Refunds for 1941 and 1942. € ” If at any tíme príor to
anuary 1, 1947, the aííowance of a credít or refund of an overpayment
of the ta for any ta abíe year begínníng after December 31, 1940, and
before anuary 1, 1943, Is otherwíse prevented by the operatíon of any
íaw or ruíe of íaw (other than sectíon 3701, reíatíng to compromíses), a
credít or refund of the overpayment of such ta to the e tent that the
overpayment ís attríbutabíe to the enactment of thís sectíon may, never-
theíess, be aííowed or made íf a cíaím therefor ís fííed before anuary 1,
1947.
Par. 2. Sectíon 29.22(b) (13)-1, as amended by Treasury Decísíon
5305, approved November 12, 1943 C. . 1943, 260 , ís further
amended to read as foííows:
Sec. 29.22(b) (13)-1. Comíensatíon of Members of Mííítary and Navaí
orces. € ” In addítíon to the e emptíons and credíts otherwíse appíícabíe, sectíon
22(b) (13) provídes that there shaíí be e cíuded from gross íncome:
(a) In the case of compensatíon receíved for actíve servíce as a member beíow
the grade of commíssíoned offícer (or commíssíoned warrant offícer) ín the
mííítary or navaí forces of the Uníted Stntes, the entíre amount of such com-
pensatíon.
(b) In the case of compensatíon receíved ín a ta abíe year begínníng after
December 31, 1942, for actíve servíce (1) as a commíssíoned offícer (or com-
míssíoned warrant offícer) ín the mííítary or navaí forces of the Uníted States,
or (2) as a member of the mííítary or navaí forces of any of the other Uníted
Natíons, íf such member ís a cítízen or resídent of the Uníted States, so much of
such compensatíon as docs not e ceed 1,500.
The e cíusíons under sectíon 22(b) (13) and thís sectíon are appíícabíe oníy
to compensatíon receíved príor to the termínatíon of the present war to be fí ed
by procíamatíon of the Presídent. Such e cíusíons are appíícabíe wíthout re-
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29
29.22(b)(13)-1.
gard to the marítaí status of the recípíent of the compensatíon, and íf a husband
and wífe both meet the requírements of the statute, then each ís entítíed to
the benefít of an e cíusíon. or the purposes of thís sectíon the mííítary and
navaí forces of the Uníted States íncíude (but are not necessarííy íímíted to)
the rmy, the Navy, the Maríne Corps, the Coast Guard, the rmy Nurse Corps,
emaíe, the Navy Nurse Corps, emaíe, the Women s rmy u íííary Corps or
the Women s rmy Corps, the Women s Reserve branch of the Navaí Reserve,
the Maríne Corps Women s Reserve, and the Coast Guard Reserve, íncíudíng
the Coast Guard Women s Reserve. Personneí servíng wíth the rmy Specíaííst
Corps are not wíthín the scope of the e emptíon. or the purposes of thís sec-
tíon the term member of the mííítary or navaí forces of any of the other Uníted
Natíons shaíí mean any Indívíduaí whose dutíes ín the servíce of any of the
Uníted Natíons other than the Uníted States correspond to those of any member
of the mííítary or navaí forces of the Uníted States as defíned ín thís sectíon.
person ís ín actíve servíce íf he ís actuaííy servíng ín such forces, not neces-
sarííy ín the fíeíd or ín the theater of war. Personneí ín the ínactíve reserve
or on retírement are not ín actíve servíce. Períods duríng whích a person Is
absent from duty on account of síckness, wounds, íeave, ínternment by the
enemy, or other íawfuí cause are períods of actíve servíce.
In the case of a husband and wífe domícííed ín a State recognízed for ederaí
íncome ta purposes as a communíty property State, any e cíusíon from gross
íncome under sectíon 22(b) (13) operates before apportíonment of the gross
íncome of the spouses In accordance wíth communíty property íaws. or e ampíe,
a man and hís wífe are domícííed ín such a State and he ís entítíed to the benefít
of the e cíusíon under sectíon 2(b) (13) as a commíssíoned offícer of the armed
forces. e receíves duríng 1943 compensatíon for actíve servíce In such forces
ín the amount of 2,000. Of such amount oníy . 00 ís taken Into account ín de-
termíníng the gross íncome of both husband and wífe.
Par. 3. There ís ínserted ímmedíateíy precedíng Subpart the foí-
íowíng:
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 Generaí. € ” Chapter 3 (mísceííaneous provísíons) ís amended
by ínsertíng at the end thereof a new sectíon readíng as foííows:
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) Defínítíons € ” s used ín thís sectíon € ”
(1) Ta attríbutabíe to servíce pay. € ” The term 1 ta attríbut-
abíe to servíce pay means € ”
( ) ín the case of a war year for whích the ta payer had no
gross Income other than compensatíon for actíve servíce as a
member of the mííítary or navaí forces of the Uníted States, the
ta ímposed under chapter 1 for such year or
( ) ín the case of a war year for whích the ta payer had
gross íncome ín addítíon to compensatíon for actíve servíce as a
member of the mííítary or navaí forces of the Uníted States, the
e cess of the ta ímposed under chapter 1 for such year over
the ta that wouíd have been ímposed íf such compensatíon had
been e cíuded from gross íncome
e cept that ín the ense of a commíssíoned offícer (or a commíssíoned
warrant offícer) of the reguíar component of the rmy, Navy, Maríne
Corps, or Coast Guard, such term shaíí not appíy to any war year
uníess, at the tíme prescríbed for the payment of the ta under
chapter 1 for such year, a períod of tíme was beíng dísregarded under
sectíon 3 04.
(2) War tear. € ” The term war year € ”
( ) when used wíth respect to the ta attríbutabíe to
servíce pay means any ta abíe year begínníng after December
31, 1939, and before anuary 1, 1947
€ €
(4) írst ínstaííment date. € ” The term fírst Instaííment date
means May 15, 1946, In the case of ta payers reíeased from actíve
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29.22(b)(13)- .
30
duty In the mííítary or navaí forces of the Uníted States príor to
December 1, 1945 and ín other cases une 15, 1947, or the fífteenth
day of the sí th month whích begíns after the date of the ta payer s
reíease from actíve duty ín such forces, whíchever ís the earííer
e cept that. If the fírst Instaííment date wíth respect to any war
year wouíd otherwíse occur earííer than the fífteenth day of the
thírd mouth foííowíng the cíose of such year, the fírst ínstaííment
date wíth respect to such year shaíí be the fífteenth day of such
thírd month.
(b) tensíon of Tíme for Payment. € ” Upon appíícatíon wíth respect
to any war year, made príor to the fírst ínstaííment date, and under
reguíatíons prescríbed by the Commíssíoner wíth the approvaí of the
Secretary € ”
(1) the tíme for payment of an amount of the ta under chapter
1 for such year whích Is equaí to the ta attríbutabíe to servíce pay
for sueíí year and whích has not been paíd before the fíííng of such
appíícatíon
€ € € € € € €
shaíí, ín ííeu of the tíme otherwíse appíícabíe, be as foííows: one-tweífth
thereof on the fírst ínstaííment date and an addítíonaí tweífth thereof
every three months thereafter untíí such ta Is paíd.
(c) Suspensíon of Períod of Límítatíon. € ” The runníng of the períod
of íímítatíon províded ín sectíon 276(c) (reíatíng to the coííectíon of the
ta after assessment) ín respect of any ta the tíme for the payment of
whích ís prescríbed under subsectíon (b), shaíí be suspended for the
períod begínníng wíth the date of the fíííng of the appíícatíon under such
subsectíon and endíng sí months after the date prescríbed thereín for
the payment of the íast ínstaííment of such ta .
(d) stímated Ta . € ” If the ta payer ís eíígíbíe for the benefíts of
subsectíon (b) wíth respect to any war year € ” –
(1) for the purposes of the appíícatíon of sectíon 5 wíth respect
to such year, compensatíon for actíve servíce as a member of the
mííítary or navaí forces of the Uníted States may be dísregarded In
determíníng the gross Income reasonabíy e pected for such year, and
In determíníng the estímated ta for such year and
(2) for the purposes of sectíon 294(d) the ta for such year shaíí
be determíned as If such compensatíon were e cíuded from gross
íncome.
Thís subsectíon shaíí not appíy wíth respect to a ta payer for any war
year who at the tíme prescríbed for makíng the decíaratíon of estímated
ta for such year ís a commíssíoned offícer (or a commíssíoned warrant
offícer) of the reguíar component of the rmy, Navy, Maríne Corps, or
Coast Guard.
(b) Refund of Interest Paíd. € ” ny ínterest paíd príor to the date
of the enactment of thís ct wíth respect to ta attríbutabíe to servíce
pay for any war year, or wíth respect to ta attríbutabíe to pre-servíce
earned íncome for any war year, shaíí be credíted or refunded íf cíaím
therefor ís fííed wíth the Commíssíoner príor to anuary 1, 1947.
Sec. 29.3 0 -1. Deferment of Certaín Ta es of Members of the Mííítart ob
Navaí. orces. € ” (a) In generaí. € ” Sectíon 3 0 provídes that, ín the case of mem-
bers of the mííítary or navaí forces of the Uníted States, that portíon of the
ta under Chapter 1 whích ís attríbutabíe to servíce pay for a war year, may,
ín ííeu of the tíme otherwíse prescríbed by íaw, be paíd ín 12 equaí quarter-annuaí
ínstaííments begínníng wíth the fírst ínstaííment date. s to what constítutes
the fírst ínstaííment date for the purposes of sectíon 3 0 see sectíon 29.3S0 -2.
The term war year as defíned ín sectíon 3 0 (a) (2) means, ín the case of
ta attríbutabíe to servíce pay. any ta abíe year begínníng after December 31,
1939, and before anuary 1,1947.
or the purposes of sectíon 3 0 the mííítary or navaí forces of the Uníted
States íncíude (but are not necessarííy íímíted to) the rmy, the Navy, the
Maríne Corps, the Coast Guard, the rmy Nurse Corps, emaíe, the Navy Nurse
Corps, emaíe, the Women s rmy u íííary Corps or the Women s rmy Corps,
the Women s Reserve branch of the Navaí Reserve, the Maríne Corps Women s
Reserve, and the Coast Guard Reserve, íncíudíng the Coast Guard Women s
Reserve. Such forces do not íncíude the rmy Specíaííst Corps.
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31
29.22(b) (13)-1.
Sectíon 0 ís appíícabíe oníy to the índívíduaí who performs servíce as a
member of the mííítary or navaí forces of the Uníted States. ence, ít has no
appíícatíon to the spouse of such Indívíduaí, uníess the spouse aíso performs
such servíce.
Nothíng contaíned ín sectíon 3 0 or these reguíatíons shaíí be construed to
requíre payment of the ta for any ta abíe year before the postponed due date
of the ta for such year under sectíon 3 04, íf such sectíon ís appíícabíe, nor
before the íast day of any períod of e tensíon aííowed under the provísíons of
sectíon 513 of the Soídíers and Saííors Cívíí Reííef ct of 1940.
(6) ppíícatíon for deferred payments. € ” In order to obtaín the prívííege of
deferred payments under sectíon 3 0 wíth respect to ta for a ta abíe year,
the ta payer must make wrítten appíícatíon, príor to the fírst Instaííment date,
to the coííector of ínternaí revenue for the dístríct ín whích the return for such
ta abíe year ís fííed. No partícuíar form ís requíred but the appíícatíon shouíd
contaín a compíete statement of the facts necessary to determíne the ta payer s
eíígíbíííty for the benefíts of sectíon 3S0S, the ta abíe years and the amounts of
ta ínvoíved, and the due date of the fírst payment. The essentíaí facts íncíude:
(1) Rank and organízatíon.
(2) Whether the ta payer ís an offícer of the reguíar component of the
rmy, Navy, Maríne Corps, or Coast Guard.
(3) Date of ínductíon or entrance ínto armed forces.
(4) Date of reíease from actív duty, If so reíeased.
(5) If the ta payer performed servíce outsíde the contínentaí Uníted
States or on sea duty, the date on whích the ta payer íeft the contínentaí
Uníted States or commenced to serve on sea duty and the date on whích he
returned to the contínentaí Uníted States or ceased to serve on sea duty.
(6) If, under the provísíons of sectíon 513 of the Soídíers and Saííors
Cívíí Reííef ct, an e tensíon of tíme for payment of the ta for a war year
has been granted, the date upon whích such períod of e tensíon e píres.
(7) The amount of ta for whích deferment ís cíaímed for each ta abíe
year ínvoíved.
(c) Interest. € ” If deferred payments are authorízed under the provísíons
of sectíon 3 0 , one-tweífth of the ta ín respect of whích deferment ís author-
ízed ís payabíe on the fírst ínstaííment date, one-tweífth thereof on the cor-
respondíng date of the thírd month foííowíng the fírst ínstaííment date, and
one-tweífth on the correspondíng date of each succeedíng thírd month after the
precedíng ínstaííment date untíí the fuíí amount of the ta ís paíd.
No ínterest shaíí be charged or paíd If the ta ís paíd upon the prescríbed
dates. Interest at the rate of 6 per cent per annum shaíí be charged on Instaíí-
ments not paíd at the tíme prescríbed from the date the Instaííment became
due untíí the ínstaííment ís paíd. If the ta payer faíís to pay an ínstaííment
of the ta on the prescríbed date, such faííure shaíí not acceíerate the due date
of the remaíníng ínstaííments.
ny ínterest paíd príor to November , 1945, on that portíon of the ta for any
ta abíe year whích couíd be deferred under the provísíons of sectíon 3 0 shaíí
be credíted or refunded to the ta payer, íf cíaím therefor Is fííed príor to anu-
ary 1, 1947, wíth the coííector of Internaí revenue as the authorízed repre-
sentatíve of the Commíssíoner.
íd) Suspensíon of períod of íímítatíon. € ” If deferred payments In respect of
the ta for any ta abíe year are authorízed ín accordance wíth the provísíons
of sectíon 3 0 , the runníng of the períod of íímítatíons under sectíon 276(c) on
the coííectíon of such ta ís suspended for the períod begínníng wíth the date
of fíííng of the appíícatíon under sectíon 3 0 (b) and endíng sí months after
the date prescríbed for payment of the íast ínstaííment of such ta .
Sac. 29.3 0 -2. íbst Instaííment Date. € ” (a) Generaí ruíe. € ” Under the defí-
nítíon contaíned ín sectíon 3 0 (a)(4), íf neíther sectíon 3 04 and the reguía-
tíons thereunder nor sectíon 513 of the Soídíers and Saííors Cívíí Reííef ct ís
appíícabíe, the fírst ínstaííment date wíth respect to ta for a war year ís as
foííows:
(1) Ta payers reíeased from actíve duty príor to December 1,1945. € ”
In the case of ta payers reíeased from actíve duty In the mííítary or navaí
forces of the Uníted States príor to December 1, 1945, the fírst Instaííment
date wíth respect to ta for a war year Is May 15. 1946, or the 15th day
of the thírd month foííowíng the cíose of such war year, whíchever ís th
íater.
(2) Other ta payers. € ” In the case of ta payers reíeased from actíve duty
ín the mííítary or navaí forces of the Uníted 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 reíeased from such
actíve duty, the fírst ínstaííment date wíth respect to ta for a war year
€ ís (í) une 15, 1947, or (íí) the 15th day of the sí th month whích begíns
after the date of the ta payer s reíease from actíve duty, whíchever Is
the earííer, but In no case shaíí the fírst Instaííment date be earííer than the
15th day of the thírd month foííowíng the cíose of such war year.
In the case of ta payers who make theír returns on a caíendar year basís
the fírst ínstaííment date, íf neíther sectíon 3 04 and the reguíatíons there-
under nor sectíon 513 of the Soídíers and Saííors Cívíí Reííef ct ís appíícabíe,
Is as foííows:
C L ND R Y RS 1940 TO 1945, INCLUSI .
Reíeased from actíve duty € ”
efore December 1, 1945
On or after December 1, 1945, but
not íater than November 30,1946.
On or after December 1, 1946
írst ínstaííment date € ”
May 15, 1946.
15th day of sí th month whích
begíns after date of reíease.
une 15, 1947.
C L ND R T R 194 .
Reíeased from actíve duty € ” írst Instaííment date € ”
efore October 1, 1946 March 15, 1947.
Duríng October, 1946 príí 15, 1947.
Duríng November, 1946 May 15, 1947.
On or after December 1,1946 une 15, 1947.
(6) Specíaí provísíons. € ” If, by reason of servíce on sea duty or outsíde the
contínentaí Uníted States, the due date of the ta for a war year ís postponed
under the provísíons of sectíon 3 04 and the reguíatíons thereunder or, íf coííec-
tíon of the ta for a war year Is deferred under the provísíons of sectíon 513
of the Soídíers and Saííors Cívíí Reííef ct, the fírst Instaííment date may
be íater than the date determíned under the generaí ruíe set forth ín sectíon
29.3 0 -2(o). In such event the fírst Instaííment date wíth respect to ta for
such war year shaíí be whíchever of the foííowíng ís the íatest:
(1) the date determíned under sectíon 29.3 0 -2(o), or
(2) the postponed due date of the ta determíned under sectíon 3 04 and
the reguíatíons thereunder, or
(3) the íast day of the períod of deferment aííowed under sectíon 513
of the Soídíers and Saííors Cívíí Reííef ct.
Sec. 29.3 0 -3. Ta ttríbutabíe to Servíce Pat. € ” The term ta attríbut-
abíe to servíce pay ís used ín sectíon 3S0 to characteríze that portíon of the
ta Imposed under Chapter 1 for a war year whích resuíts from the íncíusíon
In gross íncome of the compensatíon for actíve servíce as a member of the mííítary –
or navaí forces of the Uníted States. Under the defínítíon contaíned ín sectíon
0 (a) (1) the term ta attríbutabíe to servíce pay. for a war year means:
(a) If the ta payer had no gross íncome for such war year other than
the compensatíon for actíve servíce ín such forces, the ta Imposed under
Chapter 1, or
(6) If the ta payer had gross íncome for such war year ín addítíon to
the compensatíon for actíve servíce ín snch forces, the e cess of the ta
ímposed under Chapter 1 for such year over the ta that wouíd be ímposed
were such compensatíon e cíuded from the gross íncome.
member of the mííítary or navaí forces of the Uníted States Is ín actíve
servíce If he ís actuaííy servíng ín such forces, not necessarííy ín the fíeíd or
In the theater of war. Personneí ín the ínactíve reserve or on retírement are
not ín actíve servíce. Períods duríng whích a person ís absent from duty on
account of síckness, wounds, ípave, ínternment by the enemy, or other íawfuí
cause are períods of actíve servíce.
In computíng the amount of the ta attríbutabíe to servíce pay for a war
year the ta ímposed under Chapter 1 shaíí be determíned wíthout regard to
the credít under sectíon 31 for ta es paíd to a foreígn country or a possessíon
of the Uníted States and wíthout regard to the credíts províded ín sectíons 32
and 35 for ta es wíthheíd nt the source.
or the purposes of sectíon 3 0S, the term ta attríbutabíe to servíce pay
has no appíícatíon to commíssíoned offícers of the reguíar component of the rmy,
Navy, Maríne Corps, or Coast Guard for any war year uníess, by reason of
servíce on sea duty or outsíde the contínentaí Uníted States, the due date of the
ta for such year ís postponed under the provísíons of sectíon 3 04 and the
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33
29.22(b) (13)-1.
reguíatíons thereunder. or e ampíe, a commíssíoned offícer of the reguíar
component of the rmy was assígned to duty ín Great rítaín ín ebruary, 1042,
and served contínuousíy ín the uropean theater thereafter untíí he returned
to the Uníted States In uíy, 1943. ssumíng that the offícer makes hís
returns on the caíendar year basís, the reguíar due dates of the ta es under
Chapter 1 for the war years 1942 to 1044, íncíusíve, faíí príor to anuary 15,
1946, whích ís the 15th day of the sí th month after the date of hís return to
the Uníted States. ccordíngíy, under the provísíons of sectíon 3 04, the due
dates of the ta es for the ta abíe years 1942 to 1044, Incíusíve, are postponed
and the ta payer ís eíígíbíe for the benefíts of sectíon 3 0 wíth respect to the
ta es for such years. owever, ínasmuch as the reguíar due date of the ta
for the ta abíe year 1945 ís March 15, 1946, and such date ís íater than anuary
15, 1946, there ís no postponement of the due date of the ta for such ta abíe
year under the provísíons of sectíon 3 04 and payment of the ta for 1945 may
not be deferred under the provísíons of sectíon ) .
The computatíon of the ta attríbutabíe to servíce pay may be Iííustrated
by the foííowíng e ampíe:
ampíe. Captaín , a reserve offícer ín the Uníted States Navy, Is a marríed
man and has no dependents. Duríng the caíendar years 1942 and 1943 he receíved
compensatíon for actíve servíce on sea duty. ís base pay amounts to 1,500
ín 1942 and 4,000 ín ír43. In addítíon to hís servíce pay, he receíved íncotne
In the form of dívídends whích amounts to T6.000 ín each of the caíendar years
1942 and 1913. ís aííowabíe deductíons for each year for íncome ta purposes
amount to . 400 and he had no víctory ta deductíons. ís wífe had no íncome
or deductíons for eíther year. ís ta ííabíííty for the caíendar year 1943 and
the amount of such ta attríbutabíe to servíce pay Is computed as foííows:
19í2.
Compensatíon for actíve servíce 1,500.00
Dívídends 6.000. 00
Gross íncome , 7, 500. 00
Less: ííowabíe deductíons 400. 00
Net íncome 7,100. 00
Less: Personaí e emptíon 1, 200. 00
Surta net íncome 5, 900. 00
Less: arned íncome credít (not íess than 300) 300.00
Normaí ta net íncome 5. 600.00
Normaí ta at 6 per cent 336. 00
Surta on 5,900 960.00
Totaí ta 1,296.00
191,3.
INCOM T .
Compensatíon for actíve servíce 4,000.00
Less: 1,500 e cíusíon under sectíon 22(b) (13) 1, 500. 00
aíance of servíce pay 2, 500. 00
Dívídends 0, 000.00
Gross íncome , 500. 00
Less: ííowabíe deductíons € ” z 400. 00
Net íncome ,100. 00
Less: Personaí e emptíon 1, 200. 00
Surta net íncome 6,900.00
Less: arned íncome credít (not íess than 300) 300. 00
Normaí ta net Income 6, 600. 00
Normaí ta at 6 per cent 96. 00
Surta on 6,900 1,106. 00
Totaí ta under sectíons 11 and 12 1, 592. 00
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29.22(b) (13)- . 34
ICTORY T .
Gross íncome 3,500.00
Deductíons None
íctory ta net íncome ,500. 00
Less: íctory ta e emptíon 624. 00
Income sub|ect to víctory ta 7, 76.00
íctory ta at 5 per cent on 7, 76 393. 0
Less: íctory ta credít (40 per cent of ta ) 157.52
Net víctory ta 236.23
Ta for 1943 after gívíng effect to sectíon 6 of the Current Ta Payment ct
of 1943.
Income ta under sectíons 11 and 12 1, 592. 00
Net víctory ta 236.2
Totaí ta 1, 2 .2
Increase In 1943 ta under sectíon 6(a) of Current Ta Pay-
ment ct of 1943:
Totaí ta for 1942 1, 296
Less amount forgíven (three-fourths of 1,296) 972
Unforgíven portíon added to 1943 ta 321. 00
Ta ííabíííty for 1943 2,152. 2
Computatíon of ta for 1943 after e cíudíng compensatíon for actíve servíce ín
armed forces.
€ ž 1942.
Gross íncome 7, 500.00
Less: Servíce pay Incíuded ín gross Income 1, 500.00
Gross Income (e cíusíve of servíce pay) 6, 000.00
Less: ííowabíe deductíons: 400. 00
Net íncome 5,600.0)
Less: Personaí e emptíon 1, 200. 00
Surta net Income 4,400.00
Less: arned Income credít (not íess than 300) 300.00
Normaí ta net íncome 4.100.00
Normaí ta at 6 per cent 246. 00
Surta on 4,400 660.00
Totaí ta 906.00
1943.
INCOM T .
Gross íncome , 500.00
Less: Servíce pay íncíuded In gross Income 2, 500.00
Gross Income (e cíusíve of servíce pay) 6,000.00
ííowabíe deductíons 400.00
Net Income 5,6 1.00
Less: Personaí e emptíon 1,200.00
Surta net íncome 4,400.00
í: arned íncome credít (not íess than 300) 300.00
Normaí ta net Income 4,100.00
Normaí ta at 6 per cent – 246.00
Surta on 4,400 660.00
Totaí ta under sectíons 11 and 12 906.00
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35 . 29.22(b) (13)-1.
ICTO T ta
Gross Income (e cíusíve of servíco pay) 6,000.00
Less: Deductíons None
íctory ta net íncome 6, 000. 00
Less: íctory ta e emptíon 624. 00
Income sub|ect to víctory ta 5,376. 00
íctory ta at 5 per cent on 5,376 26 . 0
Less: íctory ta credít (40 per cent of 26 . 0) 107.52
íctory ta 161.2
Ta for 1943 after e cíudíng servíce pay and gívíng effect to sectíon 6 of the
Current Ta Payment ct of 1943.
Income ta under sectíons 11 and 12 906. 06
íctory ta 161.2
Totaí ta 1,067.2
Increase ín 1943 ta under sectíon 6(a) of the Current Ta
Payment ct of 1943:
Ta for 1942 I 906.00
Less: mount forgíven (three-fourths of 906) 679.50
Unforgíven portíon added to 1943 ta 226. 50
Ta for 1943 íf compensatíon for actíve servíce e cíuded 1, 293. 7
Ta ííabíííty for 1943 2,152, 2
Ta ííabíííty for.1943 íf compensatíon for actíve servíce e cíuded 1, 293. 7
Ta attríbutabíe to servíce pay under sectíon 3 0 . 5 . 50
Sec. 2D.3 0 -4. stímated Ta foe Wab Years € ” Sectíon 3r0 (d) contaíns spe-
cíaí ruíes for the appíícatíon of sectíon 5 , reíatíng to decíaratíons of estímated
ta , and sectíon 294(d), reíatíng to penaítíes In connectíon wíth estímated ta ,
In the case of certaín members of the mííítary or navaí forces of the Uníted
States who are eíígíbíe for the benefít of deferred payments under sectíon 3 0 .
Under the ruíes prescríbed, íf aíí or part of the ta under Chapter 1 for a war
year couíd be deferred under the provísíons of sectíon 3 0 , the amount of the
compensatíon for actíve servíce as a member of the mííítary or navaí forces
of the Uníted States shaíí not be taken ínto account € ”
(a) ín determíníng the gross íncome reasonabíy e pected for such year
for the purpose of ascertaíníng whether a decíaratíon of estímated ta
ís requíred under the provísíons of sectíon 5 (a)
(6) ín determíníng the amount of the estímated ta for such year under
the provísíons of sectíon 5 (b) and
(c) ín determíníng the amount of the ta for such year for the purposes
of sectíon 294(d), reíatíng to penaítíes In connectíon wíth estímated ta .
If the ta payer ís eíígíbíe for the benefíts of sectíon 3 0 the provísíons of
sectíon 3 0 (d) are appíícabíe even though the ta payer does not take advantage
of the authorízed deferment or does not make appíícatíon therefor.
The provísíons of sectíon 3 0 (d) and thís sectíon have no appíícatíon to a
member of the mííítary or navaí forces who at the tíme prescríbed for makíng
the decíaratíon of estímated ta for a ta abíe year Is a commíssíoned offícer
(or a commíssíoned warrant offícer) of the reguíar component of the rmy,
Navy, Maríne Corps, or Coast Guard.
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29.22(b) (13)-1. 36
R GUL TIONS 103.
Par. 4. There ís ínserted ímmedíateíy precedíng sectíon 19.22(b)
(13)-1 the foííowíng:
S C. 141. DDITION L LLOW NC OR MILIT RY ND N L
P RSONN L. (R NU CT O 1945.)
(a) In Generaí. € ” Sectíon 22(b) (13) (reíatíng to the e cíusíon from
gross íncome for mííítary and navaí personneí) ís amended to read as
foííows:
(13) ddítíonaí aííowance for mííítary and navaí person-
neí. € ”
€ € € €
( ) Compensatíon receíved duríng any ta abíe year and
before the termínatíon of the present war as procíaímed by
the Presídent, for actíve servíce as a member beíow the grade
of commíssíoned offícer (or commíssíoned warrant offícer) ín the
mííítary or navaí forces of the Uníted States duríng such war.
(b) Ta abíe Tears to Whích ppíícabíe. € ” € subparagraph
( ) € € shaíí be appíícabíe wíth respect to ta abíe years be-
gínníng after December 31, 1940.
(c) Credíts or Refunds fob 1941 and 1942. € ” If at any tíme príor to
anuary 1, 1947, the aííowance of a credít or refund of an overpayment
of the ta for any ta abíe year begínníng after December 31, 1940, and
before anuary 1, 1943, ís otherwíse prevented by the operatíon of any
íaw or ruíe of íaw (other than sectíon 3761, reíatíng to compromíses),
a credít or refund of the overpayment of such ta to the e tent that
the overpayment ís attríbutabíe to the enactment of thís sectíon may,
nevertheíess, be aííowed or made íf a cíaím therefor Is fííed before
anuary 1, 1947.
Par. 5. Sectíon 19.22(b) (13)-1, as amended by Treasury Decísíon
5297, approved September 20, 1943 C. . 1943, 247 , ís further
amended to read as foííows:
Sec 19.22(b) (13)-1. Compensatíon of Members of Mííítary and Navaí
b C S. € ” In addítíon to the e emptíons and credíts otherwíse appíícabíe, there
shaíí be e cíuded from gross íncome the entíre amount of the compensatíon
receíved ín a ta abíe year begínníng after December 31, 1940, for actíve servíce
as a member beíow the grade of commíssíoned offícer (or commíssíoned warrant
offícer) of the mííítary or navaí forces of the Uníted States.
The e cíusíon from gross íncome under sectíon 22(b) (13) and thís sectíon ís
appíícabíe oníy to compensatíon receíved príor to termínatíon of the present
war to be fí ed by procíamatíon of the Presídent. Such e cíusíon ís appíícabíe
wíthout regard to the marítaí status of the recípíent of the compensatíon, and
íf a husband and wífe both meet the requírements of the statute, then each
ís entítíed to the benefít of an e cíusíon.
or the purposes of thís sectíon the mííítary and navaí forces of the Uníted
States íncíude (but are not necessarííy íímíted to) the rmy, the Navy, the
Maríne Corps, the Coast Guard, the rmy Nurse Corps, emaíe, the Navy
Nurse Corps, emaíe, the Women s rmy u íííary Corps or the Women s
rmy Corps, the Women s Reserve branch of the Navaí Reserve, the Maríne
Corps Women s Reserve, and the Coast Guard Reserve, Incíudíng the Coast
Guard Women s Reserve. Personneí servíng wíth the rmy Specíaííst Corps
are not wíthín the scope of the e emptíon.
person ís ín actíve servíce íf he ís actuaííy servíng ín the mííítary or navaí
forces, not necessarííy In the fíeíd or In the theater of war. Personneí ín the
Inactíve reserve or on retírement are not ín actíve servíce. Períods duríng
whích a person ís absent from duty on account of síckness, wounds, íeave,
ínternment by the enemy, or other íawfuí cause are períods of actíve servíce.
In the case of a husband and wífe domícííed ín a State recognízed for ederaí
Income ta purposes as a communíty property State, any e cíusíon from gross
íncome under sectíon 22(b) (13) operates before apportíonment of the gross
íncome of the spouses ín accordance wíth communíty property íaws.
The amount of any overpayment attríbutabíe to the appíícatíon of sectíon
22(b) (13) to a ta abíe year begínníng ín 1941 shaíí be refunded or credíted íf a
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37
29.22(b)(13)-1.
cíaím therefor Is fííed before anuary 1, 1947. Such refund or credít shaíí be
aííowed notwíthstandíng the operatíon of any provísíon of íaw (other than sectíon
3761, reíatíng to compromíses) or ruíe of íaw. Such provísíons or ruí .-s of íaw
íncíude, for e ampíe, statutes of íímítatíons and res |udícata.
Par. 6. There ís ínserted ímmedíateíy after subsectíon (f) of sectíon
3 01 the foííowíng:
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 Generaí. € ” Chapter 3 (mísceííaneous provísíons) ís amended
by Insertíng at the end thereof a new sectíon readíng as foííows:
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) Defínítíons. € ” s used ín thís sectíon € ”
(1) Ta attríbutabíe to see více pat. € ” The term ta attríbut-
abíe to servíce pay means € ”
( ) In the case of a war year for whích the ta payer had
no gross Income other than compensatíon for actíve servíce as
a member of the mííítary or navaí forces of the Uníted States,
the ta ímposed under chapter 1 for such year or
( ) In the case of a war year for whích the ta payer had
gross Income ín addítíon to compensatíon for actíve servíce as a
member of the mííítary or navaí forces of the Uníted States,
the e cess of the ta Imposed under chapter 1 for such year over
the ta that wouíd have been Imposed If such compensatíon had
been e cíuded from gross íncome
e cept that ín the case of a commíssíoned offícer (or a commíssíoned
warrant offícer) of the reguíar component of the rmy, Navy, Maríne
Corps, or Coast Guard, such term shaíí not appíy to any war year
uníess, at the tíme prescríbed for the payment of the ta under
chapter 1 for such year, a períod of tíme was beíng dísregarded under
sectíon 3 04.
(2) Wab tear. € ” The term war year € € ”
( ) when used wíth respect to the ta attríbutabíe to servíce
pay means any ta abíe year begínníng after December 31, 1939,
and bafore anuary 1, 1947 and
( ) when used wíth respect to the ta attríbutabíe to pre-
servíce earned Income means any ta abíe year begínníng after
December 31, 1939, but before anuary 1, 1942, and before the
ta payer entered upon actíve servíce as a member of the mííítary
or navaí forces of the Uníted States, but does not íncíude any
year uníess part of the ta ímposed by chapter 1 for such year
became due and payabíe after the ta payer entered upon such
actíve servíce.
(3) Ta attríbutabíe to pre-servíce earned íncome. € ” The term
ta attríbutabíe to pre-servíce earned Income means the e cess
of the ta Imposed by chapter 1 for any war year over the ta that
wouíd have been ímposed for such year If there had been e cíuded
from the net íncome for such year the amount of the earned net
íncome (as such term was defíned ín sectíon 25(a) (4) as In force
wíth respect to such year, e cept that ín computíng such earned net
íncome, compensatíon for actíve servíce In such forces shaíí be dís-
regarded).
(4) írst ínstaííment date. € ” The term fírst Instaííment date
means May 15, 1946, ín the case of ta payers reíeased from actíve
duty ín the mííítary or navaí forces of the Uníted States príor to
December 1, 1945 and ín other cases une 15, 1947, or the fífteenth
day of the sí th month whích begíns after the date of the ta payer s
reíease from actíve duty In such forces, whíchever ís the earííer
e cept that, If the fírst Instaííment date wíth respect to any war
year wouíd otherwíse occur earííer than the fífteenth day of the
thírd month foííowíng the cíose of such year, the fírst Instaííment
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í 29.22(b) (13)- .
3S
date wíth respect to such year shaíí be the fífteenth day of such
thírd month.
(b) tensíon of Tíme for Payment. € ” Upon appíícatíon wíth re-
spect to any war year, made príor to the fírst Instaííment date, and under
reguíatíons prescríbed by the Commíssíoner wíth the approvaí of the
Secretary € ”
(1) the tíme for payment of an amount of the ta under chapter
1 for such year whích Is equaí to the ta attríbutabíe to servíce pay
for such year and whích has not been paíd before the fíííng of such
appíícatíon and
(2) the tíme for the payment of an amount of the ta under
chapter 1 for such year whích Is equaí to the ta attríbutabíe to
pre-servíce earned íncome for such year and whích has not been
paíd before the fíííng of such appíícatíon,
shaíí, ín ííeu of the tíme otherwíse appíícabíe, be as foííows: one-tweífth
thereof on the fírst ínstaííment date and an addítíonaí tweífth thereof
every three months thereafter untíí such ta ís paíd.
(c) Suspensíon of Pehíod of Límítatíon. € ” The runníng of the períod
of íímítatíon províded ín sectíon 270(c) (reíatíng to the coííectíon of the
ta after assessment) ín respect of any ta the tíme for the payment of
whích ís prescríbed under subsectíon (b), shaíí be suspended for the
períod begínníng wíth the date of the fíííng of the appíícatíon under
such subsectíon and endíng sí months after the date prescríbed thereín
for the payment of the íast ínstaííment of such ta .
€ € € € € _ €
(b) Refund of Interest Paíd. € ” ny Interest paíd príor to the date of
the enactment of thís ct wíth respect to ta attríbutabíe to servíce
pay for any war year, or wíth respect to ta attríbutabíe to pre-servíce
earned íncome for any war year, shaíí be credíted or refunded íf cíaím
therefor ís fííed wíth the Commíssíoner príor to anuary 1, 1947.
Sec. 19.3 0 -1. Deferment of Certaín Ta es of Members of the Mííítary
or Navaí orces. € ” (a) In generaí. € ” Sectíon 3 0 provídes that, ín the case of
members of the mííítary or navaí forces of the Uníted States, that portíon of the
ta under Chapter 1 whích ís attríbutabíe to servíce pay for a war year or to
pre-servíce earned íncome for a war year, may, ín ííeu of the tíme otherwíse
prescríbed by íaw, be paíd íh 12 equaí quarter-annuaí Instaííments begínníng
wíth the fírst ínstaííment date. s to what constítutes the fírst ínstaíí-
ment date for the purposes of sectíon 3 0 see sectíon 19.3 0 -2.
The term war year as defíned ín sectíon 3 0 (a) (2) means, ín the case of
ta attríbutabíe to servíce pay, any ta abíe year begínníng after December 31,
1939, and before anuary 1, 1947. In the case of the ta attríbutabíe to pre-
servíce earned Income, the term means any ta abíe year begínníng after De-
cember 31, 1939, but before anuary 1, 1942, and before the ta payer entered
upon actíve servíce as a member of the armed forces of the Uníted States, but
does not Incíude any ta abíe year uníess part of the ta Imposed by Chapter 1
for such ta abíe year became due and payabíe after the ta payer entered upon
such actíve servíce.
or the purposes of sectíon 0 the mííítary or navaí forces of the Uníted
States Incíude (but are not necessarííy íímíted to) the rmy, the Navy, the
Maríne Corps, the Coast Guard, the rmy Nurse Corps, emaíe, the Navy Nurse
Corps, emaíe, the Women s rmy u íííary Corps or the Women s rmy Corps,
the Women s Reserve branch of the Navaí Reserve, the Maríne Corps Women s
Reserve, and the Coast Guard Reserve, Incíudíng the Coast Guard Women s
Reserve. Such forces do not íncíude the rmy Specíaííst Corps.
Sectíon 3 0 Is appíícabíe oníy to the Indívíduaí who performs servíce as a
member of the mííítary or navaí forces of the Uníted States. ence, ít has no
appíícatíon to the spouse of such índívíduaí, uníess the spouse aíso performs
such servíce.
Nothíng contaíned ín sectíon 3 0 or these reguíatíons shaíí be construed to
requíre payment of the ta for any ta abíe year before the postponed due date
of the ta for such year under sectíon 3S04, If such sectíon Is appíícabíe, nor
before the íast day of any períod of e tensíon aííowed under the provísíons of
sectíon 513 of the Soídíers and Saííors Cívíí Reííef ct of 1940.
( ) ppíícatíon for deferred payments. € ” In order to obtaín the prívííege of
deferred payments under sectíon 3 0 wíth respect to ta for a ta abíe year,
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39
29.22(b) (16)-1.
the ta payer must make wrítten appíícatíon, príor to the fírst Instaííment date,
to the coííector of Internaí revenue for the dístríct In whích the return for such
ta abíe year Is fííed. No partícuíar form Is requíred but the appíícatíon shouíd
contaín a compíete statement of the facts necessary to determíne the ta payer s
eíígíbíííty for the benefíts of sectíon 3S0 , the ta abíe yenrs and the amounts of
ta ínvoíved, and the due date of the fírst payment. The essentíaí facts íncíude:
(1) Rank and organízatíon.
(2) Whether the ta payer Is an offícer of the reguíar component of the
rmy, Navy, Maríne Corps, or Const Guard.
(3) Date of ínductíon or entrance ínto armed forces.
(4) Date of reíease from actíve duty, íf so reíeased.
(5) If the ta payer performed servíce outsíde the contínentaí Uníted
States or on sea duty, the date on whích the ta payer íeft the contínentaí
Uníted States or commenced to serve on sea duty and the date on whích he
returned to the contínentaí Uníted Stares or ceased to serve on sea duty.
(6) If, under the provísíons of sectíon 513 of the Soídíers and Saííors
Cívíí Reííef ct, an e tensíon of tíme for payment of the ta for a war year
has been granted, the date upon whích such períod of e tensíon e píres.
(7) The amomt of ta for whích deferment ís cíaímed for each ta abíe
year Invoíved.
(c) Interest. € ” If deferred payments are authorízed under the provísíons of
ectíon 3 0 , one-tweífth of the ta In respect of whích deferment ís authorízed
ís payabíe on the fírst ínstaííment date, one-tweífth thereof on the correspondíng
date of the thírd month foííowíng the fírst ínstaííment date, and one-tweífth on
the correspondíng date of each succeedíng thírd month after the precedíng
ínstaííment date untíí the fuíí amount of the ta Is paíd.
No Interest shaíí be charged or paíd íf the ta Is paíd upon the prescríbed
dates. Interest at the rate of 6 per cent per annum shaíí be charged on ínstaíí-
ments not paíd at the tíme prescríbed from the date the ínstaííment became due
untíí the Instaííment ís paíd. If the ta payer faíís to pay an ínstaííment of the
ta on the prescríbed date, such faííure shaíí not acceíerate the due date of the
remaíníng ínstaííments.
ny Interest paíd príor to November , 1945, on that portíon of the ta for
any ta abíe year whích couíd be deferred under the provísíons of sectíon 3 0
shaíí be credíted or refunded to the ta payer, If cíaím therefor ís fííed príor to
anuary 1, 1947, wíth the coííector of Internaí revenue as the authorízed repre-
sentatíve of the Commíssíoner.
(d) Suspensíon of períod of íímítatíon. € ” If deferred payments ín respect of the
ta for any ta abíe year are authorízed ín accordance wíth the provísíons of
sectíon 3 0 , the runníng of the períod of íímítatíons under sectíon 276(c) on the
coííectíon of such ta ís suspended for the períod begínníng wíth the date of
fíííng of the appíícatíon under sectíon 3 0 (b) and endíng sí months after the
date prescríbed Cor payment of the íast Instaííment of such ta .
Sec. 19.3 0 -2. íbst Instaííment Date. € ” (a) Generaí ruíe. € ” Under the def-
ínítíon contaíned ín sectíon 3 0 (a)(4), íf neíther sectíon 3 04 and the regu-
íatíons thereunder nor sectíon 513 of the Soídíers and Saííors Cívíí Reííef ct
ís appíícabíe, the fírst Instaííment date wíth respect to ta for a war year
ís as foííows:
(1) Ta payers reíeased from actíve duty príor to December 1, 19)5. € ” In
the ense of ta payers reíeased from actíve duty ín the mííítary or navaí forces
of the Uníted States príor to December 1, 1945, the fírst Instaííment date wíth
respect to ta for a war year ís May 15, 1946, or the 15th day of the thírd
month foííowíng the cíose of such war year, whíchever Is the íater.
(2) Other ta payers. € ” In the case of ta payers reíeased from actíve duty
ín the mííítary or navaí forces of the Uníted States on or after December 1,
1945, and ín the case of ta payers who have not been reíeased from such
actíve duty, the fírst ínstaííment date wíth respect to ta for a war year Is (1)
une 15,1947, or (II) the 15th day of the sí th month whích begíns after the
date of the ta payer s reíease from actíve duty, whíchever Is the earííer, but
In no case shaíí the fírst ínstaííment date be earííer than the 15th day of the
thírd momth foííowíng the cíose of such war year.
In the case of ta payers who make theír returns on a caíendar year basís
the fírst Instaííment date, íf neíther sectíon 3 04 and the reguíatíons there-
under nor sectíon 513 of the Soídíers and Saííors Cívíí Reííef ct Is appíícabíe,
ís as foííow :
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29:22(b)(13)-í.
40
C L ND R Y RS 1040 ND 1041.
Reíeased from actíve duty € ”
efore December 1, 1945
On or after December 1, 1945, but
írst ínstaííment date € ”
May 15, 1946.
15th day of sí th month whích be-
not íater than November 30,1940.
On or after December 1,1940
gíns after date of reíease.
une 15, 1947.
(6) Specíaí provísíons. € ” If, by reason of servíce on sea duty or outsíde the
contínentaí Uníted States, the due date of the ta for a war year ís postponed
under the provísíons of sectíon 3 04 and the reguíatíons thereunder or, íf coí-
íectíon of the ta for a war year ís deferred under the provísíons of sectíon 513
of the Soídíers and Saííors Cívíí Reííef ct, the fírst ínstaííment date may
be íater than the date determíned under the generaí ruíe set forth ía sectíon
í9.3 0 -2(a). In such event the fírst ínstaííment date wíth respect to ta for
such war year shaíí be whíchever of the foííowíng Is the íatest:
(1) the date determíned under sectíon 19.3 0 -2(o), or
(2) the postponed due date of the ta determíned under sectíon 3S04 and
the reguíatíons thereunder, or
(3) the íast day of the períod of deferment aííowed under sectíon 513 of
the Soídíers and Saííors Cívíí Reííef ct.
Sec. 19.3 0 -3. Ta ttríbutabíe to Servíce Pay. € ” The term ta attríb-
utabíe to servíce pay Is used ín sectíon 3 0 to characteríze that portíon of the
ta ímposed under Chapter 1 for a war year whích resuíts from the íncíusíon
In gross íncome of the compensatíon for actíve servíce as a member of the míí-
ítary or navaí forces of the Uníted States. Under the defínítíon contaíned ín
sectíon 3 0 (a) (1) the term ta attríbutabíe to servíce pay for a war year
means:
(a) íf the ta payer had no gross íncome for such war year other than
the compensatíon for actíve servíce ín such forces, the ta ímposed under
Chapter 1, or
(ft) íf the ta payer had gross íncome for such war year ín addítíon to
the compensatíon for actíve servíce ín such forces, the e cess of the ta
ímposed under Chapter 1 for such year over the ta that wouíd be ímposed
were such compensatíon e cíuded from the gross íncome.
member of the mííítary or navaí forces of the Uníted States ís ín actíve serv-
íce íf he ís actuaííy servíng ín such forces, not necessarííy ín the fíeíd or ín the
theater of war. Personneí ín the Inactíve reserve or on retírement are not ín
actíve servíce. Períods duríng whích a person ís absent from duty on account of
síckness, wounds, íenve, ínternment by the enemy, or other íawfuí cause are
períods of actíve servíce.
In computíng the amount of the ta attríbutabíe to servíce pay for a war
year the ta ímposed under Chapter 1 shaíí be determíned wíthout regard to the
credít under sectíon 31 for ta es paíd to a foreígn country or a possessíon of
the Uníted States and wíthout regard to the credíts províded ín sectíon 32 for
ta es wíthheíd at the source.
or the purposes of sectíon 3 0 , the term ta attríbutabíe to servíce pay
has no, appíícatíon to commíssíoned offícers of the reguíar component of the rmy,
Navy, Maríne Corps, or Coast Guard for any war year uníess, by reason of serv-
íce on sea duty or outsíde the contínentaí Uníted States, the due date of the
ta for such year ís postponed under the provísíons of sectíon 3 04 and the regu-
íatíons thereunder. or e ampíe, a commíssíoned offícer of the reguíar compo-
nent of the rmy was assígned to duty ín Great rítaín ín ebruary, 1942, and
served contínuousíy ín the uropean theater thereafter untíí he returned to the
Uníted States ín uíy, 1945. The reguíar due date of the ta under Chapter 1
for the war year 1941 faíís príor to anuary 15,1946, whích ís the 15th day of the
sí th month after the date of hís return to the Uníted States. ccordíngíy,
under the provísíons of sectíon 3 04, the due date of the ta for the ta abíe year
1941 ís postponed and the ta payer ís eíígíbíe for the benefíts of sectíon 3 03
wíth respect to the ta for such year.
The computatíon of the ta attríbutabíe to servíce pay may be íííustrated
by the foííowíng e ampíe:
ampíe. , a reserve offícer ín the Uníted States rmy, ís marríed and has
no dependents. e makes hís returns on the caíendar year basís. e entered
upon actíve duty wíth the armed forces ín 1941 and duríng such year receíved
compensatíon for actíve servíce ín the amount of 2,000. In addítíon to hís
servíce pay he receíved ta abíe dívídends ín the amount of 0,000. ís aííow-
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41
29.22(b) (13)-1.
abíe deductíons for 1941 amount to 700. ís wífe had no íncome or deductíons.
ís ta ííabíííty for the caíendar year 1941 and the amount of such ta attríbut-
abíe to servíce pay ís computed as foííows:
Gross íncome , 000
Less: ííowabíe deductíons 700
Net Income 7,300
Less: Personaí e emptíon .. 1, 500
Surta net Income 5, 00
Less: arned íncome credít (mínímum) 300
Income sub|ect to normaí ta 5, 500
Normaí ta at 4 per cent 220
Surta on 3, 00 534
Ta ííabíííty for 1941 754
Computatíon of ta for 1941 after e cíudíng compensatíon for actíve servíce
ín armed forces.
Gross íncome € ” , 000
Less: Servíce pay 2,000
Gross Income (e cíusíve of servíce pay) 6,000
Less: ííowabíe deductíons 700
Net íncome: 5,300
Less: Personaí e emptíon 1, 500
Surta net íncome 3, 00
Less: arned íncome credít (mínímum) 300
Income sub|ect to normaí ta _ 3, 500
Normaí ta at 4 per cent 140
Surta on 3, 00 2 2
Totaí ta 422
Ta ííabíííty for 1941 , 754
Ta ííabíííty for 1941 íf compensatíon for actíve servíce e cíuded 422
Ta attríbutabíe to servíce pay 332
Sec. 19.3 0 -4. Ta ttríbutabíe to Pre-Servíce arned Income. € ” The de-
ferment províded In sectíon 3S0 for members of the mííítary or navaí forces of
the Uníted States wíth respect to ta attríbutabíe to pre-servíce earned íncome
ís appíícabíe oníy to a war year as defíned In sectíon 3 0 (a) (2) ( ). See sec-
tíon 19.3 0 -1.
The term ta attríbutabíe to pre-servíce earned íncome means the e cess
of the ta ímposed under Chapter 1 for the ta abíe year over the ta that wouíd
be ímposed íf there were e cíuded from the net íncome for such year the amount
of the earned net íncome. or the purpose of such computatíon the earned net
íncome shaíí be determíned ín accordance wíth the provísíons of sectíon 25(a) (4)
under the íaw appíícabíe to the ta abíe year, e cept that ín computíng the earned
net íncome under such sectíon compensatíon for actíve servíce ín the armed
forces shaíí not bo fatten ínto account. s to what constítutes earned net íncome,
see sectíon 19.25-2.
In computíng the amount of the ta attríbutabíe to pre-servíce earned íncome
for a war year, the ta Imposed under Chapter 1 shaíí be determíned wíthout
regard to the credít under sectíon 31 for ta es paíd to a foreígn country or a
possessíon of the Uníted States and wíthout regard to the credít under sectíon 32
for ta wíthheíd at the source.
703673 € ” 1 1
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S 29.22(b) (13)- .
42
The appíícatíon of thís sectíon may be Iííustrated by the foííowíng e ampíe:
ampíe. , a marríed man wíth two dependent chíídren, was empíoyed as
a saíes representatíve ín 1041. e receíved a saíary of 100 a week píus com-
míssíons on saíes and paíd hís own traveííng e penses. On uíy 1, 1941, he re-
ceíved a commíssíon as coíoneí ín the rmy of the Uníted States and In ebruary,
1942, he was transferred to Great rítaín. was returned to the Uníted States
ín ugust, 1945, and was reíeased from actíve servíce In September, 1945.
Duríng the caíendar year 1941 was paíd a totaí of 1 ,000, saíary and com-
míssíons, for hís servíces as a saíesman. Duríng the same períod he Incurred
e penses of 3,700 for traveííng, meaís, and íodgíng In connectíon wíth hís em-
píoyment. ís base pay as a coíoneí ín the rmy for the íatter haíf of 1911
amounted to 2,000. Duríng the caíendar-year 1941 he aíso receíved dívídends of
0,000, íncome from rents, 2,200, and ta abíe ínterest In the amount of 00.
e paíd 3,S00, State and íocaí ta es, 2,300, Interest on a mortgage, and made con-
tríbutíons to varíous charítabíe organízatíons ín the aggregate amount of 1,650.
ís íncome ta ííabíííty for the caíendar year 1041 ís computed as foííows:
Gross Income € ”
Saíary and commíssíons (saíesman) 1 ,000
Compensatíon for servíce In armed forces 2,000
Dívídends 6,000
Income from rents 2,200
Interest íncome 00
Totaí 29,000
Deductíons € ”
Ta es (State and íocaí) 3, 00
Traveííng e penses , , 700
Interest paíd 2,300
Contríbutíons 1, 650
Totaí 11,450
Net íncome 17,550
Less: Personaí e emptíon € 1, 500
Credít for dependents 00
Surta net íncome 15,250
Less: arned íncome credít (ma ímum) 1,400
Normaí ta net íncome IS, 50
Normaí ta (4 per cent of 13, 50) 554
Surta . 2, 00
Totaí ta 3,354
On ebruary 1, 1946, fííed hís Income ta return for the caíendar year 1941
and at the same tíme made appíícatíon for deferred payments under sectíon 3 0
on that part of hís ta attríbutabíe to servíce pay and to pre-servíce earned
íncome. Under the facts stated the caíendar year 1941 ís a war year wíth
respect to the ta attríbutabíe to servíce pay sínce It began after December 31,
1939, and before anuary 1, 1947. It ís aíso a war year wíth respect to pre-
servíce earned íncome sínce ít began after December 31, 1939, and before anuary
1, 1942, and the entíre amount of the ta for such year became due and payabíe
after entered actíve servíce as a member of the armed forces. Sínce was
díscharged príor to December 1, 1945, the fírst ínstaííment date ís May 13,
1946, uníess ííe ís entítíed to the benefíts of sectíon 3 04 and such date Is earííer
tban the postponed due date under the íatter sectíon. Sínce was outsíde the
contínentaí Uníted States on March 15,1942, the due date of the ta for 1941, and
contínuousíy thereafter untíí ugust, 1945, the postponed due date under sectíon
3 04 ís the 15th day of the sí th month foííowíng hís return to the Uníted States,
or ebruary 15, 1946. ence, the fírst ínstaííment date ís May 15, 1946, and
the appíícatíon for deferment under sectíon 3S0 Is tímeíy.
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43 29.22(b) (13)-1.
The amount of the ta for 1941 whích Is attríbutabíe to servíce pay for such
year ís computed as foííows:
Gross íncome for 1941 29,000.00
Less: Servíce pay to be e cíuded 2, 000. CO
27,000. 00
Less: Deductíons 11,450.00
Net Income 15, 550. 00
Less: Personaí e emptíon 1,500. 00
€ Credít for dependents SCO. 00
2,300.00
Surta net íncome 13,250.00
Less: arned íncome credít (ma ímum) 1,400.00
Normaí ta net íncome 11, 50. 00
Normaí ta (4 per cent of 11, 50) 474.00
Surta 2,1 2. 50
Totaí ta 2,650.50
Totaí ta ííabíííty for 1941 3, 354. 00
Ta after servíce compensatíon e cíuded 2, 650. 50
Ta attríbutabíe to servíce compensatíon T 697. 50
The amount of the ta for 1941 whích ís attríbutabíe to pre-servíce earned ín-
come ís computed as foííows:
Net íncome for 1941 17, 550. 00
Pre-servíce earned íncome:
arned íncome (dísregardíng servíce pay) 1 ,000.00
Deductíons attríbutabíe to earned íncome 3, 700. 00
arned net Income (before íímítatíon) 14,300.00
arned net Income (after íímítatíon) 14,000.00
Net Income after e cíusíon 3, 550. 00
Less: Personaí e emptíon 1, 500. 00
Credít for dependents 00 00
2,300. 00
Surta net íncome 1,250. 00
Less: arned íncome credít (10 per cent of earned net íncome or 10
per cent of net Income, whíchever ís smaííer, but not íess than 300) _ 300. 00
Normaí ta net íncome 950. 00
Normaí ta at 4 per cent 3 . 00
Surta 75. 00
Totaí 113. 00
Totaí ta ííabíííty 3, 354. 00
Ta íf pre-servíce earned Income e cíuded : 113. 00
Ta attríbutabíe to pre-servíce earned Income 3, 241. 00
Taw sub|ect to deferment.
Ta attríbutabíe to servíce compensatíon 697. 50
Ta attríbutabíe to pre-servíce earned íncome , 241. 00
Totaí 3, 93 . 50
Sínce the totaí ta ííabíííty for 1941, 3,354, ís íess than 3,93 .50, the de-
ferment appííes to the totaí ta and the fírst ínstaííment of 279.50 (one-tweífth
of 3 54) ís due and payabíe on May 15, 1946.
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29.22(b)(13)- .
41
(Thís Treasury Decísíon ís íssued under the authoríty contaíned ín
sectíon 62 of the Internaí Revenue Code (53 Stat., 32 26 U. S. C, 62)
and sectíons 141 and 142 of the Revenue ct of 1945 (Pubííc Law 214.
Seventy-nínth Congress).)
oseph D. Nunan, r..
Commíssíoner of Internaí Revenue.
pproved príí 15, 1946.
oseph . O Conneíí, r., ,
ctíng Secretary of the Treasury.
( ííed wíth the Dívísíon of the ederaí Regíster príí 15, 1946, 4.31 p. m.)
Sectíon 29.22(b) (13)-1: Compensatíon of mííí- € 1946-3-12224
tary and navaí forces. Mím. 5972
( íso Sectíon 3 0 .)
Provísíons of Revenue ct of 1945 reíatíng to members of the
armed forces.
Treasury Department,
Offíce of Commíssíoner of Internaí Revenue, €
Washíngton 25, D. C, anuary 9,1946.
Coííectors of Internaí Revenue, Internaí Revenue gents ín Charge,
and Others Concerned:
1. Reference ís made to sectíons 141, 142(a), and 142(b) of the
Revenue ct of 1945, whích províde addítíonaí reííef for members and
veterans of the armed forces. The purpose of thís mímeograph ís to
summaríze these provísíons and to descríbe the admínístratíve pro-
cedure to be used. s stated ín prevíous mímeographs, the poíícy of
the ureau ís to deaLwíth aíí ta matters affectíng members of the
armed forces ín a cooperatíve and sympathetíc manner. ccord-
íngíy, cíaíms cíerks, audítors, and other Internaí Revenue empíoyees
concerned shouíd be ínstructed to gíve specíaí and prompt attentíon
to such cíaíms and appíícatíons as may aríse under these provísíons.
CLUSIONS O S R IC P Y.
2. Commíssíoned offícers, or commíssíoned warrant offícers, ín the
mííítary and navaí forces of the Uníted States/ cítízens or resídents of
the Uníted States as members of the mííítary or navaí forces of any
of the other Uníted Natíons. € ” The Revenue ct of 1945 makes no
change wíth respect to the e cíusíon of the fírst 1,500 of actíve servíce
pay receíved by ta payers ín the foregoíng cíassífícatíons. Thís e -
cíusíon has been ín effect for ta abíe years begínníng on or after an-
uary 1, 1943, and wííí contínue untíí the present war ís decíared ter-
mínated by the Presídeht.
. níísted personneí. € ” ctíve servíce pay receíved by members of
the armed forces of the Uníted States beíow the grade of commíssíoned
offícer or commíssíoned warrant offícer, duríng ta abíe years begínníng
on or after anuary 1 1941, wííí be e cíuded from gross íncome for
the purpose of computíng íncome ta untíí the present war ís decíared
termínated by the Presídent.
4. rmed forces personneí or veterans ínquíríng wíth respect to the
addítíonaí e cíusíons shouíd be ínformed oí theseTbenefíts. If the ta
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45
29.22(b)(13)-í.
has been paíd for years ín whích addítíonaí e cíusíons may be aííowed,
ínstructíon and assístance shouíd be gíven ín the preparatíon of appro-
príate cíaíms for refund or credít on orm 43. It foííows that any
unpaíd assessment shouíd be abated to the e tent that ít may be reduced
by takíng ínto consíderatíon the addítíonaí e cíusíon. It wííí be neces-
sary, however, to e amíne the returns and accounts on whích credíts,
refunds, or abatements are based to determíne the vaíídíty of the cíaím
and the e tent to whích ít may be aííowed. refund or credít of any
overpayment of the ta for 1941 and 1942 (ta abíe years begínníng
after December 31,1940, and before anuary 1, 1943) may be aííowed
íf the cíaím ís fííed before anuary 1,1947, even though the aííowance
ís otherwíse prevented by the statute of íímítatíons or the operatíon of
any other íaw or ruíe (other than compromíses as províded for ín sec-
tíon 3761 of the Code).
D RM NT O P YM NT O T S.
5. The new ct provídes that payment of unpaíd ta es for war
tears whích are attríbutabíe to actíve servíce pay and pre-servíce
earned íncome may be made ín 12 quarteríy ínstaííments begínníng on
a prescríbed fdíst ínstaííment date. Thís deferment ís aííowabíe
upon appíícatíon before the fírst ínstaííment date to persons who served
as members of the armed forces of the Uníted States duríng the pres-
ent war (not to persons who served oníy ín the forces of any other
natíon). In order that the amounts of ta sub|ect to e tensíon for pay-
ment and the ínstaííment dates on whích payments are due may be
readííy determíned, the foííowíng e píanatíon of the terms used ín the
ct are gíven:
(a) Ta attríbutabíe to servíce pay means the totaí ta for a war
year reduced by the ta on íncome other than actíve servíce pay re-
ceíved from the Uníted States. owever, íf the servíce person ís a
commíssíoned offícer, or commíssíoned warrant offícer, of the reguíar
component of the rmy, Navy, Maríne Corps, or Coast Guard, none of
Ms ííabíííty may be defíned as ta attríbutabíe to servíce pay un-
íess he was beíng granted reííef on the due date(s), from payíng ta
because he was on sea duty or outsíde the contínentaí Uníted States.
(b) Ta attríbutabíe to -pre-servíce earned íncome ís computed as
foíí ows: (1) Determíne ta abíe íncome, as defíned under Chapter 1
of the Code, for war year and compute the ta (2) subtract earned
íncome other than servíce earned íncome from ta abíe íncome deter-
míned ín (1) and compute the ta on thís baíance (3) subtract the ta
computed ín (2) from the ta computed ín (1). The resuítíng ííabíí-
íty ís the ta attríbutabíe to pre-servíce earned íncome.
(o) War year when used wíth respect to the ta attríbutabíe to
servíce pay means any ta abíe year (caíendar or físcaí) begínníng
after December 31,1939, and before anuary 1,1947. War year when
used wíth respect to pre-servíce earned íncome means any ta abíe
year (caíendar or físcaí) begínníng after December 31, 1939, and
before anuary 1, 1942, íf the ta abíe year began before the ta payer
entered upon actíve servíce and íf at íeast a part of the ta became due
and payabíe after he entered upon actíve servíce.
(a) The -fírst ínstaííment date for ta payers reíeased from actíve
servíce at any tíme before December 1, 1945, ís May 15, 1940 . The
fírst ínstaííment date ín aíí other cases ís une 15,1947, or the 15th day
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I 29.22(b)(13)-í.
4G
of the sí th month whích begíns after the date of the ta payer s
reíease from actíve duty, whíchever ís the earííer. owever, none of
the above dates ís to be effectíve to bríng the fírst ínstaííment due be-
fore the 15th day of the thírd month foííowíng the cíose of the ta abíe
year to whích the ta appííes nor are any of the above dates to be
effectíve to bríng the fírst ínstaííment due before the postponed due
date estabííshed because of sea duty, or duty outsíde the contínentaí
Uníted States.
