(161⁄2 percent of 85 percent $1,683.00 1,927.00 Total tax under general ALTERNATIVE TAX Less net income allocated to first Net income allocated to Tax on first division: $34,000.00 25,000.00 9,000.00 Total net income. 25,000.00 15,000.00 10,000.00 8,500.00 its instrumentalities, credit for which is | Less credit for dividends received Example (1). The A Corporation, a domestic corporation (not a bank affiliate), has for the calendar year 1938 a net income of $34,000, including interest on United States obligations (allowable as a credit under section 26 (a)) in the amount of $15,000 and dividends amounting to $12,000 (allowable as a credit under section 26 (b)). It is not entitled to a dividends paid credit under section 27. Since, as will hereinafter appear, the alternative tax is more than the tax computed under the general rule, the correct tax is the tax computed under the general rule, that is, $1,927. The tax is computed as follows: TAX UNDER GENERAL RULE Adjusted net income. Example (2). The A Corporation, a domestic corporation (not a bank affiliate), has for the calendar year 1938 a net income of $27,000, including interest on United States obligations (allowable as a credit under section 26 (a)) in the amount of $10,000, but no dividends allowable as a credit under section 26 (b). It paid dividends during the year in the amount of $15,000. It is not en$34,000.00 | titled to any dividend carry-over under 15,000.00 section 27. Since the alternative tax is less than the tax computed under the 19,000.00 general rule, the correct tax is the alternative tax, that is, $2,665. The tax 3,610.00 is computed as follows: then in lieu of the credit against the tentative tax as computed under subsection (c) on account of dividends paid, there shall be allowed a credit of 22 percent $10,000 of the adjusted net income. If the net 15,000 income of any such corporation is $25,000 25,000 or less, it is taxed under section 14, and if its net income is slightly more than 2,000 $25,000, it may be subject to the alterna27,000 tive tax under section 13 (d). 1,400 Generally, in the case of any proceedings under the Bankruptcy Act of 1898, as 625 amended, the corporation is in bankruptcy if it has been adjudicated bankrupt, if a petition for reorganization of 2,025 the corporation has been filed by the cor640 poration or its creditors and has been approved by the court having jurisdiction thereof, or if the corporation has filed a petition for an arrangement of its indebtedness under Chapter XI of the Act in a court having jurisdiction thereof. In such case, the provisions of subsection (e) of section 13, allowing a credit of 22 percent of the adjusted net income, in 17, 000 lieu of the credit on account of dividends paid, shall not apply to 2, 665 $27,000 10,000 3,230 (a) the debtor corporation if the proceeding is dismissed prior to the confirmation by the court of a plan of re3, 105 organization or an arrangement; § 9.13-4 Corporations in bankruptcy or receivership, joint-stock land banks, and rental housing corporations. In any case in which the tax is computed under subsection (c) of section 13 and the taxpayer is (1) a domestic corporation which for any portion of the taxable year is 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, or (2) a joint-stock land bank organized under the Federal Farm Loan Act, as amended, or (b) any corporation organized pursuant to the provisions of the plan; (c) any corporation which pursuant to the plan or arrangement acquires any of the properties of the debtor corporation by way of consolidation or merger or any corporation which is merged or consolidated with the debtor corporation pursuant to the plan; or (d) the debtor corporation for any taxable year subsequent to the taxable year during which any of the properties dealt with by the plan either (1) are transferred and conveyed by the trustee or trustees to the debtor corporation or the other corporation or corporations provided for by the plan, or, (3) a corporation which at the close of (2) if no trustee has been appointed, the taxable year is regulated or restricted are retained by the debtor corporation, by the Federal Housing Administrator free and clear of all claims of the debtor under section 207 (b) (2) of the National corporation, its shareholders and credHousing Act, as amended, and such ad-itors, except such claims as may consistministrator certifies to the Commissioner ently with the plan be reserved in the the fact that such regulation or restric- order confirming the plan or directing tion existed at the close of the taxable the transfer and conveyance or retention year, of such properties. The term "insolvent" means insolvency in the sense of excess of liabilities over assets and in the sense of inability to meet obligations as they mature. Any corporation claiming the credit under subsection (e), (f), or (g) of section 13, that is, seeking to reduce the tentative tax by 21⁄2 percent of the adjusted net income, instead of by 21⁄2 percent of the dividends paid credit, shall file as a part of its return for each taxable year for which such credit is claimed a statement under oath of all facts pertinent to its claim.