posed by subchapter D of this chapter is not in effect. (Added June 25, 1940, 11:45 a. m., E. S. T., ch. 419, title II, § 201, 54 Stat. 520; amended Oct. 8, 1940, 11 p. m., E. S. T., ch. 757, title I, § 101 (d), 54 Stat. 974; Sept. 20, 1941, 12:15 p. m., E. S. T., ch. 412, title I, § 104 (a), 55 Stat. 693; Oct. 21, 1942, 4:30 p. m., E. W. T., ch. 619, title I, § 105 (b), 56 Stat. 805; Nov. 8, 1945, 5:17 p. m., E. S. T., ch. 453, title I, §§ 121 (a), 122 (g) (3), 59 Stat. 568, 570; Sept. 23, 1950, 3:15 p. m., E. D. T., ch. 994, title I, pt. II, § 121 (c), 64 Stat. 915; Jan. 3, 1951, 10:13 a. m., ch. 1199, title II, § 201 (a), 64 Stat. 1216; Oct. 20, 1951, 2:07 p. m., E. S. T., ch. 521, title I, § 121 (f), 65 Stat. 468.)

AMENDMENTS

1951-Act Oct. 20, 1951, amended section generally to restate definition of "corporation surtax net income" in subsec. (a), to impose a tax rate of 22% on surtax net incomes over $25,000, in subsec. (b), and to add subsec. (c).

Subsec. (b) (1) amended by act Jan. 3, 1951, to increase the surtax rate 2 percentage points from 20 per centum to 22 per centum.

1950-Act Sept. 23, 1950, amended section generally to redefine term "corporation surtax net income", and to increase the surtax rate.

1945 Subsec. (a) amended by act Nov. 8, 1945, § 122 (g) (3), which struck out "minus the credit for income subject to the tax imposed by Subchapter E of Chapter 2 provided in section 26 (e) and", and struck out "(computed by limiting such credit to 85 per centum of the net income reduced by the credit for income subject to the tax imposed by Subchapter E of Chapter 2 in lieu of 85 per centum of the adjusted net income so reduced),".

Subsec. (b) amended generally by act Nov. 8, 1945, § 121 (a), which decreased the corporation surtax. 1942-Act Oct. 21, 1942, amended section in its entirety. 1941-Act Sept. 20, 1941, amended section in its entirety. 1940 First sentence was amended in its entirety by act Oct. 8, 1940.

EFFECTIVE DATE OF 1951 AMENDMENTS Amendment of section generally as applicable only with respect to taxable years beginning after Mar. 31, 1951, and to taxable years beginning on Jan. 1, 1951, and ending on Dec. 31, 1951, see note set out under section 13 of this title.

Section 201 (e) of act Jan. 3, 1951, provided that the amendments of subsec. (b) (1) of this section and sections 207 (a) (3) (A) (ii), 362 (b) (4), and 421 (a) (1) of this title should be applicable with respect to taxable years beginning on or after July 1, 1950.

EFFECTIVE DATE OF 1950 AMENDMENT

Amendment of section by act Sept. 23, 1950, as applicable only with respect to taxable years ending after December 31, 1950, see note set out under section 13 of this title.

EFFECTIVE DATE OF 1945 AmendmenTS Sections 121 (d) and 122 (g) (3) of act Nov. 8, 1945, provided that the amendments of this section were made applicable to taxable years beginning after Dec. 31, 1945. EFFECTIVE DATE OF 1942 AMENDMENT

Section 101 of act Oct. 21, 1942, provided that the amendment of this section was made applicable to taxable years beginning after Dec. 31, 1941.

EFFECTIVE DATE OF 1941 AMENDMENT

Section 118 of act Sept. 20, 1941, provided that the amendment of this section was made applicable to taxable years beginning after Dec. 31, 1940.

EFFECTIVE DATE OF 1940 AMENDMENT

Section 101e of act Oct. 8, 1940, provided that the amendment of this section was made applicable to taxable years beginning after Dec. 31, 1939.

DIVIDENDS RECEIVED ON PREFERRED STOCK OF PRIVATE UTILITY

In case of taxable years beginning before April 1, 1951, any reference in subsec. (a) of this section and section 26 (b) of this title to dividends received on preferred stock of public utility to be construed as referring only to dividends received on the preferred stock of public utility with respect to which the credit provided in section 26 (h) of this title for dividends paid was allowable, see note under section 26 of this title.

OMISSION OF FORMER SECTION

Former section 15, act May 28, 1938, ch. 289, § 15, 52 Stat. 457, relating to corporate taxes effective for two taxable years was omitted by act June 29, 1939, 10 p. m., ch. 247, title II, § 201, 53 Stat. 863, which amended sections 13, 14, and 15 to "read as follows" and failed to reenact said former section 15. Amendment omitting said former section was made applicable only with respect to taxable years beginning after December 31, 1939 by § 229 of said act.

TREATY OBLIGATIONS

Section 615 of act Oct. 20, 1951, provided that: "No amendment made by this Act [act Oct. 20, 1951] shall apply in any case where its application would be contrary to any treaty obligation of the United States."

Similar provisions were contained in the following acts: 1950-Sept. 23, 1950, 3:15 p. m., E. D. T., ch. 994, title II, § 214, 64 Stat. 937.

1942-Oct. 21, 1942, 4:30 p. m., E. W. T., ch. 619, title I, § 109, 56 Stat. 808.

1941-Sept. 20, 1941, 12:15 p. m., E. S. T., ch. 412, title I, § 108, 55 Stat. 695.