The tabíe set forth beíow presents a conveníent reference for deter-
míníng fírst ínstaííment dates:
caíendar year € ”
If deferred ta Is attríbutabíe to € ”
físcaí year € ”
Date of reíease (If any).
1940,1M1
194 IMS
1944,1946
1M6
egínníng
after
an. 1, 1940,
and endíng
egínníng
after
Mar. 31, 1945,
and endíng
egínníng
after
Mar. 31, 1946,
and endíng
The tínt Instaííment date ís € ”
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
Reguíar due
date.
Reguíar due
date.
Daríng:
December, IMS...-.
une 16,1946
uíy 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
uíy 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
Reguíar due
date or the
15th day of
sí th month
begínníng
after daíe of
reíease
whíchever
ís the íater.
ebruary, IMS
March, 1946
príí, IMS
May, 194 _
The reguíar
due date of
return-
une, 1946
uíy. í 4fí
ugust,.194
September, 1949_
October, 1946
November, 1946
In servíce after Nov. 30,1946.
une 16.1M7
une 15.1947
une 16,1947
une 15,1947
Reguíar due
date.
COLL CTORS PROC DUR ON D RM NTS O T S OR MILIT RY ND
N L P RSONN L.
6. Sínce the grantíng of an e tensíon of tíme for payment wííí be
condítíoned upon an appíícatíon made príor to the fírst ínstaííment
date, an e amínatíon of the return(s) and account(s) for the year(s)
ínvoíved wííí be necessary to determíne the unpaíd ta attríbutabíe
to (1) servíce pay and (2) pre-servíce earned íncome. The appííca-
tíon for e tensíon may be made by the ta payer ín any conveníent
wrítten form. No formaí type of appíícatíon form wííí be prescríbed,
aíthough the coííector may, íf he desíres, prepare a mímeographed
form for thís purpose to aíd ín conveníentíy servíng the ta payers.
When the return(ís) and account(s) have been e amíned, the ta -
payer shouíd be advísed that hís appíícatíon has been gíven consídera-
tíon and that he wííí receíve, príor to the ínstaííment dates, notíces of
the amounts to be paíd. If the return(s) and account(s) díscíose any
unpaíd ta whích may not be deferred under the provísíons of the ct,
the ta payer shouíd be advísed to that effect and as to the amount
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47
29.22(b) (13)-1.
whích may not be deferred. owever, coííectors shouíd contínue to
fíve fuíí recognítíon to the e tensíons províded ín sectíon 513 of the
oídíers and Saííors Cívíí Reííef ct, sectíon 3 04 of the Code, and
Treasury Decísíon 5279 (C. . 1943, 952) as they appíy to such unpaíd
ííabííítíes. The poíícy set forth ín Mímeograph 5931 shouíd aíso con-
tínue to serve as the basís for coííectíon of ííabííítíes not sub|ect to the
new ínstaííment method of payment.
7. When an e tensíon has been granted under the ínstaííment
method of payment, the date of appíícatíon and the statutory authoríty
shouíd be noted on the account. When the amounts of the ínstaííments
have been determíned, notíces shouíd be prepared. The form to be
used for thís purpose ís to be mímeographed by coííectors and shouíd
be substantíaííy símííar to híbít I attached to thís mímeograph.
tíckíer fííe shouíd be estabííshed for the notíces so that each one can be
maííed to the ta payer appro ímateíy 10 days before the due date of
the ínstaííment. If more than one year s ííabíííty for a partícuíar ta -
payer ís ínvoíved, notíces shouíd be prepared for each account. If the
ínstaííment dates for each of the accounts coíncíde, the varíous notíces
shouíd be maííed ín one enveíope at the appropríate tíme. The date
of maíííng of each notíce shouíd aíso be noted on the account. Whííe
one-tweífth of the amount e tended ís to be paíd on the fírst ínstaíí-
ment date and one-tweífth ís to be paíd every three months thereafter
untíí the fuíí amount of the ta e tended ís paíd, the ta payer may
compíete payment before the specífíed ínstaííment dates íf he wíshes.
owever, advance payment of ínstaííments shouíd not be construed
as advancíng any of the remaíníng ínstaííment dates. When advance
payments of ínstaííments are receíved, the notíces to whích such
payments appíy shaíí be so marked to prevent theír beíng maííed.
. It wíííTbe the poíícy to aííow the ínstaííment method of payment
to contínue untíí the date of the tweífth ínstaííment ís reached even
though the ta payer eíther compíeteíy faíís to make payment of one or
more ínstaííments or does not make tímeíy payment of one or more
ínstaííments. Under the ínstaííment method of payment, ta attríb-
utabíe to servíce pay and pre-servíce earned íncome wííí be consídered
for practícaí and admínístratíve purposes to be 12 equaí and separate
amounts. Thus ínterest on any deíínquent ínstaííment wííí be com-
puted at the rate of 6 per cent per annum from the due date of the
ínstaííment to the date of payment.
9. Suspensíon of períod of íímítatíon. € ” The runníng of the períod
of íímítatíon for coííectíon of ta es after assessment as set forth ín sec-
tíon 276(c) of the Code shaíí be suspended for the períod begínníng
wíth the date of fíííng an appíícatíon for the ínstaííment method of
payment and endíng sí months after the date prescríbed for the pay-
ment of the íast ínstaííment.
STIM T D T .
10. If a ta payer ís eíígíbíe for deferment of payment of ta wíth
respect to any war year, he may dísregard compensatíon receíved
for actíve servíce as a member of the mííítary or navaí forces of the
Uníted States ín determíníng hís gross íncome for the purpose of com-
putíng estímated ta for such year. Thís provísíon ís aíso to be appííed
forthe purpose of consíderíng penaítíes for underestímatíon of ta .
owever, thís provísíon shaíí not appíy to any person who at the
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I 29.22(b) (13)- .
4
tíme for makíng a decíaratíon of estímated ta for any war year, ís
a commíssíoned offícer or a commíssíoned warrant offícer of the reguíar
component of the rmy, Navy, Maríne Corps, or Coast Guard.
INT R ST.
11. ny ínterest paíd príor to November , 1945 (the date of enact-
ment of the Revenue ct of 1945), wíth respect to ta for whích pay-
ment couíd be deferred under the ct, shaíí be credíted or refunded
íf the cíaím ís fííed before anuary 1, 1947. It foííows that any such
ínterest that has accrued wííí not be assessed, and that any such ínter-
est whích has been assessed but not coííected, wííí be abated. ny
ínterest accruíng or assessed on or after November , 1945, and
before the date whích wouíd be the fírst ínstaííment date wíth
respect to ta for whích payment couíd be deferred wííí for admínís-
tratíve reasons not be assessed or coííected. If such ínterest has been
paíd ít wííí be credíted or refunded íf the cíaím ís fííed wíthín the tíme
prescríbed under the generaí ruíes províded ín sectíon 322 of the Code.
12. The provísíons of the Revenue ct of 1945 shouíd not be con-
strued as confííctíng wíth sectíon 3 04 of the Code, sectíon 513 of the
Soídíers and Saííors Cívíí Reííef ct, or Treasury Decísíon 5279.
Instead, as e píaíned ín thís mímeograph, the Revenue ct of 1945
provídes for further reííef and benefíts to veterans and servícemen.
13. Correspondence reíatíve to the contents of thís mímeograph
shouíd refer to íts number and to the symboís C: Coí.
Wm. T. Sherwood,
ctíng Commíssíoner.
híbít 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
Taíabíe year.
Totaí ta deferred.
Unpaíd baíance.
mount of thís
Date thís Instaíí-
ment Is due.
Your remíttance, together wíth thíí
notíce, shouíd reach the offíce of
.....(address)
To Insure proper credít píease return thís notíce wíth your
remíttance.
not íater than the date shown abort.
Make check or money order payabto
to Coííector of Internaí Revenue.
n Instaííment not paíd on tíme wííí
bear ínterest at the rate of 6 per cent
per annum from the date due untíí
paíd.
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49
29.22(b) (13)-1.
Sectíon 29.22(b) (13)-1: Compensatíon of 1946-7-12275
mííítary ana navaí forces. Mím. 5972
( íso Sectíon 3 0 .) (Suppíement 1)
Cíassífícatíon of warrant offícers.
Treasury Department,
Offíce of Commíssíoner of Internaí Revenue,
Washíngton 25, D. C, March 6,1946.
Coííectors of Internaí Revenue, Internaí Revenue gents ín Charge,
and Others Concerned:
Reference ís made to Mímeograph 5972 page 44, thís uííetín ,
whích summarízes provísíons of the Revenue ct of 1945 reíatíng to
members of the armed forces.
The mímeograph states that the Revenue ct of 1945 e cíudes from
gross íncome aíí ctíve servíce pay receíved by members of the armed
forces of the Uníted States beíow the grade of commíssíoned offícer or
commíssíoned warrant offícer ítaíícs suppííed , duríng ta abíe years
begínníng on or after anuary 1,1941, untíí the present war
ís decíared termínated by the Presídent.
The mímeograph aíso states, ín effect, that commíssíoned warrant
offícers are entítíed oníy to an e cíusíon of the fírst 1,500 of actíve
servíce pay, the same as for commíssíoned offícers.
These references to commíssíoned warrant offícers have resuíted
ín numerous ínquíríes as to the dístínctíon between such offícers and
other warrant offícers. The purpose of thís mímeograph ís to cíarífy
thís dístínctíon.
The facts are as foííows:
1. In the rmy, the íowest rank of commíssíoned offícer ís second
ííeutenant. Therefore, aíí íower rmy ranks (íncíudíng chíef warrant
offícers, warrant offícers, |uníor grade, fííght offícers, sergeants, etc.)
are treated for ederaí íncome ta purposes the same as eníísted men.
2. In the Navy and Coast Guard, nowever, chíef warrant offícers are
commíssíoned (í. e., treated as offícers) but other warrant offícers are
not commíssíoned (í. e., treated as eníísted men). Títíes of the two
groups are ídentícaí e cept that commíssíoned warrant offícers have the
desígnatíon chíef precedíng theír títíes. Thus, when not commís-
síoned, the warrant offícers of these servíces are desígnated boatswaíns,
gunners, carpenters, saíí-makers, pharmacísts, machínísts, pay cíerks,
eíectrícíans, radío eíectrícíans, torpedomen, shíps cíerks, aerograph-
ers, and photographers. When commíssíoned, they are desígnated
chíef boatswaíns, chíef gunners, chíef carpenters, chíef saíí makers,
chíef pharmacísts, chíef machínísts, chíef pay cíerks, chíef eíectrícíans,
chíef radío eíectrícíans, chíef torpedomen, chíef shíps cíerks, chíef
aerographers, and chíef photographers. íí íower ranks of these
servíces, íncíudíng chíef petty offícers, are treated the same as eníísted
men.
3. In the Maríne Corps, aíso, chíef warrant offícers are commíssíoned
(í. e., treated as offícers), but other warrant offícers are not commís-
síoned (í. e., treated as eníísted men). Títíes of the two groups are
ídentícaí e cept that commíssíoned warrant offícers have the desígna-
tíon chíef precedíng theír títíes. Thus, when not commíssíoned,
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29.22(b)(14)- .
50
the warrant offícers of thís servíce are desígnated maríne gunner, quar-
termaster cíerk, and pay cíerk. When commíssíoned, they are desíg-
nated chíef maríne gunner, chíef quartermaster cíerk, and chíef pay
cíerk.
Correspondence reíatíve to the contents of thís mímeograph shouíd
refer to íts number and to the symboís C: Coí.
oseph D. Nunan, r.,
Commíssío n er.
Sectíon 29.22(b) (13)-1: Compensatíon of mííítary
and navaí forces.
INT RN L R NU COD .
Lump-sum payments receíved by ír Corps Reserve offícers under
the ct of une 16,1936, as amended. (See I. T. 3790, beíow.)
Sectíon 29.22(b) (13)-1: Compensatíon of mííítary
and navaí forces.
INT RN L R NU COD .
Income from sources wíthín a possessíon of the Uníted States.
(Seeí. T. 3791, page 14 .)
Sectíon 29.22(b) (13)-1: Compensatíon of members of
mííítary and navaí forces.
INT RN L R NU COD .
Lump-sum payment receíved by wídow or other benefícíary of a
deceased commíssíoned navaí offícer. (See I. T. 3 01, page 109.)
Sectíon 29.22(b) (14)-1: Musteríng-out pay- 1946-7-12276
ments of mííítary and navaí forces. I. T. 3790
( íso Sectíon 29.22(b) (13)-1.)
ínternaí revenue code.
Lump-sum payments receíved by ír Corps Reserve offícers under
the ct of une 16, 1936 (49 Stat., 1524), as amended, are not mus-
teríng-out payments whích are e cíudíbíe from gross íncome under
sectíon 22(b) (14) of the Internaí Revenue Code. Such íump-sum
payments receíved by ír Corps Reserve offícers as members of the
mííítary forces for actíve servíce ín such forces are e cíudíbíe from
gross íncome to the e tent províded ín sectíon 22(b) (13) of the
Code, as amended.
dvíce ís requested whether íump-sum payments receíved by ír
Corps Reserve offícers under the ct of une 16.1936 (49 Stat., 1524),
as amended, are musteríng-out payments whích are e cíudíbíe from
gross íncome under sectíon 22(b) (14) of the Internaí Revenue Code.
Sectíon 2 of the ct of une 16, 1936, as amended, provídes as
foííows:
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51
29.22(b) (14)-1.
Seo. 2. Whenever any ír Corps Reserve offícer who has not been seíected for
commíssíon ín the Reguíar rmy Is reíeased from actíve duty that has been
contínuous for one or more years, he shaíí be paíd a íump sum of 500 for each
compíete year of actíve servíce as such offícer- and If reíeased from actíve duty
otherwíse than upon hísíown request, or as a resuít of Ineffícíent or unsatísfactory
servíce as determíned by the Secretary of War, such íump-sum payment shaíí be
prorated for fractíonaí parts of each year of such actíve servíce. The íump-sum
payments hereín authorízed shaíí be ín addítíon to any pay, aííowances, com-
pensatíon, or benefíts whích such offícers may otherwíse be entítíed to receíve.
(Sec. 300a, títíe 10, T . S. C. .)
Sectíon 22 (b) (14) of the Internaí Revenue Code provídes as foííows:
(b) cíusíons from Gross Income. € ” The foííowíng ítems shaíí not be ín-
cíuded ín gross Income and shaíí be e empt from ta atíon under thís chapter
Chapter 1 of the Code :
€ € € €
(14) MUST RINO-OUT P YM NTS OR MILIT RY ND N L P RSONN L. € ”
mounts receíved duríng the ta abíe year as musteríng-out payments wíth
respect to servíce ín the mííítary or navaí forces of the Uníted States.
The íaw reíatíng to the payment of a íump sum to an ír Corps
Reserve offícer ís based upon and has a dírect reíatíon to the number
of years or fractíonaí part of a year of actíve servíce ín the ír Corps
Reserve, and payments made thereunder represent addítíonaí compen-
satíon. The íaw ín questíon contaíns no provísíon for e emptíng
such payments from ederaí íncome ta atíon, whereas musteríng-out
payments were specífícaííy e empted from such ta atíon by the pro-
vísíons of the Musteríng-Out Payment ct of 1944 (5 Stat., ), ínfra,
and by sectíon 22(b) (14) of the Internaí Revenue Code. or the
purposes of the e cíusíon from gross íncome under sectíon 22(b) (14)
of the Code, musteríng-out payments are payments made to any recíp-
íents pursuant to the provísíons of the Musteríng-Out Payment ct of
1944. (See sectíon 29.22(b) (14)-1 of Reguíatíons 111.) The Mus-
teríng-Out Payment ct of 1944 provídes ín part as foííows:
(b) No musteríng-out payment shaíí be made to € ”
€ . € € €
(4) any ír Corps Reserve offícer who ís entítíed to receíve a íump-sum
payment under sectíon 2, as amended (55 Stat. 240), of the ct of une 10,
1036
In víew of the foregoíng, ít ís heíd that íump-sum payments receíved
by ír Corps Reserve offícers under the ct of une 16,1936, as amend-
ed, supra, are not musteríng-out payments whích are e cíudíbíe from
oss íncome under sectíon 22(b) (14) of the Internaí Revenue Code,
owever, such íump-sum payments receíved by ír Corps Reserve
offícers as members of the mííítary forces for actíve servíce ín such
forces are e cíudíbíe from gross íncome to the e tent províded ín sec-
tíon 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 .
Sectíon 29.22(d)-2: Requírements íncídent to 1946-7-12277
adoptíon and use of eíectíve 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.
Reguíatíons 111 amended wíth respect to eíectíve ínventory com-
putatíons.
Treasury Department,
Offíce of Commíssíoner of Internaí Revenue,
Washíngton, D. C.
To Coííectors of Internaí Revenue and Others Concerned:
Paragraph 1. Sectíon 29.22(d)-2 of Reguíatíons 111 Part 29, Títíe
26, Code of ederaí Reguíatíons, Cum. Sup. ís amended as foííows:
( ) y revísíng that portíon thereof precedíng the numbered para-
graphs to read:
Sec. 29.22(d)-2. Requírements Incídent to doptíon and Use op íectíve
Method. € ” cept as otherwíse províded ín sectíon 29.22(d)-í wíth respect to
raw materíaí computatíons, the adoptíon and use of the eíectíve ínventory method
ís, by sectíon 22 (d) and the reguíatíons thereunder, made sub|ect to the foííowíng
requírements:
( ) y stríkíng that portíon of paragraph (4) precedíng the íet-
tered subparagraphs, and by ínsertíng ín ííeu thereof the foííowíng:
(4) Goods of the specífíed type on hand as of the cíose of the ta abíe year In
e cess of what were on hand as of the begínníng of the ta abíe year shaíí be In-
cíuded ín the cíosíng ínventory, regardíess of ídentífícatíon wíth specífíc ínvoíces
nnd regardíess of specífíc cost accountíng records, nt costs determíned pursuant
to the provísíons of ruíe ( ) or ruíe ( ) hereof, dependent upon the character
of the transactíons ín whích the ta payer ís engaged
Ruíe ( ). In the case of a ta payer engaged ín the purchase and saíe of
merchandíse, such as a retaíí grocer or druggíst, or engaged In the ínítíaí
productíon of merchandíse and Its saíe wíthout processíng, such as a míner
seíííng hís ore output wíthout smeítíng or Yefíníng, such costs shaíí be deter-
míned € ”
(C) y ínsertíng ín paragraph (4) ímmedíateíy precedíng e ampíe
(1) the foííowíng:
The appíícatíon of ruíe ( ) may be íííustrated by the foííowíng e ampíes:
(D) y revísíng e ampíe (2) ín paragraph (4) to read as foííows:
ampíe (2). Suppose that the ta payer s cíosíng ínventory for 1943, the year
foííowíng that ínvoíved ín e ampíe (1), refíects an ínventory decrease for the
year, ard not an íncrease suppose that there ís, accordíngíy, a 1943 cíosíng ínven-
tory of 13 uníts. Inasmuch as the decreased cíosíng ínventory wííí be determíned
whoííy by reference to the 15 uníts refíected ín the openíng ínventory for the
year, and wííí be taken ín the order of acquísítíon pursuant to sectíon
22(d) (1) ( ), and ínasmuch as the character of the ta payer s openíng ínventory
for the year wííí be dependent upon íts method of vaíuíng íts 5-unít ínventory ín-
crease for the precedíng year, the cíosíng ínventory for 1943 wííí (e computed as
foííows:
(a) In case the Increase for the precedíng ta abíe year was taken by reference
to the most recent purchases € ”
10 at 10 (from 1941) 100
1 at 1,3 ( uíy 1942) 13
2 at 14 (October 1942) 2
Totaís: 13 141
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53
5 19.23(a)- .
(6) In ease the Increase for the precedíng ta abíe year was taken In the order
of acquísítíon € ”
10 at 10 (from 1941) 100
1 at 11 ( anuary 1942) 11
2 at 12 ( príí 1942) 24
Totaís: 13
or
(c) In case the íncrease for the precedíng ta abíe year was taken on the basís
of an average € ”
10at 10 (from 1941) 100
3 at 13 (from 1942) – 39
Totaís: 13 139
( ) y ínsertíng ín paragraph (4) ímmedíateíy after e ampíe (2)
the foííowíng:
Ruíe (U). In the case of a ta payer engaged ín manufacturíng, fabrícatíng,
processíng, or otherwíse producíng merchandíse, such costs shaíí be determíned € ”
(a) In the case of raw materíaís purchased or ínítíaííy produced by the
ta payer, ín the manner eíected by the ta payer under ruíe ( ) to the same
e tent as íf the ta payer were engaged ín purchase and saíe transactíons
and
(6) In the case of goods ín process, regardíess of the stage to whích the
manufacture, fabrícatíng, or processíng may have advanced, and ín the
case of fíníshed goods, pursuant to any proper method whích, ín the opíníon
of the Commíssíoner, cíearíy refíects íncome.
R GUL TIONS 103.
Par. 2. The above amendments to Reguíatíons 111, whích reguía-
tíons cover ta abíe years begínníng after December 31,19.41, are hereby
made appíícabíe to any ta abíe year begínníng after December 31,
193 , and príor to anuary 1,1942, such years beíng covered by Regu-
íatíons 103.
(Thís Treasury Decísíon ís íssued under the authoríty contaíned ín
sectíons 62 and 22(d) of the Internaí Revenue Code (53 Stat, 32, 77:
26 U. S. C, 1940 ed., 62, 22(d)).)
oseph D. Nunan, r.,
Commíssíoner of Internaí Revenue.
pproved March 20,194G.
oseph . O Conneíí, r.,
ctíng Secretary of the Treasury.
( ííed wíth the Dívísíon of the ederaí Regíster March 21, 1946, 4.2 p. m.)
S CTION 23(a). € ” D DUCTIONS ROM GROSS
INCOM : P NS S.
Sectíon 19.23(a)-í: usíness e penses. 1946-5-12249
Ct. D. 1665
íncome ta € ” ínternaí revenue code € ” decísíon of court.
1. Gross Income € ” Deductíons € ” Ordínary and Necessabt usíness
penses € ” Compromíse of Sun € ” Penaítíes.
mounts paíd by ta payer corporatíons ín 1930 ín compromíse
of a suít brought agaínst them by the State of Te as for aííeged
135
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19.23(a)- .
54
víoíatíons of the antítrust íaws of the State were payments made
as penaítíes for víoíatíons of such íaws, and are not deductíbíe as or-
dínary and necessary busíness e penses under sectíon 23(a) (1) ( )
of the Internaí Revenue Code, as amended.
2. Decísíon Reversed.
Decísíon of The Ta Court of the Uníted States ( T. C, 310)
reversed.
3. Cebtíokakí Deníed.
Petítíon for certíorarí deníed on October , 1945 ( 66 S. Ct, 33).
Uníted States Círcuít Court or ppeaís foe the ífth Círcuít.
Commíssíoner of Internaí Revenue, petítíoner, v. Longhorn Portíand Cement
, Co., respondent.
Commíssíoner of Internaí Revenue, petítíoner, v. an ntonío Portíand Cement
Co., respondent.
14 ed. (2d), 276.
Petítíons for revíew of decísíons of The Ta Court of the Uníted States.
efore utcheson, oímes, and MoCord, Círcuít udges.
March 27, 1945.
OPINION.
Domes, Círcuít udge: Respondents are Te as corporatíons engaged In the
manufacture and saíe of cement. The State of Te as, aííegíng that these cor-
poratíons had víoíated the antítrust íaws of the State, fííed a suít agaínst them
to recover statutory penaítíes and other affírmatíve reííef. € ach corporatíon
paíd the sum of 50,000 to the State ín 1939 In compromíse of the suít, and an
agreed |udgment was entered whích recíted that saíd payments were In fuíí satís-
factíon of aíí cíaíms of the State for penaítíes for the aííeged víoíatíons of íaw,
but that the defendants díd not thereby admít, or estop themseíves to deny, the
truth of the aííegatíons of the petítíon agaínst them. The questíon for decísíon
ís whether the sums so paíd were deductíbíe by the corporatíons ín theír Income
ta returns for 1939 as ordínary and necessary busíness e penses.
The Ta Court, fíndíng that the corporatíons díd not admít theír guíít and
were not proven guííty, and that the compromíse settíement was made by them
because they beííeved a defense of the suít wouíd be more e pensíve than the
settíement even íf the verdíct was favorabíe, heíd that the compromíse pay-
ments were not penaí ín nature and were deductíbíe as ordínary and necessary
busíness e penses.1 The Commíssíoner Insísts that the payments were made as
penaítíes for víoíatíons of a State íaw, and Invokes the doctríne that ta deduc-
tíons may not be aííowed when theír effect ís to frustrate the pubííc poíícy of
a State. We deem ít unnecessary to díscuss the factuaí consíderatíons that
persuaded The Ta Court to íts decísíon favoríng the ta payers for, concedíng
the truth of every fact found, the íssue Is controííed by príncípíes other than
those appííed by ít.
The sense of the ruíe that statutory penaítíes are not deductíbíe from gross
íncome Is that the penaíty ís a puníshment ínfíícted by the State upon those who
commít acts víoíatíve of the fí ed pubííc poíícy of the sovereígn, wherefore to
permít the víoíator to gaín a ta advantage through deductíng the amount of the
penaíty as a busíness e pense, and thus to mítígate the degree of hís puníshment,
wouíd frustrate the purpose and effectíveness of that pubííc poíícy.
The test uníversaííy empíoyed to determíne the appíícabíííty of the doctríne
to any such cíaímed deductíon Is whether the sums cíaímed were paíd as penaí-
tíes. Thus aíí e penses Incurred ín the successfuí defense of a suít to ímpose a
O . ., O U. .
Great Northern Ity. Co. v. Commíssíoner (40 ed. (2d), 372) urroughs ídg. ítateruu
Co. . Commíssíoner (47 ed. (2d), 17 Ct. D. 207, C. . -í. 97 (1931) ) níttí
States v. affray (97 ed. (2d). 4 ) : Standard Oíí Co. . Commíssíoner (129 ed. (2d).
363) eíveríng v. Superíor Wínes Líquors (134 ed. (2d), 7 ). Cf. Commíssíoner
v. eínínger (320 D. ., 467 Ct. D. 1596, C. . 1944, 4 4 ).
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55
29.23(a)- .
fíne or penaíty agaínst a busíness are deductíbíe. ven e penses Incurred In
unsuccessfuííy resístíng the Issuance of a fraud order, whích wouíd destroy one s
busíness, are not requíred to be deníed as a matter of íaw If deductíon for such
e penses Is to be deníed, ít must be because aííowance wouíd frustrate sharpíy
defíned pubííc poíícíes.4
Though the soíutíon of such íssues usuaííy turns upon the ta payer s guíít or
Innocence of a críme, the uítímate determínatíve ínquíry upon thís appeaí Is
whether the deductíon cíaímed was paíd as a penaíty. Thís ís íííustrated by cases
where, due to a compromíse settíement, the questíon of guíít or Innocence was not
estabííshed, yet the deductíon cíaímed was dísaííowed to the e tent that It rep-
resented a payment made to e tínguísh a cause of actíon to Impose a penaíty.
The suít of the State of Te as agaínst these defendants for víoíatíons of the
antítrust íaws was a suít to ímpose a personaí penaíty upon the defendants.
The sums now cíaímed as busíness e penses were paíd ín fuíí satísfactíon of
aíí cíaíms of the State of Te as for penaítíes for the aííeged víoíatíons of íaw.
In accordance wíth the príncípíes díscussed and the authorítíes cíted, we hoíd
that the deductíons cíaímed shouíd not have been aííowed.
The decísíons of The Ta Court are reversed, and the causes remanded for
further proceedíngs not ínconsístent wíth thís opíníon.
ttorneys fees paíd by a ta payer In connectíon wíth the defense
of a suít brought by the Príce dmínístrator under sectíon 205(e)
of the mergency Príce Controí ct of 1942 ( 56 Stat., 23) for a
víoíatíon of reguíatíons estabííshíng ceíííng príces are deductíbíe as
ordínary and necessary busíness e penses for ederaí íncome ta
purposes.
n opíníon ís requested whether attorneys fees paíd by a ta payer
ín connectíon wíth the defense of a suít brought by the Príce dmín-
ístrator under sectíon 205(e) of the mergency Príce Controí ct of
1942 (56 Stat., 23) for a víoíatíon of reguíatíons estabííshíng ceíííng
príces are deductíbíe as ordínary and necessary busíness e penses for
ederaí íncome ta purposes.
In G. C. M. 24377 (C. . 1944, 93) ít was heíd that íegaí e penses -
íncurred ín defense of a suít for víoíatíon of the Sherman ntí-Trust
ct, ín whích suít the defendant was found guííty of the víoíatíon,
are deductíbíe for ederaí íncome ta purposes as ordínary and nec-
essary busíness e penses. That opíníon was based on Commíssíoner v.
S. . eínínger (320 U. S., 467, Ct. D. 1596, C. . 1944, 4S4) and the
partíaí acquíescence (C. . 1944, 1 ) ín Langhorn Portíand Cement
Co. et aí. v. Commíssíoner (3 T. C, 310). Subsequent to those decí-
síons, The Ta Court rendered a decísíon ín Greene Motor Co. v.
Commíssíoner (5 T. C, 314, acquíescence, C. . 1945, 3), hoídíng
that certaín íegaí fees íncurred ín connectíon wíth a compromíse of
íncome ta defícíencíes, penaítíes, and crímínaí ííabíííty are deductíbíe
as ordínary and necessary busíness e penses. The offer ín compromíse
was made to secure reíease of the ta payer from ííabíííty for makíng
faíse and frauduíent íncome ta returns, evasíon of payment of ta ,
together wíth penaíty and ínterest, and for any crímínaí ííabíííty
íncídent thereto.
ornhauaer v. Uníted States (276 T . ., 145 T. D. 4222, C. . II-2, 267 (102 ) ):
mmís íoner v. Peopíe -Píttaburg Trust Co. (CO ed. (2d), 1 7).
€ Commísnfoncr v. eínínger (320 U. S., 467).
Sectíon -29.23 (a)-í: usíness 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 víew of the foregoíng, ít ís the opíníon of thís offíce that attorneys
fees paíd by a ta payer ín connectíon wíth the defense of a suít brought
by the Príce dmínístrator under sectíon 205(e) of the mergency
Príce Controí ct of 1942, supra, for víoíatíon of reguíatíons estab-
ííshíng ceíííng príces are deductíbíe as ordínary and necessary busíness
e penses for ederaí íncome ta purposes.
. P. Wencheí,
Chíef Counseí, ureau of Internaí Revenue.
Sectíon 29.23(a)-í: usíness e penses. 1946-1O-12307
I. T. 3799
INT RN L R NU COD .
mounts paíd to the Uníted States on account of actíons ínstítuted
or proposed to be ínstítuted by the Príce dmínístrator under sectíon
205(e) of the mergency Príce Controí ct of 1042 (56 Stat., 23, 34),
as amended by sectíon 10 (b) of the Stabííízatíon tensíon ct of
1044 ( 5 Stat., 632. 640), upon faííure of buyers of commodítíes soíd
In víoíatíon of a reguíatíon, order, or príce scheduíe of the Offíce of
Príce dmínístratíon to ínstítute actíons pursuant to such íaw, are
not deductíbíe from gross íncome for ederaí íncome ta purposes.
dvíce ís requested whether payments made on account of actíons
ínstítuted or proposed to be ínstítuted by the Príce dmínístrator
under sectíon 205(e) of the mergency Príce Controí ct of 1942
(56 Stat., 23, 34), as amended by sectíon 10 (b) of the Stabííízatíon
tensíon ct of 1944 (5 Stat., 632, 640) , upon faííure of buyers of
commodítíes soíd ín víoíatíon of a reguíatíon, order, or príce scheduíe
of the Offíce of Príce dmínístratíon prescríbíng a ma ímum príce or
ma ímum príces to ínstítute actíons pursuant to such íaw, are deductí-
bíe from gross íncome for ederaí íncome ta purposes.
Sectíon 205(e) of the mergency Príce Controí ct of 1942, as
amended, supra, provídes ín part as foííows:
(e) If any person seíííng a commodíty víoíates a reguíatíon, order, or príce
scheduíe prescríbíng a ma ímum príce or ma ímum príces, the person who buys
such commodíty for use or consumptíon other than In the course of trade or busí-
ness may, wíthín one year from the date of the occurrence of the víoía-
tíon, € bríng an actíon agaínst the seííer on account of the overcharge.
If any person seíííng a commodíty víoíates a reguíatíon, order, or
príce scheduíe prescríbíng a ma ímum príce or ma ímum príces, and the buyer
eíther faíís to ínstítute an actíon under thís subsectíon wíthín 30 days from the
date of the occurrence of the víoíatíon or ís not entítíed for any reason to bríug
the actíon, the dmínístrator may ínstítute such actíon on behaíf of the Uníted
States wíthín such one-year períod.
The actíon whích the Príce dmínístrator ís authorízed to ínstítute
whenever a buyer havíng a cause of actíon (under sectíon 205(e) of
the mergency Príce Controí ct of 1942, as amended, supra) faíís to
ínstítute such actíon ís símííar to the actíon whích may be brought by
the dmínístrator where the buyer has no cause of actíon. It has
been heíd ín cases ín whích the buyer ís not entítíed to bríng a suít
that amounts paíd ín satísfactíon of a |udgment as the resuít of a
suít brought by the Príce dmínístrator (other than as the uítímate
consumer or íessee), under sectíon 205(e) of the mergency Príce
Controí ct of 1942, or amounts paíd by way of compromíse or settíe-
ment of such a suít or contempíated suít, are not deductíbíe for ed-
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57
19.23(a)-2.
eraí íncome ta purposes. (See I. T. 3627, C. . 1943, 111, and I. T.
3630, C. . 1943,113.)
In víew of the foregoíng, ít ís heíd that amounts paíd to the Uníted
States on account of actíons ínstítuted or proposed to be ínstítuted by
the Príce dmínístrator under sectíon 205(e) of the mergency Príce
Controí ct of 1942, as amended, supra, upon faííure of buyers of
commodítíes soíd ín víoíatíon of a reguíatíon order, or príce scheduíe
of the Offíce of Príce dmínístratíon to ínstítute actíons pursuant to
such íaw, are not deductíbíe from gross íncome for ederaí íncome ta
purposes. It ís ímmateríaí that the víoíatíons were not wííífuí or the
resuít of faííure to take practícabíe precautíons to prevent theír
occurrence.
Sectíon 29.23(a)-í: usíness e penses.
INT RN L R NU COD .
Payment ín compromíse of suít for escheat of reaí property ín
Caíífornía. (See G. C, M. 24742, page 79.)
Sectíon 19.23(a)-2: Traveííng e penses. 1946-3-12225
( íso Sectíon 24, Sectíon 19.24-1.) Ct. D. 1659
íncome ta € ” ínternaí revenue code € ” decísíon of supreme court.
1. Gross Income € ” Deductíons € ” Traveííng penses.
The ta payer, who has resíded wíth hís famííy ín ackson, Míss.,
sínce 1903, became ín 1906 an empíoyee of a raííroad whích had íts
maín offíce ín Mobííe, ía. n arrangement wíth the raííroad per-
mítted hím to determíne for hímseíf the amount of tíme spent ín
each of the two cítíes. Ta payer s príncípaí post of busíness was at
the maín offíce, but duríng the ta abíe years 1939 and 1940 he spent
most of hís tíme ín ackson. ííe made 33 tríps ín 1939 and 40 tríps
ín 1940 between the two cítíes, and deducted ín hís ederaí íncome
ta returns traveííng e penses from ackson to Mobííe and íívíng
e penses whííe ín Mobííe. eíd: The ta payer ís not entítíed to a
deductíon for traveííng and íívíng e penses whííe away from home
ín the pursuít of a trade or busíness under the provísíons of sectíon
23(a) (1) ( ) of the Internaí Revenue Code. ís e penses were ín-
curred soíeíy as the resuít of hís desíre to maíntaín a home ín ackson.
Traveííng e penses ín pursuít of busíness, wíthín the meaníng of the
sectíon, couíd aríse oníy when the raííroad s busíness forced the ta -
payer to traveí and to ííve temporarííy at some píace other than
Mobííe, thereby advancíng the ínterests of the raííroad. The e ígen-
cíes of busíness rather than the personaí conveníences and neces-
sítíes of the traveíer must be the motívatíng factors.
Note. € ” The Court found ít unnecessary to decíde the meaníng of
the word home as used ín sectíon 23(a)(1)( ) of the Code.
2. Decísíon Reversed.
Decísíon of the Uníted States Círcuít Court of ppeaís, ífth Cír-
cuít (14 ed. (2d), 1G3), reversíng memorandum opíníon of The
Ta Court, reversed.
Supreme Court of the Uníted States.
Commíssíoner of Internaí Revenue, petítíoner, v. . N. íowers.
On wrít of certíorarí to the Uníted States Círcuít Court of ppeaís for the ífth Círcuít.
anuary 2, 1946.
opíníon.
Mr. ustíce Mekphy deíívered the opíníon of the Court.
703672 € ” 46 5
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í 19.23(a)-2.
5S
Thís case presents a probíem as to the meaníng and appíícatíon of the pro-
vísíon of sectíon 23(a) (1) ( ) of the Internaí Revenue Code1 aííowíng a deduc-
tíon for íncome ta purposes of traveííng e penses (Incíudíng the entíre amount
e pended for meaís and íodgíng) whííe away from home ín the pursuít of a trade
or busíness.
The ta payer, a íawyer, has resíded wíth hís famííy ín ackson, Míss., sínce
1903. There he has paíd ta es, voted, schooíed hís chíídren and estabííshed
socíaí and reíígíous connectíons. e buíít a house ín ackson nearíy 30 years ago
and at aíí tímes has maíntaíned ít for hímseíf and hís famííy. e has been
connected wíth severaí íaw fírms ín ackson, one of whích he formed and whích
has borne hís name sínce 1022.
In 1906 the ta payer began to represent the predecessor of the Guíf, Mobííe
Ohío Raííroad, hís present empíoyer. e acted as tríaí counseí for the raííroad
throughout Míssíssíppí. rom 191 untíí 1927 he acted as specíaí counseí for
the raííroad ín Míssíssíppí. e was eíected generaí soíícítor ín 1927 and con-
tínued to be eíected to that posítíon each year untíí 1930, when he was eíected
generaí counseí. Thereafter he was annuaííy eíected generaí counseí untíí
September, 1910, when the propertíes of the predecessor company and another
raííroad were merged and he was eíected více presídent and generaí counseí of
the newíy formed Guíf, Mobííe Ohío Raííroad.
The maín offíce of the Guíf, Mobííe Ohío Raííroad ís ín Mobííe, ía., as was
aíso the maín offíce of íts predecessor. When offered the posítíon of generaí
soíícítor ín 1927, the ta payer was unwííííng to accept ít íf ít requíred hím to
move from ackson to Mobííe. e had estabííshed hímseíf In ackson both
professíonaííy and personaííy and was not desírous of movíng away. s a
resuít, an arrangement was made between hím and the raííroad whereby he couíd
accept the posítíon and contínue to resíde ín ackson on condítíon that he pay
hís traveííng e penses between Mobííe and ackson and pay hís íívíng e penses
ín both píaces. Thís arrangement permítted the ta payer to determíne for
hímseíf the amount of tíme he wouíd spend ín each of the two cítíes and was
ín effect duríng 1939 and 1940, the ta abíe years In questíon.
The raííroad company províded an offíce for the ta payer ín Mobííe but not
ín ackson. When he worked ín ackson hís íaw fírm províded hím wíth offíce
space, aíthough he no íonger partícípated ín the fírm s busíness or shared ín íts
profíts. e used hís own offíce furníture and fí tures at thís offíce. The raííroad,
however, furníshed teíephone servíce and a typewríter and desk for hís secretary.
It aíso paíd the secretary s e penses whííe ín ackson. Most of the íegaí busí-
ness of the raííroad was centered ín or conducted from ackson, but thís busíness
was handíed by íocaí counseí for the raííroad. The ta payer s partícípatíon was
advísory oníy and was no dífferent from hís partícípatíon ín the raííroad s íegaí
busíness ín other areas.
The ta payer s príncípaí post of busíness was at the maín offíce ín Mobííe.
owever, duríng the ta abíe years of 1939 and 1940, he devoted nearíy aíí of
hís tíme to matters reíatíng to the merger of the raííroads. Sínce ít was íeft to
hím where he wouíd do hís work, he spent most of hís tíme ín ackson duríng
thís períod. In connectíon wíth the merger, one of the companíes was ínvoíved
In certaín íítígatíon In the ederaí court In ackson and the ta payer partící-
pated ín that íítígatíon.
Duríng 1939 he spent 203 days ín ackson and 66 ín Mobííe, makíng 33 tríps
between the two cítíes. Duríng 1940 he spent 16 days ín ackson and 102 In
Mobííe, makíng 40 tríps between the two cítíes. The raííroad paíd aíí of hís
traveííng e penses when he went on busíness tríps to poínts other than ackson
or Mobííe. ut ít paíd none of hís e penses In traveííng between these two
poínts or whííe he wns at eíther of them.
The ta payer deducted 900 ín hís 1930 Income ta return and 1,620 In hís
1940 return as traveííng e penses Incurred ín makíng tríps from ackson to
20 U. S. C, sectíon 23(a) (1) ( ), as amended (56 Stat, 19).
S C. 23. D DUCTIONS ROM GROSS INCOM . € ”
In computíng net Income there tshaíí be aííowed as deductíons:
(a) penses. € ”
(1) Trade or busíness e penses. € ”
( ) In Generaí. € ” íí the ordínary and necessary e penses paíd or íncurred
duríng the ta abíe year In carryíng on any trade or busíness. Incíudíng a reason-
abíe aííowance for saíaríes or other compensatíon for personaí servíces actuaííy
rendered traveííng e penses (íncíudíng the entíre amount e pended for meaís
and íodgíng) whííe away from home ín the pursuít of a trade or busíness: and
rentaís or other payments requíred to be made as a condítíon to the contínued
use or possessíon, for purposes of the trade or busíness, of property to whích
the ta payer has not taken or ís not takíng títíe or ín whích he has no equíty.
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59
19.23 (a)-2.
Mobííe and as e pendítures for meaís and hoteí accommodatíons whííe ín
Mobííe. The Commíssíoner dísaííowed the deductíons, whích actíon was sus-
taíned by The Ta Court. ut the ífth Círcuít Court of ppeaís reversed The
Ta Court s |udgment (14S ed. (2d), 103), and we granted certíorarí because
of a confííct between the decísíon beíow and that reac ed by the ourth Círcuít
Court of ppeaís ín arnhííí v. Commíssíoner (14 ed. (2d), 913 LCt. D. 1040,
C. . 1945,96 ).
The portíon of sectíon 23(a)(1)( ) authorízíng the deductíon of traveííng
e penses (íncíudíng the entíre amount e pended for meaís and íodgíng) whííe
away from home ín the pursuít of a trade or busíness ís one of the specífíc
e ampíes gíven by Congress ín that sectíon of ordínary and necessary e penses
paíd or íncurred duríng the ta abíe year ín carryíng on any trade or busíness.
It ís to be contrasted wíth the provísíon of sectíon 24(a)(1) of the Internaí
Revenue Code dísaííowíng any deductíons for personaí, íívíng, or famííy e -
penses. nd ít ís to be read ín ííght of the ínterpretatíon gíven ít by sectíon
19.23(a)-2 of Treasury Reguíatíons 103, promuígated under the Internaí Revenue
Code. Thís ínterpretatíon, whích ís precíseíy the same as that gíven to ídentícaí
traveííng e pense deductíons authorízed by príor and successíve Revenue cts,
ís deemed to possess ímpííed íegísíatíve approvaí and to have the effect of íaw.
( cívcríng v. Wínmííí, 305 U. S., 79 Ct. D. 1305, C. . 193 -2, 212 oehm v.
Commíssíoner, 323 U. S., € ” Ct. D. 1052, C. . 1945, 353 .) In pertínent
part, thís ínterpretatíon states that Traveííng e penses, as ordínarííy under-
stood, íncíude raííroad fares and meaís and íodgíng. If the tríp ís undertaken
for other than busíness purposes, the raííroad fares are personaí e penses and
the meaís and íodgíng are íívíng e penses. If the tríp ís soíeíy on busíness, the
reasonabíe and necessary traveííng e penses, íncíudíng raííroad fares, meaís, and
íodgíng, are busíness e penses. Oníy such e penses as are reasonabíe
and necessary ín the conduct of the busíness and dírectíy attríbutabíe to ít may
be deducted. Commuters fares are not consídered as busíness e penses
and are not deductíbíe.
Three condítíons must thus be satísfíed before a traveííng e pense deductíon
may be made under sectíon 23(a) (1) ( ):
(1) The e pense must be a reasonabíe and necessary traveííng e pense, as
that term ís generaííy understood. Thís íncíudes such ítems as transportatíon
fares and food and íodgíng e penses íncurred whííe traveííng.
(2) The e pense must be íncurred whííe away from home.
(3) The e pense must be íncurred ín pursuít of busíness. Thís means that
there must be a dírect connectíon between the e pendíture and the carryíng on
of the trade or busíness of the ta payer or of hís empíoyer. Moreover, such an
e pendíture must be necessary or appropríate to the deveíopment and pursuít
of the busíness or trade.
Whether partícuíar e pendítures fuífííí these three condítíons so as to entítíe
a ta payer to a deductíon ís pureíy a questíon of fact ín most ínstances. (See
Commíssíoner v. eínínger, 320 U. S., 467, 475 Ct. D. 1596, C. . 1944, 4S4I.)
nd The Ta Court s ínferences and concíusíons on such a factuaí matter, under
estabííshed príncípíes, shouíd not be dísturbed by an appeííate court. Com-
míssíoner v. Scottísh merícan Co., 323 U. S., 119 Ct. D. 1019, C. . 1944, 340
Dobson v. Commíssíoner, 320 U. S., 4 9 Ct. D. 1597, C. . í .:44, 56 .)
In thís ínstance, The Ta Court wíthout detaííed eíaboratíon concíuded that
The sítuatíon presented ín thís proceedíng ís, ín príncípíe, no dífferent from
that ín whích a ta payer s píace of empíoyment ís ín one cíty and for reasons
satísfactory to hímseíf he resídes ín another. It accordíngíy dísaííowed the
deductíons on the ground that they represent íívíng and personaí e penses rather
than traveííng e penses íncurred whííe away from home ín the pursuít of busíness.
The court b íow accepted The Ta Court s fíndíngs of fact hut reversed íts |udg-
ment on the basís that ít had ímproperíy construed the word home as used
ín the second condítíon precedent to a traveííng e pense deductíon under sectíon
23(a)(1)( ). The Ta Court, ít was saíd, erroneousíy construed the word to
mean the post, statíon or píace of busíness where the ta payer was empíoyed € ” ín
thís ínstance, Mobííe € ” and thus erred ín concíudíng that the e pendítures ín íssue
No cíaím for deductíon was made by the ta payer for the amounts sncnt In traveííng
y0r Mobííe to ackson. e aíso took tríps duríng the ta abíe years to Washíngton, New
íopk. New Oríeans, aton Rouge, Memphís, and ackson (Tenn.), whích were apparentíy
ríf atur busíness tríps for whích the ta payer presumabíy was reímburs|d by the
raííroad. No cíaím was made In regard to them.
,. rtícíe 23(a)-2 of Reguíatíons 101. 4, 0: artícíe 122 of Reguíatíons 77 and 74 ar-
tícíe 102 of Reguíatíons 69 and 65 artícíe 101 (a) of Reguíatíon 62.
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19.23(a)-2.
60
were not Incurred whííe away from home. The court beíow feít that the word
was to be gíven no such unusuaí or e traordínary meaníng In thís statute,
that ít símpíy meant that píace where one In fact resídes or the príncípaí
píace of abode of one who has the íntentíon to ííve there permanentíy. (14 ed.
(2d), at 164.) Sínce the ta payer here admíttedíy had hís home, as thus denned,
ín ackson and sínce the e penses were íncurred whííe he was away from
ackson, the deductíon was permíssíbíe.
The meaníng of the word home ín sectíon 23(a)(1)( ) wíth reference
to a ta payer resídíng ín one cíty and workíng In another has engendered much
díffícuíty and íítígatíon. (4 Mertens, Law of ederaí Income Ta atíon (1942),
sectíon 25. 2.) The Ta Court and the admínístratíve ruííngs have consíst-
entíy defíned It as the equívaíent of the ta payer s píace of busíness. (See
amhííí v. Commíssíoner, supra (C. C. . 4).) On the other hand, the decísíon
beíow and Waííace v. Commíssíoner (144 ed. (2d), 407 (C. C. . 9)), have
fíatíy re|ected that víew and have confíned the term to the ta payer s actuaí
resídence. (See aíso Coburn v. Commíssíoner, 13 ed. (2d), 763 (C. C. 2).)
We deem ít unnecessary here to enter ínto or to decíde thís confííct. The Ta
Court s opíníon, as we read It, was grounded neíther soíeíy nor prímarííy upon
that agency s conceptíon of the word home. Its díscussíon was dírected maíníy
toward the reíatíon of the e pendítures to the raííroad s busíness, a reíatíonshíp
requíred by the thírd condítíon of the deductíon. Thus even íf The Ta Court s
defínítíon of the word home was ímpíícít ín Its decísíon and even íf that
defínítíon was erroneous, íts |udgment must be sustaíned here íf ít properíy con-
cíuded that the necessary reíatíonshíp between the e pendítures and the raííroad s
busíness was íackíng. aííure to satísfy any one of the three condítíons destroys
the traveííng e pense deductíon.
Turníng our attentíon to the thírd condítíon, thís case ís dísposed of quíckíy.
There ís no cíaím that The Ta Court mísconstrued thís condítíon or used ím-
proper standards ín appíyíng ít. nd ít ís readííy apparent from the facts that
íts ínferences were supported by evídence and that íts concíusíon that the e -
pendítures ín Issue were nondeductíbíe íívíng and personaí e penses was fuííy
|ustífíed.
The facts demonstrate cíearíy that the e penses were not íncurred ín the pur-
suít of the busíness of the ta payer s empíoyer, the raííroad. ackson was hís
reguíar home. ad hís post of duty been ín that cíty the cost of maíntaíníng hís
home there and of commutíng or drívíng to work concededíy wouíd be nonde-
ductíbíe íívíng and personaí e penses íackíng the necessary dírect reíatíon to the
prosecutíon of the busíness. The character of such e penses ís unaítered by the
círcumstance that the ta payer s post of duty was ín Mobííe, thereby íncreasíng
the costs of transportatíon, food and íodgíng. Whether he maíntaíned one abode
or two, whether he traveíed 3 bíocks or 300 mííes to work, the nature of these
e pendítures remaíned the same.
The added costs ín íssue, moreover, were as unnecessary and- Inappropríate to
the deveíopment of the raííroad s busíness as were hís personaí and íívíng costs ín
ackson. They were íncurred soíeíy as the resuít of the ta payer s desíre to
maíntaín a home ín ackson whííe workíng ín Mobííe, a factor írreíevant to the
maíntenance and prosecutíon of the raííroad s íegaí busíness. The raííroad díd
not requíre hím to traveí on busíness from ackson to Mobííe or to maíntaín íívíng
quarters ín both cítíes. Nor díd ít compeí hím, save ín one ínstance, to perform
tasks for It ín ackson. It símpíy asked hím to be at hís príncípaí post ín Mobííe
as busíness demanded and as hís personaí conveníence was served, aííowíng hím
to dívíde hís busíness tíme between Mobííe and ackson as he saw fít cept for
the ederaí court íítígatíon, aíí of the ta payer s work ín ackson wouíd normaííy
have been performed ín the headquarters at Mobííe. The fact that he traveíed
frequentíy between the two cítíes and Incurred e tra íívíng e penses In Mobííe,
4 í íer v. Commíssíoner (5 . T. ., 11 1) : Oríesemer v. Commíssíoner (10 . T. .,
3 6) rown v. Commíssíoner (13 . T. ., 32) Duncan v. Commíssíoner (17 . T. .,
10 ) Peters v. Commíssíoner (19 . T. ., 901) Líndsay v. Commíssíoner (34 . T. ,
40) Potccíí v. Commíssíoner (34 . T. .. 655) Tract/ v. Commíssíoner (39 . T. ., 5( ),
Príddy v. ommíasíoner (43 . T. .. 1 ) Schnrer . Commíssíoner (3 T. C, 544)
Oust at son v. Commíssíoner (3 T. C, 99 ). ,
Sectíon 19.23(n)-2 of Treasury Reguíatíons 103 does not attempt to defíne the
home aíthough the Commíssíoner argues that the statement thereín contaíned to toe
effect that commuters fares are not busíness e penses and are not deductíbíe necessarííy
rests on the premíse that home for ta purposes ís at the íocaííty of the ta payer
busíness headquarters. Other admínístratíve ruííngs have been more e píícít In f
the statutory home as the abode at the ta payer s reguíar post of duty. (See. e. g-. o –
1021, C. . 5. 174 (1921 1 : I. T. 1264, C. . 1-1, 122 fí922) I. T. 3314, C. . 1939-2,15-.
. C. M. 23672, C. . 1943, 66.)
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61
23.23(a)-15.
whííe doíng much of hís work In ackson, was occasíoned soíeíy by hís personaí
propensítíes. The raííroad gaíned nothíng from thís arrangement e cept the
personaí satísfactíon of the ta payer.
Traveí e penses ín pursuít of busíness wíthín the meaníng of sectíon
23(a)(1)( ) couíd aríse oníy when the raííroad s busíness forced the ta payer
to traveí and to ííve temporarííy at some píace other than Mobííe, thereby advanc-
íng the ínterests of the raííroad. usíness tríps are to be ídentífíed ín reíatíon
to busíness demands and the traveíer s busíness headquarters. The e ígencíes
of busíness rather than the personaí conveníences and necessítíes of the traveíer
must be the motívatíng factors. Such was not the case here.
It foííows that the court beíow erred ín reversíng the udgment of The Ta
Court
Mr. ustíce ackson took no part ín the consíderatíon or decísíon of thís case.
Díssentíng opíníon by Mr. ustíce Rutíedge.
Sectíon 29.23(a)-C: Compensatíon for personaí servíces.
INT RN L R NU COD .
Optíon granted to empíoyee to purchase stock of the empíoyer
corporatíon or an affíííate of the empíoyer corporatíon. (See I. T.
3795, page 15.)
Sectíon 29.23(a)-15: Nontrade or nonbusíness
e penses.
( íso Sectíon 19.23 (a)-15, Reguíatíons 103
Sectíon 24, Sectíon 29.24-2, Reguíatíons 111,
Sectíon 19.24-2, Reguíatíons 103.)
TITL 26 € ” INT RN L R NU . € ” C PT R I, SU C PT R , P RT 19 ND
P RT 29.
Reguíatíons 111 and príor reguíatíons amended wíth respect to
deductíon of certaín nontrade or nonbusíness e penses.
Treasury Department,
Offíce of Commíssíoner of Internaí Revenue,
Washíngton 25, D. C.
To Coííectors of Internaí Revenue and Others Concerned:
R GUL TIONS 111 ND 103.
Paragraph 1. Sectíon 29.23(a)-15(6) of Reguíatíons 111 Part 29,
Títíe 26, Code of ederaí Reguíatíons, Cum. Sup. , as amended by
Treasury Decísíon 5331, approved ebruary 9, 1944 C. . 1944, 9
and sectíon 19.23(a)-15(í), as added to Reguíatíons 103 Part 19,
Títíe 26, Code of ederaí Reguíatíons, 1940 Sup. by Treasury Decí-
síon 519G, approved December , 1942 C. . 1942-2, 96 , and amended
by Treasury Decísíon 5331, approved ebruary 9, 1944, are each fur-
ther amencfed as foííows:
( ) y stríkíng the sí th, seventh, eíghth, and tenth paragraphs
thereof and ínsertíng after the fífth paragraph the foííowíng:
Reasonabíe amounts paíd or Incurred by the fíducíary of an estate or trust
on account of admínístratíon e penses, íncíudíng fíducíaríes fees and e penses
of íítígatíon, whích are ordínary and necessary ín connectíon wíth the perform-
ance of the dutíes of admínístratíon are deductíbíe under thís sectíon, notwíth-
standíng that the estate or trust ís not engaged ín a trade or busíness, e cept
to the e tent that such e penses are aííocabíe to the productíon or coííectíon
1946-11-12317
T. D.5513
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í 29.23(a)-15.
62
of ta -e empt íncome. ut see sectíon 29.162-1 for dísaííowance of such deduc-
tíons to an estate where such ítems are cíaímed as a deductíon under sectíon
12(b) ín computíng the net estate sub|ect to the estate ta .
( ) y stríkíng from the eíeventh paragraph thereof the íast sen-
tence begínníng wíth the words pendítures íncurred for the pur-
pose of preparíng ta returns and ínsertíng ín ííeu thereof the
foííowíng:
penses paíd or íncurred by an Indívíduaí ín the determínatíon of ííabíííty for
ta es upon hís íncome are deductíbíe. If property ís heíd by an índívíduaí for
the productíon of íncome, amounts e pended In determíníng a property ta ím-
posed wíth respect to such property duríng the períod when so heíd are deductíbíe.
penses paíd or íncurred by an Indívíduaí ín determíníng or contestíng any
ííabíííty asserted agaínst hím do not become deductíbíe, however, by reason of
the fact that property heíd by hím for the productíon of íncome may be requíred
to be used or soíd for the purpose of satísfyíng such ííabíííty. Thus, e penses
paíd or íncurred by an índívíduaí In the determínatíon of gíft ta ííabíííty, e cept
to the e tent that such e penses are aííocabíe to Interest on a refund of gíft
ta es, are not deductíbíe, even though property heíd by hím for the productíon
of íncome must be soíd to satísfy an assessment for such ta ííabíííty or even
though, ín. the event of a cíaím for refund, the amount receíved wííí be heíd by
hím for the productíon of Income.
Par. 2. Sectíon 29.24-2 of Reguíatíons 111 Part 29, Títíe 26, Code
of ederaí Reguíatíons, Cum. Sup. and sectíon 19.24-2 of Reguíatíons
103 Part 19, Títíe 26,. Code of ederaí Reguíatíons, 1940 Sup. , as
amended by Treasury Decísíon 5166, approved ugust 17,1942 C. .
1942-2, 7 , are each amended by stríkíng the eíghth sentence whích
reads as foííows:
penses of the admínístratíon of an estate, such as court costs, attorneys fees,
and e ecutors commíssíons, are chargeabíe agaínst the corpus of the estate and
are not aííowabíe deductíons.
PRIOR INCOM T R GUL TIONS.
Par. 3. Subsectíon (e) of sectíon 121 of the Revenue ct of 1942
(56 Stat., 19) provídes as foííows:
(e) Retroactíve mendment to Príor Revenue cts. € ” or the pur-
poses of the Revenue ct of 193 or any príor revenue ct the amend-
ments mnde to the Internaí Revenue Code by thís sectíon shaíí be
effectíve as íf they were a part of such revenue ct on the date of íts
enactment.
Pursuant to the above provísíons of íaw, the amendment to Regu-
íatíons 103 (coveríng ta abíe years begínníng after December 31,
193 ) set forth ín thís Treasury Decísíon ís hereby made appíícabíe to
ta abíe years begínníng príor to anuary 1, 1939 (such years beíng
covered by Reguíatíons 101, 94, 6, 77, 74, 69, 65, 62, 45, and 33).
(Thís Treasury Decísíon ís íssued under the authoríty contaíned ín
sectíon 62 of the Internaí Revenue Code (53 Stat., 32 26 U. S. C, 1940
ed., 62), correspondíng provísíons of príor revenue íaws, and sectíon
121 of the Revenue ct of 1942 (56 Stat, 19 26 U. S. C, Sup.,
23(a)(2)).)
oseph D. Nun an, r.,
Commíssíoner of Internaí Revenue
pproved May 14, 1946.
oseph . O Conneíí, r.,
ctíng Secretary of the Treasury.
( ííed wíth the Dívísíon of the ederaí Regíster May 15, 1946,10.5 a. m.)
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63 29.23(c)-í.
S CTION 23(b). € ” D DUCTIONS ROM GROSS
INCOM : INT R ST.
Sectíon 19.23 (b)-í: Interest.
INT RN L R NU COD .
Payments made by corporatíon to hoíders of corporate obíígatíons.
(See Ct. D. 1660, page 191.)
Sectíon 29.23(b)-í: Interest.
INT RN L R NU COD .
Interest on mortgage paíd by husband on property ín Mínnesota
heíd by hím and hís wífe as |oínt tenants. (Sec I. T. 37 5, page 9 .)
S CTION 23(c). € ” D DUCTIONS ROM GROSS
INCOM : T S G N R LLY.
Sectíon 29.23(c)-í: Ta es. 1946-2-12212
I. T. 3777
INT RN L R NU COD ND R NU CTS OP 192 , 1932, ND 1934.
Reaí property ta es ín the State of Míssourí do not accrue untíí
the date upon whích they are íevíed, í. e., the date upon whích the
ííen for such ta es attaches. No date can ho fí ed as the date cf íevy
of reaí property ta es throughout the State, but they are not actuaííy
íevíed untíí the year for whích they are ímposed.
I. T. 2 5 (C. . I -1, C4 (1935)) modífíed.
Reconsíderatíon has been gíven to I. T. 2 5 (C. . T -1, 64
(1935)) whích hoíds ín part that reaí property ta es ín the State of
Míssourí accrue, for ederaí íncome ta purposes, on the 1st day of
une of each year.
Under sectíons 15747 to 15762, íncíusíve, of the Míssourí Revísed
Statutes nnotated, contaíníng specíaí provísíons for the assessment of
property ín the cíty of St. Louís (símííar to the Míssourí statutes ap-
píícabíe to the baíance of the State), aíí property ís assessed by the
assessor and hís deputíes, commencíng on une 1 annuaííy, and assess-
ment must be compíeted on or before the 1st cíay of anuary ne t foí-
íowíng. The assessor compíetes the books from the deputy s reports,
statements fííed, and best ínformatíon obtaínabíe, on or before the
thírd Monday ín March annuaííy. When the assessment books are
compíeted, the assessor must gíve two weeks notíce ín at íeast two daííy
newspapers that the books are open for ínspectíon. quaíízatíon and
hearíng of índívíduaí compíaínts then foííow. fter the assessment
books have been corrected, the assessor makes an abstract thereof and
certífíes to the mayor and the State audítor as to the correctness of the
abstract on or before the fourth Monday ín May, and e tends State,
schooí, and cíty ta es ín the books. The assessor then prepares ta
bííís whích are deíívered to the comptroííer who checks them and turns
them over to the coííector.
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29.23(c)- .
64
In Uníted States v. Certaín Land ín Cíty of St. Louís, Mo., et aí.
(29 ed. Supp., 92), the Uníted States had condemned certaín íands
ín the cíty of St. Louís, and on une 16,1939, had paíd ínto the regístry
of the Uníted States dístríct court an amount íntended to represent
|ust compensatíon. On the same date ít obtaíned a |udgment vestíng
fee símpíe títíe to the property ín the Uníted States. The cíty of St.
Louís fííed cíaím for dístríbutíon to ít, out of the fund ín the regístry
of the court, of certaín amounts as cíty, State, and schooí ta es. The
court heíd that the fund on deposít ín the regístry of the court stood
ín the píace of the reaí estate condemned and was sub|ect to the cíaím
of aíí ííen hoíders for the payment of the amounts of theír ííens -whích
had attached to the reaí estate at the tíme of the appropríatíon of the
property by the Government. The court referred to the opíníon of
the Supreme Court of Míssourí ín Mc naííy v. Líttíe Ríver Draínage
Dístríct et aí. (325 Mo., 34 2 S. W. (2d), 650), ín whích ít was heíd
that the ííen does not accrue and become a fí ed encumbrance untíí the
amount of the ta ís determíned by an annuaí assessment of the íand
and annuaí íevy of the ta . The court accordíngíy concíuded that reaí
estate ta es do not become a ííen untíí the íevy ís made and the amount
of the ta defíníteíy determíned. It poínted out that ín the cíty of
St. Louís the cíty authorítíes must íevy the ta príor to or on the fourth
Monday, of May. of the year for whích the ta es are assessed. It
therefore concíuded that sínce the ííen for the 1940 ta es had not
€ attached on une 16, 1939, the date the property was acquíred by the
ederaí Government, the cíty was not entítíed to have dístríbuted to ít
any part of the funds ín the regístry of the court on account of the
ta es for 1940. The court further heíd that even though the ííen for
ta es for the year 1939 had attached to the íand, the cíty of St. Louís
was, nevertheíess, not entítíed to recover out of the .fund the fuíí
amount of the ta es for the year 1939, but oníy the portíon of such
ta es properíy aííocabíe to the tíme duríng that year that the property
was ín prívate ownershíp.