*† SEC. 14. Tax on special classes of corporations. (a) Special class net income.For the purposes of this title the term "special class net income" means the adjusted net income minus the credit for dividends received provided in section 26 (b). (b) There shall be levied, collected, and paid for each taxable year upon the special class net income of the following corporations (in lieu of the tax imposed by section 13) the tax hereinafter in this section specified. (c) Corporations with net incomes of not more than $25,000.-If the net income of the corporation is not more than $25,000, and if the corporation does not come within one of the classes specified in subsection (d), (e), (f), or (g) of this section, the tax shall be as follows: Upon special class net incomes not in excess of $5,000, 121⁄2 per centum. $625 upon special class net incomes of $5,000, and upon special class net incomes in excess of $5,000 and not in excess of $20,000, 14 per centum in addition of such excess. $2,725 upon special class net incomes of $20,000, and upon special class net incomes in excess of $20,000, 16 per centum in addition of such excess. (d) Special classes of corporations.-In the case of the following corporations the tax shall be an amount equal to 161⁄2 per centum of the special class net income, regardless of the amount thereof: place of business therein, the tax shall be as provided in section 231 (a). insurance companies, the tax shall be as pro(f) Insurance companies. In the case of vided in Supplement G. (g) Mutual investment companies.—In the case of mutual investment companies, as defined in Supplement Q, the tax shall be as provided in such Supplement. (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. § 9.14-1 Tax on special corporations. Section 14 imposes an income tax upon (1) corporations having net incomes of not more than $25,000, (2) certain special classes of corporations, and (3) certain foreign corporations. The special classes of corporations are banks, as defined in section 104, corporations organized under the China Trade Act, 1922, and 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. The tax imposed by section 14 is in lieu of the tax imposed by section 13. Corporations expressly exempt from taxation under Title I (see section 101) are not subject to tax under section 14. The tax is imposed upon the "special class net income," that is, the adjusted net income minus the credit for dividends received provided in section 26 (b), relating to dividends received from a domestic corporation which is subject to taxation under Title I (85 percent of dividends received, but not in excess of 85 percent of the adjusted net income). (1) Banks, as defined in section 104. (2) Corporations organized under the The term "special class net income" is China Trade Act, 1922. (3) 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. (e) Foreign corporations.—(1) In the case of a foreign corporation engaged in trade or business within the United States or having an office or place of business therein, the tax shall be an amount equal to 19 per centum of the special class net income, regardless of the amount thereof. (2) In the case of a foreign corporation not engaged in trade or business within the United States and not having an office or used elsewhere in the regulations under Title I and where so used has the meaning here given it. As in the case of corporations subject to the tax under section 13, it makes no difference that a domestic corporation subject to any tax imposed by section 14 may derive no income from sources within the United States. So also, 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 **For statutory and source citations, see note to § 9.1-1. Page 1621 income (see also sections 47, 52, 53, 144, | therein, the tax is as provided in secand 235). For what the term "corpora- tion 231 (a). In the case of insurance tion" includes and for the difference be- companies, the tax is as provided in tween domestic and foreign corporations, Supplement G. In the case of mutual see section 901. For surtax on personal investment companies, as defined in holding companies, see Title IA. For Supplement Q, the tax is as provided in surtax on corporations improperly accu- Supplement Q. mulating surplus, see section 102. For the duration of the operation of section 14, see section 15. Example. The A Corporation, a domestic corporation, has for the calendar year 1938 a net income of $24,000, including interest on United States obligations (allowable as a credit under section 26 (a)), in the amount of $9,000 and dividends received of the class allowable as a credit under section 26 (b) in the amount of $5,000. The corporation pays to its shareholders, during the taxable year, $5,000 in dividends. The tax upon the corporation is $1,430, computed as follows: Total net income_ Less interest on United States obligations Adjusted net income.. Deduct credit under section 26 (b) (85 percent of $5,000) --. Special class net income.... Tax on $5,000 from table on p. 628-- Total tax--- Subsection (c) of section 14 imposes a tax at graduated rates on corporations which do not have net incomes of more than $25,000 and which do not come within one of the