§ 9.11-1 Income tax on individuals. Title I of the Act, which applies only to taxable years beginning after December 31, 1937 (see section 1), imposes an income tax on individuals, in

cluding a normal tax (section 11) and a surtax (section 12). The tax is upon net income which is determined by subtracting the allowable deductions from the

gross income. (See general sections 2124.) In certain cases credits are allowed against the net income before computing the tax (section 25) and in other cases

against the amount of the tax (sections 31, 32, and 131). In general, the tax is

payable upon the basis of returns rendered by persons liable thereto (sections 51, 53, 142, and 217), except that in some instances it is to be paid at the source of the income (section 143). Exceptions and additional provisions applicable to certain special classes of taxpayers are listed in section 4. See section 102 as to shareholders of corporations formed or availed of to prevent imposition of surtax.

See Supplement P as to shareholders of foreign personal holding companies. See section 117 as to the treatment of capital gains and capital losses.*

§ 9.11-2 Citizens or residents of the United States liable to tax. In general, citizens of the United States, wherever resident, are liable to the tax, and it makes no difference that they may own no assets within the United States and may receive no income from sources within the United States. Every resident alien individual is liable to the tax, even though his income is wholly from sources

§ 9.11-3 Who is a citizen. Every States, and subject to its jurisdiction, is person born or naturalized in the United a citizen. When any naturalized citizen has left the United States and resided for 2 years in the foreign country from which he came, or for 5 years in any other foreign country, it is presumed that he has ceased to be an American citizen. This presumption does not apply, however, to residence abroad while the United States was at war, nor does it apply in the case of individuals born in the United States subject to its jurisdiction. However, even though an individual born in the United States, subject to its jurisdiction, of either citizen or alien parents, resided in a foreign country for a number of years, he would still be a citizen of the United States, unless he had become naturalized in, or taken an oath of allegiance to, the foreign country of residence or some other foreign state. A foreigner who has filed his declaration of intention of becoming has not yet received his final citizenship

a citizen of the United States but who

papers is an alien.

See $89.211-2 to

9.211-5 for distinction between a resident alien individual and a nonresident alien

individual.*†

SEC. 12. Surtax on individuals.-(a) Definition of "surtax net income".-As used in this section the term "surtax net income" means the amount of the net income in excess of the credits against net income provided in section 25 (b).

(b) Rates of surtax.-There shall be levied, collected, and paid for each taxable year upon the surtax net income of every individual a surtax as follows:

Upon a surtax net income of $4,000 there shall be no surtax; upon surtax net incomes in excess of $4,000 and not in excess of $6,000, 4 per centum of such excess.

$80 upon surtax net incomes of $6,000; and upon surtax net incomes in excess of $6,000 and not in excess of $8,000, 5 per centum in addition of such excess.

$180 upon surtax net incomes of $8,000; and upon surtax net incomes in excess of $8,000 and not in excess of $10.000, 6 per

centum in addition of such excess.

$300 upon surtax net incomes of $10.000; and upon surtax net incomes in excess of $10,000 and not in excess of $12,000, 7 per centum in addition of such excess.

$440 upon surtax net incomes of $12,000; and upon surtax net incomes in excess of $12,000 and not in excess of $14.000, 8 per centum in addition of such excess.

$780 upon surtax net incomes of $16,000; and upon surtax net incomes in excess of $16.000 and not in excess of $18,000, 11 per centum in addition of such excess.

$1,000 upon surtax net incomes of $18,000; and upon surtax net incomes in excess of $18,000 and not in excess of $20,000, 13 per centum in addition of such excess.

$1,260 upon surtax net incomes of $20,000; and upon surtax net incomes in excess of $20,000 and not in excess of $22,000, 15 per centum in addition of such excess.

$1,560 upon surtax net incomes of $22,000; and upon surtax net incomes in excess of $22,000 and not in excess of $26,000, 17 per centum in addition of such excess.

$2,240 upon surtax net incomes of $26,000; and upon surtax net incomes in excess of $26,000 and not in excess of $32,000, 19 per centum in addition of such excess.

$3,380 upon surtax net incomes of $32,000; and upon surtax net incomes in excess of $32,000 and not in excess of $38,000, 21 per centum in addition of such excess.

$4,640 upon surtax net incomes of $38,000; and upon surtax net incomes in excess of $38,000 and not in excess of $44,000, 24 per centum in addition of such excess.

$6,080 upon surtax net incomes of $44,000; ind upon surtax net incomes in excess of 344,000 and not in excess of $50,000, 27 per centum in addition of such excess.

$7,700 upon surtax net incomes of $50,000; and upon surtax net incomes in excess of $50,000 and not in excess of $56,000, 31 per centum in addition of such excess.

$9,560 upon surtax net incomes of $56,000; and upon surtax net incomes in excess of $56,000 and not in excess of $62,000, 35 per centum in addition of such excess.