It ís beííeved that ínherent ín the decísíon ín Uníted States v.
Certaín Land ín Cíty of St. Louís, Mo., et aí., supra, ís the determína-
tíon that neíther the property owner nor the íand ís charged wíth
a ííabíííty for the reaí property ta príor to the date upon whích
the ííen attaches for such ta , whích ís the date of the íevy of
the ta . ccordíngíy, ít ís heíd that reaí property ta es ín the
State of Míssourí do not accrue untíí the date upon whích they are
íevíed, í. e., the date upon whích the ííen for such ta es attaches.
No date can be fí ed as the date of íevy of reaí property ta es
throughout the State, but they are not actuaííy íevíed untíí the year
for whích they are ímposed.
I. T. 2 5, supra, ís hereby modífíed to conform to the above-stated
. concíusíons.
Sectíon 29.23(c)-í: Ta es.
INT RN L R NU COD .
Ta es paíd by husband on property ín Mínnesota heíd by hím and
hís wífe as |oínt 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.
Sectíon 19.23 (e)-í: Losses by índívíduaís. 1946-1-12203
I. T. 3776
INT RN L R NU COD .
íoss upon the saíe of a resídence ínheríted ín 1935 sub|ect to a
íífe estate and soíd ín 1940 after the death of the íífe tenant, whích
property was not used as a resídence by the ta payer but was ímíne-
.díateíy íísted for saíe after the íífe tenant s death, ís deductíbíe as
a íoss sustaíned ín a transactíon entered ínto for profít wíthín the
meaníng of sectíon 23(e) (2) of the Internaí Revenue Code.
I. T. 3594 (C. . 1942-2, 106) revoked.
s a resuít of recent decísíons of The Ta Court of the Uníted States
ín steííe G. Mar v. Commíssíoner (5 T. 0,173, acquíescence, page 3
of thís uííetín) and ín N. Stuart Campbeíí et u . v. Commíssíoner
(5 T. C, 272, acquíescence, page 1 of thís uííetín), further consídera-
tíon has been gíven to I. T. 3594 (C. . 1942-2, 106) whích hoíds, ín
effect, that a íoss sustaíned upon the saíe of a resídence ínheríted ín
1935 sub|ect to a íífe estate and soíd ín 1940 after the death of the íífe
tenant, whích property was not used as a resídence by the ta payer but
was ímmedíateíy íísted for saíe after the íífe tenant s death, was not
sustaíned ín a transactíon entered ínto for profít wíthín the meaníng
of sectíon 23(e) (2) of the Internaí Revenue Code.
In steííe G. Mar v. Commíssíoner, supra, the íoss arose from the
saíe ín 1939 of a yacht ínheríted by the petítíoner ín 193 , ímme-
díateíy offered for saíe, and never used by her. In N. Stuart Camp-
beíí et u . v. Commíssíoner supra, the íoss arose from the saíe ín
1941 of a prívate resídence ínheríted ín 1934 by N. Stuart Campbeíí
and hís síster, whích resídence was offered for saíe or rent and at no
tíme was used or íntended to be used by them as a resídence. In each
of those cases The Ta Court heíd that the íoss was sustaíned ín a
transactíon entered ínto for profít wíthín the meaníng of sectíon
23(e) (2) of the Internaí Revenue Code. (See aíso ppeaí of Robert
W. Wííííams, ecutor, 1 . T. ., 1101, acquíescence, C. . I -2,
5 (1925).)
Whether a íoss ís.íncurred ín a transactíon entered ínto for profít
ís a questíon of fact to be determíned from the evídence ín each case.
Thís was stated as earíy as 1919 when the dvísory Ta oard, ín
T. . R. 35 (C. . 1, 122 (1919)), heíd that a íoss deductíbíe from
gross íncome under sectíon 214(a) (5) of the Revenue ct of 191 ís
sustaíned upon the saíe of property acquíred by gíft, bequest, devíse,
or descent, whenever property so acquíred ís, as a matter of fact,
acquíred for purposes of profít, and that ordínary ínvestment prop-
erty so acquíred ís to be treated as havíng been acquíred for purposes
of profít uníess the conduct of the recípíent furníshes evídence to the
contrary.
In the Mar and Campbeíí cases, supra, there was no evídence to
show that the ta payer had any íntentíon of convertíng the ínheríted
property to prívate or personaí use. On the contrary, the property
ín each case was ímmedíateíy íísted for saíe. In I. T. 3594 the ta payer
never used or íntended to use the property as hís resídence, and as soon
as the íífe estate ín hís father had ended, he ímmedíateíy íísted the
property for saíe and soíd ít Under the círcumstances, there ís no
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29.23(m)-í.
06
vaííd basís for makíng a dístínctíon between the factuaí sítuatíon ín the
Campbeíí case and that ínvoíved ín I. T. 3594, supra.
In víew of the foregoíng, ít ís heíd that a íoss upon the saíe of a
resídence ínheríted ín 1935 sub|ect to a íífe estate and soíd ín 1940
after the death of the íífe tenant, whích property was not used as a
resídence by the ta payer but was ímmedíateíy íísted for saíe after
the íífe tenant s death, ís deductíbíe as a íoss sustaíned ín a trans-
actíon entered ínto for profít wíthín the meaníng of sectíon 23(e) (2)
of the Internaí Revenue Code. I. T. 3594, supra, ís hereby revoked.
Sectíon 29.23(e)-í: Losses by índívíduaís.
INT RN L R NU COD .
Lapse of optíon receíved by empíoyee to purchase stock of the
empíover corporatíon or an affíííate of the empíoyer corporatíon.
(See I. T. 3795, page 15.)
S CTION 23 (m). € ” D DUCTIONS ROM GROSS
INCOM : D PL TION.
Sectíon 29.23 (m) -1: Depíetíon of mínes, oíí 1946-5-12251
and gas weíís, other naturaí deposíts, and G. C. M. 24 49
tímber deprecíatíon of ímprovements.
INT RN L R NU COD .
Consíderatíon receíved for the assígnment of a short-ííved In-oíí
payment ríght carved out of any type of depíetabíe ínterest ín oíí
and gas ín píace ís ordínary íncome sub|ect to the depíetíon aííow-
ance where such consíderatíon ís not píedged for use ín further
deveíopment.
n opíníon ís requested wíth respect to the status, for ederaí
íncome ta purposes, of cash payments to owners of depíetabíe eco-
nomíc ínterests ín oíí and gas ín píace as consíderatíon for assígnments
of ín-oíí payment ríghts carved out of the economíc ínterests heíd by
them. Such ríghts entítíe the assígnee to oíí or gas produced, or the
proceeds deríved from an agreed share of productíon íf, as, and when
produced, untíí a fí ed or determínabíe amount of oíí or gas, or an
ascertaínabíe sum of money, has been receíved. Such ríghts ordínarííy
pay out and e píre wíthín one or two years.
G. C. M. 22730 (C. . 1941-1, 214) deaís wíth the íssue oníy to the
e tent of dístínguíshíng the case ín whích an operator assígns an
ín-oíí payment ríght ín return for cash whích he ís píedged to use ín
the deveíopment of the property (ín whích event such cash payment
ís not íncome to the assígnor and íts use for the píedged purpose ís
not regarded as an e pendíture by the assígnor) from the ínstant case
whích ínvoíves an outríght purchase of an ín-oíí payment ríght for
cash whereín there ís no such píedge to ínvest the proceeds ín deveí-
opment and the buyer s capítaí ínvestment wouíd repíace the íessee s
capítaí ínvestment aííocabíe to the ínterest soíd. Thís statement,
made parenthetícaííy ín G. C. M. 22730, supra, at page 222, was not en-
íarged upon there. Consíderatíon must now be gíven to the ederaí
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67
29.23(m)-í.
íncome ta effect, ín the case of the assígnor, of a transactíon whereín
he receíves unquaíífíedíy a cash payment for an ín-oíí payment ríght.
Is such cash payment ordínary íncome or proceeds from the saíe of a
capítaí asset If ít ís the íatter, the capítaí gaín ís measured hy the
cash payment íess the aííocabíe part of the basís of the assígnor-oper-
ator ín the oíí and gas ín píace, píus the estímated cost to hím of
producíng the oíí ínvoíved ín the oíí payment ríght € ” an obíígatíon
ííe assumes wíthout further cost to the assígnee.
G. C. M. 22730, supra, recognízes that the hoíder of an ín-oíí pay-
ment ríght, however acquíred, has a depíetabíe economíc ínterest ín
the oíí and gas ín píace, whích ís potentíaííy a capítaí asset ín hís
hands, províded the condítíons of that cíassífícatíon under sectíon 117
of the Internaí Revenue Code are met. Such concíusíons as to the
status of the ín-oíí payment ríght ín the hands of- the grantee are not
determínatíve of the nature of the transactíon ín the case of the
grantor. s poínted out ín the cíted opíníon, the controíííng decísíons
hoíd that a íandowner who grants a íease, or a íessee who subíeases or
assígns hís íease, ín consíderatíon of a cash bonus payment and an
agreement to pay stípuíated royaítíes ís ta abíe on aíí such payments
as ordínary íncome. In such a case, the cash bonus payment ís re-
garded as an advance royaíty payment sub|ect to the depíetíon aííow-
ance as respects the íessor or subíessor, though ít represents a capítaí
ínvestment by the íessee or subíessee ín oíí and gas ín píace, returnabíe
ta -free to hím by way of depíetíon deductíons spread over the pro-
ductíve íífe of the íease asset ín hís hands. That concíusíon rests on
the anaíogy between the receípt of such advance royaíty payments
and substantíaí cash payments receíved by the íessor upon the e ecu-
tíon of an ordínary íease, whích payments are regarded as advance
rentaí payments ta abíe as ordínary íncome. Thus, ín connectíon
wíth the ínstant íssue, as ín the cíted opíníon, the fact that the assígnee
acquíres an asset whích potentíaííy quaíífíes as a capítaí asset ín hís
hands does not requíre the concíusíon that the assígnor parted wíth
such an asset.
In-oíí payment ríghts, royaíty ríghtS| and operatíng ríghts are
anaíogous ín that they are essentíaííy ríghts to productíon íncome
characterízed as ordínary íncome when reaíízed. íí are regarded
as depíetabíe economíc ínterests ín oíí and gas ín píace entítííng the
owner to ta -free return of hís ínvestment through the depíetíon
aííowance. In-oíí payment ríghts are dístínguíshabíe from royaíty
ínterests and operatíng ríghts ín that the íatter ínterests, by defíní-
tíon, e tend to the entíre oíí and gas resource content of the íand and,
as such, represent forms of fractíonaí property ríghts ínto whích the
property ínterests ín oíí and gas ín píace are commoníy dívíded,
whereas an ín-oíí payment ríght ís a ríght to íncome for a íímíted
tíme or amount. Thís dífference ís emphasízed by the fact that an
ín-oíí payment ríght may be carved out of eíther of the specífíed prop-
erty ínterests ín oíí and gas ín píace, but the reverse ís not true. Thus,
saíes of royaíty ríghts or operatíng ríghts are saíes of property ríghts,
whereas assígnments of ín-oíí payment ríghts carved out of such prop-
erty ríghts, are, wíth respect to the assígnor, essentíaííy mere assígn-
ments of e pected íncome from such property ríghts for a fí ed or
determínabíe períod of tíme.
The íssue presented by such assígnments of e pected íncome between
strangers ín ínterest, presumptíveíy at theír present worth, shouíd not
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5 23.23 (m)-í.
6
be confused wíth the questíon presented ín such cases as Lucas v. arí
( 2 1 U. S., Iíí), eíveríng v. orst (311 U. S., 112, Ct. D. 1472,
C. . 1940-2, 206), and eíveríng v. ubank (311 U. S., 122, Ct D.
1473, C. . 1940-2, 209), ínvoívíng donatíve assígnments of íncome
by the earner thereof ín an attempt to dívíde hís íncome between
hímseíf and members of hís famííy. There the earner-assígnor s
attempt ís to avoíd reaíízatíon of e pected íncome. ere the assígnor
e pedítes such reaíízatíon. See erman M. Rhodes v. Commíssíoner
(43 . T. ., 7 0, affírmed, 131 ed. (2d), 50), whereín thn Uníted
States oard of Ta ppeaís (now The Ta Court of the Uníted
States) heíd that a stockhoíder s e ercíse of hís power to seíí or
assígn hís ríght to receíve the decíared dívídend constítuted a reaííza-
tíon of íncome by petítíoner stockhoíder ta abíe to hím as ordínary
íncome.
In príncípíe the assígnment of a ríght to a dívídend seems índístín-
guíshabíe from assígnments of other ríghts to e pected íncome. s-
sígnments of íncome ríghts by the earner for cash or property, meas-
ured by the then worth of such ríghts, may not be dísregarded, and
as respects such earner-assígnor, he has eíected to antícípate normaí
reaíízatíon by assígníng or díscountíng such ríght. Consíderatíon
receíved by hím represents ordínary íncome reaíízed by hím upon the
antícípatory assígnment of hís ríght to íncome. Once such ríghts to
íncome from property or for servíces are separated from the earner
by hís act of assígnment, they become property ríghts owned by the
purchaser or assígnee wíth a basís ín hís hands measured by the con-
síderatíon paíd. Thus, any díscountíng of the face vaíue of the íncome
ríght or cíaím by the earner thereof upon the assígnment wííí resuít
ín íncome to the assígnee when such díscount ís reaíízed by hím.
The stated generaí ruíe wíth respect to antícípatory assígnments of
íncome for cash or property seems equaííy appíícabíe to assígnments
of íncome arísíng from royaíty or operatíng property ríghts ín oíí
and gas ín píace. s noted above, tríe characterízatíon of a trans-
actíon as a purchase ín the case of the assígnee ís not ínconsístent wíth
treatíng ít as a mere antícípatory reaíízatíon of ordínary íncome to
the earner. That ís true under the generaí ruíe pertaíníng to such
assígnments as weíí as to cases of grants of depíetabíe ínterests ín
oíí and gas ín píace for advance royaíty payments made to obtaín such
grants under oíí and gas íeases. Símííaríy, ít ís ímmateríaí that the
assígnment of íncome vests a depíetabíe ríght ín the assígnee. The
ríght to depíetíon, as such, ís not transferred. The assígnor, on
receípt of the antícípated íncome thereby reaíízed, ís entítíed to the
depíetíon aííowance whích ís desígned to compensate hím for the
€ dímínutíon ín hís ínterests sustaíned by the conversíon of capítaí
ínto ordínary íncome thereby effected. Thus, quaíífícatíon of the
assígned ríght as a depíetabíe ríght ín the hands of the assígnee
spríngs from the character of the ríght rather than from the transfer.
To the e tent that there ís a shíft of depíetabíe ínterest, ít ís anaíogous
to the correspondíng shíft resuítíng from a cash bonus or an advance
royaíty payment made to obtaín an oíí and gas íease. In both ín-
stances, the assígnor or grantor ís entítíed to a depíetíon aííowance
whích attends the íncome thereby reaíízed by hím, and the assígnee,
ín both ínstances, acquíres a depíetabíe economíc ínterest ín oíí and
gas ín píace.
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69
19.23ta)-10.
or the reasons stated, ít ís the opíníon of thís offíce that consíder-
atíon (not píedged for deveíopment) receíved for the assígnment of
a short-ííved ín-oíí payment ríght carved out of any type of depíetabío
ínterest ín oíí-and gas ín píace (íncíudíng a íarger ín-oíí payment
ríght) ís ordínary íncome sub|ect to the depíetíon aííowance ín the
assígnor s hands. No opíníon ís e pressed wíth respect to the status
of ín-oíí payment ríghts e tendíng over a substantíaí portíon of the
íífe of the depíetabíe economíc ínterests from whích such ríghts are
carved.
. P. We cheí,
Chíef Counseí, ureau of Internaí Revenue.
Sectíon 19.23 (m) -10: Depíetíon € ” d| ustments of 1946-4-12236
accounts based on bonus or advanced royaíty. Ct. D. 1664
INCOM T € ” INT RN L R NU COD € ” D CISION O SUPR M COURT.
1. Gross Income € ” Deductíons € ” Percentage Depíetíon € ” On. and Gas
Leases € ” Royaítíes and onuses € ” Net Profíts rom Oíí -
tracted.
The ta payers, who owned ínterests ín fee ín certaín íands whích
they íeased for the productíon of oíí, gas, and other míneraís ín
consíderatíon of cash bonuses, royaítíes ín the usuaí form, and addí-
tíonaí payments from the net profíts of the operatíons, had an
economíc ínterest ín the oíí suffícíent to entítíe them to deductíons
for depíetíon, under sectíons 23(m) and 114(b) (3) of the Internaí
Revenue Code, not oníy on the royaítíes and bonuses, but aíso on
theír share of net profíts receíved from oíí e tracted from the
íeased íands.
2. Decísíons Reversed and ffírmed.
Decísíon of the Uníted States Círcuít Court of ppeaís, ífth
Círcuít (14 ed. (2d), 0), reversíng decísíon of The Ta Court
of the Uníted States (2 T. C, 125 ), reversed decísíon of the
Uníted States Círcuít Court of ppeaís, Nínth Círcuít (14 ed.
(2d), 776), affírmíng memorandum opíníon of The Ta Court,
affírmed.
Supreme Court of the Uníted States.
56. írby Petroíeum Co., petítíoner, v. Commíssíoner of Internaí Revenue.
On wrít of certíorarí to the Uníted States Círcuít Court of ppeaís for the ífth Círcuít.
197. Commíssíoner of Internaí Revenue, petítíoner, v. nna íckers Crawford.
On wrít of certíorarí to the Uníted States Court of ppeaís for the Nínth Círcuít.
anuary 2 , 1046.
OPINION.
Mr. ustíce Reed deíívered the opíníon of the Court.
The wrít of certíorarí ín írby Petroíeum Co. v. Commíssíoner bríngs here
for revíew the |udgment of the Círcuít Court of ppeaís for the ífth Círcuít
(14 ed. (2d), 0) reversíng the decísíon of The Ta Court (2 T. C, 125 ),
whích had sustaíned the ta payer s posítíon. The narrow íssue ía the deductí-
bíííty under sectíons 23(m) and 114(b)(3)1 of the Internaí Revenue Code of
1 Internaí Revenue Code:
S C. 23. D DUCTIONS ROM GROSS INCOM .
In computíng net íncome there shaíí be aííowed as deductíons:
€ € € € € € €
(m) Depíetíon. € ” In the case of mínes, oíí and gns weíís, other naturaí deposíts, and
tímber, a reasonabíe aííowance for depíetíon and for deprecíatíon of Improvements, accord-
íng to the pecuííar condítíons ín each case such reasonabíe aííowance ín aíí cases to be
made under ruíes and reguíatíons to be prescríbed by the Commíssíoner, wíth the approvaí
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I 19.23(m)-10.
70
the depíetíon aííowance of 27 per cent of gross Income from the property
duríng the ta abíe year, permítted by those sectíons from the ta payer s gross
íncome for 1040 from certaín oíí íeases.
The ta payer owned the fee símpíe títíe to certaín Te as íands, e cept for a
mínor míneraí ínterest whích ís not here ínvoíved. It íeased the íands to two
companíes for the productíon of oíí, gas and other míneraís for a cash bonus,
a royaíty ín the usuaí form and an agreement, e ecuted contemporaneousíy
wíth the íease and as part consíderatíon therefor, that the ta payer shouíd
receíve 20 per cent of the net money profíts reaíízed by the íessees from theír
operatíons under the íease.
The same narrow íssue ís ín Commíssíoner v. Crawford. In thís íatter case, the
ta payer owned an ínterest ín fee In certaín reaí estate ín Caíífornía. She,
together wíth her coowners, entered ínto severaí íeases for portíons of the property
for the productíon of oíí, gas and other míneraís. or an understandíng of
the íssues here presented, ít ís unnecessary to anaíyze the íeases further than
to say that they were gíven In consíderatíon of bonuses, royaítíes ín the usuaí
form and addítíonaí payments from the net profíts of the operatíon. The Com-
míssíoner assessed a defícíency because of the deníaí of a cíaímed depíetíon
aííowance for 193 , 1930 and 1010. The Ta Court supported the ta payer s
posítíon. The Círcuít Court of ppeaís affírmed. (14 ed. (2d), 776.)
In both cases, the Commíssíoner concedes that the depíetíon aííowance of
sectíons 23(m) and 114(b) (3) Is appíícabíe to the bonuses and royaítíes. The
statutory provísíons are ídentícaí for aíí years. The 271/.. per centum of sectíon
114(b) (3) was therefore properíy deducted by the ta payers from these bonuses
and royaítíes. In each of these years there was aíso íncome to these ta payers
from the íease provísíons for the íessors to share ín the net profíts from the
oíí e tracted from the íeased íands. The ta payers cíaím the ríght to deduct the
27 per cent depíetíon from these receípts aíso. These are the deductíons whích
the Commíssíoner dísaííowed. On account of the confííctíng decísíons of the
círcuíts In these cases on the poínt, certíorarí was granted by us. ( € ” U. S.,
- € ” u. s., € ” .)
The present provísíons for depíetíon aííowances have been worked out so as
to gíve the hoíder of an economíc Interest ín the oíí or other naturaí resource
an aííowance for depíetíon. Whííe there are íncome Incídents to the utííízatíon
of naturaí resources, there ís aíso an obvíous e haustíon of the capítaí used
to produce the íncome. In theory the aggregate sum aííowed for depíetíon wouíd
equaí the vaíue of the naturaí resource at the tíme of íts acquísítíon by the
ta payer, so that at the e haustíon of the resource the ta payer wouíd have
of the Secretary. € € In the case of íeases the deductíons shaíí be equítabíy appor-
tíoned between the íessor and íessee. € €
S C. 114. SIS OR D PR CI TION ND D PL TION.
€ € € € € € €
(b) asís fob Depíetíon. € ”
€ € € € €
(3) Percentage depíetíon for oíí and cas weíís. € ” In the case of oíí and gas weíís
the aííowance for depíetíon under sectíon 23(m) shaíí be 27 fa per centum of the gross
íncome from the property duríng the ta abíe year, e cíudíng from such gross íncome
an amount equaí to any rents or royaítíes paíd or íncurred by the ta payer ín respect
of the property. € € €
€ The foííowíng cíause of one íease wííí íííustrate the type of arrangement whích pro-
duced the addítíonaí payments:
When, and as soon as the Income Credíts of saíd account shaíí e ceed the Operatíng
Charges of the Lessee, the Lessor shaíí be entítíed to a secondary and addítíonaí royaíty,
the amount thereof to be one-haíf of such dífference between the Operatíng Charges
and Income Credíts of saíd account.
The íeases denned methods of computatíon.
urnet v. ííarmeí (2 7 D. S.. 103. Iíí Ct. D. 611, C. . I-2. 210 (1932)1) : Paímer
. ender (2S7 U. S., 551, 557 ICt. D. 641, C. . II-1, 235 (1933) ). (See nderson v.
eíveríng. 310 U. S., 404. 409 Ct. D. 1456. C. . 1940-1. 10 ).)
Treasury Reguíatíons 103, sectíon 19.23(m)-í, as amended by Treasury Decísíon 5413,
C. . 1944, 124, 129:
Under such provísíons, the owner of an economíc ínterest ín míneraí deposíts or stand-
íng tímber ís aííowed annuaí depíetíon deductíons. n economíc ínterest ís possessed In
every case In whích the ta payer has acquíred, hy Investment, any ínterest ín míneraí In
píace or standíng tímber and secures, by any form of íegaí reíatíonshíp, íncome deríved
from the severance and saíe of the míneraí or tímber, to whích he must íook for a return
of hís capítaí. ut a person who has no capítaí ínvestment ín the míneraí deposít or
standíng tímber does not possess an economíc ínterest mereíy because, through a con-
tractuaí reíatíon to the owner, he possesses a mere economíc advantage deríved from pro-
ductíon. Thus, an agreement between the owner of an economíc ínterest and another
entítííng the íatter to purchase the product upon productíon or to share ín the net íncome
deríved from the ínterest of such owner does not convey a depíetabíe economíc ínterest.
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71
19.23(m)-10.
recovered through depíetíon e actíy hís Investment The admínístratíve díffí-
cuítíes ín ta atíon of oíí and gas productíon ín víew of the uncertaíntíes of
quantítíes and tíme of acquísítíon, that ís at the purchase of the property or at
the díscovery of oíí or gas, fínaííy have brought Congress to the arbítrary aííow-
ance of 27 per cent now embodíed In sectíon 114(b) (3). Thus, the 27 per
cent ís appropríated by the statute to the restoratíon of the ta payer s capítaí
and the rest of the proceeds of the naturaí asset becomes gross íncome
( nderson v. Ueívcríng, 310 U. S., 404, 407 0 Ct. D. 1450, C. . 1940-1,
10 .) It foííows from thís theory that oníy a ta payer wíth an economíc
ínterest ín the asset, here the oíí, ís entítíed to the depíetíon. (Paímer v. ender,
2 7 U. S., 551, 557 Ct. D. 041, C. . II-1, 235 (1933) Thomas v. Perkíns, 301
U. S., 655, 659 Ct. D. 1237, C. . 1937-1, 162 .) y thís ís meant oníy that
under hís contract he must íook to the oíí ín píace as the source of the return
of hís capítaí ínvestment. The technícaí títíe to the oíí ín píace ís not ímportant.
Títíe ín a case of a íease may depend upon the íaw of the State ín whích the
deposít ííes. ( urnet v. fanncí, 2 7 U. S., 103,109-110 Ct. D. 611, C. . I-2, 210
(1932) .) The test of the ríght to depíetíon ís whether the ta payer has a
capítaí ínvestment ín the oíí ín píace whích ís necessarííy reduced as the oíí ís
e tracted. (See nderson v. cíveríng, 310 U. S., 401, 407.)
The ta payers here ínvoíved were íessors. Under the íeases and our prevíous
decísíons, these ta payers had an economíc ínterest, a capítaí ínvestment, In so
much of the e tracted oíí as was used by the íessee to pay to the ta payers the
royaítíes and bonuses. See note 3, supra. The ta payer íessors were entítíed
to the depíetíon aííowance on these royaítíes and bonuses whether they were paíd
to them ín oíí or cash, the proceeds of the oíí. ( eívcríng v. Twín eíí Oíí Syndí-
cate, 293 U. S., 312, 321 Ct. D. í 05, C. . I -1, 253 (1935) .)
If the addítíonaí payment ín these íeases had been a portíon of the gross receípts
from the saíe of the oíí e tracted by the íessees Instead of a portíon of the net
profíts, there wouíd have been no doubt as to the economíc Interest of the íessors
ín such oíí. Thís wouíd be an oíí royaíty. The íessors economíc ínterest ín the
oíí ís no íess when theír ríght ís to share a net profít. s In Thomas v. Perkíns
(301 U. S., 655), theír oníy source of payment ís from the net profít whích the oíí
produces. In both sítuatíons the íessors possíbíííty of return depends upon oíí
e tractíon and ends wíth the e haustíon of the suppíy. conomíc ínterest does
not mean títíe to the oíí In píace but the possíbíííty of profít from that economíc
ínterest dependent soíeíy upon the e tractíon and saíe of the oíí.
The depíetíon aííowance, ín the aggregate, ís aíways the same amount, 27 per
cent of the gross íncome from the property. In the case of íeases the
deductíons shaíí be equítabíy apportíoned between the íessor and íessee. (Sectíon
23(m).) n equítabíe apportíonment Is obtaíned by e cíudíng from the íessee s
gross íncome from oíí or gas produced from the property ( cíveríng v. Twín eíí
OU Syndícate, supra, 321), an amount equaí to any rents or royaítíes paíd or
íncurred by the ta payer ín respect of the property. (Sectíon 114(b)(3).)
Such deductíons become the gross íncome of the íessor. We thínk these ta payers
had an economíc ínterest ín the oíí, suffícíent to support depíetíon on the sums
receíved as net profít.
If we assume that the oníy payment for the prívííege of oíí e tractíon made
to the ta payer íessors by the íessees was the portíon of net Income paíd under
the íeases, It wouíd be cíear that such payment of net Income wouíd ta wíse
be rent or royaíty paíd by the íessees for the prívííege of e tractíon. Sínce sectíon
114(b) (3) wouíd requíre the íessees to deduct thís rent or royaíty from theír
gross íncomes from the saíe of oíí from the property before takíng the íessees ,
depíetíon, a gross receípt from oíí soíd, equaí to the amount of the net íncome
paíd to the ta payer íessors, wouíd not be sub|ect to depíetíon, uníess the ta payer
íessors are permítted to appíy depíetíon to thís payment. Thís wouíd be contrary
to the purpose of the depíctíon statute, whích Is to aííow to the íessor and íessee
together a depíetíon of 27 per cent of the gross saíe príce of the oíí. On the
other hand íf depíetíon on the net Income payments ís aííowed to the íessors,
the íessees are aííowed depíetíon on the gross íncome from oíí saíes íess the net
or the background of the present provísíons, see cíveríng v. Twín eíí Oíí Syndícate
(293 U. ., 312 ret. P. 905, C. . I -1. 253 (1935) ).
Whííe the reservatíon of rovnítíes shows an economíc ínterest ín the oíí necessary for
the satísfactíon of the royaítíes, such reservatíon wouíd not show an economíc ínterest ín
oíí not necessary for the parment of the royaítíes. ut see state o| ophet (3 T. C, 6).
Sectíon 114(b)(3). The gross íncome refers oníy to oíí and rus. ( eívcríng v. Twín
eíí Oíí Syndícate, 293 U. .. 312. 320-321 nderson v. eívcríng, 310 U. S., 404, 40 )
€ – € Ihíceríng . Twín eíí Oíí Syndícate (293 U. S., 312, 322).
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29.23(p)-í.
72
íncome payment and the entíre aííowabíe depíetíon ís aííocated between the íessors
and íessees.
Reference ís made to a sentence In nderson v. eíveríng (310 U. S., 404, 409),
as índícatíng that thís Court had determíned that net profít payments were not
sub|ect to depíetíon. It reads as foííows:
share ín the net profíts deríved from deveíopment and operatíon, on the
contrary, does not entítíe the hoíder of such ínterest to a depíetíon aííowance
even though contínued productíon ís essentíaí to the reaíízatíon of such profíts.
The nderson case Invoíved the ta abíííty to the oíí operator of the gross proceeds
of the oíí, whích hís contract for the purchase of the oíí property requíred hím
to turn over to the seííer as a means of satísfyíng a deferred payment for the
property. s the deferred payment aíso had to be satísfíed out of any saíe of
the fee símpíe títíe to the íand, we heíd the operator ííabíe as a purchaser because
the seííer was not entíreíy dependent upon the oíí productíon for hís purchase
príce. Thís gave the operator the benefít of the appíícabíe depíetíon. (Page 413.)
Oníy the reservatíon of an ínterest ín the fee dífferentíated the nderson case
from Thomas v. Perkíns (301 U. S., 655), where deferred payment ín oíí or íts
proceeds, payabíe oníy from productíon, was heíd sub|ect to depíetíon when paíd
to the assígnors.
Tííe part |ust quoted from the nderson case occurs In settíng out the seríes
of cases deaííng wíth depíetíon. No net íncome was Invoíved ín the nderson
case. The statement was supported by the cítatíon of eíveríng v. O Donneíí
(303 U. S., 370 Ct. D. 1324, C. . 103 -1, 337 ) and eíveríng v. íoe Oíí Land
Deveíopment Co. (303 U. S., 372 TCt. D. 1322, O. . 193 -1, 293 ). In the O Don-
neíí case, the ta payer, who receíved the net íncome from an oíí operatíon was
a stranger to the íease, who had contracted for a share of íts net profíts as consíd-
eratíon for hís stock ín a corporatíon whích was the owner of the íease. € The
questíon ís whether respondent had an Interest, that ís, a capítaí Investment, ín
the oíí and gas In píace € . s a mere owner of shares ín the San Gabríeí
Co., respondent had no such ínterest. (Page 371.) In the íbe Oíí Land case,
there was a specífíc provísíon that consíderatíon other than the net profít pay-
ment shouíd resuít ín fuíí ownershíp to the buyer. The transactíon whích
íncíuded the cíause for net profít was a saíe of aíí the ríght, títíe and ínterest
ín the property, whích consísted of tangíbíe personaíty and drííííng permíts,
agreements, and íeases. Thís Court saíd the addítíonaí payment of a share of net
profíts díd not quaíífy ín any way the effect of the transactíon as an absoíute
saíe. (Page 375.) Thus the nderson case correctíy stated that a share In net
profíts dísassocíated from an economíc ínterest, does not entítíe the hoíder to a
depíetíon aííowance. The facts of each transactíon must be appraísed to deter-
míne whether the transferor has made an absoíute saíe or has retaíned an eco-
nomíc ínterest € ” a capítaí Investment.
In our víew, the net profít payments In these cases fíow dírectíy from the
ta payers economíc ínterest In the oíí and partake of the quaííty of rent rather
than of a saíe príce. Therefore, the capítaí Investment of the íessors ís reduced
by the e tractíon of the oíí and the íessors shouíd have depíetíon.
No. 5fí ís reversed.
No. 1 7 ís affírmed.
Mr. ustíce ackson took no part ín the consíderatíon or decísíon of these cases.
Mr. ustíce Dougías díssents.
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.
Sectíon 29.23 (p)-í: Contríbutíons of an em- 1946-6-12261
píoyer to an empíoyees trust or annuíty Mím. 59 5
pían and compensatíon under a deferred
payment pían € ” In generaí.
Contríbutíons to an empíoyees trust, to constítute aííowabíe de-
ductíons, must be made pursuant to a pían ín effect and to a vaííd
e ístíng trust whích ís recognízed as such under the íocaí íaw. Thís
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73
29.23(p)-í.
requírement wííí be deemed to have been compííed wíth for ta abíe
years endíng on or before ebruary 2 , 1946, ín the case of a ta payer
on the accruaí basís íf aíí requísítes have been met on or before the
íast day of the year of accruaí e cept the furníshíng of the trust
corpus, whích must be suppííed wíthín 60 days after the cíose of such
ta abíe year of accruaí.
Treasury Department,
Offíce of Commíssíoner of Internaí evenue,
Washíngton 25, D. C, ebruary 21,1946.
Coííectors of Internaí Revenue, Internaí Revenue gents ín Charge,
eads of íeíd Dívísíons, Technícaí Staff, and Others Concerned:
1. Sectíon 23(p)(í) ( ) and (C) of the Internaí Revenue Code
provídes for deductíons or contríbutíons paíd ínto a trust whích ís
e empt under sectíon 165(a) of the Code. trust ís e empt under
the íatter sectíon upon compííance wíth certaín requírements, one of
whích ís that ít be part of a stock bonus, pensíon, or profít-sharíng
pían. Thus, the pían must be ín effect before the trust ís entítíed to
e emptíon under that sectíon. urther there must be a vaííd and
e ístíng trust to whích the contríbutíon ís made. If an essentíaí eíe-
ment of a trust ís íackíng, there ís, ín effect, no trust. Thus, íf the
trust corpus ís íackíng, ít can not be saíd that a trust ís ín e ístence.
The coroííary, therefore, ís that e emptíon under sectíon 165 (a) appííes
to an e ístíng trust, compíete ín aíí respects, íncíusíve of possessíon
of the corpus.
2. Sectíon 23(p) (1) ( ) of the Code provídes that a ta payer on
the accruaí basís shaíí be deemed to have made a payment, for the
purposes of subparagraphs ( ), ( ), and (C), on the íast day of
the year of accruaí íf the payment ís on account of such ta abíe year
and ís made wíthín 60 days after the cíose of the ta abíe year of accruaí.
Subparagraph ( ) pertaíns to a pensíon trust and subparagraph (C)
to a stock bonus or profít-sharíng trust. Thus, íf there ís a trust, the
ta payer on the accruaí basís ís permítted to make hís contríbutíon
thereto wíthín 60 days after the cíose of the year of accruaí. Subpara-
graph ( ), however, does not create a trust or reíate a trust back to
a períod when ín fact ít had no e ístence.
3. The effect of the aforesaíd requírements ís that contríbutíons to
an empíoyees trust, to constítute aííowabíe deductíons, must be made
pursuant to a pían ín effect and to a vaííd e ístíng trust whích ís
recognízed as such under the íaw prevaíííng ín the |urísdíctíon to
whích the trust ís sub|ect.
4. Under the authoríty of sectíon 3791(b) of the Internaí Revenue
Code, the aforesaíd ruíe wííí be deemed to have been compííed wíth
for ta abíe years endíng on or before ebruary 2 , 1946. ín the case
of a ta payer on the accruaí basís-, íf aíí requísítes have been met on
or before the íast day of the year of accruaí e cept the furníshíng of
the trust corpus, whích must be suppííed wíthín 60 days after the
cíose of such ta abíe year of accruaí.
5. Correspondence from the foííowíng regardíng thís mímeograph
shouíd refer to the number hereof and to the symboís índícated: Coí-
íectors of ínternaí revenue, C: Coí ínternaí revenue agents ín
703672 € ” 40 6
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29.23(p)-9. 74
charge, IT: PS heads of fíeíd dívísíons of the Technícaí Staff,
TS: RM.
oseph D. Nunan, r.,
Commíssíoner.
pproved ebruary 21, 1946.
oseph . O Conneí , r.,
ctíng Secretary of the Treasury.
Sectíon 29.23(p)-9: Contríbutíons of an em- 1946-12-12327
píoyer toward the purchase of retírement Mím. 6020
annuítíes (sectíon 23(p) (1) ( )).
or the purpose of sectíon 23(p) (1) ( ) of the Internaí Revenue
Code, contríbutíons must be paíd under a pían ín effect, as evídenced
by an e ecuted contract or e ecuted contracts. Thís requírement wííí
be deemed to have been compííed wíth for ta abíe years endíng on or
before May 31, 1940, íf certaín other condítíons evídencíng a pían
In effect e ísted before the cíose of the ta abíe year.
Treasury Department,
Offíce of Commíssíoner of Internaí Revenue,
Washíngton 25, D. C, May 27,19tf.
Coííectors of Internaí Revenue, Internaí Revenue gents ín Charge,
eads of íeíd Dívísíons, Technícaí Staff, and Others Concerned:
1. Deductíons for contríbutíons paíd toward the purchase of retíre-
ment annuítíes are governed by sectíon 23(p) (1) ( ) of the Internaí
Revenue Code. mong the condítíons prescríbed under that sectíon
for the aííowance of a deductíon are:
(a) contríbutíons must be paíd toward the purchase of retíre-
ment annuítíes, and
(í) under a pían whích meets the requírements of sectíon 165
(a)(3), (4), (5k and (6) of the Code.
Wíth respect to (a) above, ít shouíd be noted that a contríbutíon ís
not paíd íf aíí or any part of ít ís recoverabíe at the request of the
empíoyer. When any portíon of a recoverabíe remíttance on account
of a premíum becomes írrecoverabíe under an e ecuted contract, how-
ever, such portíon then becomes a contríbutíon paíd. Wíth respect
to ( ) above, there must be a pían ín effect. pían whích ís repre-
sented by a group annuíty contract or by annuíty contracts ís not ín
effect before such contract ís, or contracts are, e ecuted and íssued.
2. Under the authoríty of sectíon 3791 (b) of the Internaí Revenue
Code, for a ta abíe year endíng on or before May 31,1946, an annuíty
pían wííí be deemed ín effect íf ít ís evídenced by the compíetíon of the
foííowíng steps by the cíose of the ta abíe year:
(a) a resoíutíon by the board of dírectors (or e ecutíon of an
acknowíedgment ín the case of an uníncorporated empíoyer)
settíng forth a defíníte pían for the purchase of retírement an-
nuítíes under a group annuíty contract or annuíty contracts,
(b) an appíícatíon for such contract or contracts,
(c) an acceptance of the appíícatíon by an ínsurance company
statíng that ít wííí íssue the contract or contracts (sub|ect to any
necessary approvaí by a State authoríty),
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75
29.23( )-í.
(d) preparatíon of the contract or contracts, or of compíete
abstracts thereof, ín suffícíent detaíí to defíne aíí the terms of the
contract or contracts to be íssued, and
(e) remíttance on account of the premíums ín accordance wíth
the terms set forth thereunder,
províded that, wíthín a reasonabíe tíme thereafter, the contract ís, or
contracts are, e ecuted and íssued, and, ín such cases, remíttances ín
the ta abíe year on account of premíums for the year ín accordance
wíth the pían and the contract or contracts wííí be deemed contríbu-
tíons paíd for the purpose of sectíon 23(p) (1) ( ).
3. The foregoíng ís aíso appíícabíe to amendments to annuíty píans
and the contract or contracts thereunder.
4. Correspondence from the foííowíng regardíng thís mímeograph
shouíd refer to the number hereof and to the symboís índícated:
Coííectors of ínternaí revenue, C: Coí ínternaí revenue agents ín
charge, IT: PS heads of fíeíd dívísíons of the Technícaí Staff,
TS: RM.
oseth D. Nunan, r.,
Commíssíoner of Internaí Revenue.
pproved May 24, 1946.
oseph . O Conneíí., r.,
ctíng Secretary of the Treasury.
S CTION 23( ). € ” D DUCTIONS ROM GROSS INCOM :
M DIC L, D NT L, TC., P NS S.
Sectíon 29.23 ( )-1: Medícaí, dentaí, etc., 1946-5-12252
e penses. I. T. 37 6
INT RN L R NU COD .
Traveííng e penses (Incíudíng e penses of meaís and íodgíng)
Incurred on behaíf of a mínor chííd, In order to obtaín medícaí care
for the aííevíatíon of a physícaí defect or íííness, are deductíbíe for
ederaí íncome ta purposes as medícaí e penses under sectíon 23( )
of the Internaí Revenue Code. If It ís necessary for one of the par-
ents to accompany the chííd because of íts physícaí condítíon and
ímmaturíty, reasonabíe e penses íncurred for traveí (íncíudíng e -
penses of meaís and íodgíng) of the parent are aíso deductíbíe as
medícaí e penses.
dvíce ís requested whether traveííng e penses íncurred on behaíf
of a mínor chííd, ín order to obtaín medícaí care for the aííevíatíon
of a physícaí defect or íííness, are deductíbíe for ederaí íncome ta
purposes as medícaí e penses under sectíon 23( ) of the Internaí Reve-
nue Code. dvíce ís aíso requested whether, ín the event ít ís neces-
sary for one of the parents to accompany the chííd because of íts
physícaí condítíon and ímmaturíty, e penses of traveí of the parent
are deductíbíe as medícaí e penses.
Sectíon 23( ) of the Internaí Revenue Code provídes ín part as
foííows:
Seo. 23. In computíng net íncome there shaíí be aííowed as deductíons:
€ € € €
( ) Medícaí, Dentaí, tc., penses. € ” penses paíd duríng the ta abíe year,
not compensated for by ínsurance or otherwíse, for medícaí care of the ta payer,
hís spouse, or a dependent specífíed ín sectíon 25(b) (3), to the e tent that such
e penses e ceed 5 per centum of the ad|usted gross íncome. The term
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29.23(aa)-í.
76
medícaí care , as used In thís subsectíon, shaíí Incíude amounts paíd for the
díagnosís, cure, mítígatíon, treatment, or preventíon of dísease, or for the purpose
of affectíng any structure or functíon of the body (Incíudíng amounts paíd for
accídent or heaíth ínsurance).
Sectíon 29.23 ( )-í of Reguíatíons 111 provídes ín part as foííows:
ííowabíe deductíons under sectíon 23 ( ) wííí be confíned stríctíy to
e penses íncurred prímarííy for the preventíon or aííevíatíon of a physícaí or
mentaí defect or íííness. Thus, payments for e penses for hospítaí, nursíng
€ and for ambuíance híre and traveí prímarííy for and essentíaí to the
rendítíon of the medícaí servíces or to the preventíon or aííevíatíon of a physícaí
or mentaí defect or íííness, are deductíbíe. Itaíícs suppííed.
The traveí e penses aííowabíe as medícaí e pense deductíons under
sectíon 23( ) of the Code, supra, and sectíon 29.23( )-í of Reguíatíons
111, supra, íncíude e penses of transportatíon, meaís, and íodgíng, and
reasonabíe traveííng e penses are aííowabíe ín theír entírety íf the
traveí whích gíves ríse to such e penses ís prímarííy for and essentíaí
to the rendítíon of the medícaí servíces or to the preventíon or aííevía-
tíon of a physícaí or mentaí defect or íííness.
In víew of the foregoíng, ít ís heíd that traveííng e penses (íncíud-
íng e penses of meaís and íodgíng) íncurred on behaíf of a mínor chííd,
ín order to obtaín medícaí care for the aííevíatíon of a physícaí de-
fect or íííness, are deductíbíe for ederaí íncome ta purposes as medí-
caí e penses under sectíon 23 ( ) of the Internaí Revenue Code. If ít
ís necessary for one of the parents to accompany the chííd because of
íts physícaí condítíon and ímmaturíty, reasonabíe e penses íncurred
for traveí (íncíudíng e penses of meaís and íodgíng) of the parent
are aíso deductíbíe as medícaí e penses.
S CTION 23(aa). € ” D DUCTIONS ROM GROSS
INCOM : OPTION L ST ND RD D DUC-
. TION OR INDI IDU LS.
Sectíon 29.23(aa)-í: Standard deductíon. 1946-1-12202
I. T. 3775
INT RN L R NU COD .
n Indívíduaí who fííes a ederaí Income ta return for the
caíendar year 1945 and cíaíms the benefít of the standard deduc-
tíon prescríbed by sectíon 23(aa) of the Internaí Revenue Code may,
on or before March 15, 1940, fííe an amended return ítemízíng hís
deductíons whích are aííowabíe under other provísíons of sectíon 23
of the Code. fter March 15, 1946, hís eíectíon to take the standard
deductíon wííí be Irrevocabíe.
dvíce ís requested whether an índívíduaí who fííes a ederaí íncome
ta return for the caíendar year 1945 and cíaíms the benefít of the
standard deductíon prescríbed by sectíon 23 (aa) of the Internaí Reve-
nue Code may, on or before March 15,1946 (the due date of the return),
fííe an amended return ítemízíng hís deductíons whích are aííowabíe
under other provísíons of sectíon 23 of the Code.
Sectíon 23(aa) of the Internaí Revenue Code, supra, reads ín part
as foííows:
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77
29.23(aa)-í.
S C. 23. D DUCTIONS ROM GROSS INCOM .
In computíng net íncome there shaíí be aííowed as deductíons:
€ € €
(aa) Optíonaí Standard Deductíon for Indívíduaís. € ”
(1) ííowance. € ” In the case of an índívíduaí, at hís eíectíon a standard
deductíon as foííows:
( ) d|usted Gross Income 5,000 or More. € ” If hís ad|usted gross
íncome ís 5,000. or more, the standard deductíon shaíí be 500.
( ) d|usted Gross Income Less Than 5,000. € ” If hís ad|usted gross
íncome ís íess than 5,000, the standard deductíon shaíí be an amount
equaí to 10 per centum of the ad|usted gross íncome upon the basís of
whích the ta appíícabíe to the ad|usted gross íncome of the ta payer
ís determíned under the ta tabíe províded ín sectíon 400.
€ € € € € €
1 Method and effect of eíectíon. € ”
( ) If the ad|usted gross íncome shown on the return ís 5,000 or
more, the standard deductíon shaíí be aííowed oníy íf the ta payer so
eíects ín hís return, and the Commíssíoner, wíth the approvaí of the
Secretary, shaíí by reguíatíons prescríbe the manner of sígnífyíng such
eíectíon ín the return.
( ) If the ad|usted gross Income shown on the return ís íess than
5,000, the standard deductíon shaíí be aííowed oníy íf the ta payer
eíects, ín the manner províded ín Suppíement T, to pay the ta Imposed
by such suppíement.
(C) If the ta payer does not sígnífy, ín the manner províded by
subparagraph ( ) or ( ), hís eíectíon to take the standard deductíon,
ít shaíí not be aííowed. If he does so sígnífy, such eíectíon shaíí be
Irrevocabíe.
If a ta payer whose ad|usted gross íncome ís íess than 5,000 eíects
to have hís ta for 1945 determíned under Suppíement T, Chapter 1
of the Code, he aíso eíects to receíve the benefít of the standard deduc-
tíon of 10 per cent of hís ad|usted gross íncome as províded by sectíon
23(aa) (1) ( ) of the Code, supra, whích ís taken ínto consíderatíon
ín the basíc tabíe set forth ín sectíon 400 of Suppíement T, Chapter 1
of the Code. In the case of a ta payer whose ad|usted gross íncome ís
5,000 or more, the eíectíon to take the standard deductíon ís made by
cíaímíng 500 as a deductíon on ííne 2, page 3 of orm 1040. The
specífíc questíon presented ís whether a ta payer, havíng cíaímed the
standard deductíon permítted by sectíon 23 (aa) of the Code for the
ta abíe year 1945, eíther by determíníng hís ta under Suppíement T
or by cíaímíng 500 as a deductíon on orm 1040, may, after such eíec-
tíon, fííe an amended return on or before March 15,1946, ítemízíng hís
deductíons and cíaímíng them under the other paragraphs enumerated
ín sectíon 23 of the Code. The questíon aríses by vírtue of sectíon
23(aa) (3) (C) of the Code, supra, whích states ín effect that íf a ta -
payer sígnífíes hís eíectíon to take the standard deductíon, such eíec-
tíon shaíí be írrevocabíe. Díffícuíty wííí aríse, for e ampíe, ín the
case where a ta payer, on ebruary 1,1946, fííes an índívíduaí return,
orm 1040, cíaímíng the standard deductíon of 500 and thereafter, on
or before March 15, 1946, desíres to fííe an amended return ítemízíng
bís deductíons aggregatíng 00 and receíve the benefít of the íatter
amount ín computíng hís íncome ta ííabíííty or ín the case where a
ta payer fííes a return usíng the ta tabíe ín sectíon 400 of Suppíe-
ment T and on or before March 15, 1946, desíres to fííe an amended
return ítemízíng hís deductíons.
The questíon of eíectíon wíth respect to the fíííng of índívíduaí ín-
come ta returns was consídered ín Grant v. Rose (24 ed. (2d), 115).
Under the statute ínvoíved, sectíon 223 of the evenue ct of 1921, a
husband and wífe íívíng together had a ríght to make separate returns
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29.23(aa)-í.
7
or íncíude the íncome of each ín a síngíe |oínt return, and ín the íatter
case the ta was computed on the aggregate íncome. The court poínted
out that the statute made no provísíon for the amendment of returns,
but, ín order to correct místakes and prevent ínequítíes and ín|ustíces,
amended returns ought manífestíy to be, and are, freeíy aííowed. It
stated, however, that there was nothíng ín the ct to e tend the ríght
of choíce beyond the tíme for makíng the returns. The court heíd that
the statutory ríght of choíce ís e hausted at the e píratíon of the
tíme for makíng a return, and stated that ít ís not unreasonabíe to
cíaím a ríght to substítute one form of return for the other up to the
íast day for makíng returns, but after that, and especíaííy after the
returns have been revíewed and assessments made, there are strong
admínístratíve reasons for not permíttíng the upsettíng of the whoíe
basís of caícuíatíon. The decísíon was affírmed ín Rose v. Grant (39
ed. (2d), 340). oííowíng these decísíons, the ureau heíd ín I. T.
2535 (C. . I -1, 125 (1930)) that where a husband and wífe fííed
a |oínt return on ebruary 4, 1929, for the caíendar year 192 . and
separate returns were subsequentíy fííed by the husband and wífe on
ebruary 20,1929, such separate returns shouíd be accepted as substí-
tutes for the |oínt return prevíousíy fííed. Thus the ureau adopted
the ruíe íaíd down ín the Grant case that where a ta payer had an eíec-
tíon wíth respect to fíííng hís índívíduaí return and the method of
computíng the ta , the ríght of eíectíon was not e hausted untíí the
íast dnv on whích the return was requíred to be fííed.
In Uaggar Company v. Tíeíveríng (30 U. S., 3 9, Ct. D. 1433, C. .
1940-1, 237), the questíon ínvoíved was the ad|usted decíared vaíue of
capítaí stock for the purpose of the capítaí stock ta and e cess-profíts
ta ímposed by sectíons 215 and 210, respectíveíy, of the Natíonaí
Industríaí Recovery ct. Sectíon 215(f) of that ct províded for
an ad|usted decíared vaíue of the capítaí stock as decíared by the
corporatíon ín íts fírst return under thís sectíon (whích decíaratíon of
vaíue can not be amended), as of the cíose of íts íast íncome-ta ta -
abíe year. The Supreme Court of the Uníted States poínted out that
the ct nowhere mentíoned the words amended return and stated
that the fírst return thus means a return for the fírst year ín whích
the ta payer e ercíses the prívííege of fí íng íts capítaí stock vaíue for
ta purposes, and íncíudes a tímeíy amended return for that year.
The Court further stated that a tímeíy amended return ís as much a
fírst return for the purpose of fí íng the capítaí stock vaíue, ín
contradístínctíon to returns for subsequent years, as ís a síngíe return
fííed by the ta payer for the fírst ta year. The Court concíuded that
sectíon 215(f) of the Natíonaí Industríaí Recovery ct díd not pre-
cíude a change of the decíaratíon of vaíue ín a tímeíy amended return.
On the other hand, the Supreme Court has heíd that the decíared vaíue
of the capítaí stock couíd not be changed after the due date of the
return. (See Scaífe Co. v. Commíssíoner, 314 U. S., 459, Ct. D. 1535,
C. . 1942-1, 207, and eheríng v. Lemer Stores Corporatíon (Md.),
314 U. S., 4G3, Ct. D. 1536, C. . 1942-1, 209.)
In víew of the foregoíng, ít ís heíd that an índívíduaí who fííes a
ederaí íncome ta return for the caíendar year 1945 and cíaíms the
benefít of the standard deductíon prescríbed by sectíon 23 (aa) of the
Internaí Revenue Code may, on or before March 15, 1940, fííe an
amended return ítemízíng hís deductíons whích are aííowabíe under
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79
19.24-2.
other provísíons of sectíon 23 of the Code. fter March 15,1946, hís
eíectíon to take the standard deductíon wííí be írrevocabíe.
S CTION 24. € ” IT MS NOT D DUCTI L .
Sectíon 19.24-1: Personaí and famííy e penses.
INT RN L R NU COD .
Traveííng and íívíng e penses not íncurred ín the pursuít of trade or
busíness. (See Ct. D. 1659, page 57.)
Sectíon 29.24-2: Capítaí e pendítures. 1946-6-12262
( íso Sectíon 23(a), Sectíon 29.23 (a)-í.) G. C. M. 24742
INT RN L R NU COD .
payment made by a Caíífornía corporatíon, some of the stock-
hoíders, dírectors, offícers, and empíoyees of whích were aííeged
apanese aííens, to the State of Caíífornía ín compromíse of a suít
Instítuted by the State for escheat of reaí property acquíred In víoía-
tíon of the Caíífornía ííen Property Inítíatíve ct of 1020, as
amended, does not constítute an ordínary and necessary busíness
e pense whích Is deductíbíe for ederaí íncome ta purposes. Such
payment, however, constítutes a capítaí e pendíture whích may be
added to the cost or other basís of the property.
n opíníon ís requested reíatíve to the proper treatment, for ederaí
íncome ta purposes, of a payment made by a Caíífornía corporatíon
to the State of Caíífornía ín compromíse of a suít ínstítuted by the
State for escheat of reaí property acquíred ín víoíatíon of the Caíí-
fornía ííen Property Inítíatíve ct of 1920, as amended.
In the ínstant case, the escheat proceedíngs were ínstítuted on the
ground that apanese aííens were íncíuded among the stockhoíders,
dírectors, offícers, and empíoyees of the corporatíon. Whííe such pro-
ceedíngs were pendíng, a compromíse settíement was entered ínto by
the partíes whích províded for the saíe and conveyance of the property
by the corporatíon to a thírd party, and the payment by the corpora-
tíon out of the proceeds of the saíe of a stípuíated sum to the State
ín fuíí and compíete reíease and díscharge of aíí of the State s cíaíms
to such property.
Sectíon 7 of the Caíífornía ííen Property Inítíatíve ct of 1920, as
amended, under whích the escheat proceedíngs were brought, provídes
ín part as foííows:
7. scheat of property acquíred ín fee: grícuíturaí íand. ny reaí property
hereafter acquíred ín fee ín víoíatíon of the provísíons of thís net by any aííen
mentíoned ín sectíon 2 of thís act, or by any company, assocíatíon or corporatíon
mentíoned ín sectíon 3 of thís act, shaíí escheat as of the date of such acquíríng,
to, and become nnd remaín the property of the State of Caíífornía. The attorney
generaí or dístríct attorney of the proper county shaíí ínstítute proceedíngs to
have the escheat of such reaí property ad|udged and enforced ín the manner pro-
víded by sectíon 474 of the Poíítícní Code and títíe , part 3 of the Code of Cívíí
Procedure. Upon the entry of fínaí |udgment ín such proceedíngs, the títíe to
such reaí property shaíí pass to the State of Caíífornía, as of the date of such
acquísítíon ín víoíatíon of the provísíons of thís act. € € Deeríng s Generaí
Laws of Caíífornía, 1031, voíume 1, page 107.
Sectíon 1 of the Caíífornía ííen Property Inítíatíve ct, as
amended, provídes that aíí aííens eíígíbíe to cítízenshíp under the íaws
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29.24-2.
0
of the Uníted States may acquíre, possess, en|oy, use, cuítívate, occupy,
transfer, transmít, and ínherít reaí property or any ínterest thereín.
Sectíon 2 of the act provídes that those aííens not capabíe of becomíng
Uníted States cítízens may acquíre reaíty ín the State oníy ín the man-
ner and to the e tent prescríbed bv a treaty e ístíng between the Uníted
States and the aííen s country. Sectíon 3 makes símííar provísíons, as
do sectíons 1 and 2, wíth respect to corporatíons of whích a ma|oríty
of the members are aííens or a ma|oríty of the stock of whích ís owned
by aííens. Sectíon 9 provídes ín part as foííows:
9. Conveyance to prevent escheat. very transfer of reaí property, or of
an ínterest thereín, though coíorabíe In form, shaíí be voíd as to the State and
the ínterest thereby conveyed or sought to be conveyed shaíí escheat to the State
as of the date of such transfer, íf the property ínterest ínvoíved ís of such a
character that an aííen mentíoned ín sectíon 2 hereof ís ínhíbíted from acquíríng,
possessíng, en|oyíng, usíng, cuítívatíng, occupyíng, transferríng, transmíttíng or
ínherítíng ít, and íf the conveyance ís made wíth íntent to prevent, evade or avoíd
escheat as províded for hereín. Deeríng s Generaí Laws of Caíífornía, 1931,
voíume 1, page 10 .
It ís weíí settíed that amounts e pended ín defendíng or perfectíng
títíe to property are capítaí e pendítures constítutíng a part of the
cost of the property and are not deductíbíe as ordínary and necessary
busíness e penses. € (See sectíon 29.24-2 of Reguíatíons 111 Murphy
Oíí Co. v. urnet, 2 7 U. S., 299, Ct. D. 619, C. . -1, 231 (1933)
Morgan ones state v. Commíssíoner, 127 ed. (2d), 231 R. D.
armer et aí., Trustees, v. Commíssíoner, 126 ed. (2d), 542 North
merícan Oíí Consoíídated v. Commíssíoner, 2 6 U. S., 417, Ct. D. 499,
C. . I-1, 293 (1932).) It has been heíd that payments made to the
ííen Property Custodían to procure the reíease of property are not
an aííowabíe busíness e pense but a capítaí e pendíture to be added
to the cost of the property. (See . R. R. 231 , C. . II-í, 2 (1923),
and ííce P. achofen von cht v. Commíssíoner, 21 . T. ., 702.)
In . . íííott Co. v. Commíssíoner (45 . T. ., 2), the ta payer
had purchased certaín assets from another corporatíon whích went
ínto bankruptcy and the bankruptcy trustee brought suít to set asíde
the transfer on the ground that the transfer was frauduíent. It was
heíd that the payment of 4,000 by the ta payer ín compromíse settíe-
ment of the suít was a capítaí e pendíture to protect the ta payer s
ínvestment ín the assets purchased, and not deductíbíe as an ordínary
and necessary busíness e pense.
In the ínstant case, the corporatíon heíd agrícuíturaí íand under
coíor of títíe. The escheat proceedíngs were a cíoud on that títíe sínce,
íf the ta payer had been unsuccessfuí ín those proceedíngs, the íand
wouíd have escheated to the State. s a resuít of the compromíse
payment ín fuíí settíement of the State s cíaíms, the cíoud on the títíe
was removed and the ta payer was abíe to convey good títíe to a thírd
party. It ís not materíaí that provísíon was made for payment of the
compromíse amount out of the proceeds of the saíe.
In víew of the foregoíng, ít ís the opíníon of thís offíce that the
ayment ín questíon does not constítute an ordínary and necessary
msíness e pense whích ís deductíbíe for ederaí íncome ta purposes.
Such payment, however, constítutes a capítaí e pendíture whích may
be added to the cost or other basís of the property.
. P. We cheí,
Chíef Counseí, ureau of Internaí Revenue.
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1
29.42-2.
Sectíon 29.24-2: Capítaí e pendítures.
( íso Sectíon 19.24-2, eguíatíons 103.)
INT RN L R NU COD .
eguíatíons 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.
Sectíon 29.42-2: Income not reduced to 1946-11-1231
possessíon. I. T. 3 02
INT RN L R NU COD .
The retírement pay of a Uníted States rmy offícer for the períod
daríng whích he was heíd a prísoner of war ín the Phíííppínes was
constructíveíy receíved by hím as ít accrued and ís sub|ect to ederaí
íncome ta for the years ín whích ít was so receíved.
dvíce ís requested whether the retírement pay of a Uníted States
rmy offícer for the períod duríng whích he was heíd a prísoner of
war m the Phíííppínes ís sub|ect to ederaí íncome ta for the year
ín whích such pay accrued or for the year ín whích ít was actuaííy
receíved.
In the ínstant case, the ta payer, havíng served the necessary
períod of tíme ín the Uníted States rmy, was retíred as a non-
commíssíoned offícer ín 1929. e made hís home ín the Phíííppíne
Isíands untíí 1942, when he was taken a prísoner of war and ínterned
there by the apanese. Upon hís reíease ín 1945, he returned to the
Uníted States, where he receíved the amount of hís retírement pay
whích had accumuíated duríng the períod of hís ínternment.
Sectíon 42(a) of the Internaí Revenue Code provídes ín part as
foííows:
(a) Generaí Ruíe. € ” The amount of aíí ítems of gross íncome shaíí be
íncíuded ín the gross íncome for the ta abíe year ín whích receíved by the
ta payer, uníess, under methods of accountíng permítted under sectíon 41, any
such amounts are to be properíy accounted for as of a dífferent períod. €
Sectíon 29.42-2 of Reguíatíons 111 provídes ín part as foííows:
Sec. 29.42-2. Income Not Reduced to Possessíon. € ” Income whích ís credíted
to the account of or set apart for a ta payer and whích may be drawn upon by
hím at any tíme ís sub|ect to ta for the year duríng whích so credíted or set
apart, aíthough not then actuaííy reduced to possessíon. To constítute receípt
ín such a case the íncome must be credíted or set apart to the ta payer wíthout
any substantíaí íímítatíon or restríctíon as to the tíme or manner of payment
or condítíon upon whích payment ís to be made, and must be made avaííabíe
to hím so that ít may be drawn at any tíme, and Its receípt brought wíthín hís
own controí and dísposítíon.
