tax which would be payable under section 211 if his earned net income constituted his entire net income.

Since section 209 (a) of the law fixes the maximum earned income at $20,000, the maximum credit in the case of a citizen or resident using the rates in effect for the year 1926 is as follows:

This maximum credit, however, could be received by a husband or wife only when all of the exemptions were allocated to the return of the other spouse.

The minimum amount of earned income is fixed at $5,000 and is independent of the source from which such income arises.

...

LIMITATION ON EARNED INCOME CREDIT.-Under section 209 (b), “in no case shall the credit allowed. . . . exceed 25 per centum of his tax under section 210 plus 25 per centum of the tax which would be payable under section 211 if his earned net income constituted his entire net income." Accordingly a taxpayer who receives his entire income from a source not subject to normal tax, e.g., dividends, will not be entitled to any earned income credit. Correspondingly a taxpayer receiving income in part exempt from normal tax rates and in part taxable at both normal and surtax rates will not be allowed a greater credit for earned income than an amount which is 25 per cent of the normal tax per the return (or 25 per cent of the normal tax on $20,000, if net income, subject to normal tax exceeds that amount), plus 25 per centum of the surtax payable if his net income constituted his entire income due before the earned income credit is applied.

EARNED INCOME IN RETURNS OF HUSBAND AND WIFE.-If joint returns are filed the combined earned income of husband and wife can not exceed $20,000. If separate returns are filed each spouse is entitled to a credit based upon earned income up to $20,000, provided such income is actually earned. In community property states the

spouse reporting half of the earned income received by the other spouse may not treat such income as earned, if in excess of $5,000.26 The foregoing ruling may not be correct. The credit of $5,000 is extended to individuals and two individuals should receive credits aggregating $10,000.

EARNED INCOME CREDIT WHEN EARNED INCOME IS EXEMPT FROM

TAX.

RULING. The entire income of the taxpayer, an individual citizen of the United States residing in a foreign country, consists of profits from a business carried on in that country in which both personal services and capital are material income-producing factors; 20 per cent of the net profits of his business, if reasonable compensation for his services, is exempt from tax.

He is also entitled to the earned income credit provided in section 209 of the Revenue Act of 1926, notwithstanding the fact that all of his earned income as defined in section 209 (a) I is exempt from tax by reason of the exemption contained in section 213(b)14. (V-32-2861; G. C. M. 396.)

26

2o C. B. IV-1, 14; Mim. 3283; also C. B. IV-1, 13; I. T. 2126.

This chapter will discuss the payment of taxes shown to be due on returns, except the returns of non-resident aliens. The payment and collection of additional assessments, as well as all matters of procedure after the return is filed and the tax shown to be due thereon has been paid, is discussed in Volume II, Chapter 6. The payment and collection of delinquent taxes is also discussed in Volume II, Chapter 6. For payment of taxes at the source see Chapter II.

Return is basis of tax.-In making income tax returns, taxpayers in effect assess themselves. When the return is filed, the amount due as computed therein is treated as having been assessed against the taxpayer. The assessment must be paid, even though errors have been made and a claim for refund filed, unless the taxpayer is fortunate enough to convince the Treasury of the error before the due date of one or more of the installments. As a practical matter this is almost impossible. Returns should, therefore, be carefully prepared.

At least one-fourth of the tax must be paid when the return is filed.

FRACTIONAL PART OF CENT.

LAW. Section 1118. . . . . (c) In the payment of any tax under this Act not payable by stamp 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 I cent.

To whom paid.—All income taxes are payable to the Collector of Internal Revenue with whom the return is filed. (See page 46 for office where return should be filed.)

By whom paid.-Ordinarily the tax is payable by the person named in the return as the taxpayer.

RULING. A taxpayer may not, by a contract providing that a third person pay its taxes, force the Government to collect from such third person. (V-40-2923; G. C. M. 659.)

DECEDENTS.-Where a taxpayer dies, however, without having prepared a return or paid the tax, his executor or administrator must pay the taxes for the period ended with the date of death, even though the returns are made in the name of the taxpayer and not of his estate.

DISSOLVED CORPORATIONS.

REGULATION. When a corporation is dissolved, its affairs are usually wound up by a receiver or trustees in dissolution. The corporate existence is continued for the purpose of liquidating the assets and paying the debts, and such receiver or trustees stand in the stead of the corporation for such purposes. (Art. 548.)

If the receiver or trustee does not pay the tax, the tax may be collected from the stockholders. See Chapter 6, Volume II.

CONSOLIDATED RETURNS.-Where a consolidated return is filed, the tax may be apportioned among the affiliated corporations on any basis desired. (See page 103.)

LAW. Section 240. . . . (b) In any case in which a tax is assessed upon the basis of a consolidated return, the total tax shall be computed in the first instance as a unit and shall then be assessed upon the respective affiliated corporations in such proportions as may be agreed upon among them, or, in the absence of any such agreement, then on the basis of the net income properly assignable to each.

When tax is payable.1

IF PAID IN LUMP SUM.

LAW. Section 270. (a) Except as provided in subdivisions (b), (c) and (d) of this section the total amount of tax imposed by this title shall be paid

(1) In the case of a taxpayer, other than a non-resident alien individual, and other than a foreign corporation not having an office or

1 [Former Procedure] See Income Tax Procedure, 1924, pages 273, et seq.

place of business in the United States, on the fifteenth day of March following the close of the calendar year, or, if the return should be made on the basis of a fiscal year, then on the fifteenth day of the third month following the close of the fiscal year. . . . .

REGULATION.

Where the taxes are due on Sunday they may

be accepted on the following day. (Art. 1391.)

The same is true of a tax due on a legal holiday. (C. B. IV-1, 67; I. T. 2136.)

NON-RESIDENT ALIENS AND FOREIGN CORPORATIONS HAVING NO OFFICE OR PLACE OF BUSINESS IN THE UNITED STATES.

LAW. Section 270. (a) Except as provided in subdivisions (b), (c) and (d) of this section the total amount of tax imposed by this title shall be paid

(2) In the case of a nonresident alien individual, and of a foreign corporation not having an office or place of business in the United States, on the fifteenth day of June following the close of the calendar year, or, if the return should be made on the basis of a fiscal year, then on the fifteenth day of the sixth month following the close of the fiscal year.

IF PAID IN INSTALLMENTS.-The law permits the taxpayer to divide his tax into four installments, payable quarterly.

....

LAW. Section 270. . . . . (b) (1) The taxpayer may elect to pay the tax in four equal installments, in which case the first installment shall be paid on the date prescribed in subdivision (a) for the payment of the tax by the taxpayer, the second installment shall be paid on the fifteenth day of the third month, the third installment on the fifteenth day of the sixth month, and the fourth installment on the fifteenth day of the ninth month, after such date. . . . .

(2) If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax unpaid shall be paid upon notice and demand from the collector.

RULING. Where an understatement of the tax in a return is not attributable to negligence or fraud and a taxpayer accordingly fails to pay at least one-quarter of the tax due at the time for filing the return, he does not lose his right to make installment payments. (C. B. 4, 317; O. D. 961.)

Corporation taxes for 1926.-The 1926 law repealed the capital stock tax and increased the income tax rate on corporations from 121⁄2 per cent to 13 per cent for 1925 and 131⁄2 per cent for subsequent years.

* See section 230 (b), quoted in footnote 3 on page 160, for exception.