INTERNAL REVENUE TITLE Subtitle A-Taxes Subject to the Jurisdiction of The Tax Court of the United States CHAPTER 1-INCOME TAX SUBCHAPTER A-INTRODUCTORY PROVISIONS SEC. 2. CROSS REFERENCES. The cross references in this chapter to other portions of the chapter, where the word "see" is used, are made only for convenience, and shall be given no legal effect. SEC. 3. CLASSIFICATION OF PROVISIONS. as The provisions of this chapter are herein classified and designated Subchapter A-Introductory provisions, Subchapter B-General provisions, divided into Parts and sec tions, Subchapter C-Supplemental provisions, divided into Supplements and sections. SEC. 4. SPECIAL CLASSES OF TAXPAYERS. The application of the General Provisions and of Supplements A to D, inclusive, to each of the following special classes of taxpayers shall be subject to the exceptions and additional provisions found in the Supplement applicable to such class, as follows: (a) Estates and trusts and the beneficiaries thereof,-Supplement E. (b) Members of partnerships, Supplement F. (d) Nonresident alien individuals, Supplement H. (f) Individual citizens of any possession of the United States who are not otherwise citizens of the United States and who are not residents of the United States,-Supplement J. * (g) Individual citizens of the United States satisfying the conditions of section 251 by reason of deriving a large portion of their gross income from sources within a possession of the United States, Supplement J. (i) Foreign personal holding companies and their shareholders,— Supplement P. (j) Regulated investment companies,-Supplement Q. (k) Shareholders of personal service corporations,-Supple ment S. (1) Individuals with adjusted gross income of less than $5,000,— Supplement T. SUBCHAPTER B-GENERAL PROVISIONS . Part I-Rates of Tax [See also sections 103-107] SEC. 11. NORMAL TAX ON INDIVIDUALS. There shall be levied, collected, and paid for each taxable year upon the net income of every individual a normal tax determined by computing a tentative normal tax of 3 per centum of the amount of the net income in excess of the credits against net income provided in section 25, and by reducing such tentative normal tax by 5 per centum thereof. For alternative tax which may be elected if adjusted gross income is less than $5,000, see Supplement T. [For doubling of tax on citizens of certain foreign countries, see section 103. For alternative tax in case of capital gains, see section 117 (c) (2). For rate of withholding in the case of nonresident aliens, see section 143 (b). For rates of tax on nonresident aliens, see section 211 (a) (1) (A) and (c) (3).] SEC. 12. SURTAX ON INDIVIDUALS. (a) DEFINITION OF "SURTAX NET INCOME".-As used in this section the term "surtax net income" means the amount of the net income in excess of the credits against net income provided in section 25 (b). (b) RATES OF SURTAX.-There shall be levied, collected, and paid for each taxable year upon the surtax net income of every individual a surtax determined by computing a tentative surtax under the following table, and by reducing such tentative surtax by 5 per centum thereof: If the surtax net income is: Not over $2,000_ Over $2,000 but not over $4,000. The tentative surtax shall be: 17% of the surtax net income. $340, plus 19% of excess over $2,000. $32,000. excess over Over $90,000 but not over $100,000 $55,920, plus 84% of excess over Over $100,000 but not over $150,000... $64,320, plus 86% $100,000. Over $150,000 but not over $200,000.- $107,320, plus 87% Over $200,000 - - $150,000. of excess over of excess over of excess over [For doubling of tax on citizens of certain foreign countries, see section 103. For limit on surtax attributable to certain claims against the United States, see section 106. For rate of withholding in the case of nonresident aliens, see section 143 (b). For rates of tax on nonresident aliens, see section 211 (a) (1) (A) and (c) (3).] ́c) TAX IN CASE OF CAPITAL GAINS OR LOSSES.— For rate and computation of alternative tax in lieu of normal tax and surtax in the case of a capital gain or loss from the sale or exchange of capital assets held for more than 6 months, see section 117 (c). (d) SALE OF OIL OR GAS PROPERTIES. For limitation of surtax attributable to the sale of oil or gas properties; see section 105. (g) LIMITATION ON TAX.-The tax imposed by this section and section 11, computed without regard to the credits provided in sections 31, 32, and 35, shall in no event exceed in the aggregate 851⁄2 per centum of the net income of the taxpayer for the taxable year. (h) ALTERNATIVE TAX.— For alternative tax which may be elected if adjusted gross income is less than $5,000, see Supplement T. Part II-Computation of Net Income SEC. 21. NET INCOME. [See also sections 111-130] (a) DEFINITION.-"Net income" means the gross income computed under section 22, less the deductions allowed by section 23. SEC. 22. GROSS INCOME. (a) GENERAL DEFINITION. "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including personal service as an officer or employee of a State, or any political subdivision thereof, or any agency or instrumentality of any one or more of the foregoing), 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 courts of the United States taking office after June 6, 1932, the compensation received as such shall be included in gross income; and all acts fixing the compensation of such Presidents and judges are hereby amended accordingly. 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. (b) EXCLUSIONS FROM GROSS INCOME. The following items shall not be included in gross income and shall be exempt from taxation under this chapter: (1) LIFE INSURANCE.