lowed exemption. If an individual dies during the year his personal exemption is determined by his status at the date of death. The surviving spouse, if any, is entitled to full credits according to his or her status at the end of the year. The credit for each dependent is $400, as formerly.

Normal Tax

Effective January 1, 1924, the normal tax rates upon individual incomes is 2 per cent on the first $4,000 of net income, 4 per cent on the next $4,000 and 6 per cent on all over $8,000, instead of 4 per cent on the first $4,000 and 8 per cent on all above that amount. Citizens and residents of Canada or Mexico are entitled to the reduced normal tax rates of 2 per cent on the first $4,000 and 4 per cent on the next $4,000 of net income from salaries and wages for work done in the United States. Surtaxes

The schedule of surtaxes begins at I per cent on net income of more than $10,000, and increases on successive parts of the income, as the income grows larger, to 40 per cent on incomes over $500,000. Under the former Act, the surtax began to apply on net incomes of more than $6,000 and increased to a maximum of 50 per cent on incomes of more than $200,000.

Tax Free Securities

Tax exempt income from securities, such as interest on state, county and municipal bonds, Federal farm loan bonds, etc., must be reported in returns. This was not required before. Earned Income

The new Act contains special provision for reduced taxes on "earned income" which did not appear in previous laws. "Earned income" is defined to include wages, salaries, professional fees, and other amounts received as compensation for personal services actually performed; it does not include payments, received as a bonus, which represent a distribution of profits rather than reasonable compensation for personal services. All net income of $5,000 or less is considered to be earned income. If the net income is more than $5,000, at least $5,000, but not more than $10,000, is considered earned income. For example, a man whose entire income consists of $3,000 salary and $1,000 interest may consider the entire $4,000 as earned income, but an officer of a corporation whose salary is $20,000, may treat

only $10,000 as earned income. Where a taxpayer is engaged in a trade or business in which both personal services and capital are material income-producing factors (for example, a merchant), a reasonable allowance as compensation for the services he actually performs, of not more than 20 per cent of his share of the net profits of the business, is considered earned income. In computing the credit allowed for earned income, the tax computed in the ordinary way is credited with 25 per cent of the amount which would be payable if the "earned net income" were the entire net income. The amount of this credit is limited to 25 per cent of the normal tax computed in the regular way. Capital Net Gain

Under Section 208, the taxpayer, at his option, may report separately for taxation at the flat rate of 122 per cent his net gain from the sale or exchange of capital assets. "Capital assets" is defined as property held by the taxpayer more than two years (whether or not it is connected with his trade or business), but does not include stock in trade, inventoriable property or property held primarily for sale in the course of business. Under the former Act, a capital asset had to be "property acquired and held by the taxpayer for profit or investment" more than two years. The Act of 1921 also provided that if a taxpayer elected to segregate his assets, his total tax could not be less than 121⁄2 per cent of his entire net income. This limitation has been removed and a taxpayer may now segregate his assets and yet pay less than 121⁄2 per cent of his entire net income.

If a taxpayer sustains a "capital net loss"—that is, if his capital losses plus capital deductions exceed his capital gains-his total tax is arrived at by computing first the tax on his ordinary net income at the usual rates of normal tax and surtax, and then deducting 121⁄2 per cent of the "capital net loss." This method is new in the 1924 Act. It is compulsory, not optional. The Law provides, however, that in no case where there is a capital net loss shall the total tax be less than the tax at the ordinary rates computed without regard to this provision.

Liquidating Dividends

The new Act restores substantially the principle contained in the Revenue Act of 1918 and treats liquidating dividends received by a stockholder as payment in exchange for his stock. A gain is subject to both normal tax and surtax unless taxable as a capital gain at the rate of 121⁄2 per cent. Dividends in liqui

dation are defined to mean payments by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in cancellation or redemption of all or a portion of its stock. Under the Act of 1921, the Treasury Department made no distinction as to taxability between a liquidating dividend and an ordinary dividend. That is to say, amounts distributed in excess of the cost of the stock to a stockholder (or its value on March 1, 1913, if acquired before that date, whichever is higher) were subject only to surtax to the extent that payments were made out of earnings or profits accumulated since February 28, 1913.

Gain or Loss

The provisions of the new Act covering gain or loss from sales or exchanges of property, and those sections relating to the basis used in determining gain or loss, depreciation and depletion, are an almost complete revision of the corresponding sections in the Act of 1921. Under the old Law, gain or loss was recognized in an exchange of property only when the property received had a readily realizable market value. In the new Law, gain or loss is recognized in every case not specifically excepted.

