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No deduction shall be allowed in the case of a life or terminable interest acquired by gift, bequest, or inheritance, where the estate or trust is entitled to a deduction under the statute but there is no reduction of the income of the life or terminable interest. For example, an estate or a trust in a certain State sells securities at a loss; if, under the laws of that State, the beneficiary suffers no actual loss, then even though the estate or trust is permitted to deduct such loss in making its return, the beneficiary whose income has not been diminished thereby is not entitled to a deduction on account of such loss, but must include in his return the full amount distributed or distributable. See articles 341-347.

CREDITS ALLOWED INDIVIDUALS

Sec. 216. For the purpose of the normal tax only there shall be allowed the following credits:

(a) The amount received as dividends (1) from a domestic corporation other than a corporation entitled to the benefits of section 262, and other than a corporation organized under the China Trade Act, 1922, or (2) from a foreign corporation when it is shown to the satisfaction of the Commissioner that more than 50 per centum of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation bas been in existence) was derived from sources within the United States as determined under the provisions of section 217;

(b) The amount received as interest upon obligations of the United States which is included in gross income under section 213;

(c) In the case of a single person, a personal exemption of $1,000; or in the case of the head of a family or a married person living with husband or wife, a personal exemption of $2,500. A husband and wife living together shall receive but one personal exemption. The amount of such personal exemption shall be $2,500. If such husband and wife make separate returns, the personal exemption may be taken by either or divided between them.

(d) $400 for each person (other than husband or wife) dependent upon and receiving his chief support from the taxpayer if such dependent person is under eighteen years of age or is incapable of self-support because mentally or physically defective.

(e) In the case of a nonresident alien individual or of a citizen entitled to the benefits of section 262, the personal exemption shall be only $1,000. The credit provided in subdivision (d) shall not be allowed in the case of a nonresident alien individual unless he is a resident of a contiguous country, nor in the case of a citizen entitled to the benefits of section 262.

(f) (1) The credits allowed by subdivisions (d) and (e) of this section shall be determined by the status of the taxpayer on the last day of his taxable year.

(2) The credit allowed by subdivision (c) of this section shall, in case the status of the taxpayer changes during his taxabe year, be the sum of (A) an amount which bears the same ratio to $1,000 as the number of months during which the taxpayer was single bears to 12 months, plus (B) an amount which bears the same ratio to $2,500 as the number of months during which the taxpayer was a married person living with husband or wife or was the head of a family bears to 12 months. For the purposes of this paragraph a fractional part of a month shall be disregarded unless it amounts to more than half a month, in which case it shall be considered as a month,

(3) In the case of an individual who dies during the taxable year, the credits allowed by subdivisions (c), (d), and (e) shall be determined by his status at the time of his death, and in such case full credits shall be allowed to the surviving spouse, if any, according to his or her status at the close of the taxable year.

Art. 301. Credits against net income.-(a) For the purpose of computing the normal tax the taxpayer's net income as determined pursuant to section 212 of the statute and articles 21-26 is first reduced by the sum of the allowable credits. These include dividends (as defined in section 201 and article 1541) received from a domestic corporation (other than a corporation entitled to the benefits of section 262, or other than a corporation organized under the China Trade Act, 1922), or from a foreign corporation when it is shown to the satisfaction of the Commissioner that more than 50 per cent of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the United States as determined under the provisions of section 217 (see article 319); interest not entirely exempt from tax (and hence included in gross income) received upon obligations of the United States; a personal exemption; and a credit for dependents. Consequently, the normal tax does not apply to the dividends just described nor to interest on any obligations of the United States. See section 213 (b) of the statute and articles 77–84 and 1131. For the purpose of imposing the surtax the taxpayer's net income is entitled to none of these credits. As to credits allowed corporations, see section 236 and article 591.

(6) Under the Revenue Act of 1924 a single person is entitled to a personal exemption of $1,000 and the head of a family or a married person living with husband or wife to $2,500, regardless of the amount of the net income. A husband and wife living together have but one personal exemption, which is $2,500. If they make separate returns, such exemption may be taken by either or divided between them.

ART. 302. Personal exemption of head of family.--A head of a family is an individual who actually supports and maintains in one household one or more individuals who are closely connected with him by blood relationship, relationship by marriage, or by adoption, and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation. In the absence of continuous actual residence together, whether or not a person with dependent relatives is a head of a family within the

meaning of the statute must depend on the character of the separation. If a father is absent on business, or a child or other dependent is away at sehool or on a visit, the common home being still maintained, the additional exemption applies. If, moreover, through force of circumstances a parent is obliged to maintain his dependent children with relatives or in a boarding house while he lives elsewhere, the additional exemption may still apply. If, however, without necessity the dependent continuously makes his home elsewhere, his benefactor is not the head of a family, irrespective of the question of support. A resident alien with children abroad is not thereby entitled to credit as the head of a family. As to the amount of the exemption see article 301.