Sectíon 2 of Pubííc Law 490, Seventy-seventh Congress, second
sessíon (56 Stat, 143), approved March 7, 1942 (known as the
Míssíng Persons ct), provídes ín part as foííows:
ny person who ís ín actíve servíce and ís offícíaííy reported as
captured by an enemy shaíí, whííe so absent, be entítíed to receíve or to have
credíted to hís account the same pay and aííowances to whích such person was
entítíed at the tíme of the begínníng of the absence or may become entítíed to
thereafter € € €
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f 29.43-2.
2
mounts thus made avaííabíe to the use of an índívíduaí are
constructíveíy receíved by hím at the tíme they are credíted to hís
account, and represent íncome for the year ín whích such constructíve
receípt occurs rather than for the year of actuaí receípt. íthough
sectíon 2 of Pubííc Law 490, supra, does not cover the pay of retíred
personneí of the Uníted States rmy who were prísoners of war,
settíement of the retíred pay accounts of such índívíduaís was accom-
pííshed, accordíng to advíce receíved from the War Department,
after theír reíease from enemy controí ín the same manner as ín
the case of pay accounts of índívíduaís ín actíve servíce covered by
sectíon 2 of Pubííc Law 490.
In víew of the foregoíng, ít ís heíd that the retírement pay of a
Uníted States rmy offícer for the períod duríng whích he was heíd
a prísoner of war ín the Phíííppínes was constructíveíy receíved by
hím as ít accrued and ís sub|ect to ederaí íncome ta for the year
ín whích ít was so receíved.
S CTION 43. € ” P RIOD OR W IC D DUCTIONS
ND CR DITS T N.
Sectíon 29.43-2: When charges deductíbíe. 1946-10-12303
I. T. 3 00
INT RN L R NU COD .
Tíme of accruaí for ederaí Income ta purposes of certaín pay-
ments (whích are deductíbíe for ederaí íncome ta purposes) made
by víoíators of a reguíatíon, order, or príce scheduíe of the Offíce of
Príce dmínístratíon ín settíement of actíons ínstítuted or proposed
to be ínstítuted under the authoríty of sectíon 205(e) of the mer-
gency Príce Controí ct of 1942 (56 Stat., 23, 34).
dvíce ís requested as to the tíme of accruaí for ederaí íncome ta
purposes pf (1) the ííabíííty wíth respect to amounts paíd pursuant to
|udgments ín favor of consumers or users (other than the Uníted
States) ín consumer actíons under sectíon 205(e) of the mergency
Príce Controí ct of 1942 (56 Stat, 23, 34) and of amounts paíd ín
compromíse of pendíng or contempíated íítígatíon ín such cases (2)
voíuntary payments made to the Uníted States on account of príce
ceíííng víoíatíons duríng the 6-month períod anuary 31. 1942, the
day after the date on whích the mergency Príce Controí ct of 1942
was approved, to uíy 30, 1942, the day precedíng the date on whích
sectíon 205(e) of such ct became effectíve, both dates íncíusíve and
(3) amounts paíd to the Uníted States on account of overcharges
wíth respect to saíes made on or after uíy 31, 1942, to consumers or
users (other than the Uníted States) who have a ríght of actíon agaínst
the seííers under sectíon 205(e) of the mergency Príce Controí ct
of 1942 príor to the amendment of that sectíon ín 1944. The pay-
ments ín questíon were heíd to be deductíbíe for ederaí íncome ta
purposes ín I. T. 3G27 (C. . 1943, 111) and I. T. 3630 (C. . 1943,113).
The ruíe as to the tíme when deductíons may be taken for ederaí
íncome ta purposes by a ta payer who keeps accounts and fííes re-
turns on the accruaí basís for amounts paíd to consumers or to the
Uníted States ín settíement of causes of actíon arísíng from víoíatíons
of príce ceíííngs estabííshed by the Offíce of Príce dmínístratíon ís
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29.43-2.
the same as ín the case of any other ííabíííty whích ís paíd by a ta payer
who keeps accounts and fííes returns on the accruaí basís. The ta -
abíe year ín whích aíí the events occur fí íng the ííabíííty to make pay-
ment ís the proper tíme of accruaí. The ííabíííty to make payment
must be defíníte and certaín and not contíngent or contested. (See
Dí íe-Píne Products Co. v. Commíssíoner, 320 U. S., 516, Ct. D. 159 ,
C. . 1914, 509, and cases cíted thereín.)
It ís heíd that the ííabíííty wíth respect to amounts paíd pursuant
to |udgments ín favor of consumers or users (other than the Uníted
States) ín consumer actíons under sectíon 205(e) of the mergency
Príce Controí ct of 1942 accrues on the date the |udgments become
fínaí, and the ííabíííty wíth respect to amounts paíd ín compromíse of
pendíng or contempíated íítígatíon ín such cases accrues on the date
ííabíííty to make such payments becomes fí ed and certaín.
The ííabíííty wíth respect to voíuntary payments made to the
Uníted States on account of príce ceíííng víoíatíons duríng the above-
mentíoned 6-month períod anuary 31, 1942, to uíy 30, 1942, whích
payments are not made under statutory compuísíon, accrues at the
tíme payment ís made or at such earííer tíme when, by agreement or
otherwíse, the ííabíííty to make such payments becomes fí ed and
certaín.
Sectíon 205(e) of the mergency Príce Controí ct of 1942, as
amended by sectíon 10 (b) of the Stabííízatíon tensíon ct of 1944
(5 Stat., 632, 640), authorízes the Príce dmínístrator to ínstítute
a cívíí actíon ín any case ín whích a buyer havíng a cause of actíon
agaínst a seííer on account of a príce ceíííng víoíatíon faíís to ínstítute
an actíon wíth respect thereto wíthín 30 days from the date of occur-
rence of the víoíatíon. s províded ín sectíon 10 (c) of the Stabííí-
zatíon tensíon ct of 1944, the amendment made by sectíon 10 (b)
of that ct ís appíícabíe oníy wíth respect to víoíatíons occurríng after
the date of enactment of such ct ( une 30,1944). Where the actíon
ís ínstítuted, or proposed to be ínstítuted, by the Príce dmínístrator
under sectíon 205(e) of the mergency Príce Controí ct of 1942,
as amended, amounts paíd to the Uníted States are not deductíbíe for
ederaí íncome ta purposes. (See I. T. 3799, page 56, thís uííetín.)
efore amendment of sectíon 205(e) of the mergency Príce Controí
ct of 1942 by sectíon 10 (b) of the Stabííízatíon tensíon ct of
1944, the Príce dmínístrator had no authoríty to ínstítute cívíí ac-
tíons on account of overcharges wíth respect to saíes made to con-
sumers or users (other than the Uníted States) who had ríghts of
actíon agaínst the seííers, and ít ís for that reason that payments
made to the Uníted States on account of such overcharges were heíd
ín I. T. 3630, supra, to be deductíbíe. Therefore, the ruííng made ín
I. T. 3630, supra, reíatíng to the deductíbíííty of such payments, ís
appíícabíe oníy wíth respect to payments to the Uníted States on ac-
count of overcharges on saíes made on or after uíy 31, 1942, and
before uíy 1, 1944.. In accordance wíth the above-stated ríde of
accruaí, the ííabíííty wíth respect to such payments accrues, for ed-
eraí íncome ta purposes, at the tíme payment ís made or at such
earííer tíme when, by agreement or otherwíse, the ííabíííty to make the
payment becomes fí ed and certaín.
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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.
Sectíon 29.51-1: Indívíduaí returns. 1946- -12237
I. T. 37 2
INT RN L R NU COD .
husband and wífe domícííed ín Okíahoma are entítíed to In-
cíude ín theír separate ederaí íncome ta returns one-haíf of theír
communíty íncome receíved or accrued on and after uíy 26, 194. ,
the effectíve date of the 1945 Okíahoma Communíty Property ct.
dvíce ís requested whether a husband and wífe who are domí-
cííed ín the State of Okíahoma may each report ín separate ederaí
íncome ta returns one-haíf of theír communíty íncome receíved or
accrued after the effectíve date of the 1945 Okíahoma Communíty
Property ct.
The ureau recognízes that the 1945 Okíahoma Communíty Prop-
erty ct, approved príí 2 , 1945 ( . . 21 , twentíeth reguíar
sessíon, Okíahoma Legísíature), estabííshes a communíty property
system whích, for ederaí íncome ta purposes, satísfíes the test
prescríbed by the Supreme Court of the Uníted States ín Poe v. Sea-
bom (2 2 U . S., 101, Ct. D. 259, C. . I -2, 202 (19:50)) and Com-
míssíoner v. armon (323 U. S., 44, Ct. D. 1616, C. . 1944, 166).
owever, sectíon 1 of the act, whích attempts to vaíídate the 1939
Okíahoma Communíty Property ct retroactíveíy, wííí not be recog-
nízed for ederaí íncome ta purposes.
In víew of the foregoíng, ít ís heíd that a husband and wífe who
are domícííed ín the State of Okíahoma are entítíed to íncíude ín
theír separate ederaí íncome ta returns one-haíf of theír com-
muníty íncome receíved or accrued on and after uíy 26, 1945, the
effectíve date of the 1945 Okíahoma Communíty Property ct.
Sectíon 29.51-1: Indívíduaí returns. 1946-1-1223
I. T. 37 3
ínternaí revenue code.
usband and wífe hoídíng property as tenants by the entírety
In the State of onnsyívanía may each report one-haíf of the íncome
from such property ín theír separate ederaí íncome ta returns.
dvíce ís requested as to the proper treatment for ederaí íncome
ta purposes of íncome from property heíd by husband and wífe as
tenants by the entírety ín the State of Pennsyívanía.
Sectíon 31, chapter 2, títíe 4 of Purdon s Pennsyívanía Statutes
nnotated (Permanent dítíon) provídes as foííows:
Sec. 31. Marríed women to have same property ríghts as unmarríed persons
e ceptíons
ereafter a marríed woman shaíí have the same ríght and power as an un-
marríed person to acquíre, own, possess, controí, use, íease, seíí, or otherwíse
díspose of any property of any kínd, reaí, personaí or mí ed, and eíther ín pos-
sessíon or e pectancy, and may e ercíse the saíd ríght and power ín the same
manner and to the same e tent as an unmarríed person, but she may not mort-
gage or convey her reaí property, uníess her husband |oín ín such mortgage or
conveyance.
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29.51-1.
In O MaUeyv. O Maííey (272 Pa., 52 116 tí., 500) the Supreme
Court of Pennsyívanía stated that before the passage of the varíous
Pennsyívanía statutes reíatíng to the property of marríed women,
a husband who heíd wíth hís wífe an estate by the entíretíes ín the
State of Pennsyívanía had absoíute controí of ít and íts íncome, .e -
actíy as íf he were the owner ín fee that he couíd aííen ít, and the
purchaser wouíd obtaín an estate for the íífe of the husband and an
absoíute estate ín remaínder íf the husband survíved hís wífe. The
court poínted out that aíí thís was changed, however, by the Marríed
Women s Property cts, whích gave marríed women the same prop-
erty ríghts as unmarríed persons, wíth certaín e ceptíons. Those
acts díd not aboíísh estates by entíretíes but, due to the changes made,
neíther husband nor wífe couíd seíí even the e pectancy of survívor-
shíp ín such an estate wíthout the |oínder of the other, nor couíd a
vaííd títíe to the ímmedíate ínterest or e pectancy be obtaíned by a
sheríff s saíe or under proceedíngs ín bankruptcy. The court saíd ín
effect that íncome accruíng wíth respect to such property whííe the
grantees ííve beíongs to each of the two and not to one e cíusíveíy.
In víew of the foregoíng, ít ís heíd that husband and wífe hoídíng
property as tenants by the entírety ín the State of Pennsyívanía may
each report one-haíf of the íncome from such property ín theír sepa-
rate ederaí íncome ta returns. (See George . rennen v. Com-
míssíoner, 4 T. C, 1200, acquíescence, C. . 1945, 2, and I. T. 3743,
C. . 1945,142.)
Sectíon 29.51-1: Indívíduaí returns. 1946-4-12239
I. T. 37 4
INT RN L R NU COD .
husband and wífe who are domícííed In the Terrítory of awaíí
are entítíed to Incíude In theír separate ederaí íncome ta returns
one-haíf of theír communíty Income receíved or accrued on and after
une 1, 1045, the effectíve date of Chapter 301 of Títíe 32 of the
Revísed Laws of awaíí, 1945, reíatíng to communíty property
( . . No. 474, approved March 30,1945).
dvíce ís requested whether a husband and wífe who are domícííed
ín the Terrítory of awaíí may each report ín separate ederaí ín-
come ta returns one-haíf of theír communíty íncome receíved or ac-
crued after the effectíve date of Chapter 301 , Títíe 32, Revísed Laws
of awaíí, 1945, reíatíng to communíty property ( . . No. 474,
approved March 30, 1945).
Under the above-mentíoned awaíían statute a present vested one-
haíf ínterest ín the communíty property, as denned ín the statute, ís
gíven to the husband and a ííke ínterest to the wífe. There ís no eíec-
tíve or consensuaí provísíon ín the statute, and ít ís appíícabíe to aíí
husbands and wíves domícííed ín awaíí as an íncídent of marríage.
The índívíduaí powers of management, controí, and dísposítíon of the
communíty property gíven to the husband and wífe are specífícaííy
restrícted ín favor of the communíty ín severaí ímportant respects.
The ureau recognízes that the awaíían statute ín questíon satísfíes
the requírements of a communítv property system, as íaíd down by
the Supreme Court of the Uníted States ín Poe v. Seaborn (2 2 U. S.,
101, Ct. D. 259, C. . I -2,202 (1930)) and Commíssíoner v. armon
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29.51-1.
6
(323 U. S., 44, Ct. D. 1616, C. . 1944,166), so as to permít a husband
and wífe, domícííed ín awaíí, to íncíude ín theír separate ederaí
íncome ta returns one-haíf of theír communíty íncome.
In víew of the foregoíng, ít ís heíd that a husband and wífe who are
domícííed ín the Terrítory of awaíí are entítíed to íncíude ín theír
separate ederaí íncome ta returns one-haíf of theír communíty ín-
come receíved or accrued on and after une 1, 1945, the effectíve date
of Chapter 301 of Títíe 32 of the Revísed Laws of awaíí, 1945.
Sectíon 29.51-1: Indívíduaí returns. 1946- -122 9
I. T. 3792
INT RN L R NU COD .
Treatment for ederaí íncome ta purposes of varíous types of
íncome under the awaíían communíty property íaw (Chapter 301 ,
Títíe 32, Revísed Laws of awaíí, 1945).
I. T. 37S4 (page 5, thís uííetín) appííed and ampíífíed.
dvíce ís requested wíth respect to the treatment for ederaí íncome
ta purposes of varíous types of íncome under the awaíían commu-
níty property íaw (Chapter 301 . Títíe 32, Revísed Laws of awaíí.
1945) ín connectíon wíth the appíícatíon of I. T. 37 4 (page 5, thís
uííetín). That ruííng hoíds that a husband and wífe who are domí-
cííed ín the Terrítory of awaíí are entítíed to íncíude ín theír separate
ederaí íncome ta returns one-haíf of theír communíty íncome re-
ceíved or accrued on and after une 1, 1945, the effectíve date of the
awaíían communíty property íaw. The types of íncome wíth
respect to whích ínquíry ís made are as foííows:
1. Compensatíon receíved on or after une 1,1945, the effectíve date
of the awaíían communíty property íaw, for servíces rendered príor
to that date ín the case of a husband and wífe domícííed ín the Terrí-
tory of awaíí who fííe caíendar year returns on the cash receípts and
dísbursements basís.
2. Income receíved from partnershíp net earníngs for períods ended
príor to une 1,1945, and for períods begínníng on or after that date
where the partnershíp keeps accounts and fííes ederaí íncome ta
returns on the caíendar year and the cash receípts and dísbursements
basís.
3. Communíty íncome receíved on or after une 1,1945, ín the case
of a husband and wífe domícííed ín the Terrítory of awaíí who have
heretofore fííed separate ederaí íncome ta returns and desíre, to
contínue such practíce, each reportíng oníy hís or her actuaí íncome
and dísregardíng the communíty íncome.
The posítíon of the ureau wíth respect to the three sítuatíons pre-
sented ís as foííows:
1. In the case of a husband and wífe domícííed ín the Terrítory of
awaíí who fííe caíendar year returns on the cash receípts and dís-
bursements basís, compensatíon for servíces rendered príor to une 1,
1945, the effectíve date of the awaíían communíty property íaw,
constítutes separate íncome for ederaí íncome ta purposes, even
though such compensatíon ís receíved on or after that date. (See
Wríghtsman v. Commíssíoner, 111 ed. (2d), 227.)
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5 29.51-1.
2. In the case of a partnershíp whích keeps accounts and fííes ed-
eraí íncome ta returns on a caíendar year and cash receípts and dís-
bursements basís, íncome representíng partnershíp net earníngs for
períods ended príor to une í 1945, constítutes separate íncome, but
íncome representíng partnershíp net earníngs for períods begínníng on
or after une 1, 1945, constítutes communíty íncome. (See Wríghts-
man v. Commíssíoner, supra I. T. 1576, C. . II-í, 144 (1923) íbert
. ouston v. Commíssíoner, 31 . T. ., 1 Uníted States v.
Covíby, 251 ed., 9 2, T. D. 2 5 , C. . 1, 166 (1919), affírmed, 25
ed., 27.)
3. The íssue here ís whether ín awaíí a husband and wífe may by
agreement eíect out of the communíty property system, partícuíaríy
as to future íncome from personaí servíces and property. Sectíon
12366 of the Revísed Laws of awaíí, 1945, provídes as foííows:
Contracts. marríed woman may make contracts, oraí and wrítten, seaíed
and unseaíed, ín the same manner as íf sue were soíe, e cept that she shaíí not
contract wíth her husband províded, however, that any deed or assígnment
e ecuted by eíther husband or wífe to or ín favor of the other, and any agree-
ment e ecuted by husband and wífe settííng theír respectíve ríghts In property
owned by them or eíther of them when such agreement ís made ín contempíatíon
of dívorce or |udícíaí separatíon, shaíí be vaííd to the same e tent as bettcecn
other persons. Itaíícs suppííed.
Sectíon 7 of the awaíían communíty property íaw provídes as foí-
íows:
Sec. 7. Transfers € ” usband to wífe and wífe to husband. The husband may
gíve, grant, bargaín, seíí or convey dírectíy to hís wífe, and the wífe may gíve,
grant, bargaín, seíí or convey dírectíy to her husband, hís or her communíty
ríght, títíe, Interest, or estate ín aíí or any communíty property, reaí or personaí.
very such transfer made from the husband to the wífe or from the wífe to the
husband shaíí operate to dívest the property thereín descríbed of every cíaím
or demand as communíty property, and shaíí vest the same ín the transferee as
the separate property of the transferee províded, however, that no such transfer
shaíí affect any equíty ín favor of credítors at the tíme of such transfer.
Where a husband and wífe domícííed ín the Terrítory of awaíí
fííe separate ederaí íncome ta returns, the husband ís requíred to
íncíude hís share of communíty íncome ín the gross íncome reported
ín hís separate return, and the wífe must íncíude her share of the com-
muníty íncome ín her separate return. owever, ín víew of the pro-
vísíons of sectíon 12366 of the Revísed Laws of awaíí, 1945, supra,
and sectíon 7 of the awaíían communíty property íaw, supra, an
agreement between such a husband and wífe whích provídes that the
earníngs of eíther, or the íncome from the separate property of eíther,
shaíí be the separate íncome of the spouse whose íabor or property
produced the íncome wííí be recognízed for- ederaí íncome ta pur-
poses. (See G. C. M. 1 4, C. . 1937-2, 5 eíveríng v. íckman,
70 ed. (2d) , 9 5, Ct. D. 66, C. . III-2, 274 (1934) an ven/ v.
Commíssíoner, 10 ed. (2d), 650, certíorarí deníed, 309 U. S., 6 9
and Sparkman v. Commíssíoner, 112 ed. (2d), 774.) The cíted cases
ínvoíve the íaw of Caíífornía whích ís símííar to the íaw of awaíí
ín so far as ít reíates to assígnments of communíty property ínterests
between husband and wífe.
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55.
S
Sectíon 29.51-1: Indívíduaí returns. 1946-9-12299
I. T. 3796
INT RN L R NU COD .
usband and wífe hoídíng property as tenants by the entírety
ín the Dístríct of Coíumbía may each report one-haíf of the íncome
from such property ín theír separate ederaí íncome ta returns.
dvíce ís requested as to the proper treatment for ederaí íncome
ta purposes of íncome from property heíd by husband and wífe as
tenants by the entírety ín the Dístríct of Coíumbía.
Tenancíes by the entírety are recognízed ín the Dístríct of Co-
íumbía. (See Loughran v. Lemmon, 19 pp. D. C, 141: Settíe v.
Settíe, ed. (2d), 911, 56 pp. D. C, 50 erb v. Gerstem, 41 ed.
Supp., 634.) In aírcíaw v. orrest (130 ed. (2d), 29, 76 U. S.
pp. D. C, 197), whích ínvoíved an estate by the entírety, the Uníted
States Court of ppeaís for the Dístríct of Coíumbía stated, ínter
aíía, that the effect of the marríed woman s property íaw (16 Stat.,
45) has been to change the common-íaw príncípíe of marítaí uníty
so that the husband can not assert an e cíusíve ríght to the rents
and profíts of hís wífe s property, or dívest hís wífe of her share
dírectíy by conveyance or índírectíy by e ecutíon. In effect, the
court stated that, wíth respect to an estate by the entírety, each spouse
ís entítíed to the en|oyment and benefíts of the whoíe and neíther has
a separate estate thereín whích may be sub|ected to a conveyance or
e ecutíon. (See merícan Whoíesaíe Corporatíon v. ronsteín, 10
ed. (2d), 991, 56 pp. D. C, 126.)
The íaws of the States of Pennsyívanía and Oregon whích reíate
to tenancíes by the entírety are not materíaííy dífferent from the
íaw of the Dístríct of Coíumbía, and ít has been heíd that husbands
and wíves hoídíng property ín those States as tenants by the entírety
may each report one-haíf of the íncome from such property ín theír
separate ederaí íncome ta returns. (See I. T. 37 3, page 4, thís
uííetín, and I. T. 3743, C. . 1945,142, respectíveíy.)
In víew of the foregoíng, ít ís heíd that husband and wífe hoídíng
property as tenants by the entírety ín the Dístríct of Coíumbía may
each report one-haíf of the íncome from such property ín theír sep-
arate ederaí íncome 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.
Reguíatíons governíng the ínspectíon of íncome, e cess-profíts,
and decíared vaíue e cess-profíts ta returns by the War Contracts
Príce d|ustment oard.
Treasury Department,
Washíngton 25, D. C.
To Coííectors of Internaí Revenue and Others Concerned:
Pursuant to the provísíons of sectíons 55(a), 50 , 603, and 729(a)
of the Internaí Revenue Code, íncome, e cess-profíts, and decíared
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9
55.
vaíue e cess-profíts ta returns made under the Internaí Revenue
Code, as amended, for the year 1939 and subsequent 37ears, shaíí be
open to ínspectíon by the War Contracts Príce d|ustment oard.
The ínspectíon of such returns hereín authorízed may be made by
any offícer or empíoyee of such oard duíy authorízed by the Chaír-
man of the oard to make such ínspectíon. Upon wrítten notíce by
the Chaírman to the Secretary of the Treasury statíng the cíasses
of returns whích ít ís desíred to ínspect, the Secretary of the Treasury
and any offícer or empíoyee of the Treasury Department, wíth the
approvaí of the Secretary of the Treasury, may furnísh the oard
wíth any data on such returns or make the returns, or any of them,
avaííabíe ín the offíce of the Commíssíoner of Internaí Revenue for
ínspectíon, and takíng of such data as the Chaírman may desígnate.
The ínformatíon so obtaíned may be pubííshed or díscíosed ín statís-
tícaí form, províded such pubíícatíon does not díscíose, dírectíy or
índírectíy, the name or address of any ta paver.
( . O. 9694, ebruary 6, 1946, and sectíons 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. ínson,
Secretary of the Treasury.
pproved ebruary 6, 1946.
arry S. Truman,
The Whíte ouse.
( ííed wíth the Dívísíon of the ederaí Regíster ebruary 6, 1946, 11.06 a. m.)
e ecutíve: order € ” ínspectíon of íncome, e cess-profíts, and decíared
vaíue e cess-profíts ta returns by the war contracts tríce
ad|ustment board.
y vírtue of the authoríty vested ín me by sectíons 55(a), 50 , 603,
and 729(a) of the Internaí Revenue Code (53 Stat., 1, 29, 111 54
Stat., 974, 9 9), ít ís hereby ordered that íncome, e cess-profíts, and
decíared vaíue e cess-profíts ta returns made under the Internaí
Revenue Code for the year 1939 and subsequent years, shaíí be open
to ínspectíon by the War Contracts Príce d|ustment oard, sub|ect
to the condítíons stated ín the Treasury decísíon reíatíng to the ín-
spectíon of such returns by such oard approved by me thís date.
Thís Order shaíí be pubííshed ín the ederaí Regíster.
arry S. Truman,
The Whíte ouse.
ebruary 6,1946.
( ííed wíth the Dívísíon of the ederaí Regíster ebruary 6, 1046, 11.06 a. m.)
703672 € ” 46 7
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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
Mím. 59 0
Computatíon of corporatíon íncome ta províded by sectíon 10 of
the Internaí Revenue Code, as amended by sectíon 131(a) of the
Revenue ct of 1945, and e cess profíts ta as províded by sectíon
710(a) of the Internaí Revenue Code, as amended by sectíon 131(b)
of the Revenue ct of 1945, wíth respect to físcaí year ta payers.
Treasury Department,
Offíce of Commíssíoner of Internaí Revenue,
Washíngton 25, D. C, anuary 31, 1946.
Coííectors of Internaí Revenue, Internaí Revenue gents ín Charge,
and Others Concerned:
1. The Revenue ct of 1945 contaíns a specíaí provísíon for deter-
míníng the effect of the ta reductíon províded ín such ct ín the case
of a corporatíon makíng a return on the basís of a ta abíe year
begínníng ín 1945 and endíng ín 1946. New return forms wííí not be
prínted tor the computatíon of íncome ta , decíared vaíue e cess-
profíts ta , or e cess profíts ta by a corporatíon computíng íts íncome
and makíng íts return on a físcaí year basís. owever, such a cor-
poratíon may use the appíícabíe corporatíon forms and ínstructíons
for 1945, currentíy avaííabíe, suppíemented by the ínstructíons con-
taíned hereín, to determíne íts ta ííabíííty by gívíng effect to the
appíícabíe provísíons of íaw contaíned ín the Internaí Revenue Code,
as amended by the Revenue ct of 1945.
2. Sectíon 131 of the Revenue ct of 1945 (Pubííc Law 214, Seventy-
nínth Congress, fírst sessíon) amends sectíon 10 of the Internaí
Revenue Code by addíng a new subsectíon desígnated (c). Sectíon
10 (c) of the Code provídes, wíth respect to a corporatíon, that ín the
case of a ta abíe year begínníng ín 1945 and endíng ín 1946, the ta
ímposed by sectíons 13, 14, and 15 of the Code shaíí be an amount
equaí to the sum of € ”
(1) that portíon of a tentatíve ta , computed as íf the íaw ap-
píícabíe to ta abíe years begínníng on anuary 1, 1945, were ap-
píícabíe to such ta abíe 37ear, whích the number of days ín such
ta abíe year príor to anuary 1, 1940, bears to the totaí number
of days ín such ta abíe year, píus
(2) that portíon of a tentatíve ta , computed as íf the íaw
appíícabíe to years begínníng on anuary 1,194G, were appíícabíe
to such ta abíe year, whích the number of days ín such ta abíe
year after December 31,1945, bears to the totaí number of days ín
such ta abíe year.
3. The specíaí ruíe prescríbed ín sectíon 10 (c) of the Code for the
computatíon of the ta ímposed by sectíons 13, 14, and 15 of the
Code ín the case of a ta abíe year begínníng ín 1945 and endíng ín
1946 ís to be appííed to ascertaín € ”
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91
10 .
(a) the fírst tentatíve normaí ta and surta , computed as íf
the íaw appíícabíe to ta abíe years begínníng on anuary 1,1945,
were appíícabíe to such ta abíe | ear,
(6) the second tentatíve normaí ta and surta , computed as
íf the íaw appíícabíe to years begínníng on anuary 1, 1946, were
appíícabíe to such ta abíe year,
(c) that portíon of the fírst tentatíve normaí ta and surta ,
computed as set forth ín (a) above, whích the number of days ín
such ta abíe 3 ear príor to anuary 1, 194G, bears to the totaí
number of days ín such ta abíe year,
(d) that portíon of the second tentatíve normaí ta and surta ,
computed as set forth ín (b) above, whích the number of days
after December 31,1945, bears to the totaí number of days ín such
ta abíe year, and
(e) the amount equaí to the sum of (c) and (d).
4. Computatíon of fírst tentatíve normaí ta and surta . € ” Corpora-
tíon Income and Decíared aíue cess-Profíts Ta Return, orm
1120 for 1945, shouíd be used as a guíde to compute the fírst tentatíve
normaí ta and surta specífíed ín sectíon 10 (c) ) of the Code.
Wíth respect to the computatíon of such ta , the ítems, íínes, and
scheduíes appearíng on orm 1120 for 1945 may be used wíthout
change ín the numberíng or arrangement of such ítems, íínes, and
scheduíes. Líkewíse, the ínstructíons reíatíng to each ítem, ííne, and
scheduíe may be appííed wíth respect to the computatíon of such ta .
The fírst tentatíve normaí ta and surta wííí correspond wíth an
amount whích otherwíse wouíd be entered on ííne 27, page 2 of such
form. In cases ín whích an aíternatíve ta ís computed under the
provísíons of sectíon 117(c) of the Code, see paragraph 7 for further
ínstructíons.
5. Computatíon of second tentatíve normaí ta and surta . € ” The
Revenue ct of 1945 contaíns certaín provísíons whích must be taken
ínto consíderatíon before computíng the second tentatíve normaí ta
and surta for the reason that such ta must be computed as íf the
íaw appíícabíe to a year begínníng on anuarv 1,1946, were appíícabíe
to a ta abíe year begínníng ín 1945 and endíng ín 1946. Therefore,
certaín changes must be made on orm 1120 for 1945 to gíve effect to
the provísíons of the Revenue ct of 1945 whích are appíícabíe to a
ta abíe year begínníng on anuary 1, 1946. Such changes are set
forth beíow:
Page 1:
Stríke out ítem 39. d|usted e cess profíts net íncome from
orm 1121. (See ínstructíon on page .)
Stríke out mínus ítem 39 appearíng ín ítem 40..
Page 2:
Stríke out ííne 1 . d|usted e cess profíts net íncome (ítem
39, page 1).
Stríke out mínus 1 appearíng ín ííne 19.
mend the foííowíng numbered íínes to read € ”
Per cent.
Líne 22. Portíon of ííne 21 (not In e cess of 25,000) and ta at 6 per
cent (or per cent In the case of a consoíídated return) 6
Líne 26. Surta (14 per cent of ííne 25) (or 10 per cent ín the case of a
consoíídated return) 14
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10 .
92
orm 1120 for 1945, amended ín accordance wíth the changes set
forth above, may be used to compute the second tentatíve normaí ta
and surta specífíed ín sectíon 10 (c)(2) of the Code. The ínstruc-
tíons reíatíng to each ítem, ííne, and scheduíe, e cept as affected by the
provísíons of thís mímeograph, are appíícabíe wíth respect to the com-
putatíon of such ta . The second tentatíve ta as so computed wííí
correspond wíth an amount whích otherwíse wouíd be entered on ííne
27, page 2 of such form. In cases ín whích an aíternatíve ta ís com-
puted under the provísíons of sectíon 117(c) of the Code, see paragraph
7 for further ínstructíons.
6. Computatíon of normaí ta and surta . € ” The normaí ta and sur-
ta for a ta abíe year begínníng ín 1945 and endíng ín 194G wííí be the
sum of the foííowíng € ”
(a) that portíon of the fírst tentatíve normaí ta and surta ,
computed as set forth ín paragraph 4, whích ís obtaíned by muítí-
píyíng the amount of such tentatíve ta by the number of days ín
the ta abíe year príor to anuary 1, 1946, and dívídíng the resuít
thus obtaíned by the number of days ín such ta abíe year, and
(b) that portíon of the second tentatíve normaí ta and surta
computed as set forth ín paragraph 5, whích ís obtaíned by muítí-
píyíng the amount of such tentatíve ta by the number of days ín
the ta abíe year after December 31,1945, and by dívídíng the resuít
thus obtaíned by the number of days ín the ta abíe year.
The sum of the respectíve portíons of the fírst and second tentatíve
normaí ta es and surta es wííí correspond wítíí an amount whích other-
wíse wouíd be entered on ííne 2 , page 2 of orm 1120 for 1945, ín cases
ín whích the aíternatíve ta under sectíon 117(c) of the Code ís not
appíícabíe.
7. Computatíon of aíternatíve ta on Scheduíe C orm 1120). € ” (a)
In generaí. € ” In any case ín whích a corporatíon has a net íong-term
capítaí gaín, or an e cess of net íong-term capítaí gaíns over net short-
term capítaí íosses, the aíternatíve ta under sectíon 117(c) of the Code
for a ta abíe year begínníng ín 1945 and endíng ín 1946 wííí be an
amount equaí to the sum ot the portíon of the tentatíve ta es deter-
míned under the specíaí ruíe prescríbed ín sectíon 10 (c) of the Code
by computíng each such tentatíve ta ín accordance wíth the aíterna-
tíve ta computatíon províded ín sectíon 117(c) of the Code,, regardíess
of whether eíther tentatíve ta so computed on the aíternatíve basís ís
íarger or smaííer than the aíternatíve ta computed wíthout regard to
sectíon 117(c) of the Code.
(b) Computatíon of fírst tentatíve ta on aíternatíve basís. € ” Sched-
uíe C ( orm 1120) for 1945 may be used to compute the fírst tentatíve
ta on the. aíternatíve basís under sectíon 117(c) of the Code. The
fírst tentatíve ta so computed on the aíternatíve basís wííí correspond
wíth an amount whích otherwíse wouíd be entered on ííne 29, Scheduíe
C ( orm 1120) for 1945.
(c) Computatíon of second tentatíve ta on aíternatíve basís. € ”
Scheduíe C ( orm 1120) for 1945, changed to refíect the appíícatíon of
the provísíons of the Revenue ct of 1945, may be used for the pur-
pose of computíng the second tentatíve ta pursuant to the aíternatíve
computatíon províded ín sectíon 117(c) of the Code. The foííowíng
changes shouíd be made, ín Scheduíe C ( orm 1120) for 1945:
Líne 6: Stríke out Income sub|ect to e cess profíts ta (ítem 39,
page 1, orm 1120).
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10 .
Líne 7: Stríke out mínus ítem 39.
Líne 1 : Stríke out Income sub|ect to e cess profíts ta .
Líne 19: Stríke out mínus ííne 1 .
mend the foííowíng numbered íínes to read € ”
Per cent.
Líne 22. Portíon of ííne 21 (not In e cess of 25,000) and ta at 0 per cent
(or per cent In the case of a consoíídated return) 6
Líne 26. Surta (14 per cent of ííne 25) (or 16 per cent In the case of a
consoíídated return) 14
The second tentatíve ta so computed on the aíternatíve basís wííí
correspond wíth an amount whích otherwíse wouíd be entered on ííne
29 of Scheduíe C ( orm 1120) for 1945.
(d) Determínatíon of aíternatíve ta . € ” The aíternatíve ta (ííne 29,
Scheduíe C ( orm 1120)) for a ta abíe year begínníng ín 1945 and
endíng ín 1946, wííí be the sum of the foííowíng:
(í) that portíon of the fírst tentatíve ta on the aíternatíve
basís, computed as set forth ín (b) above, whích ís obtaíned by
muítípíyíng the amount of such tentatíve ta by the number of
days ín the ta abíe year príor to anuary 1, 194C, and dívídíng
the resuít thus obtaíned by the number of days ín the ta abíe
year and
(íí) that portíon of the second tentatíve ta on the aíternatíve
basís, computed as set forth ín (c) above, whích ís obtaíned by
muítípíyíng the amount of such tentatíve ta by the number of
days ín the ta abíe year after December 31,1945, and by dívídíng
the resuít thus obtaíned by the number of days ín the ta abíe year.
(e) Determínatíon of ta ííabíííty. € ” The ta ííabíííty for a ta abíe
year begínníng ín 1945 and endíng ín 1946 ín the case of a ta payer
havíng a. net íong-term capítaí gaín, or an e cess of net íong-term
capítaí gaíns over net short-term capítaí íosses, wííí be the totaí normaí
ta and surta as determíned under paragraph 6, or the aíternatíve
ta as determíned under subparagraph (d). above, whíchever ís the
íesser. Such ta wííí be an amount whích otherwíse wouíd be entered
on ííne 31, Scheduíe G ( orm 1120), and on ííne 2 , page 2 of orm
1120 for 1945.
. Totaí íncome ta . € ” The totaí íncome ta as determíned under
paragraph 6, or paragraph 7(e), as the case may be, wííí correspond
to an amount whích otherwíse wouíd be entered as ítem 42, page 1
of orm 1120 for 1945.
9. ppíícatíon of credít for íncome ta es paíd to a foreígn country
or Uníted States possessíon. € ” The credít for ta es ín the case of a cor-
poratíon sub|ect to the provísíons of sectíon 10 (c) of the Code shaíí
be deducted from, and any íímítatíons contaíned ín such credít shaíí
be based upon, the totaí íncome ta as determíned under paragraph .
10. Decíared vaíue e cess-profíts ta computatíon. € ” The provísíons
of sectíon 10 (c) of the Code are not appíícabíe wíth respect to the
computatíon of the decíared vaíue e cess-profíts ta . owever, sec-
tíon 201 of the Revenue ct of 1945 repeaíed Chapter 6 (ímposíng
the capítaí stock ta ), effectíve wíth respect to years endíng after
une 30, 1945, and sectíon 202 of the Revenue ct of 1945 repeaíed
Subchapter of Chapter 2 (ímposíng the decíared vaíue e cess-profíts
ta ), effectíve wíth respect to íncome-ta ta abíe years endíng after
une 30,1946. ccordíngíy, the decíared vaíue e cess-profíts ta com-
putatíon scheduíe on page 2, contaíníng íínes 1 to , íncíusíve, ís not
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10 .
94
appíícabíe ín the case of an íncome-ta ta abíe year endíng after
une 30,1946.
Wíth respect to the computatíon of the decíared vaíue e cess-profíts
ta for an íncome-ta ta abíe year endíng after une 30, 1945, and
before uíy 1, 1946, sectíon 203 of the Revenue ct of 1945 amends
sectíon 600 of the Code by addíng a new subsectíon, desígnated (b),
to províde for an aíternatíve decíared vaíue e cess-profíts ta com-
putatíon ín a case ín whích the net íncome for the purposes of the
, decíared vaíue e cess-profíts ta íncíudes any amount on account of
war íoss recoveríes under sectíon 127(c) of the Code.
The aíternatíve decíared vaíue e cess-profíts ta computed under
sectíon 600(b) of the Code ís ín ííeu of the decíared vaíue e cess-
profíts ta ímposed by sectíon 600(a) of the Code and shouíd be
computed íf the net íncome for the ta abíe year íncíudes any amount
wíth respect to war íoss recoveríes. or any such íncome-ta ta abíe
year, thís aíternatíve decíared vaíue e cess-profíts ta ís an amount
computed under sectíon 600(a) of the Code (see íínes 1 to , íncíusíve,
page 2 of orm 1120 for 1945) after e cíusíon from net íncome of
the amount of the war íoss recoveríes, píus the íesser of the foííowíng
amounts € ”
(a) I í per cent of the amount of the war íoss recoveríes ín-
cíuded ín the net íncome, or
(b) 11/4 per cent of such portíon of the net íncome whích
wouíd be sub|ect to ta under sectíon 600(a) of the Code com-
puted wíthout regard to sectíon 600(b) of the Code.
In those cases ín whích the aíternatíve decíared vaíue e cess-profíts
ta ís appíícabíe, the amount of such ta shouíd be entered on ííne ,
page 2 of orm 1120 for 1945.
11. Preparatíon of returns on orm 1120. € ” Corporatíon Income
and Decíared aíue cess-Profíts Ta Return, orm 1120 for 1945,
shouíd be used for the purpose of makíng and fíííng a return for a
ta abíe year begínníng ín 1945 and endíng ín 1946. fter gívíng
effect to the ruíes set forth ín the precedíng paragraphs, the form to be
fííed wíth the coííector of ínternaí revenue shouíd contaín € ”
(a) The computatíon of the normaí-ta net íncome (ítems 1 to
41, íncíusíve, page 1) whích may be made by fííííng ín aíí appíí-
cabíe ítems and scheduíes.
(b) On íínes 9 to 2 , íncíusíve, page 2, the computatíon of the
fírst tentatíve ta . owever, ííne 2 shouíd be amended by ín-
sertíng írst Tentatíve Ta after the descríptíon of the ítem.
(c) The amounts wíth respect to the computatíon of the totaí
íncome and decíared vaíue e cess-profíts ta es, ítems 42 to 46,
íncíusíve, page 1.
(d) nswers to questíons, and data wíth respect to Scheduíes
L, M, and N. owever, the ínformatíon reíatíng to Scheduíe N
shouíd be suppííed oníy ín ínstances ín whích the ínstructíon
stated beíow ís appíícabíe rather than the ínstructíon stated ín
ítem (d) under the headíng cess Profíts Ta on page 4 of
orm 1120 for 1945. Such ítem shouíd read as foííows:
(d) If an e cess profít ta return ís not beíng fííed for the reason that It
Is cíaímed that the e cess profíts net íncome computed under the ínvested
capítaí method ís not greater than 10,000, the foííowíng scheduíe shouíd
be fíííed ín. The compíetíon of Scheduíe N does not constítute the fíííng of
an e cess profíts ta return.
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93
10 .
There shouíd be attached to and made a part of such return appíí-
cabíe scheduíes showíng the computatíon of € ”
( ) Second tentatíve normaí ta and surta ín accordance wíth
ínstructíons contaíned ín paragraph 5,
( ) Normaí ta and surta ín accordance wíth ínstructíons
contaíned ín paragraph 6,.
(C) írst tentatíve ta on aíternatíve basís on Scheduíe C
( orm 1120) ín accordance wíth ínstructíons contaíned ín para-
graph 7(6),
(D) Second tentatíve ta on aíternatíve basís ín accordance
wíth ínstructíons contaíned ín paragraph 7(c),
( ) íternatíve ta ín accordance wíth ínstructíons contaíned
ín paragraph 7(d), and
( ) íternatíve decíared vaíue e cess-profíts ta ín cases ín
whích war íoss recoveríes are íncíuded ín net íncome. (See para-
graph 10.)
12. Computatíon of e cess profíts ta . € ” Sectíon 122(a) of the Rev-
enue ct of 1945 provídes that Subchapter of Chapter 2 of the
Code, reíatíng to the e cess profíts ta , shaíí not be appíícabíe wíth
respect to any ta abíe year begínníng after December 31, 1945. Sec-
tíon 131(b) of the Revenue ct of 1945 added a new paragraph, des-
ígnated (7), to sectíon 710(a) of the Code to províde for the compu-
tatíon of the e cess profíts ta for ta abíe years begínníng ín 1945
and endíng ín 1946. In such cases, the ta wííí be an amount equaí
to that portíon of a tentatíve ta , computed as íf the íaw appíícabíe
to ta abíe years begínníng on anuary 1, 1945, were appíícabíe to
such ta abíe year, whích the number of days ín such ta abíe year
príor to anuary 1, 1946, bears to the totaí number of days ín such
ta abíe year.
Corporatíon cess Profíts Ta Return, orm 1121 for 1945, shouíd
be used for the purpose of makíng and fíííng an e cess profíts ta
return for a ta abíe year begínníng ín 1945 and endíng ín 1946.
Wíth respect to the computatíon of such ta , the ítems, íínes, and
scheduíes appearíng on orm 1121 for 1945 mav be used wíthout
change ín the numberíng or arrangement of such ítems, íínes, and
scheduíes.
In any case ín whích a deferment under sectíon 710(a) (5) of the
Code ís cíaímed, the tentatíve e cess profíts ta determíned under
sectíon 710(a) (7) of the Code, whích ís to be prorated ín the determí-
natíon of the e cess profíts ta under such sectíon, wííí be the e cess
rofíts ta after deductíon of the ta deferment províded ín sectíon
10(a)(5) of the Code. In determíníng the appíícabíííty of sectíon
710(a)(5) of the Code wíth respect to the tentatíve e cess profíts,
ta computatíon, the ad|usted e cess profíts net íncome wííí be the
ad|usted e cess profíts net íncome computed under sectíon 710(a) (7)
of the Code, and the normaí-ta net íncome wííí be the normaí-ta net
íncome computed under sectíon 10 (c) (1) of the Code. The amount
by whích the tentatíve ta may be reduced wííí be an amount equaí
to 33 per cent of the amount by whích the tentatíve e cess profíts ta
computed wíthout the benefíts of sectíon 722 of the Code e ceeds the
amount of such tentatíve e cess profíts ta computed by usíng the
e cess profíts credít based upon a constructíve average base períod net
íncome cíaímed by the ta payer under sectíon 722 of the Code ín ííeu
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29.112(0-1.
of the actuaí credít. In such cases the return form wííí refíect ín ítem
16, page 1, the amount of the tentatíve e cess profíts ta computed
wíthout regard to the amount deferred by reason of the appíícatíon
of sectíon 710(a) (5) of the Code. The amount of the ta deferment
under such sectíon, computed as índícated above, shouíd be entered as
ítem 17, page 1.
The amount of e cess profíts ta whích shouíd be entered as ítem
1 (a), page 1, wííí not ín any case be the dífference between ítem 3
and ítem 17, as stated on the return form, but wííí be an amount de-
termíned by subtractíng ítem 17 from ítem 16, muítípíyíng the díf-
ference by the number of days ín such ta abíe year príor to anuary 1,
1946, and dívídíng the resuít by the number of days ín the ta abíe
year. The basíc fígures enteríng ínto such computatíon shouíd be ín-
serted ín the space foííowíng the descríptíon of ítem 1 (a), page 1.
íí appíícabíe ítems on page 1 appearíng beíow ítem 1 (6) shouíd
be computed as dírected and the amounts entered ín the appropríate
spaces.
In cases ín whích a scheduíe ís submítted under questíon (g), pago
2 of orm 1121, the amount of e cess profíts ta whích otherwíse wouíd
be entered as ítem 1 (6), page 1, shouíd be muítípííed by the number
of days ín the ta abíe year príor to anuary 1, 1946, and dívíded by
the number of days ín the ta abíe year. The amount so computed
shouíd be entered as ítem 1 (6), page 1, and aíí appíícabíe ítems on
page 1 foííowíng ítem 1 (6) shouíd be computed as dírected and the
amounts entered ín the appropríate spaces.
13. Correspondence reíatíng to the provísíons of thís mímeograph
shouíd refer to íts number and the symboís IT: C .
oseph D. Nunan, r.,
S CTION 112(f). € ” R COGNITION O G IN OR LOSS:
IN OLUNT RY CON RSIONS.
Where money receíved by a íessee as an award for damages from
condemnatíon of the íeased property by the Uníted States ís ínvested
ín the constructíon of a buíídíng upon íand owned by the ta payer
(íessee), and such buíídíng ís to be devoted to the same busíness
whích was formeríy conducted on the condemned property, the ín-
vestment constítutes an acquísítíon of property símííar or reíated ín
servíce or use to the property condemned wíthín the meaníng of
sectíon 112(f) of the Internaí Revenue Code, and any gaín resuítíng
from the condemnatíon wííí not be recognízed for ederaí íncome
ta purposes. Where the award money ís Invested ín machínery or
equípment, the ínvestment does not constítute an acquísítíon of prop-
erty símííar or reíated ín servíce or use to the property condemned,
and any gaín resuítíng from the condemnatíon wííí be recognízed for
ederaí íncome ta purposes.
dvíce ís requested whether gaín wííí be recognízed under sectíon
112(f) of the Internaí Revenue Code íf money receíved by a íessee as
SUPPL M NT . € ” COMPUT TION OP N T INCOM .
Sectíon 29.112(f)-í: Reínvestment of proceeds
of ínvoíuntary conversíon.
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 condemnatíon of the íeased property by
the Uníted States ís ínvested (1) ín the constructíon of a buíídíng
upon íand owned by the ta payer (íessee), such buíídíng to be devoted
to the same busíness whích was formeríy conducted on the condemned
property, or (2) ín machínery or equípment.
In 193 the ta payer íeased certaín property for a term of years,
ínstaííed machínery and other equípment thereín, and used the prem-
íses for the manufacture of paperboard bo es untíí 1942, when the
Uníted States condemned the property for use as a munítíons píant.
fter e tended íítígatíon, the ta payer was awarded a substantíaí
sum representíng damages, ínterest, and costs, the amount of whích
has been kept ín a separate account. Sínce the condemnatíon, the
ta payer has operated a temporary píant as a wartíme e pedíent and
píans to díscontínue such operatíons as soon as materíaís for repíace-
ment become avaííabíe.
Sectíon 112(f) of the Code provídes ín part as foííows:
(f) Invoíuntary Conversíons. € ” If property (as a resuít of Its destructíon ín
whoíe or In part, theft or seízure, or an e ercíse of the power of requísítíon or
condemnatíon, or the threat or Immínence thereof) ís compuísorííy or ínvoíun-
tarííy converted Into property símííar or reíated ín servíce or use to the property
so converted, or ínto money whích ís forthwíth ín good faíth, under reguíatíons
prescríbed by the Commíssíoner wíth the approvaí of the Secretary, e pended
ín the acquísítíon of other property símííar or reíated ín servíce or use to the
property so converted, or ín the acquísítíon of controí of a corporatíon owníng
such other property, or ín the estabííshment of a repíacement fund, no gaín
shaíí be recognízed, but íoss shaíí be recognízed. € Itaíícs suppííed.
Sectíon 29.112(f)-í of Reguíatíons 111 provídes ín part as foííows:
In order to avaíí hímseíf of the benefíts of sectíon 112(f) ít Is not suffícíent for
the ta payer to show that subsequent to the receípt of money from a condemna-
tíon award he purchased other property símííar or reíated ín use. The ta payer
must trace the proceeds of the award Into the payments for the property so
purchased. It ís not necessary that the proceeds ba earmarked, but the ta -
payer must be abíe to prove that the same were actuaííy reínvested ín such other
property símííar or reíated ín use to the property converted. The benefíts of sec-
tíon 112(f) can not be e tended to a ta payer who does not purchase other prop-
erty símííar or reíated In servíce or use, notwíthstandíng the fact that there was
no other such property avaííabíe for purchase.
The oard of Ta ppeaís (now The Ta Court of the Uníted
States) heíd ín Davís Reguíator Co. v. Commíssíoner (36 . T. .,
437, acquíescence, C. . 1937-2, 7) that where the petítíoner soíd íts
íeasehoíd under threat of condemnatíon, and used the award money to
construct a buíídíng thereafter used to carry on the busíness conducted
on íts former premíses, the conversíon was an ínvoíuntary conversíon
wíthín the meaníng of sectíon 112(f) of the Revenue ct of 192 (cor-
respondíng to sectíon 112 (f) of the Code), and gaín ís not to be recog-
nízed on the portíon of the amount receíved whích vas e pended ín
the constructíon of the new buíídíng.
In víew of the foregoíng, ít ís heíd that where money receíved by a
íessee as an award for damages from condemnatíon of the íeased
property by the Uníted States ís ínvested ín the constructíon of a
buíídíng upon íand owned by the ta payer (íessee), and such buííd-
íng ís to be devoted to the same busíness whích was formeríy con-
ducted on the condemned property, the ínvestment constítutes an
acquísítíon of property símííar or reíated ín servíce or use to the prop-
erty condemned wíthín the meaníng of sectíon 112(f) of the Code, and
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29.113(a)-2.
9
any gaín resuítíng from the condemnatíon wííí not be recognízed for
ederaí íncome ta purposes. Where the award money ís ínvested ín
machínery or equípment, the ínvestment does not constítute an acquís
sítíon of property símííar or reíated ín servíce or use to the property
condemned, and any gaín resuítíng from the condemnatíon wííí be
recognízed for ederaí íncome 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 basís to be used by |oínt tenants, or by a survívíng |oínt tenant,
In computíng gaín or íoss from the saíe of property sítuated ín the
State of Mínnesota ís íts cost, as províded by sectíon 113(a) of the
Internaí Revenue Code, ad|usted ín accordance wíth the provísíons
of sectíon 113(b) of the Code.
Where property sítuated íu the State of Mínnesota ís heíd by a
husband and wífe as |oínt tenants and the husband pays ta es
thereon and ínterest on a mortgage wíth respect thereto, he may
deduct the fuíí amount of such ta es and ínterest ín hís separate
ederaí íncome ta return, províded no deductíon therefor ís cíaímed
by the wífe.
dvíce ís requested reíatíve to the basís to be used by |oínt tenants,
or by a survívíng |oínt tenant, ín computíng gaín or íoss from the saíe
of property sítuated ín the State of Mínnesota, and the deductíbíííty of
ta es and ínterest whích were paíd by the husband wíth respect to
property sítuated ín the State of Mínnesota and heíd by hím and hís
wífe as |oínt tenants.
Sectíons 073 and 074 of Mason s Mínnesota Statutes, 1927 (reíat-
íng to estates ín reaí property), províde as foííows:
073. Severaí and oínt states, tc. € ” states, ín respect to the number
and connectíon of theír owners, are dívíded ínto estates ín severaíty, ín |oínt
tenancy, and ín common the nature and propertíes of whích, respectíveíy, shaíí
contínue to be such as are now estabííshed by íaw, e cept so far as the same
may be modífíed by the provísíons of thís chapter.
074. states ín Common. € ” íí grants and devíces of íands, made to two or
more persons, shaíí be construed to create estates ín common, and not ín |oínt
tenancy, uníess e pressíy decíared to be ín |oínt tenancy. Thís sectíou shaíí not
appíy to mortgages, nor to devíses or grants made ín trust, or to e ecutors.
In G. C. M. 6G77 (C. . IIL-2, 172 (1929)) ít was heíd that the
basís for the determínatíon of gaín or íoss upon the saíe by the survív-
íng spouse of property sítuated ín Iííínoís, and heíd by the husband
and wífe as |oínt tenants, ís the cost of such property. That concíu-
síon was reached on the basís that under the common íaw each |oínt
tenant ís consídered as beíng seízed of the entíre estate, that upon the
death of one |oínt tenant hís ínterest does not pass to the survívor but
ceases, and that the entíre estate contínues ín the survívíng |oínt
tenant by ríght of survívorshíp. (See eíen G. Carpenter v. Com-
míssíoner, 27 . T. ., 2 2.)
Under the provísíons of sectíon 073 of Mason s Mínnesota Statutes,
supra, a |oínt tenancy between husband and wífe ís recognízed as an
Sectíon 29.113(a)-2: Generaí ruíe.
( íso Sectíon 23(b), Sectíon 29.23(b)-í Sec-
tíon 23(c), Sectíon 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 ín reaí property. Sínce, under such |oínt tenancy, the survívor
contínues as the owner of the property and does not succeed to the
ínterest of the deceased |oínt tenant by reason of death, the ruíe
e pressed ín G. C. M. 6677, supra, ís appíícabíe to property sítuated ín
the State of Mínnesota and heíd by a husband and wífe as |oínt tenants.
It ís heíd, therefore, that the basís to be used by |oínt tenants, or by
a survívíng |oínt tenant, ín computíng gaín or íoss from the saíe of
property sítuated ín the State of Mínnesota ís íts cost, as províded by
sectíon íí3(a) of the Internaí Revenue Code, ad|usted ín accordance
wíth sectíon 113(b) of the Code.
Wíth respect to the treatment of amounts whích the husband paíd as
ta es and as ínterest on a mortgage ín connectíon wíth property sít-
uated ín the State of Mínnesota and heíd by hím and hís wífe as |oínt
tenants, G. C. M. 15530 (C. . I -2,107 (1935)) hoíds that ín. a case
ín whích property ís heíd by husband and wífe as tenants by the en-
tíretíes, eíther spouse may deduct ín hís or her separate ederaí íncome
ta return the amount of ta es and ínterest paíd by such spouse duríng
the ta abíe year ín connectíon wíth such property, íf no part thereof
ís deducted as an accrued ítem by eíther spouse ín any ta abíe year.
Sínce ín a tenancy by entíretíes and ín a |oínt tenancy each spouse ís the
owner of an undívíded ínterest ín the entíre estate, the ruíe í pressed ín
G. C. M. 15530, supra, ís aíso appíícabíe to property heíd ín |oínt
tenancy.
ccordíngíy, ít ís heíd that where property sítuated ín the State of
Mínnesota ís heíd by a husband and wífe as |oínt tenants and the hus-
band pays ta es thereon and ínterest on a mortgage wíth respect
thereto, he may deduct the fuíí amount of such ta es and ínterest ín
hís separate ederaí íncome ta return, províded no deductíon therefor
ís cíaímed by the wífe.
S CTION 115. € ” DISTRI UTIONS Y CORPOR TIONS.
Sectíon 19.115-1: Dívídends.
Payments made by corporatíon to hoíders of corporate obíígatíons.
(See a. D. 1660, page 191.)
S CTION 116. € ” CLUSIONS ROM GROSS INCOM .
Cítízens of the Uníted States who are bona ríde resídents of a
foreígn country wíthín the meaníng of sectíon 116(a)(1) of the
Internaí Revenue Code do not íose that status by reason of absence
from the foreígn country whííe servíng ín the armed forces of the
Uníted States, and íf, upon termínatíon of such servíce, resídence ín
the foreígn country ís resumed and contínued for the remaínder of
the ta abíe year, the earned íncome of such cítízens from onrces
wíthout the Uníted States for the ta abíe year duríng whích such
resídence ís resumed ís e cíudíbíe from gross Income for ederaí ín-
come ta purposes.
INT RN L R NU COD .
Sectíon 29.116-1: arned íncome from sources
wíthout the Uníted States.
1946-9-12300
I. T. 3797
INT RN L R NU COD .
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29.116-2.1
100
dvíce ís requested wíth respect to the ta abíííty of earned íncome
from sources wíthout the Uníted States ín cases where the bona fíde
resídence of cítízens of the Uníted States ín a foreígn country ís
ínterrupted by servíce ín the armed forces of the Uníted States.
It appears that numerous Uníted States cítízens performíng serv-
íces and statíoned abroad for domestíc companíes nave, as a resuít
of such empíoyment, acquíred the status of bona fíde resídents of a
foreígn country for ederaí íncome ta purposes, and have served
for varyíng períods of tíme ín the armed forces of the Uníted States
duríng the present war. Upon díscharge from mííítary servíce, such
cítízens returned to the foreígn country and resumed theír empíoy-
ment there.
Under sectíon 116(a) (1) of the Internaí Revenue Code, a cítízen of
the Uníted States who estabííshes that he ís a bona fíde resídent of
a foreígn country or countríes duríng the entíre ta abíe year ís en-
títíed to e cíude from hís gross íncome amounts receíved from sources
wíthout the Uníted States whích constítute earned íncome, e cept
amounts paíd by the Uníted States or any agency thereof. íthough
a cítízen of the Uníted States takíng up resídence ín a foreígn country
duríng the course of a ta abíe year ís not entítíed to the Denefíts of
sectíon 116(a) (1) for such ta abíe year, nevertheíess, once bona fíde
foreígn resídence has been estabííshed, temporary absence therefrom
ín the Uníted States on vacatíon or busíness tríps wííí not necessarííy
depríve such cítízen of hís status as a bona fíde resídent of a foreígn
country. (See sectíon 29.116-1, Reguíatíons 111.)
There ís no specífíc provísíon ín the reguíatíons permíttíng reten-
tíon of the status of bona fíde resídent of a foreígn country by a
cítízen of the Uníted States ín the event of hís absence from the foreígn
country whííe servíng ín the armed forces of the Uníted States. ow-
ever, when such an índívíduaí who ís so absent returns to the foreígn
country upon beíng díscharged from the armed forces for the purpose
of resumíng hís resídence there, hís absence from the foreígn country
ís deemed to have been temporary, and such absence does not serve to
termínate the índívíduaí s status as a bona fíde resídent of a foreígn
country for íncome ta purposes.
In víew of the foregoíng, ít ís heíd that cítízens of the Uníted States
who are bona fíde resídents of a foreígn country wíthín the meaníng of
sectíon 116(a) (1) of the Internaí Revenue Code do not íose that status
by reason of absence from the foreígn country whííe servíng ín the
armed forces of the Uníted States, and íf, upon termínatíon of such
servíce, resídence ín the foreígn country ís resumed and contínued
for the remaínder of the ta abíe year, the earned íncome of such
cítízens from sources wíthout the Uníted States for the ta abíe year
duríng whích such resídence ís resumed ís e cíudíbíe from gross ín-
come for ederaí íncome ta purposes.
Sectíon 29.116-2: Income of foreígn governments, 1946-6-12263
ambassadors, and consuís. L T. 37 9
INT RN L R NU COD ND R NU CT O 101 .
ven though the stock of a corporatíon may be whoííy owned by a
foreígn government, the íncome of such a corporatíon ís not e empt
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101
í 29.117-1.
from ederaí ta atíon under sectíon 110(c) of the Internaí Revenue
Code.
O. D. 62 (C. . 3,124 (1920)) revoked.
Reconsíderatíon has been gíven to the questíon of ederaí ta atíon
of íncome of a corporatíon aíí of the stock of whích ís owned by a
foreígn government. Such reconsíderatíon íncíudes O. D. 62 (C. . 3,
124 (1920)), reíatíng to the ederaí íncome ta status of the Common-
weaíth ank of ustraíía under sectíon 213(b)(5) of the Revenue
ct of 191 . That sectíon of the Revenue ct of 191 corresponds
cíoseíy to sectíon 116(c) of the Internaí Revenue Code, as amended,
whích provídes as foííows:
S C. 116. CLUSIONS ROM GROSS INCOM .
In addítíon to the Items specífíed ín sectíon 22(b), the foííowíng Items shaíí
not be íncíuded In gross íncome and shaíí be e empt from ta atíon under thís
chapter:

(c) Income of oreígn Governments and of Internatíonaí Organízatíons. € ”
The Income of foreígn governments receíved from ínvestments ín the
Uníted States ín stocks, bonds, or other domestíc securítíes, owned by such
foreígn governments , or from ínterest on deposíts ín banks ín the
Uníted States of moneys beíongíng to such foreígn governments , or
from any other source wíthín the Uníted States.
In- O. D. 62 , supra, ít was heíd that the Commonweaíth ank of
ustraíía ís a governmentaí agency of the Commonweaíth of ustraíía
and e empt from íncome ta under sectíon 213(b) (5) of the Revenue
ct of 191 . It was heíd further that ínterest credíted to the account
of the bank by a domestíc corporatíon ís not sub|ect to the wíthhoídíng
provísíons of sectíon 237 of that ct.
It ís now the posítíon of the ureau that the benefíts of sectíon
116(c) of the Internaí Revenue Code, supra, can not be e tended to a
corporatíon whích ís whoííy owned by a foreígn government ínasmuch
as a corporatíon ís an entíty separate and dístínct from íts soíe stock-
hoíder. Therefore, the íncome of such a corporatíon ís not e empt
from ederaí ta atíon under sectíon 116(c) of the Code. O. D. 62 ,
supra, ís hereby revoked.
Pursuant to authoríty contaíned ín sectíon 3791(b) of the Internaí
Revenue Code, thís ruííng and the revocatíon of O. D. 62 , supra, wííí
be appííed wíthout retroactíve effect from and after príí 1, 1946,
sub|ect to the condítíon that no refund wííí be made of any íncome,
e cess profíts, and decíared vaíue e cess-profíts ta es whích may have
been paíd.
oseí h D. Nun an, r.,
Commíssíoner of Internaí Revenue.
pproved March 6,1946.
oseph . O Conneíí, r.,
ctíng Secretary of the Treasury.
