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Fractional part of a cent not to be disregarded in computation of tax.

REGULATION. In the payment of taxes a fractional part of a cent shall be disregarded unless it amounts to one-half cent or more, in which case it shall be increased to one cent. Fractional parts of a cent should not be disregarded in the computation of taxes. (Art. 1396.)

Fractional part of month-How computed.—

RULING. Paragraph 10, page 1, of the instructions attached to Form 1120 for 1921, to the effect that if the period for which a first or final return is made includes fractions of months there shall be added to the number of complete months as many thirtieths of a month as there are days in the fractional part of months, should be followed for such purposes only in cases where the fractional months have 30 days. (C. B. I-2, 203; I. T. 1433.)

In other cases the actual number of days in the month should be used as a denominator.

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The deductions from net income for the purpose of computing the normal tax in the case of individuals are treated in Chapter 6. The purpose of this chapter is to treat the credits against the tax itself which are allowed under the law.

The credits allowed against the tax are divided into the following three classes:

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Subject to certain restrictions contained in sections 222 and 238, hereinafter quoted, income or excess profits taxes paid during the taxable year to a foreign country or to any possession of the United States may be deducted from the amount determined to be due to the United States. This does not mean that such taxes are a deduction from or credit against net income, but that the items are

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[Former Procedure] See Income Tax Procedure, 1926, page 178.

a deduction from the amount of taxes otherwise payable. The amount to be credited is not to exceed certain limitations.2

Individuals.

LAW. Section 222. (a) The tax computed under Parts I and II of this title shall be credited with:

(1) In the case of a citizen of the United States the amount of any income, war-profits and excess-profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; and

(2) In the case of a resident of the United States, the amount of any such taxes paid or accrued during the taxable year to any possession of the United States; and

(3) In the case of an alien resident of the United States, the amount of any such taxes paid or accrued during the taxable year to any foreign country, if the foreign country of which such alien resident is a citizen or subject, in imposing such taxes, allows a similar credit to citizens of the United States residing in such country; and

(4) In the case of any such individual who is a member of a partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the partnership or the estate or trust paid or accrued during the taxable year to a foreign country or to any possession of the United States, as the case may be. . . .

(d) These credits shall be allowed only if the taxpayer furnishes evidence satisfactory to the Commissioner showing the amount of income derived from sources without the United States, and all other information necessary for the verification and computation of such credits.

LIMITATION OF CREDIT FOR TAXES PAID TO FOREIGN GOVERNMENTS AND POSSESSIONS OF THE UNITED STATES.

LAW. Section 222. (a) . . . . (5) The above credits shall not be allowed in the case of a citizen entitled to the benefits of section 262; and in no other case shall the amount of credit taken under this subdivision exceed the same proportion of the tax (computed on the basis of the taxpayer's net income without the deduction of any income, war-profits, or excess-profits tax any part of which may be allowed to him as a credit by this section), against which such credit is taken, which the taxpayer's net income (computed without the deduction of any such income, war-profits, or excess-profits tax) from sources without the United States bears to his entire net income (computed without such deduction) for the same taxable year.

Section 262 refers to those receiving most of their income from sources within United States possessions. (See Chapter 41.)

REGULATION. The amount allowable as a credit against the income tax under Parts I and II of Title II is limited by section 222 (a) (5) to a sum not in excess of the same proportion of the tax (computed upon the

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basis of the taxpayer's net income without deducting any income or profits taxes, any part of which may be allowed as a credit under section 222) against which the credit is taken, which the taxpayer's net income (computed without deduction for such income and profits taxes) from sources without the United States bears to his entire net income (computed without such deduction) for the same taxable year. The operation of this limitation in the case of a citizen of the United States having $20,000 earned net income from sources within the United States within the meaning of section 209 and entitled to an exemption of $1,500 is illustrated as follows:

Income from sources within the United States..
Income from sources without the United States.