ART. 303. Personal exemption of married person.-In the case of a married man or married woman the joint exemption replaces the individual exemption only if the man lives with his wife or the woman lives with her husband. In the absence of continuous actual residence together, whether or not a man or woman has a wife or husband living with him or her within the meaning of the statute must depend on the character of the separation. If merely occasionally and temporarily a wife is away on a visit or a husband is away on business, the joint home being maintained, the additional exemption applies. The unavoidable absence of a wife or husband at a sanatorium or asylum on account of illness does not preclude claining the exemption. If, however, the husband voluntarily and continuously makes his home at one place and the wife hers at another, they are not living together for the purpose of the statute, irrespective of their personal relations. A resident alien with a wife residing abroad is not entitled to the joint exemption.

ART. 304. Credit for dependents. A taxpayer, other than a nonresident alien who is not a resident of Canada or Mexico, receives a credit of $400 for each person (other than husband or wife), whether related to him or not and whether living with him or not, dependent upon and receiving his chief support from the taxpayer, provided the dependent is either (a) under eighteen or (b) incapable of self-support because defective. The credit is based upon actual financial dependency and not mere legal dependency. It may accrue to a taxpayer who is not the head of a family. But a father whose children receive half or more of their support from a trust fund or other separate source is not entitled to the credit.

ART. 305. Date determining exemption.-(a) The status of the taxpayer on the last day of his taxable year determines his right to the exemption and credits allowed by articles 304 and 306. If he is then the chief support of a dependent who is under eighteen years of age, or is incapable of self-support because mentally or physically defeetive, the credit for dependents allowed in article 304 may be taken.

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(6) The credit allowed by subdivision (c) of section 216 to a single person, a head of family, or a married person living with husband or wife, will, in case the status of the taxpayer changes during the taxable year, be prorated according to the period during which the taxpayer occupied each status. The credit for any taxable year in such a case will thus be the sum of (1) an amount which bears the same ratio to $1,000 as the number of months the taxpayer was single bears to 12 months, plus (2) an amount which bears the same ratio to $2,500 as the number of months during which the taxpayer was a married person living with husband or wife or was the head of a family bears to 12 months. A fractional part of a month will be disregarded for this computation, unless it amounts to more than one-half month, in which case it will be considered to be a month.

Example.-A, who had been single during the preceding months of 1924, married B on July 20 and lived with her during the balance of the year. If A makes a return on a calendar-year basis, his personal exemption for 1924 will be $1,625, that is, te of $1,000 plus i of $2,500.

(c) If an individual dies during the taxable year, his executor or administrator in making a return for him is entitled to claim his full personal exemption according to his status at the time of his death. See also section 219(c) of the statute and articles 341-347. If a husband or wife so dies the joint personal exemption may be used by the executor or administrator in making a return for the. decedent, and an undiminished personal exemption, according to the status of the survivor at the end of the taxable year, may be claimed in the survivor's return.

ART. 306. Credits to citizen entitled to benefits of section 262 and nonresident alien individual.—A citizen entitled to the benefits of section 262 and a nonresident alien individual, similarly to a citizen or resident, are entitled, for the purpose of the normal tax, to the dividend credit described in article 301. They are, also, entitled in every case to a personal exemption of $1,000. This exemption however is limited to $1,000, irrespective of the marital status of the individual. The credit for dependents shall not be allowed in the case of a nonresident alien individual unless he is a resident of Canada or Mexico, nor in the case of a citizen entitled to the benefits of section 262. Under the Revenue Act of 1924 the provisions of tax laws of the foreign country of which a nonresident is a citizen or subject are immaterial in determining the right to the personal exemption, since the right of a nonresident alien individual to a personal exemption of $1,000 is absolute.

NET INCOME OF NONRESIDENT ALIEN INDIVIDUALS

SEC. 217. (a) In the case of a nonresident alien individual or of a citizen entitled to the benefits of section 262, the following items of gross income shall be treated as income from sources within the United States:

(1) Interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, not including (A) interest on deposits with persons carrying on the banking business paid to persons not engaged in business within the United States and not having an office or place of business therein, or (B) interest received from a resident alien individual, a resident foreign corporation, or a domestic corporation, when it is shown to the satisfaction of the Commissioner that less than 20 per centum of the gross income of such resident payor or domestic corporation has been derived from sources within the United States, as determined under the provisions of this section, for the three-year period ending with the close of the taxable year of such payor preceding the payment of such interest, or for such part of such period as may be applicable;

(2) The amount received as dividends (A) from a domestic corporation other than a corporation entitled to the benefits of section 262, and other than a corporation less than 20 per centum of whose gross income is shown to the satisfaction of the Commissioner to have been derived from sources within the United States, as determined under the provisions of this section, for the three-year period ending with the close of the taxable year of such corporation preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence), or (B) from a foreign corporation unless less than 50 per centum of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the United States as determined under the provisions of this section;

(3) Compensation for labor or personal services performed in the United States;

(4) Rentals or royalties from property located in the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using in the United States, patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like property; and

(5) Gains, profits, and income from the sale of real property located in the United States.

(b) From the items of gross income specified in subdivision (a) there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which can not definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as net income from sources within the United States.

(c) The following items of gross income shall be treated as income from sources without the United States :

(1) Interest other than that derived from sources within the United States as provided in paragraph (1) of subdivision (a) ;

(2) Dividends other than those derived from sources within the United States as provided in paragraph (2) of subdivision (a);

206°—24-8

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