S CTION 117. € ” C PIT L G INS ND LOSS S.
Sectíon 29.117-1: Meaníng 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 fínance company, buíídíng and íoan assocíatíon,
or an ínsurance company (other than a íífe ínsurance company)
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29.117-1.
102
whích ís offeríng for saíe parceís of reaí estate on whích ít has been
compeííed to forecíose, or personaí property taken over ín satísfac-
tíon of debts, ís not hoídíng property prímarííy for saíe to customers
ín the ordínary course of trade or busíness wíthín the
provísíons of sectíon 117(a)(1) of the Internaí Revenue Code and
correspondíng provísíons of príor revenue íaws. Gaíns or íosses
íncurred ín such saíes are to be treated as capítaí gaíns or íosses and
not as ordínary gaíns or íosses.
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 víew of the decísíon ín The anavkn aííey ank v. Commís-
síoner (4 T. C, 252, acquíescence, page 3, thís uííetín), G. C. M. 21497
(C. . 1939-2,1 7) has been reconsídered. That G. C. M. hoíds that a
bank, mortgage fínance company, or a buíídíng and íoan assocíatíon
whích ís offeríng for saíe parceís of reaí estate on whích ít has been
compeííed to forecíose ís hoídíng property prímarííy for saíe to cus-
tomers ín the ordínary course of trade or busíness wíthín
the provísíons of sectíons 117(b) of the Revenue cts of 1934 and 1936,
and that gaíns or íosses íncurred ín such saíes are to be treated as
ordínary gaíns or íosses and not as capítaí gaíns or íosses.
In connectíon wíth reconsíderatíon of G. C. M. 21497, ít was aíso
necessary to reconsíder I. T. 3336 (C. . 1939-2, 1 9), whích hoíds
that G. C. M. 21497 ís appíícabíe under símííar círcumstances to ínsur-
ance companíes other than íífe ínsurance companíes, and I. T. 3600
(C. . 1943. 369), whích hoíds, ín effect, that the príncípíe of G. C. M.
21497 ís appíícabíe to gaíns or íosses ín connectíon wíth saíes of per-
sonaí property taken over (by the desígnated ínstítutíons) ín satísfac-
tíon of debts.
Two of the questíons ínvoíved ín The amaíoha aííey ank v. Com-
míssíoner, supra, were whether three parceís of reaí estate acquíred
by the ta payer (petítíoner) ín forecíosure proceedíngs and fíve shares
of stock taken over as coííateraí for a íoan were capítaí assets wíthín
the purvíew of sectíon 117(a)(1) of the Internaí Revenue Code, as
orígínaííy enacted.
In the anawha aííey ank case, the ta payer was a corporatíon
engaged ín the bankíng busíness and organízed under the íaws of the
State of West írgínía. In compííance wíth a requírement of State
íaw that reaí estate acquíred ín satísfactíon of debts shouíd be dís-
posed of as quíckíy as practícabíe, the ta payer had estabííshed the
practíce of ímmedíateíy íístíng for saíe any reaí estate to whích ít
took títíe as a resuít of efforts to coííect upon íts íoans. In decídíng
that the three parceís of reaí estate soíd by the ta payer were capítaí
assets under sectíon 117(a) (1) of the Internaí Revenue Code, as orígí-
naííy enacted, the court stated that ít was unreasonabíe to concíude
that the ta payer, forbídden by State íaw from carryíng on a reaí
estate busíness, was actuaííy engaged ín that busíness and seíííng reaí
estate to customers ín the reguíar course thereof, mereíy because ít had
acquíred and soíd three parceís of reaí estate over a períod of two years
as an íncídent to the coííectíon or recovery of money íoaned by ít ín
the transactíon of íts reguíar bankíng busíness. or the reasons stated
by The Ta Court wíth respect to acquísítíon and saíe of the reaí es-
tate, the court aíso heíd that the shares of stock taken over as coííateraí
for a íoan were capítaí assets.
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103
29.124 10.
s índícated above, acquíescence ín the decísíon of The Ta Court
ín the anawha aííey ank case has been announced. ccordíngíy,
ít ís now the opíníon o,f thís offíce that a bank, mortgage fínance com-
pany, buíídíng and íoan assocíatíon, or an ínsurance company (other
than a íífe ínsurance company) whích ís offeríng for saíe parceís of
reaí estate on whích ít has been compeííed to forecíose, or personaí
property taken over ín satísfactíon of debts, ís not hoídíng property
prímarííy for saíe to customers ín the ordínary course of
trade or busíness wíthín the provísíons of sectíon 117(a) (1) of the
Internaí Revenue Code and correspondíng provísíons of príor revenue
íaws. Gaíns or íosses íncurred ín such saíes are to be treated as capítaí
gaíns or íosses and not as ordínary gaíns or íosses.
G. C M. 21497, supra, I. T. 3336, supra, and I. T. 3600, supra, are
ín confííct wíth the decísíon of The Ta Court ín The anawha aí-
íey ank v. Commíssíoner, supra, and the concíusíon reached hereín.
ccordíngíy, G. C. M. 21497 ís revoked, and ít ís recommended that
L T. 3336 and L T. 3G00 be revoked.
. P. Wencheí,
Chíef Counseí, ureau of Internaí Revenue.
Sectíon 29.117-1: Meaníng 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 ín víew of the recommendatíon ín G. C. M. 24910, page 101,
thís uííetín.
S CTION 124. € ” MORTIZ TION D DUCTION.
Sectíon 29.124-10: ppíícatíon for tentatíve 1946-7-1227
ad|ustments. T. D. 5500
( íso Sectíon 19.124-10, Reguíatíons 103.)
TITL 26 € ” INT RN L R NU . € ” C PT R I, SU C PT R , P RT 19 ND
P RT 29.
Reguíatíons 103 and 111 amended to conform to sectíon 7 of the
Ta d|ustment ct of 1945, reíatíng to tentatíve ad|ustments
wíth respect to amortízatíon deductíons.
Treasury Department,
Offíce of Commíssíoner of Internaí Revenue,
Washíngton, D. C.
To Coííectors of Internaí Revenue and Others Concerned:
In order to conform Reguíatíons 103 Part 19, Títíe 26, Code of
ederaí Reguíatíons, 1940 Sup. and Reguíatíons 111 Part 29, Títíe
26, Code of ederaí Reguíatíons, Cum. Sup. to sectíon 7 of the Ta
d|ustment ct of 1945 (Pubííc Law 172, Seventy-nínth Congress),
approved uíy 31,1945, such reguíatíons are amended as foííows:
Paragraph 1. There ís ínserted ímmedíateíy precedíng sectíon
19.124-0 of Reguíatíons 103 and sectíon 29.124-0 of Reguíatíons 111
the foííowíng:
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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.)
Sectíon 124 of the Internaí Revenue Code Is amended by ínsertíng at
the end thereof tííe foííowíng new subsectíons:
(|) ppíícatíon fob Tentatíve d|ustment. € ” ny ta payer who
has fííed a statement of eíectíon as prescríbed ín paragraph (4) of sub-
sectíon (d) may, wíthín nínety days from the date such statement ís
fííed, or wíthín nínety days from the date of enactment of thís ct,
whíchever ís the íater, fííe an appíícatíon for tentatíve ad|ustment
wíth respect to the ta es for ta abíe years príor to the ta abíe year ín
whích such appíícatíon Is fííed whích are to be computed as requíred by
paragraph (4) of subsectíon (d) as the resuít of such eíectíon. Such
appíícatíon shaíí be verífíed ín the manner prescríbed by sectíon 51 or
sectíon 52 ín the case of a return of such ta payer and shaíí be made ín
such manner and form as shaíí be requíred by reguíatíons prescríbed by
the Commíssíoner wíth the approvaí of the Secretary, and shaíí set forth,
ín such detaíí and wíth such supportíng data and e píanatíon as such
reguíatíons shaíí requíre, the recomputatíon of such ta es requíred by
paragraph (4) of subsectíon (d) e cept that the ta for each ta abíe
year to be recomputed shaíí be the ta for such year prevíousíy deter-
míned, ascertaíned ín accordance wíth the method prescríbed ín sectíon
3 01(d). If an appíícatíon under sectíon 37 0(a) for tentatíve carry-
back ad|ustment has been prevíousíy fííed, but such ad|ustment has not
been prevíousíy determíned, then for the purpose of subsectíon (|) and
(k), the assessments, appíícatíons, credíts, and refunds províded ín
sectíon 3 o0(b) shaíí be consídered as havíng been prevíousíy made
upon the basís of such appíícatíon under sectíon 37 0(a). Such recom-
putatíon of ta shaíí be made on the basís of the ítems on the basís
of whích the ta to be recomputed was determíned. Such appíícatíon
shaíí aíso set forth the unpaíd amount of each ta recomputed and such
other ínformatíon for the purpose of carryíng out the provísíons of
subsectíons (|) and (k) as may be requíred by such reguíatíons. n
appíícatíon under thís subsectíon shaíí not constítute a cíaím for credít
or refund.
(k) ííowance of d|ustment. € ” Wíthín a períod of nínety days
from the fíííng of an appíícatíon under subsectíon (|), the Commíssíoner
shaíí make, to the e tent he deems practícaí ín such períod, a íímíted
e amínatíon of the appíícatíon for omíssíons and errors of computatíon,
and shaíí determíne the amount of the íncrease or decrease ín each ta
to whích such appíícatíon reíates, on the basís of the appíícatíon and
the e amínatíon, e cept that the Commíssíoner may dísaííow, wíthout
further actíon, any appíícatíon whích he fínds contaíns materíaí omís-
síons, or errors of computatíon whích he deems cannot be corrected by
hím wíthín such nínety-day períod. ach íncrease shaíí be deemed
determíned as a defícíency and assessed, wíthout regard to the restríc-
tíons on assessment In sectíon 272. ach decrease shaíí be appííed
agaínst any unpaíd amount of the ta decreased, and any remaínder
shaíí be credíted agaínst the defícíencíes (and ínterest or addítíons to
the ta ) assessed under thís subsectíon, and any remaínder shaíí,
wíthín such nínety-day períod, be eíther credíted agaínst any other
íncome, war profíts, or e cess profíts ta , or Instaíment thereof, due
from the ta payer, or refunded to the ta payer. The appíícatíon, credít,
or refund of a decrease determíned under thís subsectíon shaíí be deemed
a credít or refund of an overpayment wíthín the meaníng of sectíon
7 1(b).
Par. 2. There ís ínserted ín eguíatíons 103 ímmedíateíy foííowíng
sectíon 19.124-9 a new sectíon desígnated Sec. 19.124- ) . ppííca-
tíon for Tentatíve d|ustments. , and ín Reguíatíons 111 ímme-
díateíy foííowíng sectíon 29.124-9 a new sectíon desígnated Sec.
29.124-10. ppíícatíon for Tentatíve d|ustments. , to read ín
each case as foííows:
(a) In generaí. € ” ny ta payer who has fííed wíth the Commíssíoner a state-
ment of eíectíon to termínate the amortízatíon períod, as prescríbed ín sectíon
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105
29.124-10.
124(d) (4), may fííe an appíícatíon for a tentatíve ad|ustment wíth respect to the
ta es for aíí ta abíe years príor to the ta abíe year ín whích the appíícatíon Is
fííed, but not íncíudíng any ta abíe year príor to the ta abíe year ín whích the
amortízatíon períod began, whích are affected by the revísíon of the amortíza-
tíon deductíon or any reíated ad|ustments. ta payer who ís a member of a
partnershíp whích has fííed a statement of eíectíon to termínate the amortízatíon
períod may fííe an appíícatíon for a tentatíve ad|ustment wíth respect to hís own
ta es whích resuíts from the íncrease or decrease ín hís dístríbutíve share of
the partnershíp net íncome attríbutabíe to the revísíon of the amortízatíon deduc-
tíon or any reíated ad|ustments. The ad|ustment wíth respect to such ta es ís
to be computed as requíred by sectíon 124(d) (4). The ta for each ta abíe year
whích Is to be recomputed, however, shaíí be the ta prevíousíy determíned as
ascertaíned ín accordance wíth the.method prescríbed ín sectíon 3 í(d). The
amount of the ad|ustment wíth respect to each ta Is íímíted to the íncrease or
decrease ín such ta as prevíousíy determíned whích resuíts from the revísíon of
the amortízatíon deductíon and the effect of such revísed deductíon upon any
ítems taken ínto account In computíng the ta prevíousíy determíned.
The appíícatíon for a tentatíve ad|ustment must be fí .ed wíthín 00 days from
the date the statement of eíectíon províded ín sectíon 124(d)(4) Is fííed. If,
however, such 9- day períod e píred before October 29, 1945, the appíícatíon ís
tímeíy íf ít was fí ed on or before October 29, 194, . The appíícatíon ís to be fííed
wíth the coííector where the ta was paíd or the assessment was made.
(6) Contents of appíícatíon. € ” The appíícatíon for a tentatíve ad|ustment wíth
respect to amortízatíon deductíons ín the case of a corporatíon ís to be fííed on
orm 1140, and ín the case of ta payers other than corporatíons on orm 1040.
The appíícatíons are to be fíííed out ín accordance wíth the ínstructíons accom-
panyíng such forms, and aíí ínformatíon requíred by the forms and the accom-
panyíng ínstructíons must ííe furníshed by the ta payer. The appíícatíon ín the
ease of a corporatíon ís to be sworn to ín the manner províded ín sectíon 52 ín
the case of a corporatíon íncome ta return. The appíícatíon ín the case of a
ta payer other than a corporatíon ís to be verífíed ín the manner províded ín
sectíons 51 and 142 ín the case of an íncome ta return of such ta payer.
n appíícatíon for a tentatíve ad|ustment wítíí respect to amortízatíon deduc-
tíons does not constítute a cíaím for credít or refund. If such appíícatíon ís dís-
aííowed by the Commíssíoner ín whoíe or ín part, no suít mny be maíntaíned ín
any court for the recovery of any ta based on such appíícatíon. The tn payer,
however, may fííe a reguíar cíaím for credít or refund under sectíon 121(d) (5)
or under sectíon 322 at any tíme príor to the e píratíon of the appíícabíe períod
of íímítatíon, and may maíntaín suít based on such cíaím íf ít ís dísaííowed or If
the Commíssíoner does not act on the cíaím wíthín sí months from the date
ít ís fííed. Such reguíar cíaím may be fí ed before, símuítaneousíy wíth, or nfter
the fíííng of the appíícatíon for a tentatíve ad|ustment wíth respect to amortíza-
tíon deductíons. The fíMng of an appíícatíon for a tentatíve ad|ustment wín not
constítute the fíííng of a cíaím for credít or refund wíthín the meaníng of sectíon
121(d)(5) or 322(b) for purposes of determíníng whether a cíaím for credít or
refund was fííed prío| to the e píratíon of the appíícabíe períod of íímítatíon.
The fíííng of such an appíícatíon, however, wííí constítute the fíííng of a cíaím
for credít or refund wíthín the meaníng of sectíon 121(d) (5) for purposes of
determíníng whether an ad|ustment may be made ín any case ín whích such
ad|ustment ís prevented by the operatíon of any provísíon of íaw other than
sectíon 124(d) (5) ítseíf or sectíon 3701, reíatíng to compromíses. reguíar cíaím
for credít or refund fííed under sectíon 124(d) (5) or sectíon 322 nfter the fíííng
of an appíícatíon for a tentatíve ad|ustment wíth respect to amortízatíon deduc-
tíons ís not to be consídered an amendment of such appíícatíon, but ís to be con-
sídered a now cíaím. Such reguíar cíaím, however, In proper cases may constítute
an amendment to a príor reguíar cíaím.
(c) Computatíon of íncrease or decrease ín tarc affected by the revísed
amortízatíon deductíon. € ” The ta payer ís to determíne the amount of íncrease or
decrease, attríbutabíe to the revísed amortízatíon deductíon or any reíated
ad|ustments, ín each ta prevíousíy determíned, whích ís affected by such re-
vísed amortízatíon deductíon or reíated ad|ustments, for each ta abíe year príor
t the ta abíe year ín whích the appíícatíon for a tentatíve ad|ustment ís fííed.
The ta prevíousíy determíned ís to br ascertaíned ín accordance wíth the method
prescríbed ín sectíon 3 01(d). In generaí, therefore, the ta prevíousíy deter-
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I 29.124-10.
106
míned wííí be the ta shown on the return as fííed, íncreased by any amounts
assessed (or coííected wíthout assessment) as defícíencíes príor to the tíate of
fíííng the appíícatíon for a tentatíve ad|ustment wíth respect to amortízatíon
deductíons, and decreased by any amounts abated, credíted, refunded, or other-
wíse repaíd príor to such date. ny ítems as to whích the Commíssíoner and
the ta payer are ín dísagreement at the tíme of the fíííng of the appíícatíon
shaíí be taken ínto account ín ascertaíníng the ta prevíousíy determíned oníy,
and to the e tent that, they were reported ín the return, or were refíected ín
any amount assessed (or coííected wíthout assessment) as defícíencíes, or ín
any amounts abated, credíted, refunded, or otherwíse repaíd, príor to the date
of fíííng the appíícatíon. The ta prevíousíy determíned wííí refíect the foreígn
ta credít, the credít for ta wíthheíd at source províded ín sectíon 32, the credít
for debt retírement províded ín sectíon 7 3,. and the 10 per cent credít agaínst
e cess profíts ta províded ín sectíon 7 4, but wííí not refíect the postwar credít
províded In sectíon 7 0. In the case of any ta abíe year begínníng ín 1944 for
whích the credít províded ín sectíon 7 4 ís not cíaímed on the return, the ta shown
on the return, for purposes of thís subsectíon, shaíí be the ta shown on the return
as fííed reduced by the e cess of (1) the credít under sectíon 7 4 to the e tent that
an amount has not been abated, credíted, refunded, or otherwíse repaíd ín respect
of such credít príor to the date of fíííng the appíícatíon, over (2) any amount
cíaímed on the return as a credít for debt retírement under sectíon 7 3. In the case
of any ta abíe year begínníng príor to anuary 1, 1944, any amount abated,
credíted, refunded, or otherwíse repaíd príor to the date of fíííng the appííca-
tíon, ín connectíon wíth the postwar credít províded ín sectíon 7 0, and the amount
of any bonds íssued as províded ín sectíons 7 0 and 7 1 ín connectíon wíth the
e cess profíts ta for such ta abíe year, whether or not such bonds have been
redeemed, shaíí be consídered an amount abated, credíted, refunded, or otherwíse
repaíd, ín respect of the e cess profíts ta for such ta abíe year, príor to the
date of fíííng the appíícatíon.
The Increase or decrease ín each ta prevíousíy determíned whích ís affected
by the revísíon of the amortízatíon deductíon or any reíated ad|ustments ís to
be determíned, e cept for such revísed amortízatíon deductíon and reíated ad-
|ustments, on the basís of the ítems whích entered ínto the computatíon of such
ta as prevíousíy determíned the ta prevíousíy determíned beíng ascertaíned
ín the manner descríbed ín thís subsectíon. In determíníng any such íncrease
or decrease, accordíngíy, ítems shaíí be taken ínto account oníy to the e tent
that they were reported In the return, or were refíected ín amounts assessed (or
coííected wíthout assessment) as defícíencíes, or In amounts abated, credíted,
refunded, or otherwíse repaíd, príor to the date of fíííng the appíícatíon for a
tentatíve ad|ustment wíth respect to amortízatíon deductíons. If the Com-
míssíoner and the ta payer are ín dísagreement as to the proper treatment of
any ítem, ít shaíí be consídered for purposes of determíníng the íncrease or
decrease ín the ta prevíousíy determíned that such ítem was correctíy reported
by the ta payer uníess, and to the e tent that, the dísagreement has resuíted
ín the assessment of a defícíency (or the coííectíon of an amount wíthout assess-
ment), or the aííowíng or makíng of an abatement, credít, refund, or other re-
payment, príor to the date of fíííng the appíícatíon. Thus, íf the ta payer cíaímed
a deductíon on íts return of 50,000 for saíaríes paíd íts offícers but the Commís-
síoner asserts that such deductíon shouíd not e ceed 20,000, and the Commís-
síoner and the ta payer have not agreed on the amount properíy deductíbíe
príor to the date the appíícatíon for a tentatíve ad|ustment wíth respect to amor-
tízatíon deductíons ís fííed, 50,000 shaíí be consídered as the amount properíy
deductíbíe for purposes of determíníng the íncrease or decrease ín each fa
prevíousíy determíned ín respect of the appíícatíon for a tentatíve ad|ustment.
In determíníng the íncrease or decrease ín any ta prevíousíy determíned, any
ítems whích are affected by the revísíon of the amortízatíon deductíon must be
ad|usted to refíect such revísed deductíon. Thus, any deductíon íímíted, for
e ampíe, by net íncome or ad|usted gross Income, such as the deductíon for char-
ítabíe contríbutíons, ís to be recomputed on the basís of the net íncome or ad|usted
gross íncome as affected by the revísíon of the amortízatíon deductíon. Símííaríy,
any deductíon for deprecíatíon whích ís affected by the revísíon of the amortíza-
tíon deductíon must be ad|usted to refíect such revísed amortízatíon deductíon-
No íncrease or-decrease ín ta , attríbutabíe to a net operatíng íoss carry-back
or to an unused e cess profíts credít carry-back, for a ta abíe year príor to the
ta abíe year ín whích the amortízatíon períod began, may be assessed or aííowed
pursuant to an appíícatíon for a tentatíve ad|ustment wíth respect to the amortí-
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107
29.124-10.
zatíon deductíon even though the net operatíng íoss or the unused e cess profíts
credít resuítíng ín such carry-back ís affected by the revísed amortízatíon deduc-
tíon. In determíníng the decrease ín e cess profíts ta for any ta nbíe year
begínníng príor to anuary 1, 1944, the ta as recomputed by takíng ínto account
the revísed amortízatíon deductíon and any reíated ad|ustments ís to be decreased
by any amount whích has been abated, credíted, refunded, or otherwíse repaíd,
príor to the date of fíííng the appíícatíon. In connectíon wíth the postwar credít
under sectíon 7 0, and by the amount of any bonds, whether or not such bonds
have been redeemed, íssued ns províded ín sectíons 7 0 and 7 1 ín connectíon
wíth the e cess profíts ta for such ta abíe year, to the e tent that such amounts
are properíy aííocabíe to such ta as recomputed.
In determíníng the íncrease or decrease ín any ta prevíousíy determíned
whích ís affected by the revísíon of the amortízatíon deductíon or any reíated
ad|ustments, the ta prevíousíy determíned ís to be íncreased or decreased by
the amount of any íncrease or decrease ín such ta shown on an appíícatíon fííed
under sectíon 37 0, reíatíng to tentatíve carry-back ad|ustments, to the e tent
that such Increase or decrease shown In the appíícatíon fííed under sectíon 37 0
has not been assessed or aííowed príor to the date of fíííng the appíícatíon for a
tentatíve ad|ustment wíth respect to amortízatíon deductíons. The ítems whích
enter ínto the computatíon of the ta prevíousíy determíned are to be ad|usted
ín conformíty was such íncrease or decrease shown ín the appíícatíon fííed under
sectíon 37 0 for a tentatíve carry-back ad|ustment. The provísíons of thís para-
graph are not to appíy ín any case ín whích the Commíssíoner has dísaííowed the
appíícatíon for a tentatíve carry-back ad|ustment príor to the date the appíícatíon
for a tentatíve ad|ustment wíth respect to amortízatíon deductíons ís fííed.
íd) ííowance of ad|ustments. € ” ny appíícatíon for a tentatíve ad|ustment
wíth respect to the amortízatíon deductíon ís to be acted upon wíthín a períod
of 90 days from the date such appíícatíon ís fííed. The Commíssíoner Is to make,
to the e tent he deems practícabíe ín such 90-day períod, an e amínatíon of the
appíícatíon to díscover omíssíons and errors of computatíon and ís to determíne
wíthín such 90-day períod the íncrease or decrease ín any ta prevíousíy deter-
míned, whích ís affected by the revísíon of the amortízatíon deductíon or any
reíated ad|ustments, upon the basís of the appíícatíon and such e amínatíon.
Such íncreases and decreases are to be determíned ín the same manner as that
províded ín sectíon 124(|) for the determínatíon by the ta payer of the íncreases
and decreases ín ta es prevíousíy determíned whích must be set forth ín the
appíícatíon for a tentatíve ad|ustment wíth respect to the amortízatíon deductíon.
The Commíssíoner, however, may correct any errors of computatíon or omíssíons
he díscovers upon whatever e amínatíon of the appíícatíon he makes. In deter-
míníng the Increase or decrease ín each ta prevíousíy determíned whích ís
affected by the revísíon of the amortízatíon deductíon or any reíated ad|ustments,
the Commíssíoner accordíngíy may correct any mathematícaí error appearíng
on the appíícatíon and he ííkewíse may make any other ad|ustments to, or correc-
tíons ín, the computatíons of the ta payer whích he deems are proper and whích
faíí wíthín the scope of the prescríbed basís of the computatíon. If a requíred
ad|ustment has not been made by the ta payer and the Commíssíoner has avaíí-
abíe the neces ary ínformatíon to make such ad|ustment wíthín the above 93-day
períod, he may, ín hís díscretíon, make such ad|ustment. In determíníng the
íncreases and decreases, however, the Commíssíoner wííí not, for e ampíe, change
the amount cíaímed ín the return as a deductíon for ordínnry and necessary busí-
ness e penses because he beííeves that the ta payer has cíaímed an e cessíve
amount ííkewíse, the Commíssíoner wííí not íncíude ín gross íncome any amount
not so íncíuded by the ta payer even though he beííeves that such amount ís
sub|ect to ta and properíy shouíd be íncíuded ín gross íncome.
If the Commíssíoner fínds that an appíícatíon for a tentatíve ad|ustment wíth
respect to the amortízatíon deductíon contaíns materíaí omíssíons or errors of
computatíon, he may dísaííow such appíícatíon ín whoíe or In part wíthout fur-
ther actíon. If, however, he deems that any error of computatíon can be cor-
rected by hím wíthín the abo -e 90-day períod, he may do so and aííow the appíí-
catíon ín whoíe or ín part. The Commíssíoner s determínatíon as to whether
be can correct any error of computatíon wíthín the above 90-day períod shaíí be
concíusíve. Símííaríy, hís actíon In dísaííowíng, ín whoíe or ín part, any appíí-
catíon for a tentatíve ad|ustment wíth respect to the amortízatíon deductíon
wííí be fínaí and may not be chaííenged ín any proceedíng. The ta payer ín such
rase, however, may tííe a reguíar cíaím for credít or refund under sectíon
124(d) (5) or sectíon 322, and may maíntaín a suít based ou ítch cíaím íf ít ís
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129.124-10.
10S
dísaííowed or If the Commíssíoner does not act upon the cíaím wíthín sí months
from the date ít ís fííed.
In the case of any appíícatíon for a tentatíve ad|ustment wíth respect to the
amortízatíon deductíon whích Is aííowed ín whoíe or ín part, any íncrease deter-
míned ín any ta prevíousíy determíned whích ís affected by the revísíon of the
amortízatíon deductíon or any reíated ad|ustments shaíí be deemed to have
been determíned as a defícíency and shaíí be assessed wíthout regard to the
restríctíons on assessment províded In sectíon 272. Such íncrease, for e ampíe,
may be assessed wíthout regard to whether a notíce of defícíency In respect of
such íncrease ís sent to the ta payer and wíthout regard to whether a príor
notíce of defícíency has been maííed to the ta payer. The ta payer wííí not
have a ríght to contest the assessment before The Ta Court of the Uníted States
whether or not he ís sent a notíce ín respect of such íncrease. notíce In respect
of an íncrease determíned In respect of an appíícatíon for a tentatíve ad|ustment
wíth respect to the amortízatíon deductíon, however, wííí constítute a notíce ot
defícíency wíthín the meaníng of sectíon 124(d) (5).
ach decrease determíned ín any ta prevíousíy determíned whích ís affected
by the revísíon of the amortízatíon deductíon or any reíated ad|ustments shaíí
fírst be appííed agaínst any unpaíd amount of the ta wíth respect to whích such
decrease was determíned. Such unpaíd amount of ta may Incíude one or more
of the foííowíng:
(1) n amount wíth respect to whích the ta payer Is deíínquent
(2) n amount (íncíudíng an amount the tíme for payment of whích has
been e tended under sectíon 56(c), but not íncíudíng an amount the tíme
for payment of whích has been e tended under sectíon 3779) whích ís due
and payabíe on or after the date on whích the decrease Is aííowed and
(3) n amount the tíme for payment of whích has been e tended under
sectíon 3779 whích ís due and payabíe on or after the date on whích the
decrease ís aííowed.
In case the unpaíd amount of ta íncíudes more than one of such amounts, the
Commíssíoner, In hís díscretíon, shaíí determíne agaínst whích amount or amounts,
and ín what proportíon, the decrease Is to be appííed. In generaí, however, the
decrease wííí be appííed agaínst any amounts descríbed ín cíauses (1), (2), and
(3) of thís paragraph ín the order named. If there are severaí amounts of the
type descríbed ín cíause (2), any amount of the decrease whích ís to be appííed
agaínst such amounts wííí be appííed by assumíng that the ta prevíousíy deter-
míned mínus the amount of the decrease to be so appííed ís the ta and the
ta payer had eíected to pay such ta ín four equaí Instaííments. The unpaíd
amount of ta agaínst whích a decrease may be appííed may not íncíude any
amount of ta for any ta abíe year other than the year of the decrease. The
provísíons of thís paragraph may be íííustrated by the foííowíng e ampíe:
ampíe. Corporatíon , whích keeps Its books and makes íts Income ta
returns on the caíendar year basís, fííed íts íncome ta return for 944, showíng
a ta of 100,000, on March 15, 1945, and paíd two ínstaííments of 25,000 each
on March 15, 1945, and une 15, 1945, respectíveíy. The corporatíon fííed an
appíícatíon for a tentatíve ad|ustment wíth respect to the amortízatíon deduc-
tíon on September 1, 1945. The appíícatíon, whích showed that the corporatíon s
íncome ta for 1944 as prevíousíy determíned was 100,000 and that the decrease
ín such ta due to the revísíon of the amortízatíon deductíon and aíí reíated
ad|ustments was 30,000, was aííowed In fuíí on November 30, 1945. The corpo-
ratíon secured an e tensíon of tíme under sectíon 56(c) for the payment of the
September 15th ínstaííment, ín the amount of 25,000, of íts 1944 íncome ta .
The 30,000 decrease ín the corporatíon s íncome ta for 1944 wííí be appííed
agaínst the unpaíd ínstaííments of such ta as íf 70,000 (í. e., the ta prevíousíy
determíned mínus the decrease ín such ta 100,000 mínus 30,000) were the ta
for 1944 and the corporatíon had eíected to pay such ta ín four equaí ínstaíí-
ments. ach of the ínstaííments accordíngíy wouíd be 17,500. Sínce the cor-
poratíon paíd 25,000 on March 15, 1945, and 25,000 on une íc, 1945, ít ín
effect prepaíd íts September 15th Instaííment ín the amount of 15,000. The
corporatíon therefore must pay 2,500 ( 17,500 mínus 15,C00) upon the termína-
tíon of the e tensíon whích It secured under sectíon 56fc) wíth respect to such
ínstaííment, and It must pay 17,500 on December 15, 1945. The corporatíon wííí
be ííabíe for ínterest on the 25,C00 the tíme for payment of whích was e tended
under sectíon 50(c) as foííows: Interest wííí be payabíe on 2,500 from September
15,1945, untíí the date such amount ís paíd and ínterest wííí be payabíe on 22 „
from September 15, 1945, untíí the date the decrease ín íts íncome ta for 19
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109
29.12G-1.
ís aííowed by the Commíssíoner ín connectíon wíth the appíícatíon for a tentatíve
ad|ustment wíth respect to the amortízatíon deductíon.
fter appíyíng the decrease agaínst any unpaíd amount of the ta decreased,
the Commíssíoner wííí credít any remaínder of the decrease agaínst any íncrease
(íncíudíng ínterest and addítíons to the ta ) determíned In any ta as prevíousíy
determíned whích ís attríbutabíe to the revísíon of the amortízatíon deductíon or
tíny reíated ad|ustments and whích has been assessed under sectíon 124(k).
ny remaínder of the decrease after such appíícatíon and credíts may, wíthín
the above 00-day períod, be credíted agaínst any íncome, war profíts, or e cess
profíts ta , or ínstaííments thereof, then due from the ta payer, and, íf not so
credíted, ís to be refunded to the ta payer wíthín such O-day períod.
The appíícatíon, credít, or refund of a decrease ín ta determíned under sectíon
124(k) shaíí constítute a credít or refund of an overpayment wíthín the meaníng
of sectíon 7 1(b), reíatíng to postwar credíts or postwar bonds ín the case of
credíts or refunds.
Thís Treasury Decísíon ís íssued under the authoríty contaíned ín
sectíon 62 of the Internaí Revenue Code (53 Stat., 32 2(5 U. S. C, 1940
ed., 62) and sectíon 7 of the Ta d|ustment ct of 1945 (Pubííc Law
172, Seventy-nínth Congress).)
oseph D. Nttnan, r.,
Commíssíoner of Internaí Revenue.
pproved March 11, 1946.
oseph . O Conneíí, r.,
ctíng Secretary of the Treasury.
( ííed wíth the Dívísíon of the ederaí Regíster March 12, 1946, 11.21 a. m.)
S CTION 126. € ” INCOM IN R SP CT
O D C D NTS.
Sectíon 29.126-1: Incíusíon ín gross íncome 1946-10-12309
of íncome ín respect of a decedent. I. T. 3 01
( íso Sectíon 22(b), Sectíon 29.22(b) (13)-1.)
INT RN L R NU COD .
The íump-sum pnyment receíved príor to termínatíon of the present
war by the wídow or other benefícíary of a deceased commíssíoned
navaí offícer pursuant to sectíon 12 of the Navaí víatíon Cadet ct
of 1942 (56 Stat., 737), as amended by Pubííc Law 169, Seventy-
eíghth Congress, fírst sessíon (57 Stat, 574), retaíns the same char-
acter, 1. e., compensatíon receíved for actíve servíce as a commís-
síoned offícer ín the mííítary or navaí forces of the Uníted States
duríng the present war, whích ít wouíd have had ín the hands of
the decedent had he ííved and receíved such amount. So much of
such compensatíon receíved by the wídow or benefícíary as does not
e ceed 1,500 ís e cíudíbíe from gross íncome under sectíon
22(b) (13) ( ) of the Code.
dvíce ís requested whether a íump-sum payment receíved príor
to termínatíon of the present war by the wídow or other benefícíary
of a deceased commíssíoned navaí offícer pursuant to sectíon 12 of the
Navaí víatíon Cadet ct of 1942 (56 Stat., 737), as amended by
Pubííc Law 169, Seventy-eíghth Congress, fírst sessíon (57 Stat., 574),
ís íncíudíbíe ín the gross íncome of the recípíent under sectíon 126(a)
of the Internaí Revenue Code, and whether sectíon 22(b) (13) ( ) of
the Code, reíatíng to the addítíonaí aííowance for mííítary and navaí
personneí, ís appíícabíe to such payment.
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29.126-1.
110
Sectíon 12 of the Navaí víatíon Cadet ct of 1942, as amended by
Pubííc Law 169, supra, provídes as foííows:
Sec. 12. When offícers commíssíoned pursuant to thís ct or to the Navaí
víatíon Reserve ct of 1030 ( 53 Stat. 19) are reíeased from actíve duty that
has been contínuous for one or more years, they, or ín the event of the death of
such offícers after contínuous actíve duty for one or more years, the benefícíaríes
specíaííy desígnated ín the manner prescríbed by the Secretary of the Navy, or,
íf no benefícíary has been specíaííy desígnated, the wídow of such offícer, and íf
there be no wídow, hís chííd or chíídren, and íf there be neíther wídow nor
chííd, the representatíve of the offícer s estate, shaíí be paíd a íump sum of 300
for each compíete year of contínuous commíssíoned actíve servíce,
Sectíon 126(a) of the Internaí Revenue Code provídes ín part as
foííows:
(1) Generaí ruíe. € ” The amount of aíí Items of gross íncome ín respect of
a decedent whích are not properíy íncíudíbíe ín respect of the ta abíe períod
ín whích faíís the date of hís death or a príor períod shaíí be íncíuded ín the
gross íncome, for the ta abíe year when receíved, of:
( ) the estate of the decedent, íf the ríght to receíve the amount ís ac-
quíred by the decedent s estate from the decedent
( ) the person who, by reason of the death of the decedent, acquíres
the ríght to receíve the amount, íf the ríght to receíve the amount ís not
acquíred by the decedent s estate from the decedent
€ € € € € € €
(3) Character of íncome determíned by reference to decedent. € ” The
ríght, descríbed ín paragraph (1), to receíve an amount shaíí be treated, ín
the hands of the estate of the decedent or any person who acquíred such ríght
by reason of the death of the decedent, as íf ít had been acquíred
by the estate or such person ín the transactíon by whích the decedent acquíred
such ríght and the amount íncíudíbíe ín gross íncome under paragraph
(1) shaíí be consídered ín the hands of the estate or such person to
have the character whích ít wouíd have had ín the hands of the decedent íf
the decedent had ííved and receíved such amount
Sectíon 22(b) (13) ( ) of the Code, as amended, provídes ín part as
foííows:
(b) cíusíons from Gross Income. € ” The foííowíng ítems shaíí not be ín-
cíuded ín gross íncome and shaíí be e empt from ta atíon under thís chapter
Chapter 1 of the Code :
€ € € € € €
(13) ddítíonaí aííowance for mííítary and navaí personneí. € ”
( ) In the case of compensatíon receíved duríng any ta abíe year
and before the termínatíon of the present war as procíaímed by the
Presídent, for actíve servíce as a commíssíoned offícer ín the
mííítary or navaí forces of the Uníted States duríng such war,
€ so much of such compensatíon as does not e ceed 1,500.
It ís heíd that the íump-sum payment receíved príor to the termína-
tíon of the present war by the wídow or other benefícíary of a deceased
commíssíoned navaí offícer pursuant to sectíon 12 of the Navaí vía-
tíon Cadet ct of 1942, as amended, supra, retaíns the same character,
í. e., compensatíon receíved for actíve servíce as a commíssíoned offícer
ín the mííítary or navaí forces of the Uníted States duríng the pres-
ent war, whích ít wouíd have had ín the hands of the decedent had
he ííved and receíved such amount. So much of such compensatíon
receíved by the wídow or benefícíary as does not e ceed 1,500 ís e -
cíudíbíe from gross íncome under sectíon 22(b) (13) ( ) of the Code,
supra.
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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.
Sectíon 29.131-1: naíysís of credít for 1946-2-12213
ta es. I. T. 377
INT RN L R NU COD .
The ta of 1 per cent of net profíts Imposed by artícíe 37 of
cuadorían Decree No. 1179, dated uíy 14, 1942, Is an Income
ta , and a domestíc corporatíon whích Is requíred to pay such
ta to the Repubííc of cuador ís entítíed, under sectíon 131(a) (1)
of the Internaí Revenue Code, to credít such ta agaínst Uníted
States íncome ta , sub|ect to the íímítatíons contaíned ín sectíon
131(b) of the Code.
dvíce ís requested whether the ta of 1 per cent of net profíts
ímposed by artícíe 37 of cuadorían Decree No. 1179, dated uíy
14, 1942, ís an íncome ta , and whether a domestíc corporatíon whích
ís requíred to pay such ta to the Repubííc of cuador ís entítíed
to a credít, under sectíon 131(a)(1) of the Internaí Revenue Code,
agaínst Uníted States íncome ta .
y cuadorían Decree No. 1179, supra, the Repubííc of cuador
promuígated a socíaí securíty íaw to províde certaín benefíts for
affíííated persons and theír famíííes. rtícíe 37 of such decree
provídes ín part as foííows:
rt. 37. State contríbutíons to Prívate mpíoyees and Workmen s Socíaí
Securíty und shaíí be the foííowíng:
€ € € €
(c) The foííowíng ta es, suppíementary to those ímposed on íncome:
€ € € € € €
I . oreígn companíes, whether they are domícííed entítíes
or permanentíy estabííshed agencíes, shaíí pay 1 totaí net
profíts obtaíned ín the country. Dívídends decíared and paíd ín
the country shaíí be deducted from net profíts for the purpose of
assessment to thís ta .
Sectíon 131(a) (1) of the Internaí Revenue Code provídes ín part
that ín the case of a cítízen of the Uníted States and of a domestíc
corporatíon, íf the ta payer chooses to have the benefíts of sectíon
131 of the Code, the ta ímposed by Chapter 1 (íncome ta ) shaíí
be credíted wíth the amount of any íncome, war-profíts, and e cess-
profíts ta es paíd or accrued duríng the ta abíe year to any foreígn
country.
The term íncome ta es, as used ín the foreígn ta credít proví-
síons of the Code and correspondíng provísíons of príor revenue íaws,
means a ta on íncome (G. C. M. C042, C. . III-1.1 4 (1929)), and
a ta on net profíts ís a ta on íncome (G. C. M. 7629, C. . I -1,146
(1930)).
Inasmuch as the ta ímposed by artícíe 37 of cuadorían Decree
No. 1179 ís based on a percentage of totaí net profíts and ís sup-
píementaí to the reguíar íncome ta , ít ís heíd that the ta ín questíon
ís an íncome ta . ccordíngíy, a domestíc corporatíon whích ís re-
quíred to pay such ta to the Repubííc of cuador ís entítíed, under
sectíon 131(a)(1) of the Code, to credít such ta agaínst Uníted
States íncome ta , sub|ect to the íímítatíons contaíned ín sectíon
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.
Reguíatíons 104, Sectíon- 23.11: Consoíídated 1946-3-12-226
returns for subsequent years. I. T. 3779
( íso Sectíon 33.11, Reguíatíons 110.)
INT RN L R NU COD .
íectíon wíth respect to fíííng separate ederaí íncome and e cess
profíts ta returns for físcaí years endíng ín 1946 by affíííated cor-
poratíons whích fííed consoíídated ederaí íncome and e cess profíts
ta returns for físcaí years ended ín 1943.
dvíce ís requested whether affíííated corporatíons whích fííed con-
soíídated ederaí íncome and e cess profíts ta returns for físcaí years
ended ín 1945 may eíect to fííe separate ederaí íncome and e cess
profíts ta returns for físcaí years endíng ín 1946.
Sectíon 141(a) of the Internaí Revenue Code, as amended, provídes
ín part as foííows:
(a) Prívííege to ííe Consoíídated Income and cess-Profíts-Ta Re-
turns. € ” rfhe makíng of consoíídated returns shaíí be upon the condí-
tíon that the affíííated group shaíí make both a consoíídated íncome-ta return
and a consoíídated e cess-profíts-ta return for the ta abíe year, and that aíí
corporatíons whích at any tíme duríng the ta abíe year have been members of
the affíííated group makíng a consoíídated íncome-ta return consent to aíí the
consoíídated íncome- and e cess-profíts-ta reguíatíons prescríbed under sub-
sectíon (b) príor to the íast day prescríbed by íaw for the fíííng of such return.
€ €
Sectíon 23.11 (a) of Reguíatíons 104, as amended by Treasury De-
císíon 50 7 (C. . 1941-2, 141), reíatíng to consoíídated íncome ta
returns of affíííated corporatíons, provídes ín part as foííows:
(a) Consoí|dated Returns Requíred fob Subsequent eaes. € ” If a consoíí-
dated return ís made under these reguíatíons for any ta abíe year, a consoíídated
return must be made for each subsequent ta abíe year duríng whích the affíííated
group remaíns ín e ístence uníess € (2) Chapter 1 of the Code to the
e tent appíícabíe to corporatíons, or these reguíatíons whích have been con-
sented to, have been amended and any such amendment ís of a character whích
makes íess advantageous to affíííated groups ns a cíass the contínued fíííng of
consoíídated returns, . Itaíícs suppííed.
Sectíon 33.11(a) of Reguíatíons 110, as amended by Treasury De-
císíon 50 7, supra, reíatíng to consoíídated e cess profíts ta returns
of affíííated corporatíons, provídes ín part as foííows:
(a) Consoíídated Returns Requíred for Subsequent Years. € ” If a consoíí-
dated return ís made under these reguíatíons for any ta abíe year, a consoíídated
return must be made for each subsequent ta abíe year duríng whích the affíííated
group remaíns ín e ístence uníess (2) Chapter 1 of the Code to the
e tent appíícabíe to corporatíons, or Subchapter of Chapter 2 of the Code,
or these reguíatíons whích have been consented to. have been amended and any
such amendment ís of a character whích makes íess advantageous to affíííated
groups as a cíass the contínued fíííng of consoíídated returns, . Itaíícs
suppííed.
It ís heíd that Chapter 1 and Subchapter of Chapter 2 of the
Internaí Revenue Code have been so amended by the Revenue ct of
1945 as to make íess advantageous to affíííated groups as a cíass the
contínued fíííng of consoíídated ederaí íncome and e cess profíts ta
returns for ta abíe years endíng after December 31, 1945. ccord-
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113
( 141.
íngíy, affíííated corporatíons whích fííed consoíídated íncome and e -
cess profíts ta returns for físcaí years ended ín 1945 may, notwíth-
standíng the fíííng of such returns, fííe separate íncome and e cess
profíts ta returns for físcaí years endíng ín 194G.
Reguíatíons 104, Sectíon 23.11: Consoíídated 194(3-3-12227
returns for subsequent years. L T. 37 0
( íso Sectíon 33.11, Reguíatíons 110.)
INT RN L R NU COD .
íectíon wíth respect to fíííng separate ederaí Income and e cess
profíts ta returns for the caíendar year 11)45 by affíííated corpora-
tíons whích fííed consoíídated ederaí íncome and e cess profíts ta
returns for the caíendar year 1944.
dvíce ís requested whether affíííated corporatíons whích fííed con-
soíídated ederaí íncome and e cess profíts ta returns for the caíendar
year 1944 may eíect to fííe separate ederaí íncome and e cess profíts
ta returns for the caíendar | ear 1945.
Sectíon 141(a) of the Internaí Revenue Code, as amended, provídes
ín part as foííows:
(a) Prívííege to ííe Conkoí|dateí| Income and cess- bofíts-Ta Re-
turns. € ” The makíng of consoíídated returns shaíí be upon the condí-
tíon that the affíííated group shaíí make both a consoíídated Income-ta return
and a consoíídated e cesrs profítR-ta return for the ta abíe year, and that aíí
corporatíons whích at any tíme duríng the ta abíe year have been members of
the affíííated group makíng a consoíídated íncome-ta return consent to aíí the
consoíídated íncome- and e cess-proííts-ta reguíatíons prescríbed under subsec-
tíon (b) príor to the íast day prescríbed by íaw for the fíííng of such return.

Sectíon 23.11(a) of Reguíatíons 104, as amended by Treasury Decí-
síon 50 7 (C. . 1941-2, 141), reíatíng to consoíídated íncome ta
returns of affíííated corporatíons, provídes as foííows:
(o) Consoíídated Returns Requíred tor Subsequent Years. € ” If a consoíí-
ídated return ís made under these reguíatíons for any ta abíe year, a con-
soíídated return must be made for each subsequent ta abíe year duríng whích
the affíííated grcup remaíns ín e ístence uníess (1) a corporatíon (other than a
corporatíon created or organízed, dírectíy or índírectíy, by a member of the
group) has become a member of the group duríng such subsequent ta abíe year,
or (2) Chapter 1 of the Code to the e tent appíícabíe to corporatíons, or
these reguíatíons whích have been consented to, have been amended and any
such amendment ís of a character whích makes íess advantageous to affíííated
groups as a cíass the contínued fíííng of consoíídated returns, or (3) the Commís-
síoner, príor to the tíme of makíng the return, upon appíícatíon made by the
common parent corporatíon and for good cause shown, grants permíssíon to
change.
Sectíon 33.11(a) of Reguíatíons 110, as amended by Treasury Decí-
síon 50 7, supra, reíatíng to consoíídated e cess profíts ta returns of
affíííated corporatíons, provídes as foííows:
(a) Consoíídated Returns Requíred for Subsequent Years. € ” If a consoíí-
dated return ís made under these reguíatíons for any ta abíe year, a con-
soíídated return must be made for each subsequent ta abíe year duríng whích
the affíííated group remaíns ín e ístence uníess (1) a corporatíon (other than a
corporatíon created or organízed, dírectíy or índírectíy, by a member of the
group) has become a member of the group duríng such subsequent ta abíe year,
or (2) Chapter 1 of the Code to the e tent appíícabíe to corporatíons, or
Subchapter of Chapter 2 of the Code, or these reguíatíons whích have been
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I 141-1
114
consented to, have been amended and any such amendment ís of a character
whích makes íess advantageous to affíííated groups as a cíass the contínued fíííng
of consoíídated returns, or (3) the Commíssíoner, príor to the tíme of makíng
the return, upon appíícatíon made by the common parent corporatíon and for
good cause shown, grants permíssíon to change.
It ís heíd that the amendments to the Internaí Revenue Code by
the Ta d|ustment ct of 1945 and the Revenue ct of 1945, and
the amendments to Reguíatíons 104 and to Reguíatíons 110 by
Treasury Decísíon 5476 (C. . 1945, 226) are not of a character
whích makes íess advantageous to affíííated groups as a cíass the
contínued fíííng of consoíídated ederaí íncome and e cess profíts
ta returns for the caíendar year 1945. (The Revenue ct of 1945
made no changes affectíng the computatíon of corporatíon íncome
and e cess profíts ta es for the caíendar year 1945.) ccordíngíy,
affíííated corporatíons whích fííed consoíídated íncome and e cess
rofíts ta returns for the caíendar year 1944 wííí not be permítted to
íe separate íncome and e cess profíts ta returns for the caíendar
year 1945, uníess one of the other condítíons províded ín sectíon
23.11(a) of Reguíatíons 104, supra, and sectíon 33.11(a) of Reguía-
tíons 110, supra, ís met or uníess the íaw or reguíatíons wíth respect
to the caíendar year 1945 are íater amended so as to make íess advan-
tageous the contínued fíííng of consoíídated returns. (Cf. I. T. 3769,
C. . 1945, 225.)
Reguíatíons 104, Sectíon 23.11: Consoíídated 1946- -12291
returns for subsequent years. I. T. 3794
INT RN L R NU COD .
íectíon wíth respect to fíííng separate ederaí íncome ta re-
turns for the caíendar year 1940 by affíííated corporatíons whích fííed
consoíídated ederaí Income and e cess profíts ta returns for the
caíendar year 1945.
dvíce ís requested whether affíííated corporatíons whích fííed con-
soíídated ederaí íncome and e cess profíts ta returns for the caíendar
year 1945 may eíect to fííe separate ederaí íncome ta returns for
the caíendar year 1946.
Sectíon 141 (a) of the Internaí Revenue Code, as amended, provídes
ín part as foííows:
(a) Prívííege To ííe Consoíídated Income and cess-Profíts-Ta Re-
turns. € ” € € he makíng of consoíídated returns shaíí be upon the condí-
tíon that the affíííated group snaíí make both a consoíídated íncome-ta return and
a consoíídated e cess-profíts-ta return for the ta abíe year, and that aíí corpo-
ratíons whích at any tíme duríng the ta abíe year have been members of the
affíííated group makíng a consoíídated íncome-ta return consent to aíí the con-
soíídated íncome- and e cess-profíts-ta reguíatíons prescríbed under subsectíon
(b) príor to the íast day prescríbed by íaw for the fíííng of such return. €
Sectíon 23.11(a) of Reguíatíons 104, as amended by Treasury De-
císíon 50 7 (C. . 1941-2, 141), reíatíng to consoíídated íncome ta
returns of affíííated corporatíons, provídes ín part as foííows:
(a) Consoíídated Returns Requíred tor Subsequent Years. € ” If a consoíídated
return ís made under these reguíatíons for any ta abíe year, a consoíídated return
must be made for each subsequent ta abíe year duríng whích the affíííated group
remaíns ín e ístence uníess (2) Chapter 1 of the Code to the e tent ap-
píícabíe to corporatíons, or these reguíatíons whích have been consented to, have
been amended and any such amendment ís of a character whích makes íess ad-
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115
1 1.
vantageous to affíííated groups as a cíass the contínued fíííng of consoíídated
returns. ™ ítaíícs suppííed.
It ís heíd that Chapter 1 of the Internaí Revenue Code has been so
amended by the Revenue ct of 1945 as to make íess advantageous to
affíííated groups as a cíass the contínued fíííng of consoíídated ederaí
íncome ta returns for the caíendar year 1946. ccordíngíy, affíííated
corporatíons whích fííed consoíídated íncome and e cess profíts ta
returns for the caíendar year 1945 may, notwíthstandíng the fíííng of
such returns, fííe separate íncome ta returns for the caíendar year
1946. (See I. T. 3779, page 112, thís uííetín, and cf. L T. 37 0, page
113, thís uííetín.)
Reguíatíons 110, Sectíon 33.11: Consoíídated returns
for subsequent years.
INT RN L R NU COD .
íectíon to fííe separate returns for físcaí years endíng ín 194G
where nn affíííated group fííed consoíídated returns for físcaí years
ended ín 1945. (See I. T. 3779, page 112.)
Reguíatíons 110, Sectíon 33.11: Consoíídated
returns for subsequent years.
INT RN L R NU COD .
íectíon to fííe separate returns for caíendar year 1945 where an
affíííated group fííed consoíídated returns for caíendar year 1944.
(Seeí. T. 37 0, page 113.)
Reguíatíons 104, Sectíon 23.19: Proceedíngs 1946-1-12242
under Ta d|ustment ct of 1945. T. D. 5491
( íso Sectíons 33.19 and 33.31, Reguíatíons 110.)
TITL 2G € ” INT RN L R NU . € ” C PT R I, SU C PT R , P RT 23 ND
P RT 33.
Reguíatíons 104, reíatíng to consoíídated íncome ta returns of
affíííated corporatíons, and Reguíatíons 110, reíatíng to consoíídated
e cess profíts ta returns of affíííated corporatíons, amended to con-
form to the Ta d|ustment ct of 1045.
Treasury Department,
Offíce of Commíssíoner of Internaí Revenue,
Washíngton, D. C.
To Coííectors of Internaí Revenue and Others Concerned:
In order to conform Reguíatíons 104 Part 23, Títíe 26, Code of
ederaí Reguíatíons, Cum. Sup. and Reguíatíons 110 Part 33, Títíe
26, Code of ederaí Reguíatíons, Cum. Sup. to the provísíons of the
Ta d|ustment ct of 1945 (Pubííc Law 172, Seventy-nínth Con-
gress), approved uíy 31, 1945, such reguíatíons are amended as
foííows:
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141.
116
Paragraph 1. There ís ínserted ín Reguíatíons 104 ímmedíateíy pre-
cedíng sectíon 23.0, and ín Reguíatíons 110 ímmedíateíy precedíng
sectíon 33.0, the foííowíng:
S C. 2. INCR S IN C SS-PRO ITS T SP CI IC MP-
TION. (T D USTM NT CT O 1945.)
€ € € € €
0c) Consoíídated Retubnb. € ” Sectíon 141(c) of the Internaí Revenue
Code ís amended by stríkíng out of 10,000 and ínsertíng In ííeu thereof
as .
(d) Ta abíe Years to Whích ppíícabíe, € ” The amendments made by
thís sectíon shaíí be appíícabíe to ta abíe years begínníng after December
31,1945, and to ta abíe years begínníng ín 1945 and endíng ín 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 Internaí Revenue Code ís amended by addíng at
the end thereof the foííowíng new sectíons:
€ € € € €
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 corporatíon seekíng an e tensíon of tíme under sectíon 3779, a
tentatíve carry-back ad|ustment under sectíon 37 0, or a tentatíve ad|ust-
ment wíth respect to an amortízatíon deductíon under sectíon 124 ( )
and (k), made or was requíred to make a consoíídated return, eíther for
the ta abíe year wíthín whích the net operatíng íoss or the unused e cess
profíts credít aríses or wíthín whích the eíectíon ís made to termínate the
amortízatíon períod, or for a precedíng ta abíe year affected by such íoss,
credít, or eíectíon, the provísíons of such sectíons shaíí appíy oníy to such
e tent and sub|ect to such condítíons, íímítatíons, and e ceptíons as the
Commíssíoner, wíth the approvaí of the Secretary, may by reguíatíons
prescríbe.
€ € € €
Par. 2. There ís ínserted ín Reguíatíons 104 ímmedíateíy after sec-
tíon 23.1 a ne.w sectíon desígnated Sec. 23.19. Proceedíngs U der
Ta d|ustment ct of 1945, and ín Reguíatíons 110 ímmedíateíy
after sectíon 33.1 a new sectíon desígnated Sec. 33.19. Proceedíngs
Under Ta d|ustment ct of 1945, to read ín each case as foííows:
(a) Generaí Ruíe.
In the case of an affíííated group the membershíp of whích remaíns unchanged
and for whích consoíídated returns are made or requíred for the severaí ta abíe
years ínvoíved, any statement fííed under sectíon 3779 of the Code wíth respect to
an e pected carry-back, any appíícatíon for a tentatíve carry-back ad|ustment fííed
under sectíon 37 0, and any appíícatíon for tentatíve ad|ustments wíth respect to
amortízatíon deductíons tííed under sectíon 124( |) shaíí be fííed by the common
parent corporatíon and shaíí díscíose aíí materíaí facts and círcumstances reíatíng
to the group as a whoíe. Such statement or appíícatíon shaíí be fííed on the
appropríate form prescríbed for such purpose, orm 113 , orm 1139, or orm
1140, as the case may be. ny refunds aííowabíe under any such appíícatíon wííí
be made dírectíy to and ín the name of the common parent. The makíng of any
such refund wííí díscharge any ííabíííty of the Government ín respect thereof to
the severaí affíííated corporatíons. The common parent corporatíon and íts severaí
subsídíaríes shaíí be severaííy ííabíe for any amounts assessed pursuant to sectíon
37S0 (b) or (c), 294(e), or 124(k), together wíth any ínterest or penaíty assessed
ín connectíon therewíth.
(6) Groups Wíth Changíng Membershíp Cases Invoívíng Separate Return
Períods.
The membershíp of an affíííated group may change duríng a ta abíe year for
whích a net operatíng íoss or an unused e cess profíts credít aríses or duríng
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117
11 141.
a ta abíe year In whích an eíectíon ís e ercísed to termínate the amortízatíon
períod pursuant to sectíon 124(d) of the Code or ín príor ta abíe years affected
by such net íoss, unused credít, or eíectíon. Or an affíííated group makíng a
consoíídated return for the year of such net íoss, unused credít, or eíectíon
may have made separate returns for one or more of such príor years or a group
makíng separate returns for the year of the net íoss, unused credít, or eíectíon
may have made a consoíídated return for one or more of the príor years. In any
such case, the statement províded for ín sectíon 3779(b) of the Code and the
appíícatíon for the tentatíve carry back ad|ustment províded for ín sectíon 37 0(a)
and the appíícatíon for the tentatíve ad|ustment wíth respect to amortízatíon
deductíons províded for ín sectíon 124(|) shaíí he a |oínt statement or appííca-
tíon concurred ín and e ecuted by each corporatíon whích was a member of the
group at any tíme duríng any of the severaí ta abíe years ínvoíved ín the de-
ferment or ad|ustment sought. The tíme for the payment of ta es shaíí be e -
tended under sectíon 3779 and the ad|ustments províded for In sectíons 37S0 and
124(k) shaíí be made oníy ín accordance wíth an agreement of the severaí
corporatíons ínvoíved to ba made a part of such statement or appíícatíon. ny
refund aííowabíe under any such appíícatíon wíth respect to a consoíídated re-
turn períod wííí be made dírectíy to and ín the name of the common parent
corporatíon, and the makíng of any such refund wííí díscharge any ííabíííty
of the Government ín respect thereof to the severaí affíííated corporatíons. The
common parent corporatíon and íts severaí subsídíaríes shaíí be severaííy ííabíe
for any amounts assessed pursuant to sectíon 37S0 (b) or (c), 204(e), or 124(k),
together wíth any ínterest or penaíty assessed ín connectíon therewíth.
In the absence of nn agreement between the severní corporatíons, or ín the
event of theír faííure to set forth the provísíons of such an agreement as a part
of theír statement or appíícatíon, no e tensíon of tíme for the payment of any
ta under the provísíons of sectíon 3779 shaíí be granted, and no tentatíve ad-
|ustments shaíí be made under eíther sectíon 37S0 or sectíon 124 (|) and (k).
Notwíthstandíng any agreement between the severaí affíííated corporatíons, no
tentatíve ad|ustment shaíí he made wíth respect to eíther a consoíídated or a
separate return períod ín dísregard of the severaí ííabíííty of the severaí cor-
poratíons wíth respect to any ta abíe year for whích a consoíídated return
was made or was requíred.
Par. 3. Sectíon 33.31 ( ) (24) (í) of Reguíatíons 110, as amended by
Treasury Decísíon 5441, approved ebruary 2 , 1945 C. . 1945,
214 , ís further amended to read as foííows:
(í) specífíc e emptíon as províded ín sectíon 710(b) (1),
(Thís Treasury Decísíon ís íssued under the authoríty contaíned
ín sectíon 141 (b) of the Internaí Revenue Code (53 Stat., 5 , 5G Stat.,
5 26 U. S. C, 1940 ed. and Sup., 141(b)) and sectíon 4 of the Ta
d|ustment ct of 1945 (Pubííc Law 1(2, Seventy-nínth Congress),
approved uíy 31, 1945.)
War. T. Sherwood,
ctíng Commíssíoner of Internaí Revenue.
pproved anuary 25,1946.
oseph . O Co eíí, r.,
ctíng Secretary of the Treasury.
( ííed wíth the Dívísíon of the ederaí Regíster anuary 2 , 1946, 2.43 p. m.)
Reguíatíons 110, Sectíon 33.19: Proceedíngs under
Ta d|ustment ct of 1945.
INT RN L R NU COD .
Reguíatíons 110 amended. (See T. D. 5491, page 115.)
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141.
11
Reguíatíons 104, Sectíon 23.31: ases of ta 1946-10-12310
computatíon. T. D. 5510
( íso Sectíon 33.31, Reguíatíons 110.)
TITL 2G € ” INT RN L R NU . € ” Cn rT I, SU C PT R , P RT 23 D
P RT 33.
Reguíatíons 104, reíatíng to consoíídated íncome ta returns of
affíííated corporatíons, and Reguíatíons 110, reíatíng to consoíídated
e cess profíts ta returns of affíííated corporatíons, amended to con-
form to the Revenue ct of 1945.
Treasury Department,
Offíce of Commíssíoner of Internaí Revenue,
Washíngton, D. C.
To Coííectors of Internaí Revenue and Others Concerned:
In order to conform Reguíatíons 104 Part 23, Títíe 26, Code of
ederaí Reguíatíons. Cum. Sup. and Reguíatíons 110 Part 33, Tíde
26, Code of ederaí Reguíatíons, Cum. Sup. to the provísíons of the
Revenue ct of 1945 (Pubííc Law 214, Sevent -nínth Congress),
approved November ,1945, such reguíatíons are amended as foííows:
Paragraph 1. There ís ínserted ín Reguíatíons 104 ímmedíateíy
precedíng sectíon 23.0, and ín Reguíatíons 110 ímmedíateíy precedíng
sectíon 33.0, the foííowíng:
S C. 122. R P L O C SS RO ITS T IN 1946. (R -
NU CT O 1945.)

(d) ffíííated Groups. € ” Subsectíon (b) reíatíng to carry-backs from
years after 1945, etc. shaíí be appííed ín the case of corporatíons makíng
or requíred to make a consoíídated return under chapter 1 for any ta abíe
year begínníng after December 31, 1945, and ín the case of a corpora-
tíon makíng a separate return for any such ta abíe year whích was a
member of a group whích made or was requíred to make a consoíídated
return for any príor ta abíe year, ín such manner as may be prescríbed
In reguíatíons prescríbed by the Commíssíoner wíth the approvaí of
the Secretary príor to the íast day prescríbed by íaw for the makíng
of the return for the year begínníng after December 31, 1945.
€ € € €
Par. 2. There ís ínserted ín sectíon 23.31 of Reguíatíons 104 the
foííowíng new paragraph:
(h) Carry- acks rom Ta abíe Years egínníng fter December SI, 1945.