-Amounts received under a life insurance contract paid by reason of the death of the insured, whether in a single sum or otherwise (but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income); (2) ANNUITIES, ETC. (A) In General.-Amounts received (other than amounts paid by reason of the death of the insured and interest payments on such amounts and other than amounts received as annuities) under a life insurance or endowment contract, but if such amounts (when added to amounts received before the taxable year under such contract) exceed the aggregate premiums or consideration paid (whether or not paid during the taxable year) then the excess shall be included in gross in-. come. Amounts received as an annuity under an annuity or endowment contract shall be included in gross income; except that there shall be excluded from gross income the excess of the amount received in the taxable year over an amount equal to 3 per centum of the aggregate premiums or consideration paid for such annuity (whether or not paid during such year), until the aggregate amount excluded from gross income under this chapter or prior income tax laws in respect of such annuity equals the aggregate premiums or consideration paid for such annuity. In the case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance, endowment, or annuity contract, or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee shall be exempt from taxation under paragraph (1) or this paragraph. The preceding sentence shall not apply in the case of such a transfer if such contract or interest therein has a basis for determining gain or loss in the hands of a transferee determined in whole or in part by reference to such basis of such contract or interest therein in the hands of the transferor. This subparagraph and paragraph (1) shall not apply with respect to so much of a payment under a life insurance, endowment, or annuity contract, or any interest therein, as, under section 22 (k), is includible in gross income; [For taxability of beneficiaries of trusts, see section 165 (b).] (B) Employees' Annuities.-If an annuity contract is purchased by an employer for an employee under a plan with respect to which the employer's contribution is deductible under section 23 (p) (1) (B), or if an annuity contract is purchased for an employee by an employer exempt under section 101 (6), the employee shall include in his income the amounts received under such contract for the year received, except that, if the employee paid any of the consideration for the annuity, the annuity shall be included in his income as provided in subparagraph (A) of this paragraph, the consideration for such annuity being considered the amount contributed by the employee. In all other cases, if the employee's rights under the contract are nonforfeitable except for failure to pay future premiums, the amount contributed by the employer for such annuity contract on or after such rights become nonforfeitable shall be included in the income of the employee in the year in which the amount is contributed, which amount together with any amounts contributed by the employee shall constitute the consideration paid for the annuity contract in determining the amount of the annuity required to be included in the income of the employee under subparagraph (A) of this paragraph; [For treaty provisions affecting section 22 (b) (2), see Appendix II, A, Art. X; B, Art. 8; C, Art. VI; D, Art. X.] (3) GIFTS, BEQUESTS, DEVISES, AND INHERITANCES.-The value of property acquired by gift, bequest, devise, or inheritance. There shall not be excluded from gross income under this paragraph the income from such property, or, in case the gift, bequest, devise, or inheritance is of income from property, the amount of such income. For the purposes of this paragraph, if, under the terms of the gift, bequest, devise, or inheritance, payment, crediting, or distribution thereof is to be made at intervals, to the extent that it is paid or credited or to be distributed out of income from property it shall be considered a gift, bequest, devise, or inheritance of income from property; (4) TAX-FREE INTEREST.-Interest upon (A) the obligations of a State, Territory, or any political subdivision thereof, or the District of Columbia; or (B) obligations of a corporation organized under act of Congress, if such corporation is an instrumentality of the United States; or (C) the obligations of the United States or its possessions. Every person owning any of the obligations enumerated in clause (A), (B), or (C) shall, when so required by regulations prescribed by the Commissioner with the approval of the Secretary, submit in the return required by this chapter a statement showing the number and amount of such obligations owned by him and the income received therefrom, in such form and with such information as such regulations may prescribe. In the case of obligations of the United States issued after September 1, 1917 (other than postal savings certificates of deposit to the extent they represent deposits made before March 1, 1941) and in the case of obligations of a corporation organized under act of Congress, the interest shall be exempt only if and to the extent provided in the respective acts authoriz ing the issue thereof as amended and supplemented, and shall be excluded from gross income only if and to the extent it is wholly exempt from the taxes imposed by this chapter; [Section 5 (b) of the Second Liberty Bond Act, as amended (46 Stat. 20, c. 26; 31 U. S. C. 754) reads as follows: "(b) Áll certificates of indebtedness and Treasury bills issued hereunder (after the date upon which this subdivision becomes law) shall be exempt, both as to principal and interest, from all taxation (except estate and inheritance taxes) now or hereafter imposed by the United |