classes specified in subsection (d) (special classes of corporations), (e) (foreign corporations), (f) (insurance companies), or (g) (mutual investment companies) of section 14. The tax is the same whether or not the corporation distributes any dividends during the taxable year. The following table shows the income tax due from corporations coming within the terms of subsection (c) of section 14 upon certain specified amounts of special $24,000 class net income. In each instance the first figure of the special class net incom e 9,000 in the special class net-income column is to be excluded and the second figure in15,000 cluded. The percentage given opposite 4, 250 applies to the excess of income over the first figure in the special class net-in10, 750 come column. The last column gives the 625 total tax on a special class net income 805 equal to the second figure in the special class net-income column: 1,430 $0 to $5,000. $5,000 to $20,000. $20,000 to $25,000.. The tax under subsection (c) of section 14 for any amount of special class net income not shown in the table is computed by adding to the tax for the largest amount shown which is less than the special class net income, the tax upon the excess over that amount at the rate indicated in the table.*† taxable years. The taxes imposed by section SEC. 15. Corporate taxes effective for two 13, section 14 (except subsection (e) (2)), Supplement G, or Supplement Q, of this Act, or by section 13, section 14, or Supplement G of the Revenue Act of 1936, shall not apply to any taxable year beginning after December 31, 1939. Subpart C-Gross Income-Net Income | commercial net income. This appears PART II-COMPUTATION OF NET INCOME SEC. 21. Net income.-"Net income" means the gross income computed under section 22, less the deductions allowed by section 23. For definition of "adjusted net income", see section 13 (a); for definition of "special class net income", see section 14 (a). § 9.21-1 Meaning of net income. The tax imposed by Title I is upon income. Neither income exempted by statute or fundamental law, nor expenses incurred in connection therewith, other than interest, enter into the computation of net income as defined by section 21. (See section 24 (a) (5).) In the computation of the tax various classes of income must be considered: (a) Income (in the broad sense), meaning all wealth which flows in to the taxpayer other than as a mere return of capital. It includes the forms of income specifically described as gains and profits, including gains derived from the sale or other disposition of capital assets. Cash receipts alone do not always accurately reflect income, for the Act recognizes as income-determining factors other items, among which are inventories, accounts receivable, property exhaustion, and accounts payable for expenses incurred. (See sections 22, 23, 24, and 117.) (b) Gross income, meaning income (in the broad sense) less income which is by statutory provision or otherwise exempt from the tax imposed by the Act. (See section 22.) (c) Net income, meaning gross income less statutory deductions. The statutory deductions are in general, though not exclusively, expenditures, other than capital expenditures, connected with the production of income. (See sections 23 and 24.) (d) Net income less credits. (See sections 25, 26, 27, and 28.) from the fact that ordinarily it is to be computed in accordance with the method of accounting regularly employed in keeping the books of the taxpayer. (See section 41.) The net income of corporations is determined in general in the same manner as the net income of individuals, but the deductions allowed corporations are not precisely the same as those allowed individuals. (See sections 23, 24, | 102, 118, 121, 203, 204, 207, 232, 336, and Title IA.) *+ SEC. 22. Gross income.—(a) General deflnition.-"Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. In the case of Presidents of the United States and judges_of after June 6, 1932, the compensation recourts of the United States taking office ceived as such shall be included in gross income; and all Acts fixing the compensaof such Presidents and judges are hereby amended accordingly. SECTION 1 OF THE PUBLIC SALARY TAX ACT OF tion SEC. 3. Section 22 (a) of the Internal Revenue Code is amended by adding at the end thereof a new sentence to read as follows: "In the case of judges of courts of the United States who took office on or before June 6, 1932, the compensation received as such shall be included in gross income." SECTION 210 OF THE PUBLIC SALARY TAX ACT OF 1939 SEC. 210. For the purpose of this Act, the term "officer or employee" includes a member of a legislative body and a judge or officer of a court. The normal taxes and surtaxes imposed on individuals and on corporations are computed upon net income less certain credits. Although taxable net income is a statutory conception, it follows, subject to certain modifications as to exemptions and as to deductions for partial losses in some cases, the lines of § 9.22 (a)-1 What included in gross commercial usage. Subject to these income. Gross income includes in genmodifications statutory net income is eral compensation for personal and pro |