Subdivision

The exceptions are set forth in Section 203. (b) (4) of this Section, which covers the ordinary case of the incorporation of an individual or partnership business, provides that no gain or loss is recognized where property is transferred to a corporation solely in exchange for stock or securities of the corporation, and where immediately thereafter the person or persons transferring the property are in control of the corporation.

The new Law provides that the amount of depreciation, depletion, obsolescence, etc., to be deducted from cost when property is sold, is that which was previously allowed. Under the Act of 1921, as interpreted by the Treasury Department, this deduction was the amount allowable, regardless of whether it actually had been taken in previous years. Another change of benefit to the taxpayer is a new basis for computing gain or loss from the sale of property acquired before March 1, 1913. The basis now is the cost or fair market value of the property as of March 1, 1913, whichever is greater.

Estates and Trusts

This section of the Law has been revised extensively. The principal change provides that the income of a revocable trust

is taxable to the grantor, thus preventing avoidance of high surtaxes by creating number of trusts the incomes of which, separately, would fall within lower surtax rates than the aggregate taxed to one person. Under the old Act, the Treasury Department held that a revocable trust was taxed on the same basis as an irrevocable trust. The grantor of a trust also is required, under the new Act, to pay the tax on that part of the income from a trust which, in his discretion, may (a) be distributed to him; (b) be accumulated for future distribution to him; or (c) be applied to the payment of premiums on life insurance policies on his life (except on policies irrevocably payable to religious, charitable, educational, etc., organizations).

Net Losses

In computing the amount of net loss in one year which may be used to reduce the income of the next two years, the new Law provides that deductions otherwise allowed by law, but not attributable to the operation of a trade or business regularly carried on by the taxpayer, shall be allowed only to the extent of the gross income not derived from the trade or business. A taxpayer, other than a corporation, may use capital losses as a deduction only to the extent of the capital gains.

Evasion of Surtaxes by Incorporation

Section 220 of the new Act provides for an additional tax of 50 per cent on the income of corporations which are availed of to avoid surtaxes on stockholders by permitting profits to accumulate instead of distributing them. Investment companies now are brought within the presumption of corporations used in this way. On the other hand, the provision in the former Law which required that the Commissioner certify an accumulation of surplus was unreasonable for the purposes of the business, has been eliminated. The income on which this penal tax is imposed is made up of the taxable net income used in computing the ordinary 121⁄2 per cent income tax, dividends on stock of other corporations and that part of the interest on obligations of the United States issued since September 1, 1917, which would be taxable if held by an individual. Under the Act of 1921, the additional tax rate was 25 per cent, and was imposed only on the taxable net income. The option permitting stockholders to be taxed on their distributive shares of the net income of a corporation subject to the additional tax has been stricken out of the law.

Publicity of Returns

The new Act opens to public inspection lists containing the names and addresses of taxpayers with the amount of income tax paid by each, and makes returns available to designated committees of Congress.

Gift Tax

As part of the estate tax section, the new Act provides for the taxing of gifts made after December 31, 1923. The rates are the same as the estate tax rates. The tax is to be paid by the donor on or before March 15. It is measured by the aggregate of all gifts, with certain exceptions, made during the previous calendar year. To determine the amount subject to this tax, in the case of residents, there is deducted from the aggregate of all gifts during the calendar year: (1) $50,000; (2) gifts to or for the use of the United States, religious, charitable, etc., organizations; (3) gifts aggregating $500 or less to any one person; (4) an amount equal to the value of any property which can be identified (a) as having been received within the preceding five years by gift or bequest on which a Federal gift or estate tax has been imposed, or (b) as having been acquired in exchange for property so received. The specific exemption of $50,000 is not granted to non-residents.

Board of Tax Appeals

The new Act establishes a body, independent of the Treasury Department, to which a taxpayer may appeal after he has been notified by the Commissioner of Internal Revenue of a proposed additional income or estate tax assessment. The Board regularly is to be composed of seven members appointed by the President, but for the first two years will consist of not more than twentyeight members, as the President deems necessary. Hearings before this Board are open to the public and the proceedings are conducted in accordance with rules of evidence and procedure as prescribed by the Board. In any court proceeding instituted by the Government to collect an alleged deficiency abated by the Board, or by a taxpayer to recover tax paid pursuant to the Board's decision, the findings of the Board are considered to be prima facie evidence of the facts.