$11,660 upon surtax net incomes of $62,000; and upon surtax net incomes in excess of $62,000 and not in excess of $68,000, 39 per centum in addition of such excess.

$14,000 upon surtax net incomes of $68,000; and upon surtax net incomes in excess of $68,000 and not in excess of $74,000, 43 per centum in addition of such excess.

$16,580 upon surtax net incomes of $74,000; and upon surtax net incomes in excess of $74,000 and not in excess of $80,000, 47 per centum in addition of such excess.

$19,400 upon surtax net incomes of $80,000; and upon surtax net incomes in excess of $80,000 and not in excess of $90,000, 51 per

centum in addition of such excess.

$24,500 upon surtax net incomes of $90,000; and upon surtax net incomes in excess of $90.000 and not in excess of $100.000, 55 per

centum in addition of such excess.

$30.000 upon surtax net incomes of $100.000; and upon surtax net incomes in excess of $100,000 and not in excess of $150,000, 58 per centum in addition of such excess.

$59,000 upon surtax net incomes of $150,000; and upon surtax net incomes in excess

$89,000 upon surtax net incomes of $200,000; and upon surtax net incomes in excess of $200,000 and not in excess of $250,000, 62 per centum in addition of such excess.

$120,000 upon surtax net incomes of $250,000; and upon surtax net incomes in excess of $250,000 and not in excess of $300,000, 64 per centum in addition of such excess.

$152,000 upon surtax net incomes of $300,000; and upon surtax net incomes in excess of $300,000 and not in excess of $400,000, 66 per centum in addition of such excess.

$218,000 upon surtax net incomes of $400,000; and upon surtax net incomes in excess of $400,000 and not in excess of $500,000, 68 per centum in addition of such excess.

$286,000 upon surtax net incomes of $500,000; and upon surtax net incomes in excess of $500,000 and not in excess of $750.000, 70 per centum in addition of such excess.

$461,000 upon surtax net incomes of $750,000; and upon surtax net incomes in excess of $750.000 and not in excess of $1,000,000, 72 per centum in addition of such excess.

$641,000 upon surtax net incomes of $1,000,000; and upon surtax net incomes in excess of $1,000,000 and not in excess of $2,000,000, 73 per centum in addition of such excess.

$1,371,000 upon surtax net incomes of $2,000,000; and upon surtax net incomes in excess of $2,000,000 and not in excess of $5,000,000, 74 per centum in addition of such excess.

$3,591,000 upon surtax net incomes or $5,000,000; and upon surtax net incomes in excess of $5,000,000, 75 per centum in addition of such excess.

(c) Tax in case of capital gains or losses.For rate and computation of alternative tax in lieu of normal tax and surtax in the case of a capital gain or loss from the sale or exchange of capital assets held for more than eighteen months, see section 117 (c).

(d) Sale of oil or gas properties.-For limitation of surtax attributable to the sale of oil or gas properties, see section 105.

(e) Tax on personal holding companies.For surtax on personal holding companies, see Title IA.

(f) Avoidance of surtaxes by incorporation.-For surtax on corporations which accumulate surplus to avoid surtax on shareholders, see section 102.

§ 9.12-1 Surtax. In addition to the normal tax imposed by section 11 a surtax is imposed at the rates specified in section 12 upon the surtax net income of every individual, resident or nonresident, except nonresident alien individuals subject to the tax imposed by section 211 (a). The surtax net income is the amount of the net income in excess of the personal exemption and credit for dependents. (See generally §§ 9.25-1 to 9.25-7.) For surtax on corporations improperly ac

come consisting of such dividends which is not already allocated to the first division; and third, an amount equal to the excess, if any, of the net income over the sum of $25,000 plus the amounts already allocated to the second division.

(D) The tax shall be equal to the sum of the following:

(i) A tax on the $25,000 allocated to the first division, computed under section 14 (c),

on the basis of the allocation made to the first division and as if the amount so allocated constituted the entire net income of the corporation.

(ii) 12 per centum of the dividends received allocated as such to the second division.

(iii) 32 per centum of the remainder of the amount allocated to the second division, except interest allowed as a credit under section 26 (a).

(e) Corporations in bankruptcy and receivership-If a domestic corporation is for any portion of the taxable year in bankruptcy under the laws of the United States, or insolvent and in receivership in any court of the United States or of any State, Territory, or the District of Columbia, then, when the tax is computed under subsection (c), the tentative tax shall be reduced by 22 per centum of the adjusted net income, instead of by 22 per centum of the dividends paid credit.

(f) Joint-stock land banks. In the case of a joint-stock land bank organized under the Federal Farm Loan Act, as amended. when the tax is computed under subsection (c), the tentative tax shall be reduced by 22 per centum of the adjusted net income, instead of by 22 per centum of the dividends paid credit.