Total net income (without deduction of income and profits taxes paid or accrued to foreign countries or possessions of

the United States)..

United States income tax on $75,000.

Foreign income and profit taxes upon $25,000..

Amount which may be credited against the United States tax

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$50,000.00

25,000.00

75,000.00 10,183.75' 5,000.00

3,394.58

(Art. 386.)

In the foregoing article the taxpayer would be further entitled to a deduction of $1,605.42 from gross income, because of foreign tax paid in excess of the allowable credit. (See Chapter 32.) No recomputation of the credit is, however, required.*

CITIZENS NON-RESIDENT OF THE UNITED STATES FOR MORE THAN SIX MONTHS Of the year.-Section 213 (b-14) excludes from the definition of net income, the earned income of citizens who are nonresidents of the United States for more than six months of the taxable year. Consequently, in computing the credit for foreign income taxes, such a taxpayer may not include such earned income in his net income from sources without the United States. (V-272815; I. T. 2294.)

TAXES ON FOREIGN DIVIDENDS.

RULINGS. Where under a foreign income tax law corporations are required to withhold a fixed percentage of the total amount of dividends paid to the stockholders in this country, such tax being withheld in a lump sum, although imposed upon the individual stockholders, the amounts withheld not being itemized by the foreign government, in lieu of the individual tax receipts required to be attached to Form 1116, the taxpayer may attach to the return on Form 1116 his affidavit showing the

The maximum earned income credit for a single individual amounting to $231.25 is deducted from the United States income tax.

[Former Procedure] See Income Tax Procedure, 1924, page 981.

number of shares held during the year, whether or not any of the shares held by him were acquired or sold during the year, giving dates and number of shares so acquired or sold; the total number of shares outstanding on which the dividend was declared regardless of whether the dividend was paid to citizens of the United States or other governments; and the total dividends paid or accrued on such shares during the year, and attach to and make a part of such affidavit a certified copy of the tax receipts from the foreign tax collector showing the payment of the tax en bloc, with copies of any other documents which he may have that will serve to corroborate the facts set forth in such affidavit.

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The amount of the credit claimed should be computed by dividing the total tax withheld by the total number of shares of the corporation outstanding and multiplying this result by the number of shares held during the entire year. In the event that any of the shares were acquired or disposed of during the year, an adjustment should be made showing the amount of taxes properly allocated to the dividends received after acquisition or before disposition of the stock. (C. B. 1, 188; O. D. 232.)

Where under the Income Tax Act, 1918, of Great Britain, a tax is paid to the British Government by a British corporation on the basis of its profits and gains which is deductible by the corporation from the dividends paid its shareholders, such tax is a tax against the shareholders and may be taken as a credit by a citizen shareholder of the United States under section 222 of the Revenue Acts of 1918 and 1921. (C. B. IV-1, 198; S. M. 3040.)

PERIOD TO WHICH CREDITS ARE APPLICABLE.—The law allows credit to be taken, at the option of the taxpayer, in the year in which the taxes of the foreign country accrued.

LAW. Section 222. . . . . (c) The credits provided for in subdivision (a) of this section may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year in which the taxes of the foreign country or the possession of the United States accrued, subject, however, to the conditions prescribed in subdivision (b) of this section. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country or the possession of the United States accrued, the credits for all subsequent years shall be taken upon the same basis.

REGULATION. . . . . A taxpayer whose accounts are kept upon the cash receipts and disbursements basis and who elects under section 222 (c) to take the allowable credit for taxes in the year in which the taxes accrued, may include in the credit for the first such year the amount of taxes accrued for that year plus the amount of taxes, if any, paid for the preceding year, and not previously taken as a credit. (Reg. 65, Art. 387.)

*This decision was under the 1918 law when there was no limitation on the credit. Section 222 (a-5) would have to be applied under present procedure.

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[Former Procedure] For ruling under 1918 law, see C. B. 2, 196; O. 987, also V-9-2615; S. M. 4747.

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