To the e tent that It may become necessary under sectíon 122(b) of the
Revenue ct of 1945 to determíne a net operatíng íoss for a ta abíe year begín-
níng after December 31, 1945, or to determíne .an unused e cess profíts credít
for any such year, for the purpose of the e cess profíts ta provísíons of Sub-
chapter of Chapter 2, any such determínatíon ín the case of an affíííated group
shaíí be made ín aíí respects as íf a consoíídated return for such year, sub|ect to
the provísíons of Reguíatíons 110, were made or were requíred, íf a consoíídated
íncome ta return for such year ís made or Is requíred under the provísíons of
these reguíatíons. If separate íncome ta returns are properíy fííed for any
such year, the requíred e cess profíts ta determínatíons shaíí be made as íf
separate e cess profíts ta returns were properíy fííed for such year, regardíess
of the fact that consoíídated returns may have been fííed for ta abíe years
begínníng príor to anuary 1, 1946.
Par. 3. There ís ínserted ín sectíon 33.31 of Reguíatíons 110 the
foííowíng new paragraph:
(7í) Carry- acks rom Ta abíe Years egínníng fter December 31,1945.
To the e tent that ít may become necessary under sectíon 122(b) of the Rev-
enue ct of 1945 to determíne a net operatíng íoss for a ta abíe year begínníng
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119
29.143-2.
after December 31, 1945, or to determíne an unused e cess profíts credít for any
such year, for the purpose of these reguíatíons, any such determínatíon ín the case
of an affíííated group shaíí be made In aíí respects as íf a consoíídated e cess profíts
ta return for such year were made or were requíred, If a consoíídated íncome
ta return for such year ís made or ís requíred sub|ect to the provísíons of Reg-
uíatíons 104. If separate íncome ta returns are properíy fííed for any such
year, the requíred e cess profíts ta determínatíons shaíí be made as If separate
e cess profíts ta returns were properíy fííed for such year, regardíess of the fact
that consoíídated returns may have been fííed for ta abíe years begínníng príor
to anuary 1, 194G.
(Thís Treasury Decísíon ís íssued under the authoríty contaíned ín
sectíon 141(b) of the Internaí Revenue Code (53 Stat., 5 . 56 Stat.,
5 26 U. S. C, 1940 ed., and Sup., 141(b)) and sectíon 122(d) of the
Revenue ct of 1945 (Pubííc Law 214, Seventy-nínth Congress),
approved November ,1945.)
os ra D. Nunan, r.,
Commíssíoner of Internaí Revenue.
pproved príí 23,1946.
oseph . O Conneíí, r.,
ctíng Secretary of the Treasury.
( ííed wíth the Dívísíon of the ederaí Regíster príí 24, 1946, 11.13 a. m.)
Reguíatíons 110, Sectíon 33.31: ases of ta computatíon.
INT RN L R NU COD .
Reguíatíons 110 amended. (See T. D. 5491, page 115.)
Reguíatíons 110, Sectíon 33.31: ases of ta
computatíon.
ínternaí revenue code.
Reguíatíons 110 amended. (See T. D. 5510, page 11 .)
S CTION 143. € ” WIT OLDING O T T SOURC .
Sectíon 29.143-2: í ed or determínabíe annuaí 1946-3-1222
or períodícaí íncome. I. T. 37 1
ínternaí revenue code.
mounts dístríbuted pursuant to a pían of reorganízatíon whích
are ta abíe as dívídends by reason of sectíon 112(c)(2) of the
Internaí Revenue Code do not constítute dívídends or other fí ed
or determínabíe annuaí or períodícaí íncome wíthín the meaníng of
sectíon 143(b) of the Code, and such amounts are not sub|ect to wíth-
hoídíng of ta at the source when dístríbuted to nonresídent aííen
stockhoíders.
dvíce ís requested whether íncome ta ís requíred to be wíthheíd
at the source under sectíon 143(b) of the Internaí Revenue Code
wíth respect to corporate dístríbutíons whích quaíífy as dívídends
under sectíon 112(c)(2) of the Code, when such dístríbutíons are
made to nonresídent aííen stockhoíders.
In the case under consíderatíon, ínvoívíng a reorganízatíon as
defíned ín sectíon 112(g) of the Code, the cumuíatíve preferred stock
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29.143-2.
120
and the no-par common stock of the reorganízed company were con-
verted ínto new cumuíatíve convertíbíe preferred stock and new par
vaíue common stock, respectíveíy. The dívídends on the oíd preferred
stock had not been paíd for severaí years príor to reorganízatíon.
Pursuant to the pían of reorganízatíon, each snare of the oíd preferred
stock was to be repíaced wíth one share of the new preferred stock,
eíght shares of the new common stock, and a smaíí cash payment.
ccumuíated earníngs and profíts of the reorganízed company e -
ceeded the cash to be paíd.
The cash payments wííí make avaííabíe to stockhoíders a portíon of
the accumuíated earníngs and profíts of the reorganízed company and
thus wííí have the effect of a dístríbutíon of a ta abíe dívídend. In
accordance wíth the provísíons of sectíon 112(c) (2) of the Code, the
payments are ta abíe as dívídends. It does not foííow, however, that
the payments are ídentícaí wíth ordínary dívídends (Commíssíoners.
George 0. oíb, 100 ed. (2d), 920), or, íf ídentícaí, that thev are sub-
|ect to wíthhoídíng of ta at the source under sectíon 143(b) of the
Code. That sectíon does not requíre wíthhoídíng of ta at the source
wíth respect to aíí corporate dístríbutíons. Under the wordíng of
the statute and the íanguage of sectíon 29.143-2 of Reguíatíons 111,
oníy fí ed or determínabíe annuaí or períodícaí íncome ís sub|ect to
wíthhoídíng.
It ís heíd that amounts dístríbuted pursuant to a pían of reorganíza-
tíon, whích amounts are ta abíe as dívídends by reason of sectíon
112(c) (2) of the Internaí Revenue Code, do not constítute dívídends
or other fí ed or determínabíe annuaí or períodícaí íncome wíthín the
meaníng of sectíon 143(b) of the Code, and such amounts are not sub-
|ect to wíthhoídíng of ta at the source when dístríbuted to nonresí-
dent aííen stockhoíders. (See generaííy L. O. 1024, C. . 2, 1 9
(1920), and G. C. M. 21575, C. . 1939-2, 172.)
Sectíon 29.143-2: í ed or determínabíe 1946-12-1232
annuaí or períodícaí íncome. I. T. 3 05
( íso Sectíon 144, Sectíon 29.144-1 Sectíon 362,
Sectíon 29.362-5.)
INT RN L R NU COD .
Dívídends whích are desígnated by a. reguíated ínvestment com-
pany as capítaí gaín dívídends, ín accordance wíth the provísíons of
sectíon 362(b)(7) of the Internaí Revenue Code, do not constítute
fí ed or determínabíe annuaí or períodícaí íncome wíthín the mean-
íng of sectíon 143(b) of the Code, and such dívídends are not sub|ect
to wíthhoídíng of ta at the source under sectíons 143(b) and 144
of the Code when paíd to nonresídent aííen índívíduaís and nonresí-
dent foreígn corporatíons.
dvíce ís requested whether íncome ta ís requíred to be wíthheíd
at the source under sectíons 143(b) and 144 of the Internaí Revenue
Code wíth respect to dívídends whích are desígnated by a reguíated
ínvestment company as capítaí gaín dívídends, ín accordance wíth the
provísíons of sectíon 362(b) (7) of the Code, when such dívídends are
paíd to nonresídent aííen índívíduaís and nonresídent foreígn cor-
poratíons.
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121
29.143-2.
Sectíon 143(b) of the Internaí Revenue Code-provídes ín part as
foííows:
(b) Nonrksídent ííens. € ” íí persons, In whatever capacíty actíng, €
havíng the controí, receípt, custody, dísposaí, or payment of ínterest €
dívídends, rent, saíaríes, wages, premíums, annuítíes, compensatíons, remunera-
tíons, emoíuments, or other fí ed or determínabíe nnnuaí or períodícaí gaíns,
profíts, and Income (but oníy to the e tent that any of the above ítems constítutes
gross íncome from sources wíthín the Uníted States), of any nonresídent aííen
índívíduaí € shaíí deduct and wíthhoíd from such annuaí or
períodícaí gaíns, profíts, and íncome a ta equaí to 30 per centum thereof €
Sectíon 14-1 of the Code provídes ín part as foííows:
In the case of foreígn corporatíons sub|ect to ta atíon under thís chapter
Chapter 1 of the Codeí not engaged ín trade or busíness wíthín the Uníted
States, there shaíí be deducted and wíthheíd at the source In the same manner
and upon the same ítems of íncome as ís províded ín sectíon 14M a ta equaí to
30 per centum thereof € €
Sectíon 3G2(b) of Suppíement , Chapter 1 of the Code, provídes ín
part as foííows:
(b) Method of Ta atíon of Companíes and Sn ít OLD .RS. € ” In the case of a
reguíated ínvestment company whích dístríbutes duríng the ta abíe year to íts
sharehoíders as ta abíe dívídends other than capítaí gaín dívídends an amount
not íess than )0 per centum of íts net íncome for the ta abíe year computed wíth-
out regard to net íong-term and net short-term capítaí gaíns, and compííes for
such year wíth aíí ruíes and reguíatíons prescríbed by the Commíssíoner, wíth
the approvaí of the Secretary, for the purpose of ascertaíníng the actuaí owner-
shíp of íts outstandíng stock:
€ € € €
(6) capítaí gaín dívídend shaíí be treated by the sharehoíders as gaíns
from the saíe or e change of capítaí assets heíd for more than 6 months.
(7) capítaí gaín dívídend means any dívídend or part thereof whích ís
desígnated by the company as a capítaí gaín dívídend ín a wrítten notíce
maííed to íts sharehoíders at any tíme príor to the e píratíon of thírty days
after the cíose of íts ta abíe year.
Príor to the Revenue ct of 1942, the effect of Suppíement of
Chapter 1 of the Code was to aííow an ínvestment company to earn
and dístríbute íncome wíthout ítseíf íncurríng íncome ta ííabíííty,
the purpose beíng to equaííze the ta effect on ínvestors whether they
ínvested capítaí dírectíy by theír own purchase of securítíes, or
whether they ínvested capítaí through an ínvestment company. Thís
has been referred to as the conduít príncípíe. The conference
report on the revenue bííí of 1942 (C. . 1942-2, 701, 715) states
that the Senate amendment (amendment No. 230) e tends the
recognítíon of the conduít príncípíe to capítaí gaíns, thus ta íng
dístríbuted portíons of such gaíns as capítaí gaíns ín the hands of the
sharehoíders. It wouíd seem, therefore, that Congress has e pressed
an íntent to further equaííze the ta effect on ínvestors whether they
ínvest capítaí dírectíy or through an ínvestment company. Gívíng
effect to such íntent, ín víew of sectíon 302(b) (0) of the Code, an ín-
vestor wííí not be ta ed dífferentíy because hís íncome deríved from
capítaí gaíns has been channeíed through such an ínvestment com-
pany. quaíízatíon of ta effect ís achíeved oníy by treatíng such
dívídends as assumíng the character of capítaí gaíns upon
dístríbutíon.
In víew of the foregoíng, ít ís heíd that dívídends whích are des-
ígnated by a reguíated ínvestment company as capítaí gaín dívídends,
703672 € ” 40 -9
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í 19.145-1.
122
ín accordance wíth the provísíons of sectíon 362(b) (7) of the Internaí
Revenue Code, do not constítute fí ed or determínabíe annuaí or perí-
odícaí íncome wíthín the meaníng of sectíon 143(b) of the Code, and
such dívídends are not sub|ect to wíthhoídíng of ta at the source
under sectíons 143(b) and 144 of the Code when paíd to nonresídent
aííen índívíduaís and nonresídent foreígn corporatíons.
S CTION 144. € ” P YM NT O CORPOR TION
INCOM T T SOURC .
Sectíon 29.144-1: Wíthhoídíng ín the case of
nonresídent foreígn corporatíons.
INT RN L R NU COD .
Capítaí gaín dívídends paíd by a reguíated ínvestment company.
(Seeí. T. 3 05, page 120.)
S CTION 145. € ” P N LTI S.
Sectíon 19.145-1: Penaítíes. 1946-5-12255
Ct. D. 1666
INCOM T € ” INT RN L R NU COD € ” UDICI L COD € ” D CISION O
supreme court.
1. urísdíctíon of Círcuít Court of ppeaís € ” Motíons foe New
Tríaí € ” Convíctíon fob Wííífuííy ttemptíng to Defeat and
vade Ta and fob Conspíríng, ídíng and bettíng.
The Círcuít Court of ppeaís reversed a convíctíon agaínst one re-
spondent for wííífuííy attemptíng to defeat and evade íncome ta es
and for conspíríng to do so, and agaínst the other respondents for
conspíríng wíth and aídíng and abettíng hím. The Supreme Court re-
versed and remanded to the círcuít court, whích, upon ta payers
request, remanded to the tríaí court, and a motíon for new tríaí
was fííed on the ground of newíy díscovered evídence. Motíon was
deníed and the círcuít court affírmed. second petítíon for cer-
tíorarí was dísmíssed, and the ta payers, after obtaíníng a second
remand from the círcuít court, fííed an amended motíon for new tríaí.
The tríaí court concíuded that the basíc ground for the motíon was
wíthout foundatíon. Upon appeaí, the círcuít court reversed. eíd:
The círcuít court of appeaís may not revíew orders denyíng motíons
for a new tríaí of crímínaí prosecutíons for wííífuííy attemptíng
to defeat and evade Income ta es and for conspíracy to do su
when such revíew ís sought on the aííeged ground that the tríaí
court made erroneous fíndíngs of fact and ít does not cíearíy appear
that the fíndíngs are not supported by any evídence. Under ruíe I
of the Crímínaí ppeaís Ruíes the círcuít court of appeaís on íts own
motíon shouíd have dísmíssed the appeaí as frívoíous.
2. Decísíon Reversed and Cause Remanded.
Decísíon of the Uníted States Círcuít Court of ppeaís, Seventh
Círcuít (142 ed. (2d), 5 S), reversed and cause remanded to the
dístríct court to enforce |udgment agaínst petítíoners.
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123
19.145-1.
Supreme Court of thb Uníted States.
The Uníted States of meríca, petítíoner, v. Wííííam R. ohnson.
The Uníted States of meríca, petítíoner, v. ack ommers, ames . artígan,
Wííííam P. eííy and Stuart Soíomon rown.
On wríts of certíorarí to the Uníted States Court of ppeaís for the Seventh Círcuít
ebruary 4, 194 .
OPINION.
Sír. ustíce íack deíívered the opíníon of the Court
On October 12, 1940, after a ederaí dístríct court tríaí íastíng more than
sí weeks, a |ury found respondent ohnson guííty of wííífuííy attemptíng to
defeat and evade a íarge part of hís íncome ta es for the caíendar years 1936-19 9
and of conspíríng to do so the other respondents were convícted and sentenced
for conspíríng wíth and aídíng and abettíng hím.1 rom the tíme of these con-
víctíons untíí now, enforcement of the sentences was deíayed by persístent efforts
to obtaín a new tríaí. Though there has been no second tríaí the case ís here for
the thírd tíme.
September 21, 1941, was the date when the círcuít court of appeaís fírst reversed
the convíctíon, one |udge díssentíng. (123 ed. (2d), 111.) une 7, 1043, we
reversed and remanded the case to the círcuít court of appeaís (319 U. S., 503).
Respondents then asked that court to remand the case to the tríaí court to permít
a motíon for a new tríaí on the ground of newíy díscovered evídence. The cír-
cuít court actíng pursuant to ruíe 11(3) of the Crímínaí ppeaís Ruíes remanded
the case and on October 29, 1943, respondents, wíth íeave of the tríaí court, fííed
a motíon for a new tríaí. The respondents aííeged that the newíy díscovered
evídence proved that Goídsteín, a Government wítness at the tríaí, was un-
worthy of beííef and had commítted per|ury ín testífyíng that certaín propertíes
were purchased by hím on behaíf of ohnson and wíth money suppííed by ohn-
son. To support theír charges agaínst Goídsteín respondents offered numerous
affídavíts. The Government fííed an answer to the motíon and a number of
counter-affídavíts. nd among the papers before the court were affídavíts by
Goídsteín reaffírmíng hís testímony at the tríaí. The tríaí |udge ín a carefuííy
prepared opíníon coveríng 56 pages of the record, gave thoughtfuí consíderatíon
to each affídavít, reached the concíusíon that none of them showed that Goídsteín
had per|ured hímseíf, and found both from the new affídavíts and hís own
knowíedge of the orígínaí 6-weeks tríaí, that Goídsteín s testímony was true.
The motíon for a new tríaí was consequentíy deníed.
The círcuít court of appeaís affírmed. (142 ed. (2d), 5 .) It unanímousíy
heíd that ít couíd not substítute íts |udgment on the facts for that of the tríaí
|udge that ít díd not have power to try these facts de novo that It couíd revíew
the record for errors of íaw, to determíne, among other thíngs, whether the tríaí
|udge had abused hís díscretíon that a revíew of the new evídence ín the record
díd not íncvít:íí)íy íead to the concíusíon that Goídsteín had testífíed faíseíy that
the tríaí |udge had not reached hís concíusíon arbítrarííy, caprícíousíy, or ín
the mísappíícatíon of any ruíe of íaw and hence had not abused hís díscretíon.
The respondents thereupon fííed a second petítíon for certíorarí In thís Court
Whííe thís petítíon was pendíng, respondents presented papers ínformíng us that
they hart díscovered stííí more new evídence tendíng to díscredít Goídsteín s
orígínaí testímony. We deferred consíderatíon of theír case, whích we íater
dísmíssed (323 v . S., 06), and they, after obtaíníng a second remand from the
1 The respondent rown was found guííty oníy on the conspíracy count and counts
a d 4, the substantíve counts for 193 1939.
1 Prevíousíy respondents had appííed to Mr. ustíce rankfurter for a stay of mandate
r ndínc petítíon for rehearíng. Mr. ustíce rankfurter s deníaí of the motíon specífícaííy
stated that ít wns to be wíthout pre|udíce, however, to the consíderatíon and dísposítíon
t 7 the Uníted States Círcuít Court of ppeaís for the Seventh Círcuít of any motíon fííed
tínder ruíe 11(3) of the Crímínaí ppeaís Uuíes (R. ).
Tí. Motíont.
€ € € € €
(3) motíon for a new tríaí soíeíy upon the ground of newíy-díscovered evídence may
made -wíthín sí ty (60) days after fínaí |udgment, wíthout regard to the e píratíon of
the term at whích |udgment was rendered, uníess an appeaí has been taken and In that
event the tríaí court may entertaín the motíon oníy on remand of the case by the appeííate
court for that purpose, and such remand may be made at any tíme after fínaí |udgment.
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19.145-1.
124
círcuít court of appeaís, fííed an amended motíon for new tríaí In the dístríct
court. The tríaí court agaín wrote an opíníon anaíyzíng each new affídavít
In detaíí. These addítíonaí affídavíts contaíned statements whích had they
been offered as testímony at the orígínaí tríaí wouíd have been admíssíbíe and
reíevant to díscredít Goídsteín s and buttress ohnson s testímony. t íeast
some of the facts set out ín the affídavíts had not been díscovered untíí shortíy
before the amended motíon was made. ut the tríaí court concíuded that the
new affídavíts faííed to prove that Goídsteín had commítted per|ury, and that
consequentíy the basíc ground for the motíon € ” that there was new evídence
showíng that Goídsteín had per|ured hímseíf € ” was wíthout foundatíon. That
court found agaín that the new and oíd evídence taken together affírmatíveíy
showed that Goídsteín had been a truthfuí wítness. Thís tíme, however, tbe
círcuít court of appeaís reversed wíth one |udge díssentíng. (149 ed. (2d).
1.) The reversaí rested basícaííy on the court s beííef that the tríaí |udge had
erroneousíy found that Goídsteín díd not commít per|ury. The ma|oríty of
the court revíewed parts of the affídavíts and concíuded from them that the tríaí
|udge s fíndíng that Goídsteín díd not commít per|ury was íííogícaí and unreason-
abíe. The ma|oríty substítuted Its own fíndíng that Goídsteín s orígínaí testí-
mony was unerríngíy faíse and heíd that the tríaí |udge s contrary concíu-
síon amounted to an abuse of díscretíon. Sínce we thínk ít ímportant for the
orderíy admínístratíon of crímínaí |ustíce that fíndíngs on confííctíng evídence
by tríaí courts on motíons for new tríaí based on newíy díscovered evídence
remaín undísturbed e cept for most e traordínary círcumstances, we granted
certíorarí.
In our opíníon the círcuít court of appeaís erred. The appeaí to that court
was so devoíd of merít that ít shouíd have been dísmíssed. The crucíaí ques-
tíon before the tríaí court was one of fact: Díd the new evídence show that
Goídsteín s orígínaí testímony was faíse. The tríaí |udge after carefuííy
studyíng aíí the evídence found that there was nothíng to show per|ury on
the part of Goídsteín, that Goídsteín had ín fact toíd the truth, and concíuded
that a new tríaí was not warranted. The tríaí court thus answered the above
questíon ín the negatíve. Two |udges of the círcuít court of appeaís thought
that the evídence compeííed an affírmatíve answer. ut ít ís not the provínce
of thís Court or the círcuít court of appeaís to revíew orders grantíng or deny-
íng motíons for a new tríaí when such revíew ís sought on the aííeged ground
that the tríaí court made erroneous fíndíngs of fact. ( oímgren v. Uníted
States, 217 U. S., 5C9 oít v. Uníted States, 21 T . S., 245 aírmount Cíass
Works v. Coaí Co., 2 7 U. S., 474, 4 1.) Whííe the appeííate court míght ínter-
vene when the fíndíngs of fact are whoííy unsupported by evídence (cf. Uníted
States v. Socony- acuum Oíí Co., 310 U. S., 150, 247 Gíasscr v. Uníted Síates,
315 U. S., 60, 7), ít shouíd never do so where ít does not cíearíy appear that
the fíndíngs are not supported by any evídence.
The tríaí |udge s fíndíngs were supported by evídence. e had conducted
the orígínaí tríaí and had watched the case agaínst ohnson and the other
respondents unfoíd from day to day. Consequentíy the tríaí udge was e -
ceptíonaííy quaíífíed to pass on the affídavíts. The record of both the orígínaí
tríaí and the proceedíngs on the motíons for a new tríaí shows cíearíy that the
tríaí |udge gave the numerous eíements of the controversy carefuí and honest
consíderatíon. We thínk that even a casuaí perusaí of thís record shouíd have
reveaíed to the círcuít court of appeaís that here nothíng more was ínvoíved
than an effort to upset a tríaí court s fíndíngs of fact.
Determínatíon of guíít or ínnocence as a resuít of a faír tríaí, and prompt
enforcement of sentences ín the event of convíctíon, are ob|ectíves of crímínaí
4 n aíternatíve ground for the court s deníaí of the motíon need not be consídered
here. or as wííí be seen we thínk that the tríaí court s fíndíngs that the so-caííed nc
evídence faííed to show Goídsteín s per|ury shouíd not have been upset. Tbe aíterant
. ground was that aíí the o-caííed newíy díscovered evídence was eíther not newíy dís-
covered, or mereíy cumuíatíve or Impeachíng, and In any event wouíd probabíy not pro-
duce a dífferent resuít. In thís aspect of the case, tbe tríaí court, as díd the círcuít coort
of appeaís In Its fírst opíníon, reííed on the frequentíy quoted and foííowed ruíe announced
In erry v. Georgía (10 Georgía, 511).
€ In addítíon to questíons Invoívíng the mereíy ímpeachíng or cumuíatíve effect of tbe
evídence, whích we have aíready Indícated need not be consídered here (see note 2.
supra), we aíso need not consíder what crítería shouíd have guíded the court ín passín
on the motíon, had respondents actuaííy shown that Goídsteín recanted hís testímony or
that he commítted per|ury. Compare Larríson v. Uníted States (24 ed (2d). 2) wít
erry v. Georgía, upra, note 2. or as íater appears we consíder the dístríct court I
fíndíng, that Goídsteín s testímony was not shown to have been faíse, not revíewabíe.
That was suffícíent to warrant a deníaí of the motíon.
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125
29.162-1.
íaw. In the Interest of promptness, ruíe 11(2) of the Crímínaí ppeaís Ruíes
requíres that motíons for new tríaí generaííy must be made wíthín three (íays
after verdíct or fíndíng of guíít, and ruíe III requíres appeaís to be token
wíthín fíve days. ut motíons for new tríaí on the ground of newíy díscovered
evídence have been more ííberaííy treated. They can, under ruíe 11(3) be
made at any tíme wíthín 60 days after udgment, and ín the event of an
appeaí, at any tíme before fínaí dísposítíon by the appeííate court. Thís e -
traordínary íength of tíme wíthín whích thís type of motíon can be made
Is desígned to afford reííef where despíte the faír conduct of the tríaí, It
íater cíearíy appears to the tríaí |udge that because of facts unknown at
the tíme of tríaí, substantíaí |ustíce was not done. It ís obvíous, however,
that thís prívííege míght íend ítseíf for use as a method of deíayíng enforce-
ment of |ust sentences. specíaííy ís thís true where deíay ís e tended by
appeaís íackíng ín merít. Thís case weíí íííustrates thís possíbíííty. Whííe
a defendant shouíd be afforded the fuíí benefít of thís type of rectífyíng motíon,
courts shouíd be on the aíert to see that the prívííege of íts use Is not abused.
Oue of the most effectíve methods of preventíng thís abuse Is for appeííate
courts to refraín from revíewíng fíndíngs of fact whích have evídence to
support them. The círcuít court of appeaís was ríght ín the fírst ínstance,
when ít decíared that ít díd not sít to try de novo motíons for a new tríaí.
It was wrong In the second ínstance when ít díd revíew the facts de novo and
order the |udgment set asíde.
The appeaí to the círcuít court of appeaís was ínstítuted by notíce of appeaí
under ruíe III of the Crímínaí ppeaís Ruíes. Ruíe I gíves the círcuít court of
appeaís power to supervíse and controí aíí proceedíngs on the appeaí and to
e pedíte such proceedíngs by, among other thíngs, entertaíníng motíons to dís-
míss. Ríy v. Uníted States, 301 U. S., 15 , 164 Mortensen v. Uníted States,
322 U. S., 3G9.) Under that ruíe the círcuít court of appeaís here, after studyíng
the Issues raísed, and upon determíníng that the oníy ob|ectíon was to the tríaí
court s fíndíngs on confííctíng evídence, shouíd have decíded that thís does not
present a revíewabíe íssue of íaw and on Its own motíon have dísmíssed the
appeaí as frívoíous.
The |udgment of the círcuít court of appeaís ís reversed, and the cause Is
remanded to the dístríct court to enforce the |udgments agaínst the petítíoners.
It ís so ordered.
Mr. ustíce ackson and Mr. ustíce Murphy took no part In the consíderatíon
or decísíon of thís case.
SUPPL M NT . € ” ST T S ND TRUSTS.
S CTION 161. € ” IMPOSITION O T .
Sectíon 29.161-1: Imposítíon of the ta .
INT RN L R NU COD .
Reguíatíons 111 amended. (See T. D. 54 , page 19.)
S CTION 1C2. € ” N T INCOM .
Sectíon 29.162-1: Income of estates and trusts.
INT RN L R NU COD .
Reguíatíons 111 amended. (See T. D. 54 , page 19.)
. íbert v. C7ní(c í State (21 ed. (2d). OCR) Corrígan v. Rurtícy (271 . S., 2 ,
329) vent . Uníted States (201 U. S., 127. 131) Sunarman . Uníted State (249 U. S.,
1 2 1 4) : Zucht v. íng (200 U. S.. 174, 17tt : Campbeíí v. Oíney (202 U. S.. 332):
Seaboard írííne y. Co. v. Wat ton (2 7 U. S., 6. 90. 92) : Saíínger v. Uníted States (272
U. ., 542, 544) ryder v. Indíana (305 U. S., 570) fadp v. Georgía (323 U. S., 676).
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19.1 1-1. 126
S CTION 1G6. € ” R OC L TRUSTS.
Sectíon 29.166-1: Trusts wíth respect to the corpus
of whích the grantor ís regarded as remaíníng.ín
substance the owner ta abíe years begínníng príor
to anuary 1,1946.
INT RN L R NU COD .
Reguíatíons 111 amended. (See T. D. 54 , page 19.)
Sectíon 29.166-2: Trusts wíth power to revest corpus
ín the grantor ta abíe years begínníng after
December 31,1945.
INT RN L R NU COD .
Reguíatíons 111 amended. (See T. D.-54 , page 19.)
S CTION 167. € ” INCOM OR N IT O GR NTOR.
Sectíon 29.167-1: Trusts ín the íncome of whích
the grantor retaíns an ínterest.
ínternaí revenue code.
Reguíatíons 111 amended. (See T. D. 54 , page 19.)
Sectíon 29.167-2: Díscretíonary trusts for maínte-
nance or support of certaín benefícíaríes.
INT RN L R NU COD .
Reguíatíons 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 .
Sectíon 19.1 1-1: Partnershíps.
INT RN L R NU COD .
Pennsyívanía husband and wífe partnershíp created for ta -
savíng purposes. (See Ct. D. 1669, page 9.)
Sectíon 19.1 1-1: Partnershíps.
INT RN L R NU COD .
Míchígan husband and wífe partnershíp created for ta -savíng
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 .
Sectíon 29.202-1: Reserve and other poíícy 1946-1-12205
ííabíííty credít for ad|usted normaí-ta net T. D. 54 6
íncome.
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.
ígure to be used ín determíníng reserve and other poíícy ííabíííty
credít for íífe ínsurance companíes.
Treasukt Department,
Offíce of the Secretary of the Treasury,
Washíngton, D. C, December SI, 1945.
To Offícers and mpíoyees of the Treasury Department and Others
Concerned:
y vírtue of the authoríty vested ín me by sectíon 202(b) of the
Internaí Revenue Code (53 Stat., 71), as amended by sectíon 1C3 of
the Revenue ct of 1942 ( 56 Stat., 70: 26 U. S. C., 1940 ed., and
Sup., 202(b)), ít ís hereby determíned that the fígure to be used ín
computíng the reserve and other poíícy ííabíííty credít of íífe
ínsurance companíes for the ta abíe year 1945 shaíí be .9539.
oseph . O Conneíí, r.,
ctíng Secretary of the Treasury.
( ííed wíth the Dívísíon of the ederaí Regíster December 26, 1945, 11.30 a. m.)
S CTION 204. € ” INSUR NC COMP NI S OT R
T N LI OR MUTU L.
Sectíon 29.204-2: Gross íncome. 1946-9-12301
I. T. 379
INT RN L R NU COD .
The portíons of orígínaí premíums estabííshed and segregated as a
reínsurance reserve by a títíe Insurance company on and after une 1,
1945, under sectíon 434 1. b. of the New York State Insurance Law,
as amended, may be treated as unearned premíums under sectíon
204(b) (5) of the Internaí Revenue Code. The portíons of orígínaí
premíums estabííshed and segregated as a reínsurance reserve by a
títíe ínsurance company from une 1, 193 , to May 31, 1945, under
sectíon 434 1. a. of the New York State Insurance Law may not be
treated as unearned premíums under sectíon 204(b) (5) of the Code.
dvíce ís requested reíatíve to the appíícatíon of sectíon 204(b) (5)
of the Internaí Revenue Code to portíons of the orígínaí premíums es-
tabííshed and segregated as a reínsurance reserve by a títíe ínsurance
company (1) on and after une 1,1945, under sectíon 434 1. b. of the
New York State Insurance Law, as amended by sectíon 1, chapter 635,
of the íaws of the State of New York for 1945, and (2) from une 1,
193 , to May 31, 1945, under sectíon 434 1. a. of that íaw príor to
amendment.
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29.204-2.
12
Sectíon 204(b) of the Internaí Revenue Code, reíatíng to the defíní-
tíon of íncome ín the case of ínsurance companíes sub|ect to the ta
ímposed by sectíon 204 of the Code, provídes ín part as foííows:
(1) Gboss íncome. € ” Gross Income means the sum of ( ) the combíned
gross amount earned duríng the ta abíe year, from ínvestment íncome and
from underwrítíng íncome as províded ín thís subsectíon, €
€ € € € €
(4) Underwrítíng íncome. € ” Underwrítíng íncome means the premíums
earned on Insurance contracts duríng the ta abíe year íess íosses íncurred
and e penses Incurred
(5) Premíums earned. € ” Premíums earned on ínsurance contracts duríng
the ta abíe year means an amount computed as foííows:
rom the amount of gross premíums wrítten-on ínsurance contracts duríng
the ta abíe year, deduct return premíums and premíums paíd for reínsurance.
To the resuít so obtaíned add unearned premíums on outstandíng busíness
at the end of the precedíng ta abíe year and deduct unearned premíums on
outstandíng busíness at the end of the ta abíe year. € €
The posítíon of the ureau regardíng the determínatíon of unearned
premíums ín the case of títíe ínsurance companíes ís set forth ín I. T.
19 1 (C. . ní-1,311 (1924)), whích hoíds ín part that the provísíons
of the Revenue ct of 1921 wíth respect to the dívísíon of premíums
receíved by ínsurance companíes ínto earned and unearned premíums
are not appíícabíe to títíe ínsurance companíes whose premíums are
earned ín fuíí at the tíme theír servíces are rendered. That posítíon
was sustaíned ín merícan, Títíe Co. v. Commíssíoner (76 ed. (2d),
32, Ct. D. 992, C. . I -2,254 (1935)) ín connectíon wíth the reserve
fund of a Pennsyívanía títíe ínsurance company, the estabííshment of
whích fund was requíred by the íaws of the State of Pennsyívanía.
In that State a títíe ínsurance company ís requíred to accumuíate a
reserve fund of 250,000 eíther by settíng asíde 10 per cent of the
premíums on the poíícíes íssued or, wíth the approvaí of the State
authorítíes, a greater amount. The fund remaíns constant after the
sum of 250,000. has been accumuíated, and there ís no provísíon for
the reíease of any portíon of such fund to the company s free assets.
In the merícan Títíe Co. case, the court heíd that the premíums for
títíe ínsurance were earned when receíved, and that no part was
deductíbíe as unearned premíums for ederaí íncome ta purposes.
In aríy v. Lawyers Títíe Insurance Corporatíon (132 ed. (2d),
42), the court stated that the generaí posítíon of the ureau as set
forth ín I. T. 19 1, supra, was not appíícabíe to that case ín víew of
the fact that a statute of the State of írgínía requíred títíe ínsurance
companíes to set asíde ín a reserve fund 10 per cent of the premíums
coííected, to be heíd íntact for períods or tíme varyíng wíth the
dífferent types of poíícíes. The írgínía statute províded that the
sums so requíred to be reserved shaíí at aíí tímes and for aíí purposes
be consídered and constítute unearned portíons of the orígínaí pre-
míums. In the íast-cíted case, the court heíd that the amounts re-
served constítuted unearned premíums under the provísíons of the
írgínía statute, takíng the posítíon that because of such statutory
provísíons the amounts were wíthdrawn from the controí of the com-
pany and were heíd ín trust for the contract hoíder duríng the por-
tíon of the períod of rísk whích the statute, prescríbed. The court
stated that ordínarííy a premíum paíd for títíe ínsurance ís to be
treated as fuííy earned when receíved, cítíng merícan Títíe Co. v.
Commíssíoner, supra, and uebner, Property Insurance (1929), page
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129
29.204-2.
493, and that ín the absence of the írgínía statute ít wouíd feeí con-
straíned to hoíd that no part of the premíums receíved couíd be
treated as unearned wíthín the meaníng of the revenue íaws. The
court agreed that a statute of a State couíd not be gíven the effect of
wíthdrawíng from ta atíon what ís ín fact an earned premíum by the
mere devíce of caíííng ít unearned. The court was of the opíníon that
the írgínía statute gíves to the amounts reserved aíí the attríbutes
that pertaín to unearned premíums, í. e., ít wíthdraws them from the
power of the company to use them for íts generaí purposes and ím-
presses them wíth a trust ín favor of contract hoíders untíí the rísk
shaíí have been carríed for the períod that the statute prescríbes.
It was stated that If the company shouíd ín the meantíme become
ínsoívent, they wouíd be avaííabíe as unearned premíums for re-
ínsurance of the contracts, or íf not used for that purpose wouíd be-
íong to the contract hoíders. The court specífícaííy dístínguíshed
the case of merícan Títíe Co. v. Commíssíoner, supra, on the ground
that the Pennsyívanía statute there ínvoíved created mereíy a soívency
reserve.
Sectíon 434 of the New York State Insurance Law, as amended by
sectíon 1, chapter 635, of the íaws of the State of New York for
1945, provídes ín part as foííows:
Reserves. 1. very títíe Insurance corporatíon organízed and doíng nn ín-
surance busíness under thís artícíe shaíí estabíísh, segregate and maíntaín a
reínsurance reserve duríng the períod and for the uses and purposes hereínafter
províded whích shaíí nt aíí tímes and for aíí purposes be deemed and shaíí con-
stítute unearned portíons of the orígínaí premíums and shaíí be charged as a
reserve ííabíííty of such corporatíon ín determíníng íts fínancíaí condítíon
such reserve shaíí be cumuíatíve and shaíí be estabííshed and shaíí consíst of
the foííowíng:
a. the reserve requíred to be estabííshed by such corporatíons up to May
thírty-fírst, níneteen hundred forty-fíve pursuant to paragraph (a) of subsectíon
one of sectíon four hundred thírty-four of chapter twenty-eíght of the consoíí-
dated íaws as enacted by chapter eíght hundred eíghty-two of the íaws of níne-
teen hundred thírty-níne and,
b. begínníng une fírst níneteen hundred forty-fíve (1) one doííar fífty cents
for each rísk assumed under a bínder or poíícy of ínsurance or any certífícate or
agreement íssued under eíther of them, píus one-eíghtíeth of one per cent of the
face amount of ínsurance effected thereby and (2) three per cent of the gross
fees and premíums receíved by ít for guaranteed certífícates of títíe, guaranteed
searches and guaranteed abstracts of títíe not íncíuded ín (1) of thís paragraph.
The statutory provísíons mentíoned ín sectíon 434 í.a., supra, are as
foííows:
(a) Duríng the fírst ten years of íts doíng busíness after une fírst, níneteen
hundred thírty-eíght, ít shaíí set up, accumuíate and maíntaín a reserve at the
end of each caíendar month at íeast equaí to three per cent of the totaí gross fees
and premíums receíved by ít duríng the ne t precedíng caíendar month for
títíe ínsurance, e amínatíons or searches of títíe, and for abstracts of títíe wrít-
ten, íssued or performed, as the case may he, after une fírst, níneteen hundred
thírty-eíght and at the end of every such caíendar month the amount so re-
quíred to be accumuíated shaíí be charged as a reserve ííabíííty of such corpora-
tíon ín determíníng íts fínancíaí condítíon.
Sectíon 434 í.b. of the New York State Insurance Law, supra,
gíves to the portíons of the premíums whích ít requíres to be píaced
ín the reserve aíí the attríbutes that pertaín to unearned premíums,
í. e., ít wíthdraws them from the power of the company to use them
for íts generaí purposes and ímpresses them wíth a trust ín favor of
the contract hoíders untíí the rísk shaíí have been carríed for the
períod that the statute prescríbes. In that respect ít ís símííar
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29.207-1.
130
to the provísíons of the írgínía statute ínvoíved ín aríy v. Lawyers
Títíe Insurance Corf oratíon, supra. owever, the provísíons of
sectíon 434 í.a. of the íaws of New York, supra, and íts counterpart,
sectíon 434 í.(a) of chapter 2 of the consoíídated íaws as enacted
by chapter 2 of the íaws of 1939, supra, are símííar to the Pennsyí-
vanía statutory provísíons whích were ínvoíved ín merícan Títíe Co.
v. Commíssíoner, supra. They mereíy províde for a soívency reserve,
and, unííke the provísíons of the írgínía statute ínvoíved ín aríy
v. Lawyers Títíe Insurance Corporatíon, supra, they do not ímpress
the reserve funds wíth a trust ín favor of the contract hoíders.
In víew of the foregoíng, ít ís heíd that the portíons of orígínaí
premíums estabííshed and segregated as a reínsurance reserve by a
títíe ínsurance company on and after une 1, 1945, under sectíon
434 í.b. of the New York State Insurance Law, supra, may be treated
as unearned premíums under sectíon 204(b) (5) of the Internaí Rev-
enue Code. The portíons of orígínaí premíums estabííshed and segre-
fated as a reínsurance reserve by a títíe ínsurance company from
une 1,193 , to May 31,1945, under sectíon 434 í.a. of the New York
State Insurance Law, supra, may not be treated as unearned premíums
under sectíon 204(b) (5) of the Code. (See Cíty Títíe Insurance Co. v.
Commíssíoner, 152 ed. (2d), 59, as to the íatter concíusíon.)
S CTION 207. € ” MUTU L INSUR NC COMP NI S
OT R T N LI OR M RIN .
Sectíon 29.207-1: Ta on mutuaí ínsurance com- 1946-6-12264
paníes other than íífe or maríne or fíre ínsur- T. D. 5497
ance companíes sub|ect to the ta ímposed by
sectíon 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.
mendíng Reguíatíons 111 to conform to sectíon 121 (b) and (d)
and sectíon 122(g) (7) of the Revenue. ct of 1945, reíatíng to ínsur-
ance companíes.
Treasury Department,
Offíce of Commíssíoner of Internaí Revenue,
Washíngton 25, D. C.
To Coííectors of Internaí Revenue and Others Concerned:
In order to conform Reguíatíons 111 Part 29, Títíe 26, Code of
ederaí Reguíatíons, Cum. Sup. to sectíon 121 (b) and (d) and
sectíon 122(g)(7) of the Revenue ct of 1945 (Pubííc Law 214,
Seventy-nínth Congress), enacted November ,1945 C. . 1945, 540 ,
such reguíatíons are amended as foííows:
Paragraph 1. There ís ínserted ímmedíateíy precedíng sectíon
29.204-1 the foííowíng:
S C. 122. R P L O C SS PRO ITS T IN 1946. (R -
NU CT O 1945. TITL I.)

(g) Technícaí mekdments. € ” ffectíve wíth respect to ta abíe
years begínníng after December 1, 1945 € ”
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131
29.207-1.
(7) Sectíon 204(a)(2) (reíatíng to foreígn mutuaí Insurance
companíes other than íífe or maríne) ís amended to read as foííows:
(2) Normaí-ta and corporatíon surta net íncome of foreígn
ínsurance companíes other than íífe or mutuaí and foreígn
mutuaí maríne. € ” In the case of a foreígn ínsurance company (other
than a íífe or mutuaí ínsurance company) and a foreígn mutuaí
maríne ínsurance company and a foreígn mutuaí fíre ínsurance
company descríbed ín paragraph (1) of thís subsectíon, the normaí
ta net íncome shaíí be the net íncome from sources wíthín the
Uníted States mínus the credít províded ín sectíon 26(a) and the
credít províded ín sectíon 26(b), and the corporatíon surta net
íncome shaíí be the net íncome from sources wíthín the Uníted States
mínus the credít províded In sectíon 26(b).
– €
Par. 2. There ís ínserted ímmedíateíy precedíng sectíon 29.207-1
the foííowíng:
S C. 121. D CR S IN CORPOR TION SURT . (R NU
CT O 1945, TITL I.)
€ € € € €
(b) Mutuaí Insurance Companíes Other Than Lífe or Maríne. € ”
(1) Sectíon 207(a)(1)( ) (reíatíng to surta on mutuaí ínsur-
ance companíes, other than íífe or maríne) ís amended to read as
foííows:
( ) Surta . € ” surta on the corporatíon surta net íncome,
computed at the rates províded ín sectíon 15(b), e cept that
íf the corporatíon surta net Income ís not more than . 6,000
the surta shaíí be 12 per centum of the amount by whích the
corporatíon surta net íncome e ceeds 3,000.
(2) Sectíon 207(a)(3)( ) (reíatíng to surta on Interínsurers
or recíprocaí underwríters) ís amended by stríkíng out 32 per
centum and ínsertíng ín ííeu thereof 2 per centum .
€ €
(d) Ta abíe Years to Whích ppíícabíe. € ” The amendments made
by tííís sectíon shaíí be appíícabíe wíth respect to ta abíe years begínníng
after December 31, 1945.
Par. 3. Sectíon 29.207-1, as amended by Treasury Decísíon 5369,
approved May 11,1944 C. . 1944, 333 , ís amended as foííows:
( ) y ínsertíng ímmedíateíy after the headíng thereof the foííow-
íng: (a) Generaí: 1
( ) y stríkíng out the fífth paragraph and ínsertíng ín ííeu
thereof the foííowíng:
Mutuaí Insurance companíes sub|ect to the ta ímposed by sectíon 207, e cept
ínterínsurers or recíprocaí underwríters, wíth corporatíon surta net íncomes
of over 3,C00 or wíth gross amounts of íncome from ínterest, dívídends, rents, and
net premíums, mínus dívídends to poíícyhoíders, mínus whoííy ta -e empt ínterest
of over 75,000, are sub|ect to a ta computed under sectíon 207(a) (1) or sectíon
207(a)(2) whíchever ís the greater. Interínsurers and recíprocaí underwríters
wíth corporatíon surta net íncomes of over 50,000 are sub|ect to a ta computed
under sectíon 207(a) (3).
(C) y stríkíng out the sí th and seventh paragraphs and ínsertíng
ín ííeu thereof the foííowíng:
(6) Ta abíe years begínníng príor to anuary 1, IO- íG. € ” or any ta abíe year
begínníng príor to anuary 1,1940, the ta under sectíon 207(a) (1) and 207(a) (3),
e cept as hereínafter índícated, ís computed upon normaí-ta net Income and
corporatíon surta net íncome at the rates províded ín sectíon 13 or sectíon
14(b) and ín sectíon 15(b) appíícabíe to such year. The ta under sectíon
207(a) (2), e cept as hereínafter índícated, ís a ta equaí to the e cess of 1 per
cent of the gross amount of íncome from ínterest, dívídends, rents, and net
premíums, mínus dívídends to poíícyhoíders, mínus whoííy ta -e empt ínterest,
over the amount of the ta ímposed under Subchapter of Chapter 2.
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29.207-1.
132
Under sectíon 207(a) (1), companíes wíth normaí-ta net íncomes of between
3,000 and 6,153. 6, and wíth corporatíon surta net Incomes of between 3,000
and ,000, pay a normaí ta , at the rate of 30 per cent, and a surta , at the rate
of 20 per cent, on that portíon of the normaí-ta net íncome and the corporatíon
surta net íncome, respectíveíy, ín e cess of 3,000. Under sectíon 207(a) (2),
companíes wíth gross amounts of íncome from ínterest, dívídends, rents, and
net premíums, mínus dívídends to poíícyhoíders, mínus whoííy ta -e empt ínterest,
of between 75,000 and 150,0 0, pay a ta equaí to the e cess of 2 per cent
of that portíon ín e cess of 75,000, over the amount of the ta ímposed under
Subchapter of Chapter 2. Under sectíon 207(a) (3) ínterínsurers and recíprocaí
underwríters wíth normaí-ta net Incomes and corporatíon surtr net íncomes
of between 50,000 and 100,000 pay a normaí ta , at the rate of 4 per cent, and
a surt : , at the rate of 32 per cent, on that portíon of the normaí-ta net íncome
and the corporatíon surta net íncome, respectíveíy, ín e cess of 50,000.
(D) y ínsertíng ímmedíateíy after e ampíe (4) the foííowíng:
(c) Ta abíe years begínníng after December SI, 1 )Ií5.- € ” or any ta abíe year
begínníng after December 31, 1945, the ta under sectíon 207(a) (1) and 207(a) (3).
e cept as hereínafter índícated, ís computed upon normaí-ta net íncome and
corporatíon surta net íncome at the-rates províded ín sectíon 13 or sectíon Míí))
and ín sectíon 15(b) appíícabíe to such year. The ta under sectíon 207(a)(2),
e cept as hereínafter índícated, ís 1 per cent of the gross amount of íncome from
ínterest, dívídends, rents, nnd net premíums, mínus dívídends to poíícyhoíders,
mínus whoííy ta -e empt ínterest.
Under sectíon 207(a)(1) companíes wíth normaí-ta net Incomes of between
3,000 and 6,153. 6 and wíth corporatíon surta net íncomes of between 3,000
and 0,000, pay a normaí ta , at the rate of 30 per cent, and a surta , at the
rate of 12 per cent, on that portíon of the normaí-ta net íncome and the corpora-
tíon surta net íncome, respectíveíy, ín e cess of 3,0t 0. Under sectíon 237(a)(2),
companíes wíth gross amounts of íncome from ínterest, dívídends, rents, and
net premíums, mínus dívídends to poíícyhoíders, mínus whoííy ta -e empt ínterest,
of between 75,000 and 150,000, pay a ta equaí to the e cess of 2 per cent of
that portíon In e cess of 75,000. Under sectíon 207(a)(3) ínterínsurers and
recíprocaí underwríters wíth normaí-ta net íncomes and corporatíon surta
net íncomes of between . 0,000 and 100,000 pay a normaí ta , at the rate of 4
per cent, and a surta , at the rate of 2 per cent, on that portíon of the normaí-
ta net íncome and the corporatíon surta net íncome, respectíveíy, ín e cess of
50,000.
Sectíon 207(a) (4) provídes for an ad|ustment of the amount computed under
sectíon 207(a)(1), sectíon 207(a)(2)( ), and sectíon 207(a)(3) where the
gross amount receíved duríng the ta abíe year from ínterest, dívídends, rents,
and premíums (íncíudíng deposíts and assessments) ís over 75,000 and íess thaa
125,000. The ad|ustment reduces the ta otherwíse computed under those sec-
tíons to an amount whích bears the same proportíon to such ta as the e cess
over 75,000 bears to 50,000.
The appíícatíon of sectíon 2.07(a) (1), (2), (3), and (4) may be íííustrated
by the foííowíng e ampíes:
ampíe (1). The Company, a mutuaí casuaíty ínsurance company, for the
ta abíe year 1946 has a corporatíon surta net íncome of 3,500 and cíue to par-
tíaííy ta -e empt ínterest of 600, a normaí-ta net íncome of 2,900. The gross
amount of íncome of the Company from ínterest, dívídends, rents, net pre-
míums, mínus dívídends to poíícyhoíders, mínus whoííy ta -e empt ínterest
Is 150,000. It ís not sub|ect to normaí ta under sectíon 207(a)(1) for the
ta abíe year 1946 as íts normaí-ta net íncome does not e ceed 3,000. Its sur-
ta ís 12 per cent of 500 ( 3,500 € ” 3,000) or 00, sínce íts surta net íncome ís
not more than 6,000. It has no normaí ta and, therefore, íts totaí ta nndor
sectíon 207(a)(1) ís the surta of 00. The ta under sectíon 207(a)(2) sí
per cent of 150,000, or 1,500. Sínce the ta under sectíon 207(a) (2) e ceeds
the ta under sectíon 207(a) (1), the ta under sectíon 207(a) ís 1,500, nameíy,
that ímposed by sectíon 207(a) (2).
ampíe (2). If ín the above e ampíe the normaí-ta net íncome and the
corporatíon surta net íncome were each íess than 2,900, the gross amount
receíved from ínterest, dívídends, rents, and premíums (íncíudíng deposíts and
assessments) was 90,000 and the gross amount of íncome from ínterest, díví-
dends, rents, and net premíums, mínus dívídends to poíícyhoíders, mínus whoííy
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133
29.207-1.
ta -e empt ínterest was 70,000, the Company wouíd be requíred to fííe an
íncome ta return but due to sectíon 207(a) no íncome ta wouíd be ímposed.
ampíe (3). The Y Company, a mutuaí fíre ínsurance company sub|ect to
the ta ímposed by sectíon 207, for the ta abíe year 1946 has a normaí-ta net
íncome of 6,000 and a corporatíon surta net íncome of 7,000. The gross amount
receíved from ínterest, dívídends, rents, and premíums (íncíudíng deposíts and
assessments) ís 120,000 and the gross amount of íncome from ínterest, dívídends,
rents, and net premíums, mínus dívídends to poíícyhoíders, mínus whoííy ta -
e empt ínterest ís 100,000. Under sectíon 207(a)(1), wíthout appíícatíon of
sectíon 207(a) (4), the normaí ta wouíd be 30 per cent of 3,000, or 900, sínce
thís ís íess than 020, the ta computed at the rates províded ín sectíon 14(b)
and the surta wouíd be 6 per cent of 7,000, or 420, the rate províded ín sectíon
15(b) (1), sínce íts surta net íncome e ceeds 6,000 but does not e ceed 25,000.
The combíned ta of 1,320 wouíd then be reduced by appíyíng sectíon 207(a) (4),
sínce the gross receípts are between 75,000 and 125,000. The ta under sectíon
207(a) (1), as thus ad|usted, wouíd be 90 per cent of 1,320, or 1,1 , sínce
45,000 (the e cess of 120,000 over 75,000) ís 90 per cent of 50,000. Under
sectíon 207(a) (2) ( ), wíthout reference to sectíon 207(a) (4), the ta ís 2 per
cent of 25,000 (the e cess of 100,000 over 75,000), or 500, sínce thís ís íess
than 1,000, 1 per cent of 100,000. ppíyíng sectíon 207(a) (4) reduces thís to
450, or 90 per cent of 500. Sínce 1,1 , the ta under sectíon 207(a) (1), as
ad|usted, e ceeds 450, the ta under sectíon 207(a)(2), as ad|usted, the ta
under sectíon 207(a)(1), as ad|usted, ís appíícabíe. The Y Company wouíd
accordíngíy pay a combíned normaí ta and surta of 1,1 .
ampíe (4). The Z change, an ínterínsurer, for the ta abíe year 1946 has a
corporatíon surta net íncome of 60,000 and, due to partíaííy ta -e empt ínterest
of 12,000, a normaí-ta net íncome of 4 ,000. The gross amount receíved from
ínterest, dívídends, rents, and premíums (íncíudíng deposíts and assessments)
ís 2,700,000. The Z change ís not sub|ect to normaí ta under sectíon
207(a) (3) for the ta abíe year 1946 as íts normaí-ta net íncome ís íess than
50,000. Its surta ís 2 per cent of 10,000 ( 60,000 € ” 50,000) or 2, 00, sínce
that amount ís íess than ,400, the surta computed at the rate províded ín sectíon
15(b). Sínce ít has no normaí ta and ís not sub|ect to the ta ímposed by sectíon
207(a) (2) nor entítíed to the ad|ustment províded ín sectíon 207(a) (4), íts totaí
ta under sectíon 207(a) ís 2,SO0.
(Thís Treasury Decísíon ís íssued under the authoríty contaíned ín
sectíons 121 and 122 of the Revenue ct of 1915 (Pubííc Law 214,
Seventy-nínth Congress), enacted November , 1945, and sectíon G2
of the Internaí Revenue Code (53 Stat., 32 26 U. S. C, 1940 ed., and
Sup., 62).)
oseph D. Nuna , r.,
Commíssíoner of Internaí Revenue.
pproved ebruary 27, 1946.
oseph . O Co eí , r.,
ctíng Secretary of the Treasury.
( ííed wíth the Dívísíon of the ederaí Regíster 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.
Sectíon 29.211-7: Ta atíon of nonresídent 1946-6-12265
aííen índívíduaís. T. D. 5499
( íso Sectíon 231, Sectíon 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.)
Reguíatíons affectíng the ta atíon of nonresídent aííens, resídents
of rance, and rench corporatíons and other entítíes under the
ta conventíon between the Uníted States and rance, procíaímed by
the Presídent of the Uníted States on anuary 5, 1945, effectíve
anuary 1, 1945.
Treasury Department,
Offíce of Commíssíoner of Internaí Revenue,
Washíngton, D. C.
To Coííectors of Internaí Revenue and Others Concerned:
Tabíe op Contents.
Sectíon.
7.410. Introductory.
7.411. ppíícabíe provísíons of Internaí Revenue Code.
7.412. Scope of the conventíon.
7.413. Defínítíons.
7.414. Scope of conventíon wíth respect to Industríaí and commercíaí profíts.
7.415. Controí of domestíc enterpríse by a rench enterpríse.
7.416. Income from operatíon of shíps or aírcraft.
7.417. Income from reaí property, íncíudíng míneraí royaítíes.
7.41 . Patent and copyríght royaítíes.
7.419. Government wages, saíaríes, and símííar compensatíon, pensíons and íífe
annuítíes.
7.420. Compensatíon for íabor or personaí servíces.
7.421. Stocks, securítíes, and commodítíes.
7.422. Remíttances to students.
7.423. Credít agaínst Uníted States ta ííabíííty for íncome ta paíd to rance.
7.424. d|ustment of ta ííabíííty of resídents of rance and rench corporatíons.
7.42 ííeeíprocaí admínístratíve assístance.
7.420. Recíprocaí reguíatíons.
Sectíon 7.410. Introductory. € ” The ta conventíon and protocoí
between the Uníted States and rance (hereínafter referred to as the
conventíon) procíaímed by the Presídent of the Uníted States on
anuary 5, 1945, and effectíve anuary 1, 1945, províde ín part as
foííows:
TITL I. DOU L T TION.
rtícíe 1.
The ta es referred to In thís conventíon are:
( ) In the case of the Uníted States of meríca: The ederaí Income ta es,
Incíudíng surta es and e cess-profíts ta es
(h) In the case of rance:
(1) The reaí estate tu
(2) The índustríaí and commercíaí profíts ta
(3) The annuaí ta on undístríbuted profíts
(4) The agrícuíturaí profíts ta
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135
29.211-7.
(5) The ta on saíaríes, aííowances and emoíuments, wages, pensíons and
annuítíes
(6) The professíonaí profíts ta
(7) The ta on íncome from securítíes and movabíe capítaí
( ) The generaí íncome ta .
rtícíe 2.
Income from reaí property, íncíudíng íncome from agrícuíturaí undertakíngs,
shaíí be ta abíe oníy ín the State ín whích such reaí property ís sítuated.
rtícíe 3.
n enterpríse of one of the contractíng States ís not sub|ect to ta atíon by the
other contractíng State ín respect of íts índustríaí and commercíaí profíts e cept
ín respect of such profíts aííocabíe to íts permanent estabííshment ín the íatter
State.
No account shaíí be taken, ín determíníng the ta ín one of the contractíng
States, of the purchase of merchandíse effected thereín by an enterpríse of the
other State for the purpose of suppíyíng estabííshments maíntaíned by such
enterpríse ín the íatter State.
The competent authorítíes of the two contractíng States may íay down ruíes by
agreement for the apportíonment of índustríaí and commercíaí profíts.
The term índustríaí and commercíaí profíts shaíí not íncíude the foííowíng:
(a) Income from reaí property
(6) Income from mortgages, from pubííc funds, securítíes (Incíudíng mortgage
bonds), íoans, deposíts and current accounts
(c) Dívídends and other íncome from shares ín a corporatíon
d) Rentaís or royaítíes arísíng from íeasíng personaí property or from any
ínterest ín such property, íncíudíng rentaís or royaítíes for the use of, or for the
prívííege of usíng, patents, copyríghts, secret processes and formuíae, good
wííí, trade-marks, trade-brands, franchíses, and other ííke property
(c) Profít or íoss from the saíe or e change of capítaí assets.
Sub|ect to the provísíons of thís conventíon the íncome referred to ín paragraphs
( ). ( ), ( ). ( ), and (e) shaíí be ta ed separateíy or together wíth índustríaí
and commercíaí profíts ín accordance wíth the íaws of the contractíng States.
rtícíe 4.
merícan enterpríses havíng permanent estabííshments In rance are requíred
to submít to the rench físcaí admínístratíon the same decíaratíons and the same
|ustífícatíons, wíth respect to such estabííshments, as rench enterpríses.
The rench físcaí admínístratíon has the ríght, wíthín the provísíons of íts
natíonaí íegísíatíon and sub|ect to the measures of appeaí províded ín such íegís-
íatíon, to make such correctíons ín the decíaratíon of profíts reaíízed In rance as
may be necessary to show the e act amount of such profíts.
The same príncípíe appííes mutatís mutandís to rench enterpríses havíng
permanent estabííshments ín the Uníted States.
rtícíe 5.
When an merícan enterpríse, by reason of íts partícípatíon In the manage-
ment or capítaí of a rench enterpríse, makes or Imposes on the íatter, ín theír
commercíaí or fínancíaí reíatíons, condítíons dífferent from those whích wouíd
be made wíth a thírd enterpríse, any profíts whích shouíd normaííy have ap-
peared In the baíance sheet of the rench enterpríse, but whích have been ín
thís manner, díverted to the merícan enterpríse, are, sub|ect to the measures
of appeaí appíícabíe ín the case of the ta on índustríaí and commercíaí profíts,
íncorporated ín the ta abíe profíts of the rench enterpríse.
The same príncípíe appííes mutatís mutandís, ín the event that profíts are
díverted from an merícan enterpríse to a rench enterpríse.
rtícíe 6.
Income deríved by navígatíon enterpríses of one of the contractíng States
from the operatíon of shíps documented under the íaws of that State shaíí con-
tínue to benefít ín the other State by the recíprocaí ta e emptíons accorded by
the e change of notes of une 11 and uíy , 1927, between the Uníted States
of meríca and rance.
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í .29.211-7.
136
Income whích an enterpríse of one of the contractíng States deríves from
the operatíon of aírcraft regístered ín that State shaíí be e empt from ta atíon
ín the other State.
rtícíe 7.
Royaítíes from reaí property or ín respect of the operatíon of mínes, quarríes
or other naturaí resources shaíí be ta abíe oníy ín the contractíng State ín
whích such property, mínes, quarríes or other naturaí resources are sítuated.
Royaítíes deríved from wíthín one of the contractíng States by a resídent or
by a corporatíon or other entíty of the other contractíng State as consíderatíon
for the ríght to use copyríghts, patents, secret processes and formuíae, trade-
marks and other anaíogous ríghts shaíí be e empt from ta atíon ín the former
State, províded such resídent, corporatíon or other entíty does not have a
permanent estabííshment there.
rtícíe S.
Wages, saíaríes and símííar compensatíon and pensíons paíd by one of the
contractíng States or by a poíítícaí subdívísíon thereof to Indívíduaís resídíng
ín the other State shaíí be e empt from ta atíon ín the íatter State.
Prívate pensíons and íífe annuítíes deríved from wíthín one of the contract-
íng States and paíd to Indívíduaís resídíng ín the other contractíng State shaíí
be e empt from ta atíon ín the former State.
rtícíe 0.
Income from íabor or personaí servíces shaíí be ta abíe oníy In the State ín
whích the ta payer carríes on hís personaí actívíty.
Thís provísíon does not appíy to the íncome referred to ín artícíe .
rtícíe 10.
Income from the e ercíse of a ííberaí professíon shaíí be ta abíe oníy ín the
State ín whích the professíonaí actívíty ís e ercísed.
There ís the e ercíse of a ííberaí professíon ín one of the two contractíng
States oníy when the professíonaí actívíty has a fí ed center ín that country.
rtícíe 11.
Gaíns deríved ín one of the contractíng States from the saíe or e change of
stocks, securítíes or commodítíes by a resídent or a corporatíon or other entíty
of the other contractíng State shaíí be e empt from ta atíon ín the former State,
províded such resídent or corporatíon or other entíty has no permanent estab-
ííshment ín the former State.
rtícíe 12.
Students from one of the contractíng States resídíng In the other contractíng
State e cíusíveíy for the purpose of study shaíí not be ta abíe by the íatter
State ín respect of remíttances receíved from wíthín the former State for the
purpose of theír maíntenance or studíes.
rtícíe 13.
In the caícuíatíon of ta es estabííshed ín one of the contractíng States on the
use of property or íncrement of property of an enterpríse of the other State,
account, sííníí be taken oníy of that portíon of the capítaí sítuated or empíoyed and
aííocabíe to a permanent estabííshment wíthín the former State.
The foregoíng provísíon shaíí appíy to the rench patent ta and the
Uníted States capítaí stock ta even though these two ta es have not been
referred to ín artícíe 1 of the present conventíon.