(g) Rental housing corporations.-In the case of a corporation which at the close of the taxable year is regulated or restricted by the Federal Housing Administrator under section 207 (b) (2) of the National Housing Act, as amended, when the tax is computed under subsection (c), the tentative tax shall be reduced by 22 per centum of the adjusted net income, instead of by 22 per centum of the dividends paid credit; but only if such Administrator certifies to the Commissioner the fact that such regulation or restriction existed at the close of the taxable year. It shall be the duty of such Administrator promptly to make such certification to the Commissioner after the close of the taxable year of each corporation which is so regulated or restricted by him.

(h) Exempt corporations. For corporations exempt from taxation under this title, see section 101.

(i) Tax on personal holding companies.For surtax on personal holding companies,

see Title IA.

(j) Improper accumulation of surplus.— For surtax on corporations which accumulate surplus to avoid surtax on shareholders, see section 102.

Every such corporation is liable to the tax imposed by that section, except (1) corporations expressly exempt from taxation under Title I (see section 101); (2) corporations subject to tax under section 14, being (i) corporations having net incomes of not more than $25,000, (ii) banks, as defined in section 104, (iii) corporations organized under the China Trade Act, 1922, (iv) corporations which by reason of deriving a large portion of their gross income from sources within a possession of the United States are entitled to the benefits of section 251, and (v) foreign corporations; (3) insurance companies (see Supplement G); and (4) mutual investment companies (see Supplement Q).

It makes no difference that a domestic corporation subject to any tax imposed by section 13 may derive no income from The Sources within the United States. tax imposed by section 13 is computed upon the "adjusted net income,” that is, the net income as defined in section 21 minus the credit provided in section 26 (a), relating to interest on certain obligations of the United States and its instrumentalities. The term "adjusted net income" is used elsewhere in the regulations under Title I and where so used has the meaning here given to it.

The tax is payable upon the basis of returns rendered by the corporations liable thereto, except that in some cases a tax is to be paid at the source of the income (see also sections 47, 52, 53, 144, and 235). For what the term "corporation" includes and for the difference between domestic and foreign corporations, see section 901. For surtax on personal holding companies, see Title IA. For surtax on corporations improperly accumulating surplus, see section 102. For the duration of the operation of section 13, see section 15.

§ 9.13-2 Tax under general rule. Subsection (c) of section 13 provides for the tax computation under what is termed the "general rule." A tentative tax is first computed upon the adjusted net income at the rate of 19 percent. Two credits are allowed against this tentative tax. The more important of these credits, in the majority of cases, is the one which allows a reduction in the tentative tax by 22 percent of the dividends paid credit provided for in section 27. However, this credit may not be allowed in excess of 22 percent of the adjusted net income. For definition of the term "dividends paid credit" and computation thereof, see § 9.27 (a)-1. The other credit allowed against the tentative tax is computed by taking 161⁄2 percent of the credit for dividends received as described in section 26 (b), relating to dividends received from domestic corporations.

The application of the general rule set out in subsection (c) of section 13 may be illustrated by the following example: Example. The A Corporation, a domestic corporation, which is not a bank affiliate referred to in section 26 (d), has for the calendar year 1938 a net income of $110,000, including interest on United States obligations in the amount of $10,000 allowable as a credit under section 26 (a) and dividends amounting to $10,000 from domestic corporations subject to taxation under Title I. The corporation pays to its shareholders, during the taxable year, $30,000 in dividends. It is not entitled to any dividend carry-over under section 27. Its tax for the calendar year 1938 is $17,097.50, computed as follows:

§ 9.13-3

1,902.50 17,097.50

Alternative tax (corporations with net incomes slightly more than $25,000). Subsection (d) of section 13 provides an alternative method for computing the tax in the case of corporations having net incomes of slightly more than $25,000. If no portion of the gross income consists of interest on obligations of the United States and its instrumentalities allowable as a credit under section 26 (a), or of dividends of the class with respect to which the credit is allowable under section 26

(b), the alternative tax is equal to the net income in excess of $25,000. If $3,525 plus 32 percent of the amount of any portion of the gross-income consists of interest or dividends referred to in the order to determine the amount of net preceding sentence, it is necessary, in income subject to tax and the rate of tax applicable thereto, first to divide the income into two parts, or divisions, the first division consisting of $25.000 and the second division consisting of the bal

ance of the net income in excess of $25,000.

The first division is composed, first, of gross income from interest on obligations of the United States and its instrumentalities, allowable as a credit under section 26 (a); second, the portion of the gross income consisting of dividends of the class with respect to which credit is allowable under section 26 (b); and, third, an amount equal to the excess, if any, of $25,000 over the sum of the gross income from interest on such obligations and dividends as are already allocated to the first division. For the purposes of section 13, this excess is referred to in the regulations in this part as "ordinary income." In segregating the portion of the net income allocated to the second division, the portion of the gross income from interest on certain obligations of the United States and