In the appíícatíon of the present artícíe navígatíon enterpríses of one of the
contractíng States, en|oyíng In the other State the benefíts of artícíe 6 of the
present conventíon, shaíí not be consídered as havíng a permanent estabííshment
In the íatter State ín so far as shíppíng actívítíes are concerned.
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137
29.211-7.
rtícíe 14.
It Is agreed that doubíe ta atíon shaíí be avoíded In the foííowíng manner:
. s regards the Uníted States of meríca:
Notwíthstandíng any other provísíon of thís conventíon, the Uníted States of
meríca ín determíníng the Income and e cess-profíts ta es, íncíudíng aíí sur-
ta es, of íts cítízens, or resídents, or corporatíons, may íncíude ín the basís upon
whích such ta es are ímposed, aíí ítems of Income ta abíe under the revenue
íaws of the Uníted States of meríca, as though thís conventíon had not come
Into effect. The Uníted States of meríca shaíí, however, deduct from the ta es
thus computed the amount of rench íncome ta paíd. Thís deductíon shaíí be
made ín accordance wíth the benefíts and íímítatíons of sectíon 131 of the Uníted
States Internaí Revenue Code reíatíng to credít for foreígn ta es.
. s regards rance:
(o) Schcduíar ta es. € ” Income from securítíes, debts and trusts havíng Its
source ín the Uníted States of meríca shaíí be sub|ect In rance to the ta on
íncome from securítíes but thís ta shaíí be reduced by the amount of the ta
aíready paíd ín the Uníted States of meríca on the same íncome. In consíd-
eratíon of the físcaí regíme to whích the íegísíatíon of the Uníted States of
meríca sub|ects the Income of nonresídent aííens and foreígn corporatíons or
other entítíes, the deductíon of the ta paíd ín the Uníted States of meríca
shaíí he effected ín a íump sum through a reductíon of 12 ín the rate of the ta
estabííshed by the rench íaw.
The íncome other than that índícated In the precedíng paragraph shaíí not be
sub|ect to any scheduíar ta ín rance when, accordíng to thís conventíon, ít Is
ta abíe ín the Uníted States of meríca.
(6) Generaí ta on revenue. € ” Notwíthstandíng any other provísíon of the
present conventíon, the generaí íncome ta can be determíned accordíng- to aíí
the eíements of ta abíe íncome as ímposed by rench físcaí íegísíatíon.
owever, the provísíons of the fírst paragraph of artícíe 114 of the rench
Code on dírect ta atíon reíatíve to the ta atíon of aííens domícííed or resídent
ín rance shaíí contínue to be appííed.
rtícíe 15.
In derogatíon of artícíe 3 of the decree of December 6, 1 72, merícan cor-
poratíons whích maíntaín In rance permanent estabííshments shaíí be ííabíe
to the ta on Income from securítíes on three-fourths of the profíts actuaííy
deríved from such estabííshments, the índustríaí and commercíaí profíts beíng
determíned ín accordance wíth artícíes 3 and 4 of thís conventíon.
The remaíníng one-fourth shaíí, ín aíí cases, be taken as the basís of the annuaí
ta on undístríbuted profíts appíícabíe to the same corporatíons.
btící.b 1G.
n merícan corporatíon shaíí not be sub|ect to the obíígatíons prescríbed
by artícíe 3 of the decree of December 6, 1 72, by reason of any partícípatíon In
the management or In the capítaí of, or any other reíatíons wíth, a rench cor-
poratíon. In such case, the ta on íncome from securítíes contínues to be íevíed,
ín conformíty wíth rench íegísíatíon, on the dívídends, ínterest and aíí other
dístríbutíons made by the rench enterpríse but ít ís moreover coííectíbíe, íf
the occasíon aríses, and sub|ect to the measures of appeaí appíícabíe In the
case of the ta on Income from securítíes, wíth respect to the profíts whích the
merícan corporatíon deríves from the rench corporatíon under the condítíons
prescríbed ín artícíe 5.
rttcíh 17.
The merícan corporatíons sub|ect to the provísíons of artícíe 3 of the decree
of December 6, 1 72, who were not píaced under the specíaí regíme estabííshed
by artícíes 5 and C of the conventíon for the avoídance of doubíe íncome ta atíon
between the Uníted States of meríca and rance, sígned príí 27, 1932 C. .
I -2, 535 (1935) , may, duríng a new períod of sí months from the date of
the entry ínto force of the present conventíon, e ercíse wíth reference to past
years, the optíon províded In those two artícíes under the condítíons whích they
prescríbe.
103672 € ” 46 10
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529.211-7.
13
Moreover, the merícan corporatíons contempíated In the thírd paragraph of
artícíe 10 of the conventíon of príí 27, 1932, may be admítted to benefít from
the provísíons of that paragraph, when the ta has not yet been paíd, If the
íatter was not found to be payabíe, príor to May 1, 1930, by a defínítíve |udícíaí
decísíon.or íf such decísíon has been the sub|ect of an appeaí In cassatíon.
htícíe 1 .
ny Uníted States Income ta ííabíííty remaíníng unpaíd as at the effectíve
date of thís conventíon for years begínníng príor to anuary 1, 19 6. of any
Indívíduaí resídent of rance (other than a cítízen of the Uníted States of
meríca) or of a rench corporatíon may be ad|usted by the Commíssíoner of
Internaí Revenue of the Uníted States of meríca, on the basís of the provísíoní
of the Uníted States Revenue ct of 1936. owever, no ad|ustment wííí be made
more than two years subsequent to the effectíve date of thís conventíon uníess
the ta payer fííes a request wíth the Commíssíoner of Internaí Revenue príor
to such date.
rtíc b 19.
Notwíthstandíng any other provísíon of thís conventíon, In order to avoíd doubíe
ta atíon on pubííc servants, empíoyees of one of the contractíng States beíng cítí-
zens of that State and remunerated by It, who have been receíved by the other
State to perform servíces In such State shaíí be e empt ín theír príncípaí píace
of resídence from dírect and personaí ta es whether Natíonaí, State or íocaí.
Such empíoyees who own reaí property In the State ín whích they perform
servíces shaíí not benefít from the above e emptíons wíth respect to the ta es
íevíed on such reaí property. mpíoyees who engage ín any prívate gaínfuí
occupatíon In such State shaíí not be entítíed to any e emptíon under thís
artícíe.
TITL II. ISC L SSIST NC .
rtícíe 20.
Wíth a víew to the more effectíve Imposítíon of the ta es to whích the present
conventíon reíates, the contractíng States undertake, on condítíon of recíprocíty,
to furnísh ínformatíon of a físcaí nature whích the authorítíes of each State
concerned have at theír dísposaí, or are ín a posítíon to obtaín under theír own
íaws, that may be of use to the authorítíes of the other State ín the assessment
of the saíd tn es.
Such ínformatíon shaíí be e changed between the competent authorítíes of the
contractíng States In the ordínary course or on request.
btícíe 21.
In accordance wíth the precedíng artícíe, the competent authorítíes of the
Uníted States of meríca wííí transmít to the competent authorítíes of rance,
as regards any person, corporatíon or other entíty (other than a cítízen, corpora-
tíon or other entíty of the Uníted States of meríca) havíng an address In rance
and derívíng from sources wíthín the Uníted States of meríca rents, dívídends,
ínterest, royaítíes, íncome from trusts, wages, saíaríes, pensíons, annuítíes, or
other fí ed or determínabíe períodícaí íncome, the name and address of such
person, corporatíon or other entíty as weíí as the amount of such íncome.
The competent authorítíes of rance wííí transmít to the competent authorítíes
of the U e í States of meríca, as regards any person, corporatíon or other
entíty (other than a cítízen, corporatíon or other entíty of rance) havíng an
address In the Uníted States of meríca and derívíng from sources wíthín rance
rents, dívídends, ínterest, royaítíes, Income from trusts, wages, saíaríes, pensíons,
annuítíes, or other fí ed or determínabíe períodícaí Income, the name and address
of such person, corporatíon or other entíty as weíí as the amount of such Income.
The Informatíon reíatíng to each year wííí be transmítted as soon as possíbíe
after December 31.
rtícíe 22.
The competent authorítíes of each of the contractíng States shaíí be entítíed
to obtaín, through dípíomatíc channeís, from the competent authorítíes of the
other contractíng State, e cept wíth respect to cítízens, corporatíons or entítíes of
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139
29.211-7.
the State to whích appíícatíon ís made, partícuíars In concrete cases necessary for
the estabííshment of the ta es to whích the present conventíon reíates.
owever, the competent authorítíes of each State shaíí not be prevented from
transmíttíng to the competent authorítíes of the other State ínformatíon reíatíng
to theír own natíonaís (cítízens, corporatíons or other entítíes) íf they deem ít
opportune for the preventíon of físcaí evasíon.
rtícíe 23.
ach contractíng State undertakes to íend assístance and support ín the coííec-
tíon of the ta es to whích the present conventíon reíates, together wíth ínterest,
costs, and addítíons to the ta es and fínes not beíng of a penaí character accordíng
to the íaws of the State requested, ín the cases where the ta es are defínítíveíy due
accordíng to the íaws of the State makíng the appíícatíon.
In the case of an appíícatíon for enforcement of ta es, revenue cíaíms of each
of the contractíng States whích have been fínaííy determíned shaíí be accepted
for enforcement by the State to whích appíícatíon ís made and coííected ín that
State ín accordance wíth the íaws appíícabíe to the enforcement and coííectíon of
Its own ta es.
The appíícatíon shaíí be accompaníed by such documents as are requíred by the
íaws of the State makíng the appíícatíon, to estabíísh that the ta es have been
fínaííy determíned.
If the revenue cíaím has not been fínaííy determíned, the State to whích, appííca-
tíon ís made may, at the request of the State makíng the appíícatíon, take such
measures of conservancy as are authorízed by the íaws of the former State for
the enforcement of íts own ta es.
The assístance províded for ín thís artícíe shaíí not be accorded wíth respect
to the cítízens, corporatíons or other entítíes of the State to whích appíícatíon ís
made.
rtícíe 24.
In no case shaíí the provísíons of artícíe 22 reíatíng to partícuíars ín concrete
cases, or of artícíe 23 reíatíng to mutuaí assístance In the coííectíon of ta es, be
construed so as to ímpose upon eíther of the contractíng States the obíígatíon to
carry out admínístratíve measures at varíance wíth the reguíatíons and practíce
of eíther contractíng State, or to suppíy partícuíars whích are not procurabíe
under the íaw of the State to whích appíícatíon ís made, or that of the State
makíng appíícatíon. €
The State to whích appíícatíon ís made for ínformatíon or assístance shaíí com-
píy as soon as possíbíe wíth the request addressed to ít. Nevertheíess, such State
may refuse to compíy wíth the request for reasons of pubííc poíícy or íf compííance
wouíd ínvoíve víoíatíon of a busíness, Industríaí or trade secret. In such case ít
shaíí ínform, as soon as possíbíe, the State makíng the appíícatíon.
rtícíe 25.
ny ta payer who shows proof that the actíon of the revenue authorítíes of the
contractíng States has resuíted ín doubíe ta atíon ín hís case In respect of any of
the ta es to whích the present conventíon reíates, shaíí be entítíed to íodge a
cíaím wíth the State of whích he ís n cítízen or, íf the ta payer ís n corporaí urn or
other entíty, wíth the State ín whích ít Is created or organízed. Shouíd the cíaím
be upheíd, the competent authoríty of such State may come to an agreement wíth
the competent authoríty of the other State wíth a víew to equítabíe avoídance of
the doubíe ta atíon ín questíon.
rtícíe 20.
The competent authorítíes of the two contractíng States may prescríbe reguía-
tíons necessary to ínterpret and carry out the provísíons of thís conventíon. Wíth
respect to the provísíons of tííís conventíon reíatíng to e change of ínformatíon and
mutuaí assístance ín the coííectíon of ta es, such authorítíes may, by common
agreement, prescríbe ruíes concerníng matters of procedure, forms of appíícatíon
and repííes thereto, rates of conversíon of currencíes, transfer of sums coííected,
mínímum amounts sub|ect to coííectíon, payment of costs of coííectíon, and
reíated matters.
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140
TITL III. G N R L PRO ISIONS.
rtícíe 27.
The present conventíon shaíí be ratífíed, In the case of the Uníted States of
meríca by the Presídent, by and wíth the advíce and consent of the Senate, and
In the case of rance, by the Presídent of the rench Repubííc wíth the consent
of the Parííament.
Thís conventíon shaíí become effectíve on the 1st day of anuary foííowíng the
e change of the Instruments of ratífícatíon.
The conventíon shaíí remaín ín force for a períod of fíve years and índefíníteíy
thereafter but may be termínated by eíther contractíng State at the end of the
5-year períod or at any tíme thereafter, províded sí months príor notíce of
termínatíon has been gíven, the termínatíon to become effectíve on the 1st day
of anuary foííowíng the e píratíon of the 6-month períod.
Upon the comíng ínto effect of thís conventíon, the conventíon for the avoíd-
ance of doubíe íncome ta atíon between the Uníted States of meríca and
rance, sígned príí 27, 1932, shaíí termínate.
Done at París, ín dupíícate, ín the ngíísh and rench íanguages, thís 25th
day of uíy, 1939.
seaí Wííííam C. uííítt,
seaí Geo roes onnet.
PROTOCOL.
t the moment of sígníng the present conventíon for the avoídance of doubíe
ta atíon and the estabííshment of ruíes of recíprocaí admínístratíve assístance
In the case of íncome and other ta es, the undersígned píenípotentíaríes have
agreed that the foííowíng provísíons shaíí form an íntegraí part of the con-
ventíon:
L
The present conventíon ís concíuded wíth reference to merícan and rench
íaw ín force on the day of íts sígnature.
ccordíngíy, íf these íaws are apprecíabíy modífíed the competent authorítíes
of the two States wííí consuít together.
II.
The Income from reaí property referred to ín artícíe 2 of the present conventíon
Shaíí íncíude profíts from the saíe or e change of the saíd property, but shaíí
not Incíude ínterest on mortgages or obíígatíons secured by the saíd property.
III.
s used ín thís conventíon:
(a) The term permanent estabííshment íncíudes branches, mínes and oíí
weíís, píantatíons, factoríes, workshops, stores, purchasíng and seíííng and other
offíces, agencíes, warehouses, and other fí ed píaces of busíness but does not
íncíude a subsídíary corporatíon.
When an enterpríse of one of the contractíng States carríes on busíness ín
the other State through an empíoyee or agent, estabííshed there, who has
generaí authoríty to negotíate and concíude contracts or has a stock of merchan-
díse from whích he reguíaríy fííís orders whích he receíves, thís enterpríse shaíí
be deemed to have a permanent estabííshment ín the íatter State. ut the
fact that an enterpríse of one of the contractíng States has busíness deaííngs ín
the other State through a bona fíde commíssíon agent or broker shaíí not be
heíd to mean that such enterpríse has a permanent estabííshment In the íatter
State.
Insurance enterpríses shaíí be consídered as havíng a permanent estabííshment
In one of the States as soon as they receíve premíums from or ínsure rísks In
the terrítory of that State.
(6) The term enterpríse Incíudes every form of undertakíng whether car-
ríed on by an índívíduaí, partnershíp, corporatíon, or any other entíty.
(c) The term enterpríse of one of the contractíng States means, as the case
may be, Uníted States enterpríse or rench enterpríse.
((/) The term Uníted States enterpríse means an enterpríse carríed on ín
the Uníted States of meríca by a resídent of the Uníted States of meríca or by
a Uníted States corporatíon or other entíty.
The term Uníted States corporatíon or other entíty means a partnershíp,
corporatíon or other entíty created or organízed ín the Uníted States of meríca
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141
29.211-7.
or under the íaw of the Uníted States of meríca or of any State or Terrítory of
the Uníted States of meríca.
(e) The term rench enterpríse ís defíned In the same manner, mutatís
mutandís, as the term Uníted States enterpríse.
I .
The term íífe annuítíes referred to In artícíe of thís conventíon means a
stated sum payabíe períodícaííy at stated tímes duríng íífe, or duríng a specífíed
number of years to the person who has paíd the premíums or a gross sum for
such an obíígatíon.
.
Cítízens and corporatíons or other entítíes of one of the contractíng States
wíthín the other contractíng State shaíí not be sub|ected as regards the ta es
referred to ín the present conventíon, to the payment of hígher ta es than are
ímposed upon the cítízens or corporatíons or other entítíes of such íatter State.
I.
The provísíons of the present conventíon shaíí not be construed to restríct ín
any manner any e emptíon, deductíon, credít, aííowance, or other advantage
accorded by the íaws of one of the contractíng States ín the determínatíon of the
ta ímposed by such State.
II.
Documents and ínformatíon contaíned thereín, transmítted under the provísíons
of thís conventíon by one of the contractíng States to the other contractíng
State shaíí not be pubííshed, reveaíed or díscíosed to any person e cept to the
e tent permítted under the íaws of the íatter State wíth respect to símííar
documents or ínformatíon.
III.
s used ín thís conventíon the terms competent authoríty or competent
authorítíes means, ín the case of the Uníted States of meríca, the Secretary of
the Treasury and ín the ease of rance, the Míníster of ínance.
I .
The term Uníted States of meríca as used ín thís conventíon ín a geographíc
sense íncíudes oníy the States, the Terrítoríes of íaska and awaíí, and the
Dístríct of Coíumbía.
.
The term rance, when used ín a geographíc sense, índícates contínentaí
rance, e cíusíve of ígería and the Coíoníes.
I.
Shouíd nny díffícuíty or doubt aríse as to the Interpretatíon or appíícatíon of
the present conventíon, or íts reíatíonshíp to conventíons between one of the
contractíng States and any other State, the competent authorítíes of the con-
tractíng States may settíe the questíon by mutuaí agreement.
Done ín dupíícate at París, thís 25th day of uíy, 1939.
Wííííam C. uííítt.
Georges onnet.
Sec. 7.411. ppíícabíe Provísíons of the Internaí Revenue
Code. € ” The Internaí Revenue Code provídes ín part as foííows:
S C. 22. GROSS INCOM .
€ € € €
(b) cíusíons rom Gross Income. € ” The foííowíng ítems shaíí not
be íncíuded ín gross íncome and shaíí be e empt from ta atíon under thís
chapter:
€ € € € €
(7) Income e empt under treaty. € ” Income of nny kínd, to the
e tent requíred by any treaty obíígatíon of the Uníted States

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29.211-7.
142
S C. 02. RUL S ND R GUL TIONS.
The Commíssíoner, wíth the approvaí of the Secretary, shaíí prescríbe
and pubíísh aíí needfuí ruíes and reguíatíons for the enforcement of thís
chapter.
Pursuant to sectíon 62 of the Internaí Revenue Code, artícíe 26 of
the conventíon, and other provísíons of the ínternaí revenue íaws, the
foííowíng reguíatíons are hereby prescríbed and aíí reguíatíons ín-
consístent herewíth síre modífíed accordíngíy.
Sec. 7.412. Scope of the Conventíon. € ” The prímary purposes of the conventíon
are to avoíd doubíe ta atíon upon certaín cíasses of Income, and to ínaugurate
físcaí cooperatíon between the two States wítíí respect to recíprocaí díscíosure
of ínformatíon and to the coííectíon of the ta es enumerated ín artícíe 1 of the
conventíon.
The specífíc cíasses of íncome from sources wíthín the Uníted States e empt
under the conventíon from Uníted States íncome ta es are:
(n) Industríaí and commercíaí profíts of a rench enterpríse havíng no
permanent estabííshment ín the Uníted States (artícíe 3)
(6) Income deríved by a rench enterpríse from the operatíon of shíps docu-
mented under the íaws of, or aírcraft regístered ín, rance (artícíe 6)
(c) Royaítíes deríved by a nonresídent aííen who ís a resídent of rance or
by a rench corporatíon or other rench entíty (havíng no permanent estab-
íístment wíthín the Uníted States), for the ríght to use copyríghts, patents,
secret processes and formuíae, trade-marks, and other anaíogous ríghts
(artícíe 7)
(d) Compensatíon and pensíons paíd by rance or h| a poíítícaí subdívísíon
of rance to índívíduaís (other than cítízens of the Uítíted States) for servíces
rendered to rance whether wíthín or wíthout the Uníted States (artícíe )
(c) Prívate pensíons and íífe annuítíes deríved from wíthín the Uníted States
and paíd to nonresídent aííen índívíduaís (whether or not such índívíduaís are
cítízens of rance) resídíng ín rance duríng the year ín whích such amounts are
paíd (artícíe )
(/) arned íncome of a doctor, íawyer, engíneer, or other member of a ííberaí
professíon who ís a nonresídent aííen índívíduaí and ís a resídent of rance and
does not maíntaín wíthín the Uníted States an offíce, estabííshment, Instaííatíon,
or other fí ed center reíated to the practíce of hís professíon wíthín the Uníted
States (artícíe 10)
(g) Caíns from sources wíthín the Uníted States arísíng from the saíe or
e change of stocks, securítíes, or commodítíes by a resídent of rance (other
than a cítízen of the Uníted States) or a rench corporatíon or other rench
entíty uníess such resídent, corporatíon, or other entíty has, at any tíme duríng
the ta abíe year ín whích such saíe takes píace, a permanent estabííshment
wíthín the Uníted States (artícíe 11).
cept as e pressíy províded by the conventíon, the ta ííabíííty of nonresídent
aííens who are resídents of rance or of rench corporatíons or other rench
entítíes ís determíned ín accordance wíth the provísíons of the íaws and of the
reguíatíons thereunder appíícabíe generaííy to nonresídent aííen índívíduaís and
to foreígn corporatíons.
The conventíon shaíí not be construed to affect the ííabíííty to Uníted States
íncome ta atíon of cítízens of rance who are resídent ín the Uníted States
e cept to the e tent that such índívíduaís are entítíed to the benefíts of artícíes
, 14 , and 19 and to paragraph of the protocoí of the conventíon. The ta
ííabíííty of a Uníted States cítízen or a resídent of the Uníted States, a member
of a rench partnershíp carryíng on a rench enterpríse, ís not affected by artícíe
3 of the conventíon. Such cítízen or resídent Is sub|ect to Uníted States íncome
ta upon hís dístríbutíve share of the net íncome of such partnershíp even though
the other members of such partnershíp are not sub|ect to ta upon theír share
of the partnershíp s índustríaí and commercíaí profíts from sources wíthín the
Uníted States where the enterpríse has no permanent estabííshment wíthín the
Uníted States. The conventíon shaíí not be construed to affect the ííabíííty to
Uníted States íncome ta atíon of cítízens of the Uníted States or resídents of
the Uníted States who are not cítízens of rance.
The conventíon has no reference to rates of ta atíon ímposed by the respectíve
States but ís concerned wíth the e emptíng of íncome arísíng In one of the
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5 29.211-7.
contractíng States when such Income Is deríved from sources wíthín such con-
tractíng State by a resídent or corporatíon or other entíty of the other con-
tractíng State and meets the condítíons upon whích such e emptíon depends
as prescríbed In the conventíon. These reguíatíons are not concerned wíth the
provísíons of artícíes 14 , 15, 16, and 17 of the conventíon sínce such artícíes
affect oníy the aííowance agaínst the ta es ímposed by rance of íncome and
e cess profíts ta es paíd to the Uníted States or the appíícatíon of rench revenue
íaws and decrees.
Sec. 7.413. Defínítíons. € ” ny word or term used ín these reguíatíons whích
ís defíned ín the conventíon shaíí be gíven the defínítíon assígned to such word or
term In such conventíon. ny word or term used ín these reguíatíons whích ís
not defíned ín the conventíon but ís defíned ín the Internaí Revenue Co e shaíí
be gíven the defínítíon contaíned thereín.
s used ín these reguíatíons:
(o) The term permanent estabííshment íncíudes branches, mínes and oíí
weíís, píantatíons, factoríes, workshops, stores, purchasíng and seíííng and other
offíces, agencíes, warehouses, and other fí ed píaces of busíness. rench parent
corporatíon havíng a domestíc or foreígn subsídíary corporatíon ín the Uníted
States shaíí not be deemed by reason of such fact to have a permanent estabíísh-
ment ín the Uníted States. The mere fact that a foreígn subsídíary corporatíon of
a rench parent corporatíon has a permanent estabííshment ín the Uníted States
does not mean that such rench parent corporatíon has a permanent estabííshment
ín the Uníted States. The fact that a rench enterpríse carríes on busíness
deaííngs ín the Uníted States through a bona fíde commíssíon agent or broker
shaíí not be heíd to mean that such enterpríse has a permanent estabííshment ín
the Uníted States. If, however, a rench enterpríse carríes on busíness In the
Uníted States through an empíoyee or agent estabííshed there who has generaí
authoríty to negotíate and concíude contracts or has a stock of merchandíse from
whích he reguíaríy fííís orders, such enterpríse shaíí be deemed to have a per-
manent estabííshment ín the Uníted States. Thus, íf a rench enterpríse has
a fuíí tíme empíoyee or fuíí tíme agent who for such enterpríse maíntaíns ín
the Uníted States a stock of merchandíse from whích orders are fíííed, such enter-
príse has a permanent estabííshment ín the Uníted States even though such
empíoyee or ngent has no generaí authoríty to negotíate and concíude contracts
on behaíf of such enterpríse. owever, the mere fact that a commíssíon agent
or broker through whom a rench enterpríse cnrríes on busíness ín the Uníted
States maíntaíns a smaíí stock of goods ín the Uníted States from whích occa-
síonaí orders are fíííed shaíí not be construed as meaníng that such enterpríse
has a permanent estabííshment ín the Uníted States. The mere fact that saíes-
men, empíoyees of a rench enterpríse, promote the saíe of íts products In the
Uníted States does not mean that such enterpríse has a permanent estabííshment
thereín. owever, a rench ínsurance enterpríse whích ínsures rísks wíthín
the Uníted States or receíves premíums from sources wíthín the Uníted States
ís deemed to have a permanent estabííshment wíthín the Uníted States.
(6) The term enterpríse means any commercíaí or Industríaí undertakíng,
whether conducted by an índívíduaí, partnershíp, corporatíon, or other entíty.
It íncíudes such actívítíes as manufacturíng, merchandísíng, míníng, bankíng,
and ínsurance. It does not Incíude the operatíon of, or the tradíng ín, reaí
property íocated ín the Uníted States. It does not íncíude the rendítíon of
personaí servíces. ence, a nonresídent aííen índívíduaí who ís a resídent of
rance, renderíng personaí servíces wíthín the Uníted States ís not, mereíy by
reason of such servíces, engaged ín an enterpríse wíthín the meaníng of the
conventíon, and hís ííabíííty to Uníted States íncome ta ís unaffected by artícíe
3 of the conventíon.
(c) The term rench enterpríse means an enterpríse carríed on ín rance
by a nonresídent aííen índívíduaí resídent of rance or by n rench corpora-
tíon or other rench entíty. Tha term corporatíon or othar entíty means
a partnershíp, corporatíon, or other entíty created or organízed In rance or
tínder the íaws of rance. or e ampíe, an enterpríse carríed on whoííy out-
sída rance by a rench corporatíon ís not a rench enterpríse wíthín the
meaníng of the conventíon. Whether a rench entíty ís a corporatíon, a part-
nershíp, or a trust ís to be determíned ín accordance wíth the príncípíes of
Místíng íaw reíatíng to the ta atíon of nonresídent aííens and foreígn
corporatíons.
(d) The term índustríaí and commercíaí profíts means the profíts arísíng
from the Industríaí, mercantííe, manufacturíng, or ííke actívítíes of a rench
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29.211-7.
144
enterpríse as defíned In thís sectíon. Such term does not íncíude Income from
reaí property, ínterest, dívídends, rentaís and royaítíes, gaíns from the saíe
or e change of capítaí assets, or compensatíon for íabor or personaí servíces.
Such enumerated ítems of Income are not governed by the provísíons of artícíe
3 but, to the e tent covered by the conventíon, are sub|ect to the ruíes eíse-
where set forth thereín and ín these reguíatíons.
(e) The term Secretary means the Secretary of the Treasury and the
term Míníster means the Míníster of ínance of rance
Sbo. 7.414. Scope of Conventíon Wíth Respect to Determínatíon of In-
dustríaí and Commercíaí Profíts of a Nonresídent ííen Indívíduaí Resí-
dent of rance, or of a rench Corporatíon or Other ntíty Carryíng on a
rench nterpríse ín the Uníted States. € ” (a) Generaí. € ” rtícíe 3 of the
conventíon adopts the príncípíe that an enterpríse of one of the contractíng
States shaíí not be ta abíe ín the other contractíng State ín respect of íts índus-
tríaí and commercíaí profíts uníess It has a permanent estabííshment ín tíe
íatter State. ence, a rench enterpríse ís sub|ect to Uníted States ta upon
íts índustríaí and commercíaí profíts from sources wíthín the Uníted States
oníy íf ít has a permanent estabííshment wíthín the Uníted States. rom the
standpoínt of ederaí Income ta atíon, the artícíe has appíícatíon oníy to a
rench enterpríse and to the índustríaí and commercíaí íncome thereof from
sources wíthín the Uníted States. It has no appíícatíon, for e ampíe, to com-
pensatíon for íabor or personaí servíces performed ín the Uníted States, to
íncome deríved from reaí property íocated In the Uníted States or any Interest
thereín, íncíudíng rentaís and royaítíes, to gaíns from the saíe or other dís-
posítíon of such reaí property or ínterest, to dívídends and Interest, to rentaís
and royaítíes arísíng from íeasíng personaí property or any ínterest ín such
property, íncíudíng rentaís and royaítíes for the use of patents, copyríghts,
secret processes and formuíae, good wííí, trade-marks, trade brands, franchíses,
nnd other ííke property, or to profíts from the saíe or e change of capítaí assets.
Such enumerated ítems of íncome, to the e tent covered by the conventíon,
are treated separateíy eísewhere In these reguíatíons and are sub|ect to the
ruíes íaíd down ín the sectíons havíng specífíc reference to the respectíve ítems
of íncome.
(6) No Uníted States permanent estabííshment. € ” nonresídent aííen índívíd-
uaí who ís a resídent of rance, or a rench corporatíon or other rench entíty
carryíng on a rench enterpríse, but havíng no permanent estabííshment ín the
Uníted States, ís not sub|ect to Uníted States íncome ta upon índustríaí and
commercíaí profíts from sources wíthín the Uníted States. or e ampíe, íf swh
rench corporatíon seíís stock ín trade, such as wínes or perfumery or cheese,
through a bona fíde commíssíon agent or broker ín the Uníted States, the resuítíng
profít ís. under the terms of artícíe 3 of the conventíon, e empt from Uníted States
íncome ta . Such rench corporatíon, however, remaíns sub|ect to ta upon níí
other ítems of íncome from sources wíthín the Uníted States whích are not
e pressíy e empted from such ta under the conventíon.
(c) Uníted States permanent estabííshment. € ” nonresídent aííen índívíduaí
who Is a resídent of rance, or a rench corporatíon or other entíty, carryíng on a
rench enterpríse havíng a permanent, estabííshment ín the Uníted States Is
sub|ect to ta upon hís or íts índustríaí and commercíaí profíts from sources
wíthín the Uníted States. In the determínatíon of the íncome of such resídent of
rance or rench corporatíon or other entíty from sources wíthín the Uníted
States, aíí índustríaí and commercíaí profíts from such sources shaíí be deemed to
be aííocabíe to the permanent estabííshment wíthín the Uníted States. ence,
for e ampíe, íf a rench enterpríse, havíng a permanent estabííshment In the
Uníted States, seíís dírectíy ín the Uníted States through a commíssíon agent or
broker thereín goods produced ín rance, the resuítíng profíts deríved from Uníted
States sources from the íatter transactíons are aííocabíe to such permanent
estabííshment. The net Income from sources wíthín the Uníted States, Incíudíng
the índustríaí and commercíaí profíts, shaíí be determíned ín accordance wíth the
provísíons of sectíon 119 of the Internaí Revenue Code and the reguíatíons there-
under. In determíníng Industríaí and commercíaí profíts no account shaíí be
taken of the mere purchase of merchandíse effected In the Uníted States by such
rench-enterpríse. nonresídent aííen who ís a resídent of rance, a member of
a rench partnershíp havíng a permanent estabííshment wíthín the Uníted States,
shaíí by reason of such fact be deemed to have a permanent estabííshment wíthín
the Uníted States.
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145 29.211-7.
Sec. 7.415. Controí of a Domestíc nterpríse bt a rench nterpríse. € ” rtícíe
6 of the conventíon provídes that íf a rench enterpríse by reason of Its controí of
a domestíc busíness ímposes condítíons dífferent from those whích wouíd resuít
from normaí busíness reíatíons between índependent enterpríses, the accounts
between the enterpríses wííí be ad|usted so as to ascertaín the true net íncome of
the domestíc enterpríse. The purpose ís to píace the controííed domestíc enter-
príse on a ta paríty wíth an uncontroííed domestíc enterpríse by determíníng,
accordíng to the standard of an uncontroííed enterpríse, the true net íncome from
the property and busíness of the controííed enterpríse. The conventíon contem-
píates that íf the accountíng records do not truíy refíect the net íncome from the
property and busíness of such domestíc enterpríse the Commíssíoner of Internaí
Revenue shaíí íntervene and, by makíng such dístríbutíons, apportíonments, or
aííocatíons as he may deem necessary of gross íncome or deductíons of any ítem
or eíement affectíng net íncome as between such domestíc enterpríse and the
rench enterpríse by whích ít ís controííed or dírected, determíne the true net
íncome of the domestíc enterpríse. The provísíons of sectíon 29.45-1, Reguíatíons
111 (Part 29, Títíe 26, Code of ederaí Reguíatíons, Cum. Sup.), shaíí, ín so far as
appíícabíe, be foííowed ín the determínatíon of the net íncome of the domestíc
busíness.
Sec. 7.416. Income from Operatíon of Shíps or írcraft. € ” The íncome deríved
by a rench enterpríse from the operatíon of shíps documented under the íaws of
rance, or of aírcraft regístered ín rance, ís under artícíe 6 of the conventíon
e empt from Uníted States Income ta . owever, the profíts deríved by such
enterpríse from the operatíon of shíps or aírcraft, íf any, not so documented or
regístered are treated as are índustríaí and commercíaí pn fíts generaííy. See
artícíe 3 of the conventíon and sectíon 7.414 of these reguíatíons.
Sec. 7.417. Income íbom Reaí Property, Incíudíng Míneraí Royaí.tus. € ” In-
come of whatever nature deríved by a nonresídent aííen índívíduaí who Is a
resídent of rance, or by a rench corporatíon or other rench entíty from reaí
property sítuated ín the Uníted States, íncíudíng gaíns deríved from the saíe
of such property and royaítíes ín respect of the operatíon of mínes, quarríes, or
other naturaí resources sítuated ín the Uníted States, Is not e empted from ta a-
tíon by the conventíon. The treatment of such Income for ta atíon purposes ís
governed by those provísíons of the Internaí Revenue Code appíícabíe generaííy
to the ta atíon of nonresídent aííens and foreígn corporatíons.
Sec. 7.41 . Patent and Copysíoht Royaítíes. € ” Royaítíes deríved from sources
wíthín the Uníted States by a nonresídent aííen índívíduaí who ís a resídent of
rance, or by a rench corporatíon or other rench entíty, as consíderatíon
for the ríght to use copyríghts, patents, secret processes and formuíae, trade-
marks and other anaíogous ríghts, are e empt from ederaí íncome ta under
artícíe 7 of the conventíon, províded that such índívíduaí, corporatíon, or other
entíty has no permanent estabííshment wíthín the Uníted States at any tíme
duríng the ta abíe year ín whích such íncome ís so deríved. Thus, a nonresídent
aííen who ís a resídent of rance, renderíng personaí servíces wíthín the Uníted
States, Is not sub|ect to ta wíth respect to such royaítíes even though he ís
engaged ín trade or busíness In the Uníted States by reason of rendítíon of such
servíces so íong as he has no permanent estabííshment In the Uníted States.
To ohvínte wíthhoídíng of ta at the source, the nonresídent aííen índívíduaí
resídent of rance or the corporatíon or other entíty organízed under the íaws
of rance, as the case may be, shaíí notífy by íetter the person payíng such íncome
that the íncome ís e empt from ta atíon under the provísíons of the appíícabíe
conventíon and protocoí. The íetter of notífícatíon from an índívíduaí resídent
of rance shaíí contaín hís address and a statement thnt he Is a resídent of
rance. The íetter of notífícatíon from a corporatíon or other entíty organízed
under the íaws of rance shaíí contaín the address of íts offí e or píace of busíness
and a statement that ít ís a corporatíon or other entíty organízsd under the íaws
of rance, shaíí be sígned by an effícer of such corporatíon or entíty, and shaíí
set forth hís offícíaí títíe. In the case of roynítíes deríved on or after anuary
1, 1945. the íetter of notífícatíon shaíí aíso state that the índívíduaí- resídent of
rance, or corporatíon or other entíty organízed under the íaws of rance, as
the case may be, does not have a permanent estabííshment In the Uníted States
and wííí not have such estabííshment ín the Uníted States at any tíme duríng
the caíendar year ín whích such royaítíes are paíd. The recípíent of the íetter
of notífícatíon shaíí ímmedíateíy forward such íetter or a copy thereof to the
Commíssíoner of Internaí Revenue, Wíthhoídíng Returns Sectíon, Washíngton
25, D. 0.
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29.211-7.
146
Sec. 7.419. Government Wages, Saíabíes, and Símííar Compensatíon, Pen-
síons, and Lífe nnuítíes. € ” Under artícíe of the conventíon, wages, saíaríes,
and símííar compensatíon, and pensíons paíd by rance, or by a poíítícaí subdí-
vísíon thereof, to índívíduaís resídíng In the Uníted States are e empt from
ederaí íncome ta . owever, under the provísíons of artícíe 14 of the conven-
tíon, such e emptíon shaíí not be construed as appíyíng to recípíents of such
Income who are cítízens of the Uníted States or aííen resídents who are not
cítízens of rance.
Under the provísíons of the same artícíe of the conventíon prívate pensíons
and íífe annuítíes deríved from sources wíthín the Uníted States by nonresídent
aííen índívíduaís who are resídents of rance are e empt from ederaí íncome
ta . Such ítems of íncome are therefore not sub|ect to the wíthhoídíng provísíons
of the Internaí Revenue Code. See paragraph I of the protocoí to the con-
ventíon as to what constítutes íífe annuítíes. See, aíso, sectíon 7.41 of these
reguíatíons wíth respect to patent and copyríght royaítíes as to the requírements
necessary to avoíd wíthhoídíng of the ta at the source, whích requírements are
aíso appíícabíe for the purposes of thís sectíon.
Sec. 7.420. Compensatíon fob Labor or Pebsonaí Sebvtces. € ” (o) Generaí € ” In
generaí and sub|ect to the provísíons of artícíe and artícíe 10 of the conven-
tíon and subsectíon (6) of thís sectíon, compensatíon for íabor or personaí
servíces deríved from sources wíthín the Uníted States by a nonresídent aííen
who ís a resídent of rance, ís sub|ect to ta ín accordance wíth the provísíons
of the Internaí Revenue Code appíícabíe generaííy to nonresídent aííens. The
provísíons of artícíe 9 do not dísturb eíther the provísíons of sectíon 119(a)(3)
of the Internaí Revenue Code, reíatíng to source of compensatíon for íabor or
personaí servíces, or the provísíons of the Internaí Revenue Code reíatíng to the
ta atíon of such compensatíon In the hands of a nonresídent índívíduaí who
ís a resídent of rance.
(6) Professíonaí earníngs. € ” rtícíe 10 of the conventíon provídes a specíaí
ruíe of ta atíon wíth respect to professíonaí fees constítutíng Income deríved
from sources wíthín the Uníted States by a resídent of rance who ís a non-
resídent aííen. Under such ruíe, such nonresídent aííen renderíng professíonaí
servíces, such as medícaí, íegaí, engíneeríng, and scíentífíc servíces, ís not sub-
|ect to Uníted States ta wíth respect to such compensatíon uníess he has an
offíce or other fí ed píace sítuated ín the Uníted States duríng the ta abíe year.
Thus, such aííen present In the Uníted States duríng any part of the ta abíe
year and renderíng professíonaí advíce as a medícaí doctor or as a íawyer or
as an engíneer, ís not sub|ect to ederaí íncome ta on fees deríved by hím In
such ta abíe year by reason of such servíces uníess he maíntaíns at some tíme
duríng such ta abíe year an offíce or other fí ed píace ín the Uníted States íncí-
dent to the practíce of hís professíon. The e emptíon appííes regardíess of the
íength of tíme spent wíthín the Uníted States duríng the ta abíe year and regard-
íess of the amount of the fees or professíonaí charges resuítíng to such aííen
from such servíces. s to when an aííen ís regarded as a resídent of the Uníted
States and hence outsíde the scope of the e emptíon, see sectíon 29.211-2, Regu-
íatíons 111.
Seo. 7.421. Stocks, Securítíes, and Commodítíes. € ” Under artícíe 11 of the con-
ventíon, gaíns deríved from the saíe or e change wíthín the Uníted States of
storks, securítíes, or commodítíes (íf of a kínd customarííy deaít ín on an organ-
ízed commodíty e change) by a nonresídent aííen índívíduaí resídent ín rance,
or by a rench corporatíon or other rench entíty, ís e empt from ederaí íncome
ta uníess such índívíduaí, corporatíon, or other entíty has a permanent estab-
ííshment ín the Uníted States. If. however, a permanent estabííshment ís maín-
taíned ín the Uníted States, such gaíns are not so e empt even though the saíes
or e changes resuítíng ín such gaíns were carríed on dírectíy from the home
offíce of the ta payer and not through the permanent estabííshment ín the Uníted
States. s to what constítutes a permanent estabííshment, see sectíon 7.413 of
these reguíatíons.
Sec. 7.422. Remíttances to Students. € ” Under artícíe 12 of the conventíon, non-
resídent aííen índívíduaís who are resídents of rance and who are temporarííy
resídíng ín the Uníted States for the purposes of studyíng or for acquíríng busíness
e períence, are e empt from ederaí íncome ta upon amounts representíng
remíttances from rance for the purposes of theír maíntenance and studíes.
Sec. 7.423. Credít gaínst Uníted States Ta Líabíííty fob Income Ta Paíd
to rance. € ” or the purpose of avoídnnce of doubíe ta atíon, artícíe 14 of the
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29.211-7
conventíon provídes that, on the part of the Uníted States, there shaíí be aííowed
agaínst the Uníted States íncome and e cess profíts ta ííabííítíes a credít for
any íncome, war-profíts, or e cess profíts ta es paíd to rance by Uníted States
cítízens or domestíc corporatíons. Such príncípíe aíso appííes ín the case of a
cítízen of rance resídíng ín the Uníted States. Such credít, however, ís sub|ect
to the íímítatíons províded ín sectíon 131 of the Internaí Revenue Code (reíatíng
to the credít for foreígn ta es) and sectíon 729 of such Code (reíatíng to íaws
ppíícabíe). See sectíons 29.131-1 to 29.131- of Reguíatíons 111 and sectíons
35.729-1 to 35.729-3 of Reguíatíons 112.
Sec. 7.424. d|ustment of Ta Líabíííty of Resídents of rance and rench
Corporatíons. € ” rtícíe 1 of the conventíon confers upon the Commíssíoner
authoríty to ad|ust under the Revenue ct of 1936 the ta ííabíííty for ta abíe
years begínníng príor to anuary 1, 1930, of nonresídent aííen resídents of rance,
and rench corporatíons, ín any case ín whích such ta ííabíííty remaíned unpaíd
on anuary 1, 1945. Such provísíon, however , wííí not appíy ín any case uníess € ”
(1) The Commíssíoner ís satísfíed that the addítíonaí íncome ta ínvoíved
díd not aríse by reason of fraud wíth íntent to evade the ta on the part of the
ta payer concerned and
(2) The ta payer fííes, príor to anuary 1, 1947, wíth the Commíssíoner a
sworn statement showíng for each year ínvoíved and for such other years as
the Commíssíoner may requíre, (a) by ítems and cíasses of íncome the amounts
of ínterest, dívídends, rents, saíaríes, wages, premíums, annuítíes, compensatíons,
remuneratíons, emoíuments, or other fí ed or determínabíe annuaí or períodícaí
íncome, gaíns, profíts, and íncome deríved from sources wíthín the Uníted
States (b) the busíness transactíons, íf any, carríed on ín the Uníted States
by or ín behaíf of the ta payer duríng each of such years and (e) such further
ínformatíon as the Commíssíoner may requíre ín the partícuíar case.
Sec 7.4 5. Recíprocaí dmínístratíve ssístance. € ” (a) Generaí. € ” y artícíe
20 of the conventíon, the Uníted States and rance adopt the príncípíe of e change
of ínformatíon for use ín the determínatíon and assessment of the ta es wíth
whích the conventíon ís concerned. Pursuant to such príncípíe, every Uníted
States wíthhoídíng agent shaíí make and fííe wíth the coííector, ín dupíícate, an
ínformatíon return on orm 1042O for the caíender year 1945 and each subsequent
caíendar year, ín addítíon to wíthhoídíng return orm 1042, wíth respect to
dívídends, Interest, royaítíes, rents, saíaríes, wages, pensíons, and annuítíes, or
other fí ed or determínabíe annuaí or períodícaí íncome paíd to persons whose
addresses are ín rance whether or not ta has been wíthheíd wíth respect to
such íncome. There shaíí be reported on orm 1042C not oníy such ítems of
íncome íísted on orm 1042, but aíso such ítems of ínterest íísted on monthíy
returns, orm 1012, and there shaíí be shown on such return ítems of íncome paíd
to such addressees even though such ítems are e empt from ta under the conven-
tíon, as, for e ampíe, certaín royaítíes.
The ínformatíon and correspondence reíatíng to e change of ínformatíon may
be transmítted dírect by the Secretary to the Míníster.
(6) Informatíon to be furníshed ín due course. € ” In accordance wíth the proví-
síons of artícíe 21 of the conventíon, the Secretary shaíí forward to the Míníster
as soon as practícabíe after the cíose of the caíendar year 1945 and of each caíendar
year thereafter duríng whích the conventíon Is ín effect, the names and addresses
of aíí persons whose addresses are wíthín rance and who deríve from sources
wíthín the Uníted States, dívídends, ínterest, rents, royaítíes, saíaríes, wages,
Pensíons, and annuítíes, or other fí ed or determínabíe annuaí or períodícaí profíts
and íncome showíng the amounts of such profíts and íncome ín the case of each
addressee. or these purposes, the transmíssíon to the Míníster of Informatíon
returns, orm 1042C, as províded ín subsectíon (a) of thís sectíon for the caíendar
year 1945 and subsequent caíendar years shaíí constítute a compííance wíth the
provísíons of artícíe 21 of the conventíon and of these reguíatíons.
(c) Informatíon ín specífíc cases. € ” Under the provísíons of artícíe 22 of the
conventíon, the Secretary shaíí furnísh (If request therefor ís made by the Míníster
through dípíomatíc channeís) to the Míníster such ínformatíon, reíatíve to the ta
ííabíííty to rance of any person (other than a cítízen of the Uníted States or a
Uníted States domestíc corporatíon or other Uníted States domestíc entíty), as ís
avaííabíe to, or may be obtaíned by, the Secretary under the revenue íaws of the
Uníted States.
Sec. 7.426. Recíprocaí Reottíatíons. € ” rtícíe 20 of the conventíon provídes that
the Uníted States and rance may prescríbe ( ) reguíatíons for the purpose of
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29.251-1. 14
carryíng the conventíon ínto effect wíthín the respectíve countríes and ( )
recíprocaí ruíes reíatíng to the e change of ínformatíon.
Wm. T. Sherwood,
ctíng Commíssíoner of Internaí Revenue.
pproved ebruary 27, 1946.
oseph . O Connf.íí, r.,
ctíng Secretary of the Treasury.
( ííed wíth the Dívísíon of the ederaí Regíster March 1,1946, 9.59 a. m.)
SUPPL M NT I. € ” OR IGN CORPOR TIONS.
S CTION 231. € ” T ON OR IGN CORPOR TIONS.
Sectíon 29.231-1: Ta atíon of foreígn corporatíons.
INT RN L R NU COD .
Reguíatíons affectíng the ta atíon of nonresídent aííens, resídents of
rance, and rench corporatíons and other entítíes under the ta con-
ventíon between the Uníted States and rance, procíaímed by the
Presídent of the Uníted States on anuary 5, 1945, effectíve 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.
Sectíon 29.251-1: Cítízens of the Uníted . 1946-7-12279
States and domestíc corporatíons de- I. T. 3791
rívíng íncome from sources wíthín a
possessíon of the Uníted States.
( íso Sectíon 22(b), Sectíon 29.22(b) (13)-1.)
ínternaí revenue code.
In the case of a commíssíoned offícer of the Uníted States rmy,
a cítízen of the Uníted States, whose íncome for a ta abíe year ín-
cíudes both servíce pay receíved wíthín a possessíon of the Uníted
States for servíces rendered thereín duríng a part of the year and
servíce pay receíved wíthín the Uníted States for servíces rendered
thereín duríng the remaínder of the year, the totaí íncome receíved
shouíd be reduced by the amount of the addítíonaí aííowance for
mííítary and navaí personneí to whích he ís entítíed under sectíon
22(b) (13) ( ) of the Internaí Revenue Code ín determíníng whether
he ís entítíed to any e cíusíon under sectíon 251(a) of the Code. If
he ís so entítíed, the amount to be e cíuded under sectíon 251 (a) of
the Code ís that part of the servíce pay receíved wíthín the possessíon
whích the amount of servíce pay not e cíuded under sectíon 22(b)
(13) ( ) of the Code bears to the totaí amount of servíce pay receíved.
dvíce ís requested wíth respect to the manner ín whích the e cíu-
síons from gross íncome under sectíons 22(b) (13) ( ) and 251(a) of
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149
29.251-1.
the Internaí Revenue Code shouíd be determíned ín the case of a com-
míssíoned offícer of the Uníted States rmy, a cítízen of the Uníted
States, whose íncome for the ta abíe year 1945 íncíuded both servíce
pay receíved wíthín a possessíon of the Uníted States for servíces
rendered thereín duríng a part of the year and servíce pay receíved
wíthín the Uníted States for servíces rendered thereín duríng the re-
maínder of the year.
In the ínstant case, the ta payer, a commíssíoned offícer ín the Uníted
States rmy, commenced servíce on Guam on anuary 1, 1945, where
he contínued to serve untíí une 30,1945. On that date he returned to
the Uníted States, where he served duríng the remaínder of the vear.
e receíved 2,000 servíce pay whííe on Guam for servíces rendered
there and 2,500 whííe ín the Uníted States for servíces rendered ín
the Uníted States.
Sectíon 22(b) (13) ( ) of the Code, as amended by sectíon 141(a)
of the Revenue ct of 1945, provídes as foííows:
(b) cíusíons rom Gross Income. € ” The foííowíng ítems shaíí not hp íncíuded
ín gross íncome and shaíí be e empt from ta atíon under thís chapter Chapter 1
of the Code :
€ € € € € €
(13) ddítíonaí aííowance for mííítary and navaí personnfí. € ”
( ) In the case of compensatíon receíved duríng any ta abíe year
and before the termínatíon of the present war as procíaímed by the
Presídent, for actíve servíce as a commíssíoned offícer (or a commíssíoned
warrant offícer) In the mííítary or navaí forces of the Uníted States
duríng such war, or, ín the case of a cítízen or resídent of the Uníted
States, as a member of the mííítary or navní forces of any of the other
Uníted Natíons duríng such war, so much of such compensatíon as does
not e ceed 1,500.
Sectíon 251(a) of the Code provídes ín part as foííows:
(a) Generaí Ruíe. € ” In the case of cítízens of the Uníted States € € €
satísfyíng the foííowíng condítíons, gross íncome means oníy gross íncome from
sources wíthín the Uníted States € ”
(1) If 0 per centum or more of the gross íncome of such cítízen
(computed wíthout the benefít of thís sectíon), for the three-year períod
ímmedíateíy precedíng the cíose of the ta abíe year (or for such part of such
períod ímmedíateíy precedíng the cíose of such ta abíe year as may be appíí-
cabíe) was deríved from sources wíthín a possessíon of the Uníted States
and
€ € € € €
(3) If, ín case of such cítízen, 50 per centum or more of hís gross íncome
(computed wíthout the benefít of thís sectíon) for such períod or such part
thereof was deríved from the actíve conduct of a trade or busíness wíthín
a possessíon of the Uníted States eíther on hís own account or as an empíoyee
or agent of another.
Sectíon 29.251-1 of Reguíatíons 111 provídes ín part that the saíary
or other compensatíon paíd by the Uníted States to the members of íts
cívíí, mííítary, or navaí personneí for servíces rendered wíthín a pos-
sessíon of the Uníted States represents íncome deríved from the aotíve
conduct of a trade or busíness wíthín a possessíon of the Uníted States.
y íts terms, sectíon 251(a) of the Code, supra, appííes oníy wíth
respect to gross íncome. Consequentíy, ít ís necessary to gíve eífect to
the e cíusíon from gross íncome províded by sectíon 22(b) (13) ( ) of
the Code before appíyíng the provísíons of sectíon 251 (a) of the Code.
Sectíon 22(b) (13) ( ) of the Code provídes for the e cíusíon from
gross íncome of a certaín amount of the entíre servíce pay receíved
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29.251-1.
150
duríng the ta abíe year, no provísíon beíng made for the e cíusíon of
a partícuíar part of such pay. Therefore, ín the ínstant case, a part of
the pay whích ís e cíudíbíe under sectíon 22(b) (1 ) ( ) of the Code
must be consídered a part of the pay receíved by the ta payer for
servíces rendered wíthín a possessíon of the Uníted States. That part
of the pay receíved for servíces rendered wíthín a possessíon of the
Uníted States whích ís e cíudíbíe under sectíon 22(b) (13) ( ) of the
Code may not agaín be e cíuded under sectíon 251(a) of the Code.
The part of the pay whích ís e cíudíbíe under sectíon 251(a) of the
Code may be determíned by muítípíyíng the amount of servíce pay re-
ceíved wíthín a possessíon of the Uníted States by a fractíon, the nu-
merator of whích ís the totaí amount of servíce pay receíved duríng
the ta abíe year íess the amount e cíudíbíe under sectíon
22(b) (13) ( ) of the Code, and the denomínator of whích ís the totaí
servíce pay receíved duríng the ta abíe year. In the ínstant case, the
eg 000
computatíon ís as foííows: 2,000 € ” 1,333.33. Inasmuch as
the íatter amount ( 1,333.33) was deríved from sources wíthín a pos-
sessíon of the Uníted States and ís 100 per cent of the gross íncome of
the ta payer for the appíícabíe part of the 3-year períod ímmedíateíy
precedíng the cíose of the ta abíe year 1945, and ín víew of the fact
that the servíce pay constítutes íncome deríved from the actíve con-
duct of a trade or busíness wíthín a possessíon of the Uníted States,
the 0 per cent, and the 50 per cent tests prescríbed by sectíon 251(a)
(1) and (3) of the Code are met. The ta payer ís. therefore, ta abíe
on oníy 1,666.67 of hís servíce pay, representíng the remaínder after
e cíusíon of 1,500 under sectíon 22(b) (13) ( ) of the Code and
1,333.33 under sectíon 251 (a) of the Code.
In víew of the foregoíng, ít ís heíd that ín the case of a commís-
síoned offícer of the Uníted States rmy, a cítízen of the Uníted
States, whose íncome for a ta abíe year íncíudes both servíce pay re-
ceíved wíthín a possessíon of the Uníted States for servíces rendered
thereín duríng a part of the year and servíce pay receíved wíthín
the Uníted States for servíces rendered thereín duríng the remaínder
of the year, the totaí íncome receíved shouíd be reduced by the amount
of the addítíonaí aííowance for mííítary and navaí personneí to
whích he ís entítíed under sectíon 22(b) (13) ( ) of the Internaí Reve-
nue Code ín determíníng whether he ís entítíed to any e cíusíon under
sectíon 251(a) of the Code. If he ís so entítíed, the amount to be
e cíuded under sectíon 251(a) of the Code ís that part of the servíce
pay receíved wíthín the possessíon whích the amount of servíce pay
not e cíuded under sectíon 22(b) (13) ( ) of the Code bears to the
totaí amount of servíce pay receíved.
The appíícatíon of the provísíons of sectíon 251 of the Code míght
ín some cases resuít ín a detríment rather than ín a benefít. owever,
ít ís not mandatory that a ta payer appíy the provísíons of sectíon
251 of the Code ín determíníng hís gross íncome íf appíícatíon of that
sectíon resuíts ín no ta benefít. e may, íf he desíres, determíne
hís gross íncome wíthout regard to the provísíons of sectíon 251 of
the Code. (See I. T. 3363, C. . 1940-1,92.)
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151
29.251-1.
Sectíon 29.251-1: Cítízens of the Uníted
States and domestíc corporatíons derívíng
íncome from sources wíthín a possessíon
of the Uníted States.
( íso Sectíon 29.251-2.)
INT RN L R NU COD .
ppíícatíon of sectíon 251 of the Internaí Revenue Code, reíatíng
to íncome from sources wíthín possessíons of the Uníted States, to
the retírement pay of a Uníted States rmy offícer where such pay
accrued and was constructíveíy receíved by hím whííe he was heíd a
prísoner of war, but was actuaííy receíved by hím ín the Uníted
States upon hís return to thís country ín 1945.
dvíce ís requested reíatíve to the treatment for ederaí íncome ta
purposes of the retírement pay of a Uníted States rmy offícer where
such pay accrued whííe he was heíd a prísoner of war ín the Phíííppínes.
In the ínstant case, the ta payer ís a retíred commíssíoned offícer
of the Uníted States rmy receívíng retírement pay at the rate of
3,000 per year. ís actuaí períod of servíce ín the rmy was 24
years, of whích 19 years were served ín the Phíííppíne Isíands, 4
years were served ín the Uníted States, and 1 year was served ín Cuba.
or purposes of retírement, under certaín íaws appíícabíe to the
retírement of rmy personneí, he was credíted wíth doubíe tíme for
hís servíces ín Cuba and for a portíon of hís servíces ín the Phíííppínes.
ccordíngíy, for such purposes, he was credíted wíth a totaí períod of
30 years servíce, aííocated as foííows: 24 years ín the Phíííppínes, 4
years ín the Uníted States, and 2 years ín Cuba. Upon hís retírement,
he estabííshed hís home ín the Phíííppínes and remaíned there untíí
he was taken a prísoner of war by the apanese ín 1942. e was
reíeased ín 1945 and then returned to the Uníted States. Upon hís
return to the Uníted States, he was paíd the amount of retírement pay
whích had accrued duríng the períod of hís ínternment by the enemy.
Duríng that períod, he díd not receíve actuaííy or constructíveíy any
íncome from other sources.
Sectíon 251 of the Internaí Revenue Code provídes ín part as foííows:
(a) Generaí Ruíe, € ” In the case of cítízens of the Uníted States
satísfyíng the foííowíng condítíons, gross Income means oníy gross Income from
sources wíthín the Uníted States € ”
(1) If 0 per centum or more of the gross íncome of such cítízen
(computed wíthout the benefít of thís sectíon), for the three-year períod
ímmedíateíy precedíng the cíose of the ta nbíe year (or for such part of such
períod ímmedíateíy precedíng the cíose of such ta abíe, year as may be appíí-
cabíe) was deríved from sources wíthín a possessíon of the Uníted States
and
€ €
(3) If, ín case of such cítízen, 50 per centum or more of hís gross
íncome (computed wíthout the benefít of thís sectíon) for such períod or
such part thereof was deríved from the actíve conduct of a trade or busíness
wíthín a possessíon of the Uníted States eíther on hís own account or as an
empíoyee or agent of another.
(b) mounts Receíved ín Uníted States. € ” Notwíthstandíng the provísíons of
subsectíon (a) there shaíí be íncíuded ín gross Income níí amounts receíved by
such cítízens € € wíthín the Uníted States, whether deríved from sources
wíthín or wíthout the Uníted States.
Retírement pay whích ís ta abíe ís earned íncome and constítutes
addítíonaí compensatíon for past servíces. (See Mím. 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 determíníng whether the earned íncome ís from sources
wíthín or wíthout the Uníted States, the píace where the servíces are
performed and not where the compensatíon ís paíd ís controíííng.
See I. T. 143 , C. . 1-2, 229 (1922) and I. T. 22 6, C. . -í, 52
1926).) Under the príncípíe announced ín I. T. 3 02 (page 1, thís
uííetín), the ta payer s retírement pay for the períod duríng whích
he was a prísoner of war was constructíveíy receíved whííe ne was
outsíde the Uníted States. In the case of constructíve receípt of
íncome, the píace of receípt ís the píace where the recípíent was
physícaííy present at the tíme the íncome was so receíved. The
amounts of retírement pay whích accrued to the ínstant ta payer are
deemed to have been receíved by hím ín the Phíííppíne Isíands, even
though actuaí payment was made to hím ín 1945 ín the Uníted States.
Therefore, the íímítatíons of sectíon 251(b) of the Code, supra, do
not appíy to the retírement pay ín questíon.
Sectíon 29.251-1 of Reguíatíons 111 provídes ín part that the
saíary or other compensatíon paíd by the Uníted States to the mem-
bers of íts cívíí, mííítary, or navaí personneí for servíces rendered
wíthín a possessíon of the Uníted States represents íncome deríved
from the actíve conduct of a trade or busíness wíthín a possessíon of
the Uníted States. Sínce retírement pay whích ís ta abíe ís earned
íncome and constítutes addítíonaí compensatíon for past servíces, the
ta payer s retírement pay quaíífíes as havíng been deríved from the
actíve conduct of a trade or busíness wíthín a possessíon of the Uníted
States under sectíon 251(a) (3) of the Code, supra.
There remaíns for determínatíon the appíícatíon of the percentage
requírements of sectíon 251(a) (1) and (3) of the Code, supra. To
satísfy those requírements, computatíons must be made of the ratío
whích the totaí períod of the ta payer s servíce ín possessíons of the
Uníted States bears to the totaí períod of hís entíre servíce ín the
armed forces, and of the ratío whích the totaí períod of hís servíce
outsíde the Uníted States bears to the totaí períod of hís entíre servíce
ín the aímed forces. ccordíngíy, the portíon of hís retírement pay
whích ís consídered as deríved from sources wíthín a possessíon of the
Uníted States ís an amount whích bears the same ratío to hís totaí
retírement, pay as the totaí tíme of hís servíce ín the Phíííppíne Isíands,
as ad|usted, bears to hís totaí tíme of servíce ín the armed forces, as
ad|usted. The portíon of hís retírement pay whích ís consídered as
deríved from sources outsíde the Uníted States ís an amount whích
bears the same ratío to hís totaí retírement pay as hís períod of servíce
ín both the Phíííppínes and Cuba, as ad|usted, bears to hís totaí períod
of servíce, as ad|usted, ín the armed forces.
In the ínstant case, of the totaí períod of 30 years servíce credíted
to the ta payer for retírement purposes, 24 years were aííocated to
servíce ín the Phíííppínes and 2 years were aííocated to servíce ín
Cuba. The ratíos appíícabíe to the ta payer are 24/30ths, or 0 per
cent, attríbutabíe to servíce ín a possessíon of the Uníted States, and
26/30ths, or G per cent, attríbutabíe to servíce outsíde the Uníted
States. Inasmuch as the ta payer had no other íncome duríng the
períod of hís ínternment, the percentage requírements of sectíon 251
(a) (1) and (3) of the Code, supra, are met. ccordíngíy, the amount
of 2 GOO per year, whích represents the portíon of the ta payer s re-
tírement pay deríved from sources outsíde the Uníted States, |nay be
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153
29.252-1.
e cíuded from the ta payer s gross íncome for each year duríng the
períod of hís ínternment. The baíance of 400 per year ís consídered
to be íncome deríved from sources wíthín the Uníted States and shouíd
be íncíuded ín the ta payer s gross íncome for each year duríng the
períod ínvoíved.
If the ta payer ín the ínstant case had receíved other ta abíe ín-
come duríng the years ín questíon, hís ríght to the benefíts of sectíon
251 of the Code wouíd be determíned on the basís of hís totaí íncí-me,
hís retírement pay beíng aííocated ín the same manner as hereín e -
píaíned.
Sectíon 29.251-2: Income receíved wíthín the Uníted States.
INT RN L R NU COD .
Retírement pay of a Uníted States rmy offícer who was heíd a
prísoner of war ín a possessíon of the Uníted States. (See I. T. 3 04,
page 151.)
S CTION 252. € ” CITIZ NS O POSS SSIONS
.O UNIT D ST T S.
Sectíon 29.252-1: Status of cítízens of , 1946-5-12254
Uníted States possessíon. I. T. 37
INT RN L R NU COD .
Cítízens of Puerto Ríco who are cítízens of the Uníted States oníy
by reason of coííectíve naturaíízatíon under the Organíc ct of
Puerto Ríco (39 Stat., 951), approved March 2, 1917, and suppíe-
mentary cts, or by reason of índívíduaí naturaíízatíon pursuant to
orders of the Dístríct Court of the Uníted States for Puerto Ríco,
and who are not resídents of .the Uníted States, are sub|ect to ed-
eraí íncome ta oníy upon íncome deríved from sources wíthín the
Uníted States, ín the same manner and sub|ect to the same condítíons
as nonresídent aííens.
dvíce ís requested wíth respect to the appíícatíon of sectíon 252(a)
of the Internaí Revenue Code to cítízens of Puerto Ríco who are not
resídents of the Uníted States and who are cítízens of the Uníted States
oníy by reason of coííectíve naturaíízatíon under the Organíc ct of
Puerto Ríco (39 Stat., 951), approved March 2, 1917, and suppíe-
mentary cts, or by reason of índívíduaí naturaíízatíon pursuant to
orders of the Dístríct Court of the Uníted States for Puerto Ríco.
Sectíon 252(a) of the Internaí Revenue Code provídes as foííows:
(a) ny índívíduaí who ís a cítízen of any possessíon of the Uníted States
hut not otherwíse a cítízen of the Uníted States) and who ís not a resídent of
the Uníted States, shaíí be sub|ect to ta atíon under thís chapter Chapter 1 of
the Code oníy as to íncome deríved from sources wíthín the Uníted States, and
ín such case the ta shaíí be computed and paíd ín the same manner and sub|ect
to the same condítíons as ín the case of other persons who are ta abíe oníy as to
íncome deríved from such sources. Itaíícs suppííed.
In short, the índívíduaís descríbed ín sectíon 252(a) of the Code are
ta ed ín the same manner as nonresídent aííens. The word other-
Wíse ín the parenthetícaí phrase has been consístentíy construed as
causíng thís sectíon to appíy to the cítízens of aíí the possessíons of the
703672 € ” 46 -11
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29.252-1.
154
Uníted States, íncíudíng Puerto Ríco, e cept cítízens of the írgín
Isíands.
The Temporary Organíc ct of Puerto Ríco (31 Stat., 77), approved
príí 12,1900, províded that aíí ínhabítants of Puerto Ríco -who con-
tínued to resíde thereín, who were Spanísh sub|ects on príí 11,1 99.
and then resíded ín Puerto Ríco, and theír chíídren born subsequent
thereto, shouíd be deemed and heíd to be cítízens of Puerto Ríco and,
as such, entítíed to the protectíon of the Uníted States (e cept such
persons as had eíected to preserve theír aííegíance to the Crown of
Spaín on or before príí 11,1900, ín accordance wíth the terms of the
Treaty of París) and they, together wíth those cítízens of the Uníted
States resídíng ín Puerto Ríco, shouíd constítute a body poíítíc under
the name of The Peopíe of Puerto Ríco. That ct mereíy conferred
Puerto Rícan cítízenshíp upon the ínhabítants of the ísíand and certaín
ad|acent ísíands and díd not make them cítízens of the Uníted States
(23 Op. tt. Gen. (U. S.), 370 Peopíe e reí. uarbe v. oard, of
Inspectors, 67 N. Y. S., 236). owever, by the Organíc ct of Puerto
íco (39 Stat., 951 )r approved March 2, 1917, aíí cítízens of Puerto
Ríco, as defíned by the Temporary Organíc ct, and aíí natíves of
Puerto Ríco who were temporarííy absent from the ísíand on príí 11,
1 99, who had sínce returned and were permanentíy resídíng there and
who were not cítízens of any foreígn country, were decíared deemed,
and heíd to be cítízens of the Uníted States. ut thís provísíon was
not mandatory, and any índívíduaí who wíshed to preserve hís poíítícaí
status and not become a cítízen of the Uníted States was permítted to
do so by makíng a suítabíe decíaratíon under oath, wíthín sí months
of the effectíve date of the ct, before the dístríct court for the dístríct
whereín he resíded. nother provísíon of the ct made ít possíbíe
for a person born ín Puerto Ríco of an aííen parent, and permanentíy
resídíng thereín, to make a decíaratíon of aííegíance to the Uníted
States before the Dístríct Court of the Uníted States for Puerto Ríco
wíthín sí months of the effectíve date of the ct, íf of fuíí age, or
wíthín one year after reachíng hís ma|oríty, íf a mínor, and ímmedí-
ateíy thereupon to become a cítízen of the Uníted States. Thís ct
conferred Uníted States cítízenshíp upon most of the natíves of Puerto
Ríco by a process of coííectíve naturaíízatíon, but wíth respect to one
cíass (those born of an aííen parent) províded a specíaí form of índí-
víduaí naturaíízatíon by court order. The terms of thís ct were con-
fírmed and e panded bv the provísíons of the ct of March 4,1927
(44 Stat, 141 ), and the ct of une 27,1934 (4 Stat., 1245).
Sectíon I of the fourteenth amendment of the Constítutíon of the
Uníted States provídes that íí persons born or naturaíízed ín the
Uníted States, and sub|ect to the |urísdíctíon thereof, are cítízens of
the Uníted States . Thís sectíon contempíates two sources
of cítízenshíp and two sources oníy € ” bírth and naturaíízatíon ( ík v.
Wííííams, 112 U. S., 94). ut the Uníted States cítízenshíp conferred
upon Puerto Rícan natíves by the Organíc ct of Puerto Ríco, as weíí
as by the cts of March 4,1927, and une 27,1934, was by a form of
naturaíízatíon. Throughout the períod covered by those cts, other
natíves of Puerto Ríco, as weíí as aííens resídent ín Puerto Ríco, were
obtaíníng Uníted States cítízenshíp by order of the Dístríct Court of
the Uníted States for Puerto Ríco under the generaí naturaíízatíon
íaws. It was not untíí the effectíve date ( anuary 12, 1941) of the
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155 29.252-1.
Natíonaííty ct of 1940 (54 Stat., 1137), approved October 14, 1940,
that Uníted States cítízenshíp couíd be acquíred by bírth ín Puerto
Ríco. Nevertheíess, most, íf not aíí, cítízens of Puerto Ríco born príor
to the effectíve date of the Natíonaííty ct of 1940 are cítízens of the
Uníted States by reason of the coííectíve naturaíízatíon provísíons of
the Organíc# ct of Puerto Ríco and suppíementary cts, or by reason
of naturaíízatíon by order of the Dístríct Court of the Uníted States
for Puerto Ríco.
Sectíon 29.252-1 of Reguíatíons 111 provídes ín part as foííows:
or ederaí Income ta purposes a cítízen of a possessíon of the Uníted States
who ís not otherwíse a cítízen of the Uníted States ís a cítízen of a possessíon of
the Uníted States who has not become a cítízen of the Uníted States by
naturaíízatíon.
s has been stated, vírtuaííy aíí cítízens of Puerto Ríco are cítízens of
the Uníted States by naturaíízatíon. owever, ín accordance wíth the
generaí constructíon accorded sectíon 252 (a) of the Code, ít ís heíd that
the word naturaíízatíon, as used ín thís sectíon of the reguíatíons,
means oníy naturaíízatíon ín the States or ín íncorporated terrítory
of the Uníted States.
Thís constructíon of the íaw and reguíatíons ís, ín generaí, benefícíaí
to those cítízens of Puerto Ríco who are not resídents of the Uníted
States. ew of them have any íncome from sources wíthín the Uníted
States other than ínvestment íncome, and, sínce ít ís possíbíe for an
índívíduaí to choose hís ínvestments, ít ííes wíthín hís power to avoíd
the ta atíon to whích the íncome from such ínvestments ís sub|ect.
Whííe the provísíons of sectíon 251 of the Internaí Revenue Code,
whích e empt from ederaí íncome ta atíon íncome from sources
wíthín possessíons of the Uníted States under certaín condítíons,
wouíd have accompííshed a ííke resuít ín most ínstances, doubtíessíy
there are a number of Puerto Rícans who couíd not quaíífy for e -
emptíon under that sectíon, ínasmuch as íess than haíf of theír gross
íncome ís deríved from the actíve conduct of a trade or busíness wíthín
a possessíon of the Uníted States and, íf not ta abíe under sectíon
252(a) of the Code ín the same manner as nonresídent aííens, such
índívíduaís wouíd be sub|ect to ederaí ta atíon upon theír woríd
íncome. ut whatever may have been the orígínaí purpose of ta íng
Puerto Rícans on the same basís as nonresídent aííens they have been
so ta ed under aíí of the revenue íaws, begínníng wíth the Revenue
ct of 191 . Under the íaw as ít ís construed, aííens who have acquíred
Uníted States cítízenshíp by order of the Dístríct Court of the Uníted
States for Puerto Ríco can not consístentíy be píaced ín a category
dífferíng from that of other Puerto Rícans whose Uníted States cítí-
zenshíp ís granted by statute, another means of naturaíízatíon.
In víew of the foregoíng, ít ís heíd that cítízens of Puerto Ríco
who are cítízens of the Uníted States oníy by reason of coííectíve
naturaíízatíon under the Organíc ct of Puerto Ríco, approved March
2 1917, and suppíementary cts, or by reason of índívíduaí naturaííza-
tíon pursuant to orders of the Dístríct Court of the Uníted States for
Puerto Ríco, and who are not resídents of the Uníted States, are sub-
|ect to ederaí íncome ta oníy upon íncome deríved from sources
wíthín the Uníted States, ín the same manner and sub|ect to the same
condítíons as nonresídent aííens.
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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.
Sectíon 29.272-1: ssessment of a defícíency. 1946-7-122 0
( íso Sectíon 19.272-1, Reguíatíons 103 Sec- T.D.5503
tíon 273, Sectíon 29.273-1, Reguíatíons 111,
Sectíon 19.273-1, Reguíatíons 103 Sectíon
322, Sectíon 29.322-7, Reguíatíons 111, Sec-
tíon 19.322-7, Reguíatíons 103 Sectíon 732,
Sectíon 35.732-1, Reguíatíons 112, Sectíon
30.732-1, Reguíatíons 109 Sectíons 1.73 and
1.93, Reguíatíons 105 and Sectíons 6.39
and 6.43, Reguíatíons 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.
Reguíatíons 103, 105, 10 , 109, 111, and 112 amended to conform
to sectíons 201, 202, and 203 of Pubííc Law 291 (Seventy-nínth Con-
gress), such sectíons reíatíng respectíveíy to tíme for cíaímíng
refund wíth respect to war íosses, deductíon of contríbutíons to
pensíon trusts, and tíme for fíííng petítíon wíth The Ta Court of the
Uníted States.
Treasury Department,
Offíce of Commíssíoner of Internaí Revenue,
y Washíngton, D. C.
To Coííectors of Internaí Revenue and Others Concerned:
In order to conform Reguíatíons 103 Part 19, Títíe 26, Code of
ederaí Reguíatíons, 1940 Sup. , Reguíatíons 105 Part 1, Títíe 20,
Code of ederaí Reguíatíons, Cum. Sup. , Reguíatíons 10 Part 0,
Títíe 26, Code of ederaí Reguíatíons, Cum. Sup. , Reguíatíons 109
Part 30, Títíe 26, Code of ederaí Reguíatíons, 1941 Sup. , Reguía-
tíons 111 Part 29, Títíe 26, Code of ederaí Reguíatíons, Cum. Sup. ,
and Reguíatíons 112 Part 35, Títíe 26, Code of ederaí Reguíatíons,
Cum. Sup. to the provísíons of sectíons 201, 202, and 203 of Pubííc
Law 291 (Seventy-nínth Congress), approved December 29, 1945,
such reguíatíons are amended as foííows:
R GUL TIONS 103 ND 111.
Paragraph 1. There ís ínserted ímmedíateíy precedíng sectíon
29.23(p)-í, Reguíatíons 111, the foííowíng:
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) Deductíons for the Ta abíe Year 1942 Under Príor Income Ta
cts. € ” Sectíon 23(p) (2) of the Internaí Revenue Code ís amended by
stríkíng out the words anuary 1, 1943 and Insertíng ín ííeu thereof
anuary 1, 1942 , and by stríkíng out the words December 31,1942
and ínsertíng ín ííeu thereof December 31, 1941 .
(b) ffectíve Date. € ” The amendment made by thís sectíon shaíí be
appíícabíe as If ít had been made as a part of sectíon 162(b) of the
Revenue ct of 1942.
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157
29.272-1.
Par. 2. There ís ínserted ímmedíateíy precedíng sectíon 19.272 € ” 1,
Reguíatíons 103, and sectíon 29.272-1, Reguíatíons 111, the foííowíng:
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) Tíme fob h|no Petítíon. € ” The secomí sentences of sectíons
272(a)(1), € of the Internaí Revenue Code are amended by
stríkíng out the parenthetícaí e pressíon appearíng thereín and ínsert-
íng ín ííeu thereof the foííowíng: (not countíng Saturday, Sunday,
or a íegaí hoííday ín the Dístríct of Coíumbía as the nínetíeth day) .
(b) ffectíve Date. € ” The amendments made by thís sectíon shaíí
take effect as of September , 1945.
Par. 3. Sectíon 19.272-1, Reguíatíons 103, as amended by Treasury
Decísíon 5226, approved ebruary 10, 1943 C. . 1943, 375 , and sec-
tíon 29.272-1, Reguíatíons 111, are amended by changíng the sí th
sentence of each such sectíon to read as foííows:
In determíníng such 90-day or 150-day períod, Saturday (on and after Septem-
ber , 1945), Sunday, or a íegaí hoííday ín the Dístríct of Coíumbía ís not to be
counted as the nínetíeth or one hundred fíftíeth day.
Par. 4. Sectíon 19.273-1, Reguíatíons 103, as amended by Treasury
Decísíon 5226, and sectíon 29.273-1, Reguíatíons 111, are amended by
changíng the cíause foííowíng the parenthetícaí e pressíon appearíng
ín the thírd sentence of the second paragraph of each such sectíon to
read as foííows:
not countíng Saturday (on and after September , 1945), Sunday, or a íegaí
hoííday ín the Dístríct of Coíumbía as the nínetíeth or one hundred fíftíeth day.
Par. 5. There ís ínserted ímmedíateíy precedíng sectíon 19.322 € ” 1,
Reguíatíons 103, and sectíon 29.322-1, Reguíatíons 111, the foííowíng:
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 cíaím for credít or refund under the Internaí revenue íaws re-
íates to an overpayment on account of the deductíbíííty by the ta payer
of a íoss ín respect of property consídered destroyed or seízed under sec-
tíon 127(a) of the Internaí Revenue Code (reíatíng to war íosses) for a
ta abíe year begínníng ín 1941 or 1942, the three-year períod of íímí-
tatíon prescríbed ín sectíon 322(b) (1) of the Internaí Revenue Code shaíí
ín no event e píre príor to December 31,1946. In the case of such a cíaím
tííed on or before December 31, 1946, the amount of the credít or refund
way e ceed the portíon of the ta paíd wíthín the períod províded ín sec-
tíon 322(b) (2) or (3) of such code, whíchever ís appíícabíe, to the e -
tent of the amount of the overpayment attríbutabíe to the deductíbíííty
of the íoss descríbed ín thís sectíon.
Par. 6. Sectíon 19.322-7, Reguíatíons 103, as amended by Treasury
Decísíon 5436, approved ebruary 3, 1945 C. . 1945, 115 , and
sectíon 29.322-7, Reguíatíons 111, as amended by Treasury Decísíon
5447, approved March 21, 1945 C. . 1945, 251 are further
amended by changíng the íast sentence of (a) of each such sectíon to
read as foííows:
The provísíons of thís subsectíon are sub|ect to the e ceptíons províded ín sub-
sectíons (6), (c), and (d) of thís sectíon and ín sectíon 201 of Pubííc Law 291
(Seventy-nínth Congress), approved December 29, 1945, e tendíng to December
31, 1946, the tíme for fíííng a cíaím for credít or refund based upon an over-
Payment of the ta as a resuít of the faííure to take a war íoss deductíon In
respect of property consídered destroyed or seízed under sectíon 127(a) of the
ae for a ta abíe year begínníng ín 1941 or 1942.
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29.272-1.
15
R GUL TIONS 109 ND 112.
Par. 7. There ís ínserted ímmedíateíy precedíng sectíon 30.732-1,
Reguíatíons 109, and sectíon 35.732-1, Reguíatíons 112, the foííowíng:
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) Tíme foe ííínq Petítíon. € ” The second sentences of sectíons
€ 732(a), € of the Internaí Revenue Code are amended
by stríkíng out the parenthetícaí e pressíon appearíng thereín and ín-
sertíng In ííeu thereof the foííowíng: (not countíng Saturday, Sunday,
or a íegaí hoííday ín the Dístríct of Coíumbía as the nínetíeth day) .
(b) ffectíve Date. € ” The amendments made by thís sectíon shaíí
take effect as of September , 1945.
Par. . Sectíon 30.732-1, Reguíatíons 109, and sectíon 35.732-1,
Reguíatíons 112, both sectíons as amended by Treasury Decísíon 5474,
approved ugust 21, 1945 C. . 1945, 2 0 , are further amended
by changíng the parenthetícaí e pressíon appearíng ín the second
sentence of each such sectíon to read as foííows:
(not countíng Saturday (on and after September , 1943), Sunday, or a íegaí
hoííday ín the Dístríct of Coíumbía as the nínetíeth day)
R GUL TIONS 105 ND 10 .
Par. 9. There ís ínserted ímmedíateíy precedíng sectíon 1.73, Regu-
íatíons 105, and sectíon 6.39, Reguíatíons 10 , the foííowíng:
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) Tíme for íííno Petítíon. € ” The second sentences of sectíons
™ 71(a) (1), and 1012(a) (1), respectíveíy, of the Internaí Rev-
enue Code are amended by stríkíng out the parenthetícaí e pres-
síon appearíng thereín and Insertíng ín ííeu thereof the foííowíng:
(not countíng Saturday, Sunday, or a íegaí hoííday ín the Dístríct of
Coíumbía as the nínetíeth day) .
(b) ffectíve Date. € ” The amendments made by thís sectíon shaíí
take effect as of September ,1945.
Par. 10. Sectíon 1.73, Reguíatíons 105, as amended by Treasury
Decísíon 5239, approved March 10, 1943 C. . 1943, 10 1 , ís further
amended by changíng the two parenthetícaí e pressíons ín the fourth
paragraph to read as foííows:
(not countíng Saturday (on and after September , 1945), Sunday, or a íegaí
hoííday ín the Dístríct of Coíumbía as the íast day of the períod)
Par. 11. Sectíon 1.93, Reguíatíons 105, as amended by Treasury
Decísíon 5239, ís further amended by changíng the parenthetícaí e -
pressíon ín the fífth sentence to read as foííows:
(not countíng Saturday (on and after September , 1945), Sunday, or a íeg3
hoííday ín the Dístríct of Coíumbía as the íast day)
Par. 12. Sectíon 6.39, Reguíatíons 10 , ís amended by changíng the .
fourth sentence to read as foííows:
In determíníng such prescríbed períod, Saturday (on and after September ,
1945), Sunday, or a íegaí hoííday ín the Dístríct of Coíumbía ís not to bs countea
as the íast day thereof.
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29.275-1.
Par. 13. Sectíon 6.43, Reguíatíons 10 , ís amended by changíng the
cíause foííowíng the parenthetícaí e pressíon ín the thírd sentence of
the second paragraph thereof to read as foííows:
and In determíníng such prescríbed períod Saturday (on and after September ,
1945), Sunday, or a íegaí hoííday ín the Dístríct of Coíumbía ís not to be counted
as the íast day thereof.
(Thís Treasury Decísíon ís íssued under the authoríty contaíned ín
sectíons 62, 1029, 3791, and 729(a) of the Internaí Revenue Code (53
Stat., 32, 157, 467 54 Stat., 9 9 26 U. S. C, 1940 ed., 62, 1029, 3791,
729(a)) and sectíons 201, 202, and 203 of Pubííc Law 291 (Seventy-
nínth Congress), approved December 29, 1945.)
- . oseph D. Nuna , r.,
Commíssíoner of Internaí Revenue.
pproved March 20,1946.
oseph . O Conneíí, r.,
ctíng Secretary of the Treasury.
( ííed wíth the Dívísíon of the ederaí Regíster March 21, 1946, 4.2S p. m.)
S CTION 273.- OP RDY SS SSM NTS.
Sectíon 29.273-1: eopardy assessments.
( íso Sectíon 19.273-1, Reguíatíons 103.)
ínternaí revenue code.
Reguíatíons 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.
Sectíon 29.275-1: Períod of íímítatíon upon 1946-12-12329
assessment of ta . T. D. 5516
( íso Sectíon 322, Sectíon 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.
Reguíatíons 111 amended to conform to sectíons 5 and 6(a) of
the Ta d|ustment ct of 1045, reíatíng respectíveíy to the períod
of íímítatíon In case of carry-backs and to Interest ín connectíon
wíth defícíencíes resuítíng from carry-backs and reíated matters,
and to sectíon 122 (e) and (f) of the Revenue ct of 1945, reíatíng
respectíveíy to cíaíms for refund based on carry-backs and to defí-
cíencíes attríbutabíe to carry-backs.
Treasury Department,
Offíce of Commíssíoner of Internaí Revenue,
Washíngton, D. C.
To Coííectors of Internaí Revenue and Others Concerned:
In order to conform Reguíatíons 111 Part 29, Code of ederaí Reg-
uíatíons, Cum. Sup. to sectíons 5 and 6(a) of the Ta d|ustment
ct of 1945 (Pubííc Law 172, Seventy-nínth Congress), approved
uíy 31, 1945, and to sectíon 122 (e) and (f) of the Revenue ct of
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29.275-1.
160
1945 (Pubííc Law 214, Seventy-nínth Congress), approved November
,1945, such reguíatíons are amended as foííows:
Paragraph 1. There ís ínserted ímmedíateíy precedíng sectíon 293
the foííowíng:
S C. 6. INT R ST IN CONN CTION WIT C RRY- C S.
(T D USTM NT CT OP 1945.)
(a) Sectíon 292 of the Internaí Revenue Code Is amended by addíng
at the end thereof the foííowíng new subsectíon:
(c) Defícíency Resuítíng bom Cabby- ack and Reíated Mat-
ters. € ” If any part of a defícíency ís determíned by the Commíssíoner to
be attríbutabíe ( ) to a carry-back to whích an overpayment descríbed
ín sectíon 3771(e), or a decrease determíned under sectíon 37 0(b),
ín any other ta ís attríbutabíe, or ( ) to an error ín the amount or,
effect of a carry-back whích resuíted ín a credít or refund of an over-
payment wíth Interest computed pursuant to sectíon 3771(e), or ín a
decrease determíned under sectíon 37 0(b), no ínterest shaíí be as-
sessed or paíd under subsectíon (a) wíth respect to such part of the
defícíency for any períod duríng whích ínterest was not aííowed wíth
respect to such overpayment or for a períod príor to the appíícatíon of
such decrease.
€ € € € €
Par. 2. There ís ínserted ímmedíateíy precedíng sectíon 29.275-1
the foííowíng:
S C. 5. P RIOD OP LIMIT TION IN C S OP C RRY- C S.
(T D USTM NT CT OP 1945.)
€ € € € € €
(e) Sectíon 276 of the Internaí Revenue Code ís amended by ínsertíng
Immedíateíy foííowíng subsectíon (c) the foííowíng new subsectíon:
(d) Net Operatíng Loss Carby- acks and Unused cess Profíts €
Credít Carry- acks. € ” defícíency attríbutabíe to the appíícatíon to
the ta payer of a net operatíng íoss carry-back or an unused e cess
profíts credít carry-back, íncíudíng defícíencíes whích may be assessed
pursuant to the provísíons of sectíon 37 0 (b) and (c), may be assessed
at any tíme príor to the e píratíon of the períod wíthín whích a defí-
cíency may be assessed wíth respect to the ta abíe year of the cíaímed
net operatíng íoss or unused e cess profíts credít resuítíng ín such
carry-back.
(f) ffectíve Date. € ” The amendments made by thís sectíon shaíí be
appíícabíe wíth respect to aíí ta abíe years begínníng after December
31, 1940, e cept that the amendment made by subsectíon (d) shaíí not
be appíícabíe to any ta abíe year wíth respect to whích the ta payer
and the Commíssíoner have entered ínto a cíosíng agreement under the
provísíons of sectíon 3700, príor to the date of enactment of. thís ct,
ín any case ín whích ít ís e pressíy províded ín such cíosíng agreement
that the ta ííabíííty for such ta abíe year ís not to be affected by a
net operatíng íoss carry-back or by an unused e cess profíts credít
carry-back.
S C. 122. R P L OP C SS PRO ITS T IN 1946. (R -
NU CT OP 1945.)

(f) Defícíencíes ttríbutabíe to Carby- acks. € ”
(1) Sectíon 276(d) ís amended to read as foííows:
(d) Net Opebatíno Loss Carry- acks and Unused cess Profíts
Credít Carry- acks. € ” In the case of a defícíency attríbutabíe to the
appíícatíon to the ta payer of a net operatíng íoss carry-back or an
unused e cess profíts credít carry-back, íncíudíng defícíencíes whích may
be assessed pursuant to the provísíons of sectíon 37 0 (b) or (c), such
defícíency may be assessed € ”
(1) ín case a return was requíred under subchapter of chapter
2 for the ta abíe year of the net operatíng íoss or unused e cess
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161
29.275-1.
profíts credít resuítíng ín the carry-back, at any tíme before the
e píratíon of the períod wíthín whích (under sectíon 275 or sub-
sectíon (a) or (b) of thís sectíon) a defícíency (wíth respect to
ta ímposed eíther by chapter 1 or by subchapter or of chapter
2) for such ta abíe year (whíchever ís the íonger períod) may be
assessed or
(2) ín case a return was not requíred under subchapter of
chapter 2 for the ta abíe year of the net operatíng íoss or unused
e cess profíts credít resuítíng ín the carry-back, at any tíme before
the e píratíon of the períod wíthín whích (under sectíon 275 or
subsectíon (a) or (b) of thís sectíon) a defícíency (wíth respect to
ta ímposed eíther by chapter 1 or by subchapter or of chapter
2) for such ta abíe year (whíchever ís the íonger períod) may be
assessed.
(2) ffectíve Date. € ” The amendment made by thís subsectíon
shaíí be appíícabíe wíth respect to aíí ta abíe years begínníng after
Dec-ember 31, 1940. - k

Par. 3. Sectíon 29.275-1 ís .amended bv ínsertíng ímmedíateíy pre-
cedíng the íast paragraph thereof the foííowíng:
(11) specíaí períod of íímítatíon ís províded ín sectíon 276(d) wíthín whích
a defícíency ín any ta (íncíudíng a defícíency whích may be assessed pursuant
to the provísíons of sectíon 37 0 (b) or (c), reíatíng to tentatíve carry-back
ad|ustments) whích ís attríbutabíe to the appíícatíon to the ta payer of a net
operatíng íoss carry-back or an unused e cess profíts credít carry-back may be
assessed. The períod wíthín whích such a defícíency may be assessed depends,
ín generaí, on the períod wíthín whích a defícíency may be assessed wíth respect
to the ta abíe year of the net operatíng íoss or the unused e cess profíts credít
whích resuíted ín the carry back. The períod wíthín whích such a defícíency
may be assessed depends further on whether an e cess profíts ta return was
requíred to be fííed ín the case of the gíven ta payer for the ta abíe year of
the net operatíng íoss or the unused e cess profíts credít whích resuíted ín
the carry-back. It ís ímmateríaí whether an e cess profíts ta return was
requíred to be fííed for the ta abíe year of the defícíency. The determínatíve
factor ís whether an e cess profíts ta return was requíred to be fííed for the
ta abíe year of the íoss or unused credít whích resuíted ín the carry-back.
If an e cess profíts ta return was requíred to be fííed for the ta abíe year
of the net operatíng íoss- or the unused e cess profíts credít whích resuíted ín
the carry-back, a defícíency ín any ta attríbutabíe to the appíícatíon to the
ta payer of such carry-back may be assessed at any tíme príor to the e píratíon
of the períod wíthín whích (under the provísíons of sectíon 275 or 276 (a) or (b),
and sectíons 603 and 729(a) respectíveíy makíng such sectíons 275 and 276 (a)
and (b) appíícabíe to Subchapters and of Chapter 2) a defícíency may be as-
sessed wíth respect to the same or any other ta ímposed by Chapter 1 or Sub-
chapter or of Chapter 2 for the ta abíe year of such íoss or unused credít. In
such case, a defícíency attríbutabíe to the appíícatíon to the ta payer of a
carry-back thus may be assessed at any tíme príor to the e píratíon of whíchever
of the foííowíng three períods, each períod beíng determíned under the appíícabíe
provísíons of sectíon 275, 276 (a) and (b), 603, and 729(a), e píres the íatest:
(a) the períod wíthín whích a defícíency may be assessed wíth respect to
the ta ímposed by Chapter 1 for the ta abíe year of the íoss or unused credít
whích resuíted ín the carry-back
(6) the períod wíthín whích a defícíency may be assessed wíth respect to
the decíared vaíue e cess profíts ta , ímposed by Subchapter of Chapter 2,
for the ta abíe year of the íoss or unused credít whícíí resuíted ín the carry-
back
(c) the períod wíthín whích a defícíency may be assessed wíth respect to
the e cess profíts ta , ímposed by Subchapter of Chapter 2, for the ta abíe
year of the íoss or unused credít whích resuíted ín the carry-back.
If a corporatíon ís not sub|ect to the decíared vaíue e cess profíts ta for the ta -
abíe year of the íoss or unused credít whích resuíted ín the carry-back, eíther be-
cause íts net íncome, determíned as províded ín sectíon 602, for such ta abíe year
ís not ín e cess of 10 per cent of íts decíared vaíue or because such ta abíe year
ended after une 30, 1946, the períod wíthín whích a defícíency may be assessed
wíth respect to the decíared vaíue e cess profíts ta for the ta abíe year of the
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29.275-1.
162
íoss or unused credít shaíí be dísregarded ín determíníng the períod wíthín whích
a defícíency attríbutabíe to the appíícatíon to the ta payer of a carry-back, re-
suítíng from such íoss or unused credít, may be assessed.
If no e cess profíts ta return was requíred to be fííed for the ta abíe year
of the net operatíng íoss or unused e cess profíts credít whích resuíted ín the
carry-back, a defícíency ín any ta attríbutabíe to the appíícatíon to the ta payer
of such carry-back may be assessed at any tíme príor to the e píratíon of the
períod wíthín whích (under the provísíons of sectíon 275 or 276 (a) or (b),
and sectíons 50 and 603 respectíveíy makíng such sectíons 275 and 276 (a) and
(b) appíícabíe to Subchapters and of Chapter 2) a defícíency may be
assessed wíth respect to the same or any other ta ímposed by Chapter 1 or
Subchapter or of Chapter 2 for the ta abíe year of such íoss or unused credít.
It wííí be consídered that no e cess profíts ta return was requíred to be fííed for
the ta abíe year of the íoss or unused credít íf ( ) the ta payer was e empt
from the e cess profíts ta for such ta abíe year under the provísíons of sectíon
727 ( ) the ta payer, even though sub|ect to tíe e cess profíts ta , was not
requíred to fííe an e cess profíts- ta return for such ta abíe year under the
provísíons of sectíon 729 or (C) such ta abíe year began after December 31.
1945. In such case, a defícíency attríbutabíe to the appíícatíon to the ta payer
of a carry-back thus may be assessed at any tíme príor to the e píratíon of
whíchever of the foííowíng three períods, each períod beíng determíned under
the appíícabíe provísíons of sectíons 275, 276 (a) and (b), 50 , and 603, e píres
the íatest:
(I) the períod wíthín whích a defícíency may be assessed wíth respect
to the ta Imposed by Chapter 1 for the ta abíe year of the íoss or unused
credít whích resuíted ín the carry-back
(íí) the períod wíthín whích a defícíency may be assessed wíth respect
to the surta on personaí hoídíng companíes, ímposed by Subchapter of
Chapter 2, for the ta abíe year of the íoss or unused credít whích resuíted
ín the carry-back
(ííí) the períod wíthín whích a defícíency may be assessed wíth respect
to the decíared vaíue e cess profíts ta , ímposed by Subchapter of Chapter
2, for the ta abíe year of the íoss or unused credít whích resuíted ín the
carry-back.
If a corporatíon ís not a personaí hoídíng company, as defíned ín sectíon 501,
for the ta abíe year of the íoss or unused credít whích resuíted ín the carry-
back, the períod wíthín whích a defícíency may be assessed wíth respect to the
surta on personaí hoídíng companíes for the ta abíe year of the íoss or unused
credít shaíí be dísregarded ín determíníng the períod wíthín whích a defící-
ency attríbutabíe to the appíícatíon to the ta payer of a carry-back, resuítíng
from such íoss or unused credít, may be assessed. Símííaríy, íf a corporatíon
ís not sub|ect to the decíared vaíue e cess profíts ta for the ta abíe year of the
íoss or unused credít whích resuíted ín the carry-back, eíther because íts net
Income, determíned as províded ín sectíon 602, for such ta abíe year ís not
ín e cess of 10 per cent of íts decíared vaíue or because such ta abíe year ended
after une 30, 1916, the períod wíthín whích a defícíency may be assessed wíth
respect to the decíared vaíue e cess profíts ta for the ta abíe year of the
íoss or unused credít shaíí be dísregarded ín determíníng the períod wíthín whích
n defícíency attríbutabíe to the appíícatíon to the ta payer of a carry-back,
resuítíng from such íoss or unused credít, may be assessed.
It ís ímmateríaí whether an e cess profíts ta return ín fact was fííed for
the ta abíe year of the íoss or unused credít whích resuíted ín the carry-back,
whether the defícíency ís attríbutabíe to the appíícatíon to the ta payer of a
net operatíng íoss carry-back or an unused e cess profíts credít carry-back,
whether the defícíency ís ín respect of the e cess profíts ta or some other tas,
or whether the defícíency ís ín respect of the same ta as that of the carry-back
or ín respect of some other ta . The determínatíve factor Is whether an e cess
profíts ta return was requíred to be fííed for the ta abíe year of the íoss or
unused credít whích resuíted ín the carry-back. It ís ííkewíse ímmateríaí whether
the ta , In respect of whích the defícíency resuítíng from the appíícatíon to the
ta payer of the carry-back ís to be assessed, ís the same kínd of ta wíth respect
to whích a defícíency míght be assessed for the ta abíe year of the íoss or unused
credít whích resuíted In the carry-back. Thus, If a defícíency for the caíendar
year 1943 wíth respect to the ta ímposed by Chapter 1 ís attríbutabíe to the
appíícatíon to the ta payer of a net operatíng íoss carry-back from 1945, n
the ta payer was requíred to fííe an e cess profíts ta retnrn for 1945 and íf tne
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163
29.275-1.
períods wíthín whích defícíencíes wíth respect to the ta es Imposed by Chapter 1,
Subchapter of Chapter 2, and Subchapter of Chapter 2 for 1945 e píre
respectíveíy on March 15, 1949, March 15, 1949, and September 15, 1949, the
períod wíthín whích such defícíency, attríbutabíe to the appíícatíon to the ta -
payer of the net operatíng íoss carry-back from 1945, may be assessed wíth
respect to the ta Imposed by Chapter 1 for 1943 wííí e píre on September 15,
1949.
defícíency attríbutabíe to the appíícatíon to the ta payer of a carry-back
may resuít from an ad|ustment to the net operatíng íoss or the unused e cess
profíts credít, to the resuítíng carry-back, or to the net operatíng íoss deductíon
or the unused e cess profíts credít ad|ustment. defícíency may be attríbutabíe
to the appíícatíon to the ta payer of a carry-back even though the net operatíng
íoss or the unused e cess profíts credít or the resuítíng carry-back, as cíaímed
by the ta payer, ís ídentícaí In amount wíth the actuaí íoss or unused credít or
the resuítíng carry-back. or e ampíe, íf ín computíng the net operatíng íoss
deductíon the ta payer faíís to make the ad|ustment requíred by sectíon 122(c),
the resuítíng defícíency wííí be consídered to be attríbutabíe to the appíícatíon
to the ta payer of any net operatíng íoss carry-back whích entered ínto the com-
putatíon of such net operatíng íoss deductíon. defícíency In e cess profíts ta
attríbutabíe to the appíícatíon to the ta payer of an unused e cess profíts credít
carry-back whích ítseíf ís produced, or whích ís íncreased ín amount, by a neí
operatíng íoss carry-back Is to be consídered as ííkewíse attríbutabíe to the
appíícatíon to the ta payer of such net operatíng íoss carry-back to the e tent
that such unused e cess profíts credít carry-back ís so produced or Increased
such defícíency may be assessed at any tíme príor to the e píratíon of whíchever
of the foííowíng two períods e píres íater: the períod prescríbed ín sectíon 276(d)
wíthín whích a defícíency attríbutabíe to the appíícatíon to the ta payer of such
unused e cess profíts credít carry-back may be assessed, or the períod prescríbed
ín sectíon 276(d) wíthín whích a defícíency attríbutabíe to the appíícatíon to
the ta payer of such net operatíng íoss carry-back may be assessed.
If the períod wíthín whích a defícíency may be assessed under any other appíí-
cabíe provísíon of íaw, both In the case where an e cess profíts ta return was
requíred to be fííed for the ta abíe year of the íoss or unused credít whích re-
suíted ín the carry-back and In the case where no e cess profíts ta return was
requíred to be fííed for such ta abíe year, ís íonger than the períod províded ín
sectíon 276(d), a defícíency attríbutabíe to the appíícatíon to the ta payer of
such carry-back may be assessed at any tíme príor to the e píratíon of such
íonger períod.
Par. 4. There ís ínserted ímmedíateíy precedíng sectíon 29.322-1
the foííowíng:
S C. 5. P RIOD O LIMIT TION IN C S O C RRY- C S.
(T D USTM NT CT O 1945.)
(a) Sectíon 322(b) (5) of the Internaí Revenue Code Is amended by
stríkíng the words or of a carry-back where they appear ín subpara-
graph ( ) thereof, and by stríkíng the íast sentence and Insertíng ín
ííeu thereof the foííowíng: If the cíaím for credít or refund reíates
to an overpayment on account of the effect that the deductíbíííty of
such a debt or íoss has on the appíícatíon to the ta payer of a carry-
back, the períod shaíí be eíther seven years from the date prescríbed
by íaw for fíííng the return for the year of the net operatíng íoss or the
unused e cess profíts credít whích resuíts ín such carry-back or the períod
prescríbed ín paragraph (6), whíchever e píres the íater. In the case of
a cíaím descríbed ín thís paragraph, the amount of the credít or refund
may e ceed the portíon of the ta paíd wíthín the períod prescríbed
In paragraph (2) or (3), whíchever ís appíícabíe, to the e tent of the
amount of the overpayment attríbutabíe to the deductíbíííty of ítems
descríbed ín thís paragraph.
(b) Sectíon 322(b) of the Internaí Revenue Code Is amended by ín-
sertíng ímmedíateíy foííowíng paragraph (5) the foííowíng new para-
graph:
(6) Specíaí períod of íímítatíon wíth respect to net oper-
atíng LOSS C RRY- C S ND UNUS D C SS PRO ITS CR DIT C RRY-
C S. € ” If the cíaím for credít or refund reíates to an overpayment
attríbutabíe to a net operatíng íoss carry-back or to an unused
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29.275-1.
164
e cess profíts credít carry-back, In ííeu of the three-year períod of
íímítatíon prescríbed In paragraph (1), the períod shaíí be that
períod whích ends wíth the e píratíon of the three-year períod pre-
scríbed ín paragraph (1) or the períod prescríbed ín paragraph
(3), whíchever e píres íater, wíthín whích cíaím for credít or re-
fund may be fííed wíth respect to the ta abíe year of the net oper-
atíng íoss or the unused e cess profíts credít whích resuíts ín such
carry-back. In the case of such a cíaím, the amount of the credít
or refund may e ceed the portíon of the ta paíd wíthín the períod
províded In paragraph (2) or (3), whíchever ís appíícabíe, to the
e tent of the amount of the overpayment attríbutabíe to such
carry-back.
(c) Sectíon 322(d) of the Internaí Revenue Code ís amended by
stríkíng the períod at the end thereof and ínsertíng ín ííeu thereof the
foííowíng: or (3), If such portíon was not paíd wíthín the períod
descríbed ín cíause (1), but the notíce of defícíency was maííed wíthín
the períod prescríbed ín subsectíon (b) (6) for the fíííng of a cíaím for
credít or refund of an overpayment attríbutabíe to a carry-back, or such
a cíaím was fííed, that such portíon does not e ceed the amount of the
overpayment attríbutabíe to a carry-back .
(d) Sectíon 322 of the Internaí Revenue Code ís amended by ínsertíng
ímmedíateíy foííowíng subsectíon (f) the foííowíng new subsectíon:
(g) Overpayments ttríbutabíe to Net Operatíng Loss Carry-
backs and Unused cess Profíts Credít Carry- acks. € ” If the aííow-
ance of accredít or refund of an overpayment of ta attríbutabíe to a
net operatíng íoss carry-back or to an unused e cess profíts credít carry-
back ís otherwíse prevented by the operatíon of any íaw or ruíe of íaw
other than sectíon 3761, reíatíng to compromíses, such credít or refund
may be aííowed or made, íf cíaím therefor ís fííed wíthín the períod pro-
víded ín subsectíon (b)(6). If the aííowance of an appíícatíon, credít
or refund of a decrease ín ta determíned under sectíon 37 0(b) ís
otherwíse prevented by the operatíon of any íaw or ruíe of íaw other
than sectíon 3761, such appíícatíon, credít or refund may be aííowed
or made íf appíícatíon for a tentatíve carry-back ad|ustment ís made
wíthín the períod províded ín sectíon 37 0(a). In the case of any such
cíaím for credít or refund or any such appíícatíon for a tentatíve carry-
back ad|ustment, the determínatíon by any court. Incíudíng The Ta
Court of the Uníted States, ín any proceedíng ín whích the decísíon of
the court has become fínaí, shaíí be concíusíve e cept wíth respect to the
net operatíng íoss deductíon and the unused e cess profíts credít ad|ust-
ment, and the effect of such deductíon or ad|ustment, to the e tent that
such deductíon or ad|ustment ís affected by a carry-back whích was not
ín íssue ín such proceedíng.
€ €
(f) ffectíve Date. € ” The amendments made by thís sectíon shaíí be
appíícabíe wíth respect to aíí ta abíe years bsgínníng after December
31, 1040, e cept that the amendment made by subsectíon (d) shaíí not
be appíícabíe to any ta abíe year wíth respect to whích the ta payer
and the Commíssíoner have entered Into a cíosíng agreement under the
provísíons of sectíon 3760, príor to the date of enactment of thís ct, ín
any case ín whích ít ís e pressíy províded In such cíosíng agreement
that the ta ííabíííty for such ta abíe year ís not to be affected by a net
operatíng íoss carry-back or by an unused e cess profíts credít carry-
back.
S C. 122. R P L O C SS PRO ITS T I 1046. (R -
NU CT O 194o.)
€ € € € € € €
(e) Cíaíms for Refund ased on Carry- acks. € ”
1) In generaí. € ” The fírst sentence of sectíon 322(b)(6) (re-
íatíng to períods of íímítatíon wíth respect to cíaíms for refund
based on carry-backs) ís amended to read as foííows: If the cíaím
for credít or refund reíates to an overpayment attríbutabíe to a
net operatíng íoss carry-back or to an unused e cess profíts credít
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29.275-1.
carry-back, In ííeu of the three-year períod of íímítatíon prescríbed
ín paragraph (1), the períod shaíí be that períod whích ends wíth
the e píratíon of the fífteenth day of tííe thírty-nínth mouth foí-
íowíng the end of the ta abíe year of the net operatíng íoss or the
unused e cess profíts credít whích resuíts ín such carry-back, or the
períod prescríbed ín paragraph (3) ín respect of such ta abíe year,
whíchever e píres íater.
(2) Ta abíe yeaks to whích appíícabíe. € ” The amendment made
by thís subsectíon shaíí be appíícabíe to cíaíms for credít or refund
wíth respect to ta abíe years begínníng after December 31, 1940.
€ €
Par. 5. Sectíon 29.322-7, as amended by Treasury Decísíon 5503,
approved March 20,1946 page 156, thís uííetín , ís further amended
as foííows:
( ) y stríkíng the íast sentence of subsectíon (a) and ínsertíng
ín ííeu thereof the foííowíng sentence:
The provísíons of thís subsectíon are sub|ect to the e ceptíons províded In sub-
sectíons (6), (c), d), and (e) of thís sectíon and ín sectíon 201 of Pubííc Law
291 (Seventy-nínth Congress), npproved December 29, 1945, e tendíng to De-
cember 31, 1946, the tíme for fíííng a cíaím for credít or refund based upon nn
overpayment of the ta as a resuít of the faííure to take a war íoss deductíon
ín respect of property consídered destroyed or seízed under sectíon 127(a) of
the Code for a ta abíe year begínníng ín 1941 or 1942.
( ) y stríkíng cíause (2) of subsectíon (c) and ínsertíng ín ííeu
thereof the foííowíng:
(2) the effect thnt the deductíbíííty of a debt or íoss descríbed ín cíause
(1) has on the appíícatíon to the ta payer of a capítaí íoss carry-over pro-
víded ín sectíon 117(e), a net operatíng íoss carry-over províded ín sectíon
122(b), or an unused e cess profíts credít carry-over províded ín sectíon
710(c)(3),
(C) y stríkíng the second sentence of subsectíon (c) whích begíns
wíth the words In the case of such a cíaím and ínsertíng ín ííeu
thereof the foííowíng:
If the cíaím for credít or refund reíates to an overpayment on account of the
effect that the deductíbíííty of a debt or íoss descríbed ín cíause (1) has on the
appíícatíon to the ta payer of a net operatíng íoss carry-back províded ín sectíon
122(b) or an unused e cess profíts credít carry-back províded ín sectíon
710(c) (3), such períod shaíí be whíchever of the foííowíng two períods e píres
íater:
(í) seven years from the date prescríbed by íaw for fíííng the return
(determíned wíthout regard to any e tensíon of tíme for fíííng such return)
for the ta abíe year of the net operatíng íoss or the unused e cess profíts
credít or
(íí) the períod prescríbed In subsectíon (e) of thís sectíon.
In the case of any cíaím descríbed ín thís paragraph the amount of the credít
or refund may e ceed the portíon of the ta paíd wíthín the períod províded
ín subsectíon (a) or (6) of thís sectíon, whíchever ís appíícabíe, to the e tent
of the amount of the overpayment attríbutabíe to the deductíbíííty of ítems
descríbed ín thís paragraph.
(D) y stríkíng (í) and (íí) where they appear ín the fírst
paragraph of subsectíon (c) and ínsertíng ín ííeu thereof ( ) and
( ), respectíveíy.
( ) y stríkíng the second paragraph of subsectíon (c) and ín-
sertíng ín ííeu thereof the foííowíng:
If cíaím for credít or refund ís not fííed wíthín the appíícabíe períod descríbed
ín the precedíng paragraph, then credít or refund may be aííowed or made oníy
íf cíaím therefor Is fííed, or íf such credít or refund Is aííowed or made, wíthín
any períod prescríbed ín subsectíon (o) or (6) of thís sectíon, whíchever ís
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29.275-1.
166
appíícabíe, sub|ect to the provísíons of such subsectíon (a) or (b), íímítíng
the amount of credít or refund In the case of a cíaím fííed, or, íf no cíaím was
fííed, ín the case of credít or refund aííowed or made wíthín such appíícabíe
períod as prescríbed ín such subsectíon (a) or (6).
( ) y stríkíng cíause (íí) of subsectíon (d) and ínsertíng ín
ííeu thereof the foííowíng:
(11) íf such portíon of the ta was not paíd wíthín the períod descríbed
ín ( .) of thís paragraph, but the notíce of defícíency was maííed wíthín
seven years from the tíme prescríbed for fíííng the return (determíned
wíthout regard to any e tensíon of tíme for fíííng such return), or a cíaím
of the type descríbed ín subsectíon (c) of thís sectíon was fííed, that such
portíon of the ta does not e ceed the amount of the overpayment attríbu-
tabíe to the deductíbíííty of ítems descríbed ín such subsectíon (c) or
(ííí) íf such portíon of the ta was not paíd wíthín the períod descríbed
ín (í) of thís paragraph, but the notíce of defícíency was maííed wíthín
the períod prescríbed ín subsectíon (e) of thís sectíon for the fíííng of a
cíaím for credít or refund of an overpayment attríbutabíe to a net operatíng
íoss carry-back or an unused e cess profíts credít carry-back, or such a cíaím
was fííed, that such portíon of the ta does not e ceed the amount of the
overpayment attríbutabíe to the carry-back.
The amount of the overpayment attríbutabíe to the deductíbíííty of ítems
descríbed In subsectíon (e) of thís sectíon or to a carry-back shaíí be determíned
under the provísíons of subsectíons (c) and (c), respectíveíy. or the íímí-
tatíon on the aííowance of ínterest for any portíon of an overpayment descríbed
ín (íí) or (ííí), above, see sectíon 3771 (d) or (e), whíchever ís appíícabíe.
(G) y addíng at the end thereof the foííowíng new subsectíon:
(e) Overpayment on account of net operatíng íogs carry-backs and unused
e cess profíts credít carry-backs. € ” (1) Specíaí períod of íímítatíon. € ” If the
cíaím for credít or refund reíates to an overpayment attríbutabíe to a net operat-
íng íoss carry-back, províded ín sectíon 122(b), or to an unused e cess profíts
credít carry-back, províded ín sectíon 710(c)(3), then ín ííeu of the 3-year
períod from the date the return was fííed ín whích the cíaím may be fííed or
credít or refund aííowed or made, as prescríbed ín subsectíon (n) of thís sectíon,
the períod shaíí be whíchever of the foííowíng two períods e píres íater:
(í) the períod whích ends wíth the e píratíon of the 15th day of the
thírty-nínth month foííowíng the end of the ta abíe year of the net operatíng
íoss or the unused e cess profíts credít whích resuíted ín the carry-back or
(íí) the períod whích ends wíth the e píratíon of the períod prescríbed
ín subsectíon (6) of thís sectíon wíthín whích a cíaím for credít or refund
may be fííed wíth respect to the ta abíe year of the net operatíng íoss or
the unused e cess profíts credít whích resuíted ín the carry-back.
In the case of such a cíaím, the amount of the credít or refund may e ceed the
portíon of the ta paíd wíthín the períod prescríbed ín subsectíon (a) or (6) of
thís sectíon, whíchever ís appíícabíe, to the e tent of the amount of the over-
payment attríbutabíe to the carry-back. Such a credít or refund can not e ceed
the sum of the foííowíng:
( ) the portíon, íf any, of the ta paíd wíthín the períod províded In sub-
sectíon (a) or (6) of thís sectíon, whíchever ís appíícabíe, and
( ) the amount of the overpayment attríbutabíe to the carry-back.
The portíon of an overpayment attríbutabíe to a carry-back shaíí be determíned
by treatíng the net operatíng íoss deductíon and the unused e cess profíts credít
ad|ustment, to the e tent that they are íncreased by the net operatíng íoss
carry-back or the unused.e eess profíts credít carry-back, as the fírst ad|ustments
to be made ín computíng such overpayment.
If cíaím for credít or refund ís not fííed, and. íf credít or refund ís not aííowed
or made, wíthín the períod descríbed ín the precedíng paragraph, then credít or
refund may be aííowed or made oníy íf cíaím therefor ís fííed, or íf such credít
or refund ís aííowed or made, wíthín any períod prescríbed ín subsectíon (a) or
(6) of thís sectíon, whíchever ís appíícabíe, sub|ect to the provísíons of such
subsectíon (a) or (6), íímítíng the amount of credít or refund ín the case of a
cíaím fííed, or íf no cíaím was fííed, ín the case of credít or refund aííowed or
made wíthín such appíícabíe períod.
In the case of an overpayment of e cess profíts ta attríbutabíe to an unused
e cess profíts credít carry-back whích ítseíf ís produced, or ís íncreased ín
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167
29.275-1.
amount, by a net operatíng íoss carry-back, such overpayment Is to be con-
sídered as attríbutabíe to the net operatíng íoss carry-back to the e tent that
there wouíd have been no overpayment of e cess profíts ta íf there had been
no net operatíng íoss carry-back. Cíaím for credít or refund of that portíon
of the overpayment of e cess profíts ta whích ís thus attríbutabíe to the net
operatíng íoss carry-back may be fííed, or credít or refund aííowed or made, at
any tíme príor to the e píratíon of the períod wíthín whích cíaím for credít
or refund of an overpayment attríbutabíe to the net operatíng íoss carry-back
may be fííed or such credít or refund aííowed or made íf no cíaím ís fííed.
or the íímítatíon on the aííowance of ínterest for an overpayment where
credít or refund ís sub|ect to the provísíons of sectíon 322(b)(6), see sectíon
3771(e).
(2) arred overpayments. € ” If the aííowance of a credít or refund of an over-
payment of ta attríbutabíe to a net operatíng íoss carry-back or to an unused
e cess profíts credít carry-back ís otherwíse prevented by the operatíon of any
íaw or ruíe of íaw (other than sectíon 3701, reíatíng to compromíses), sucíí
credít or refund may be aííowed or made under the provísíons of sectíon 322(g)
íf a cíaím therefor ís fííed wíthín the períod províded In sectíons 322(b) (G) and
29.322-7 (e) (1) for fíííng a cíaím for credít or refund of an overpayment at-
tríbutabíe to a carry-back. Símííaríy, íf the aííowance of an appíícatíon, credít
or refund of a decrease In ta determíned under sectíon 37 0(b) ís otherwíse
prevented by the operatíon of any íaw or ruíe of íaw (other than sectíon 3761),
such appíícatíon, credít or refund may be aííowed or made íf an appíícatíon
for a tentatíve carry-back ad|ustment ís fííed wíthín the períod províded ín
sectíon 37 0(a). Thus, for e ampíe, even though the ta ííabíííty for a gíven
ta abíe year has prevíousíy been íítígated before The Ta Court of the Uníted
States, credít or refund of an overpayment may be aííowed or made, despíte the
provísíons of sectíon 322(c), íf cíaím for such credít or refund ís fííed wíthín
the períod províded In sectíons 322(b) (6) and 29.322-7(e) (1).
In the case of a cíaím for credít or refund of an overpayment attríbutabíe
to a carry-back, or In the case of an appíícatíon for n tentatíve carry-back
ad|ustment, the determínatíon of any court, íncíudíng The Ta Court of the
Uníted States, ín any proceedíng ín whích the decísíon of the court has become
fínaí, shaíí be concíusíve e cept wíth respect to the net operatíng íoss deductíon
and the unused e cess profíts credít ad|ustment, and the effect of such deduc-
tíon or ad|ustment, to the e tent that such deductíon or ad|ustment ís affected
by a carry-back whích was not ín íssue ín such proceedíng. The provísíons of
sectíon 322(g), however, are not to appíy to any ta abíe year wíth respect to
whích the Commíssíoner and the ta payer have entered ínto a cíosíng agree-
ment under sectíon 3760 príor to uíy 31, 1945, the date of enactment of the
Ta d|ustment ct of 1945, In whích ít ís e pressíy províded that the ta
ííabíííty for such ta abíe year ís not to be affected by a net operatíng íoss carry-
back or by an unused e cess profíts credít carry-back.
The provísíons of sectíon 322(g) may be íííustrated by the foííowíng e ampíe:
ampíe. Corporatíon , whích keeps íts books and makes íts ta returns
on the caíendar year basís, fííed Its íncome and e cess profíts ta returns for
1944 on March 15, 1945. The corporatíon cíaímed 100,000 as a deductíon for
deprecíatíon on such returns. The Commíssíoner asserted that oníy 60,000
was properíy aííowabíe as a deductíon for deprecíatíon, and he further asserted
that the corporatíon had reaíízed certaín íong-term capítaí gaíns ín 1944 whích
ít ímproperíy faííed to íncíude ín íts gross íncome. These íssues were íítígated
before The Ta Court of the Uníted States, whích sustaíned the Commíssíoner s
determínatíons wíth respect to both the deductíon for deprecíatíon and the
capítaí gaíns. Pursuant to the decísíon of The Ta Court, whích became fínaí
on December 15, 1946, defícíency |udgments were entered for the-Commíssíoner
wíth respect to both the Income ta and the e cess profíts ta of the corporatíon
for the year 1944. In computíng the defícíency ín e cess profíts ta , proper
ad|ustment was made by The Ta Court for an unused e cess profíts credít
carry-back from the year 1945 to 1944. The corporatíon díd not appeaí The
Ta Court s decísíon. In a decísíon whích became fínaí on May 1, 1947, the
Supreme Court decíded that gaíns of the type heíd ta abíe as íong-term capítaí
gaíns by The Ta Court ín the above proceedíng are not sub|ect to ta . The
corporatíon sustaíned net operatíng íosses ín both 1946 and 1947 and had an
unused e cess profíts credít for 1946.
The net operatíng íoss sustaíned by the corporatíon ín 1917, when carríed
back to 1945, íncreased the unused e cess profíts credít for 1945. If proper
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29.294-2.
16
cíaíms for credít or refund are fííed wíthín the períod províded ín sectíons
322(b) (6) and 29.322-7(e) (1), the corporatíon may be aííowed credít or refund
of such portíons of the overpayments of íts íncome ta , íts e cess profíts ta ,
and any other ta affected, for 1944 as are attríbutabíe to the net operatíng
íoss carry-back or unused e cess profíts credít carry-backs whích resuít from
the above íosses and unused credíts. In computíng such overpayments, no ad-
|ustment ís to be made wíth respect to the gaíns heíd ta abíe as íong-term
capítaí gaíns by The Ta Court or wíth respect to any other Item, e cept the
net operatíng íoss deductíon and the unused e cess profíts credít ad|ustment,
whích entered ínto the determínatíon of the corporatíon s Income ta and e cess
profíts ta for 1944. The net operatíng íoss deductíon and e cess profíts credít
ad|ustment, however, may be ad|usted to the e tent that they are affected by a
carry-back whích was not ín íssue ín the above proceedíng before The Ta
Court. Líkewíse, ad|ustments may be made to refíect the effect of such net
operatíng íoss deductíon and unused e cess profíts credít ad|ustment on any
other ítems whích enter Into the determínatíon of the ta ííabíííty. Thus, for
e ampíe, any deductíon íímíted by net Income or ad|usted gross Income, such
as the deductíon for charítabíe contríbutíons, Is to be recomputed on the basís
of the net Income or ad|usted gross Income as affected by the carry-back. The
portíon of the overpayment attríbutabíe to the net operatíng íoss carry-back or
the unused e cess profíts credít carry-back ís to be determíned by treatíng the
net operatíng íoss deductíon and the unused e cess profíts credít ad|ustment to
the e tent that they are Increased by a net operatíng íoss carry-back or an
unused e cess profíts credít carry-back, as the fírst ad|ustments to be made ín
computíng such overpayment.
Pah. 6. The amendments to Reguíatíons 111 (coveríng ta abíe
years begínníng after December 31, 1941) made by paragraphs 1
through 5 of thís Treasury Decísíon are hereby made appíícabíe to
ta abíe years begínníng after December 31, 1940, and príor to anu-
ary 1, 1942 (such years beíng covered by Reguíatíons 103).
(Thís Treasury Decísíon ís íssued under the authoríty contaíned ín
sectíon 62 of the Internaí Revenue Code (53 Stat., 32 20 U. S. C,
1940 ed., 62), sectíons 5 and 6(a) of the Ta d|ustment ct of 1945
(Pubííc Law 172, Seventy-nínth Congress), and sectíon 122 (e) and
(f) of the Revenue ct of 1945 (Pubííc Law 214, Seventy-nínth Con-
gress).)
oseph D. Nunan, r.,
Commíssíoner of Internaí Revenue.
pproved May 27,1946.
oseph . O Conneíí, r.,
ctíng Secretary of the Treasury.
( ííed wíth the Dívísíon of the ederaí Regíster 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.
Sectíon 29.294-2: Substantíaí overestímate of
e pected carry-backs.
ínternaí revenue code.
Reguíatíons 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.
Sectíon 29.322-7: Límítatíons upon the credítíng
and refundíng of ta es paíd
INT RN L R NU COD .
Reguíatíons I amended. (See T. D. 5516, page 159.)
Sectíon 29.322-7: Límítatíons upon the credítíng
and refundíng of ta es paíd.
( íso Sectíon 19.322-7, Reguíatíons 103.)
INT RN L R NU COD .
Reguíatíons 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.
Sectíon 29.362-5: Method of ta atíon of share hoíders
of reguíated ínvestment companíes.
INT RN L R NU COD .
Capítaí gaín dívídends receíved by nonresídent aííen índívíduaís
and nonresídent foreígn corporatíons. (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 .
Termínatíon of ta . € ” Computatíon of ta In respect of war íoss
recoveríes. € ” Treasury Decísíon 5237 C. . 1943, C2 amended.
Treasury. Department,
Offíce of Commíssíoner of Internaí Revenue,
Washíngton 25, D. C.
To Coííectors of Internaí Revenue and Others Concerned:
In order to conform Treasury Decísíon 5237, approved March ,
1043 C. . 1943,62 , estabííshíng reguíatíons reíatíng to the decíared
703672 € ” 46 12
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170
vaíue e cess-profíts ta ímposed by Subchapter of Chapter 2 of the
Internaí evenue Code, for íncome-ta ta abíe years endíng after
une 30,1942, as amended by Treasury Decísíon 5401, .approved ugust
26,1944 C. . 1944, 204 , to sectíons 201, 202, and 203 of the Revenue
ct of 1945 (Pubííc Lnw 214, Seventy-nínth Congress), approved
November , 1945 C. . 1945, 546 , such Treasury Decísíon ís
hereby amended as foííows:
Paragraph 1. The headíng of the Treasury Decísíon ís amended
by changíng the períod at the end thereof to a comma and addíng
thereto tne foííowíng: and príor to uíy 1,1946.
Par. 2. Sectíon 21.0(a) ís amended as foííows:
( ) y ínsertíng ímmedíateíy after Introductory. € ” (a) the foí-
íowíng: (1).
( ) y ínsertíng after endíng une 30, 1942, the foííowíng:
and termínatíng wíth the year ended une 30,1945, .
(C) y addíng at the end thereof the foííowíng:
(2) The Revenue ct of 1045 provídes ín part as foííows:
S C. 201. R P L O C PIT L STOC T .
ffectíve wíth respect to years endíng after une 30, 1045, chapter 6
(ímposíng the capítaí stock ta ) Is repeaíed.
Par. 3. Sectíon 21.0 (b) ís amended as foííows:
( ) y changíng the matter at the begínníng thereof, íncíudíng
the quotatíon of sectíon COO, to read as foííows:
(6) (1) Subchapter of Chapter 2 of the Internaí Revenue Code, as amended,
provídes as foííows:
Subchapter € ” Decíared aíue cess-Profíts 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.Generaí ppíícabíe to Income-ta ta abíe years endíng after
une 30, 1042, and príor to uíy 1, 1056 . € ” If any corporatíon ís ta abíe
under sectíon 1200 wíth respect to any year endíng une 30, there shaíí
be ímposed upon íts net íncome for the íncome-ta ta abíe year endíng
after the cíose of such year, a decíared vaíue e cess-profíts ta equaí
to the sum of the foííowíng:
6 o per centum of such portíon of íts net Income for such íncome-
ta