CROSS REFERENCES

Fiscal year taxpayers, see section 108 of this title.
PART II.-COMPUTATION OF NET INCOME

§ 21. Net income-(a) Definition.

"Net income" means the gross income computed under section 22, less the deductions allowed by section 23.

(b) Cross references.

For definition of "adjusted net income" and "normal-tax net income", see section 13. (53 Stat. 9; June 29, 1939, 10 p. m., E. S. T., ch. 247, title II, § 210 (a), 53 Stat. 866.)

DERIVATION

Act May 28, 1938, ch. 289 § 21, 52 Stat. 457.

AMENDMENTS

1939 Subsec. (b) amended by act June 29, 1939. Prior to said amendment subsec. read as follows: "(b) Cross references.

"For definition of 'adjusted net income', see section 13 (a); for definition of 'special class net income', see section 14 (a)."

EFFECTIVE DATE OF 1939 AMENDMENT

Amendment of subsec. (b) made applicable only with respect to taxable years beginning after Dec. 31, 1939, by section 229 of act June 29, 1939.

SIMILAR PROVISIONS

1936 June 22, 1936, ch. 690, § 21, 49 Stat. 1657. 1934-May 10, 1934, ch. 277, § 21, 48 Stat. 686. 1932-June 6, 1932, ch. 209, § 21, 47 Stat. 178. 1928-May 29, 1928, ch. 852, § 21, 45 Stat. 797. 1926-Feb. 26, 1926, ch. 27, § 212, 44 Stat. 23. 1924 June 2, 1924, ch. 234, § 212, 43 Stat. 267.

§ 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, etc.

Amounts received

(A) under a life insurance contract, paid by reason of the death of the insured; or

(B) under a contract of an employer providing for the payment of such amounts to the beneficiaries of an employee, paid by reason of the death of the employee;

whether in a single sum or otherwise (but if such amounts are held by the insurer, or the employer, under an agreement to pay interest thereon, the interest payments shall be included in gross income). The aggregate of the amounts excludible under subparagraph (B) by all the beneficiaries of the employee under all such contracts of any one employer may not exceed $5,000.

(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 income. 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;

(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. (C) Joint and survivor annuities.

For purposes of subparagraphs (A) and (B) of this paragraph, where amounts are received by a surviving annuitant under a joint and survivor's annuity contract and the basis of such survivor annuitant's interest is determined under section 113 (a) (5) the consideration paid for such survivor's annuity shall be considered to be an amount equal to such basis.

(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 authorizing 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;

(5) Compensation for injuries or sickness.

Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 23 (x) in any prior taxable year, amounts received through accident or health insurance or under workmen's compensation acts, as compensation for personal injuries or sickness, plus the amount of any damages received whether by suit or agreement on account of such injuries or sickness, and amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country;

(6) Ministers.

The rental value of a dwelling house and appurtenances thereof furnished to a minister of the gospel as part of his compensation;

(7) Income exempt under treaty.

Income of any kind, to the extent required by any treaty obligation of the United States; (8) Miscellaneous items.

The following items, to the extent provided in section 116:

Earned income from sources without the United States;

Salaries of certain Territorial employees;
The income of foreign governments;

Income of States, municipalities, and other political subdivisions;

Receipts of shipowners' mutual protection and indemnity associations;

Dividends from China Trade Act corporations; Compensation of employees of foreign govern

ments.

(9) Income from discharge of indebtedness.

In the case of a corporation, the amount of any income of the taxpayer attributable to the discharge, within the taxable year, of any indebtedness of the taxpayer or for which the taxpayer is liable evidenced by a security (as hereinafter in this paragraph defined) if the taxpayer, at such time and in such manner as the Secretary by regulations prescribed, makes and files its consent to the regulations prescribed under section 113 (b) (3) then in effect. In such case the amount of any income of the taxpayer attributable to any unamortized premium (computed as of the first day of the taxable year in which such discharge occurred) with respect to such indebtedness shall not be included in gross income and the amount of the deduction attributable to any unamortized discount (computed as of the first day of the taxable year in which such discharge occurred) with respect to such indebtedness shall not be allowed as a deduction. As used in this paragraph the term "security" means any bond, debenture, note, or certificate, or other evidence of indebtedness, issued by any corporation.

(10) Income from discharge of indebtedness of a railroad corporation.

The amount of any income attributable to the discharge, within the taxable year, of any indebtedness of a railroad corporation, as defined in section 77m of the National Bankruptcy Act, as amended1 to the extent that such income is deemed to have been realized by reason of a modification in or cancellation in whole or in part of such indebtedness pursuant to an order of a court in a receivership proceeding or in a proceeding under section 77 of the National Bankruptcy Act, as amended. In such case the amount of any income of the taxpayer attributable to any unamortized premium (computed as of the first day of the taxable year in which such discharge occurred) with respect to such indebtedness shall not be included in gross income and the amount of the deduction attributable to any unamortized discount (computed as of the first day of the taxable year in which such discharge occurred) with respect to such indebtedness shall not be allowed as a deduction. Paragraph (9) shall not apply with respect to any discharge of indebtedness to which this paragraph applies. This paragraph shall not apply to any discharge occurring in a taxable year beginning after December 31, 1954.

(11) Improvements by lessee on lessor's property.

Income, other than rent, derived by a lessor of real property upon the termination of a lease, representing the value of such property attributable to buildings erected or other improvements made by the lessee.

1 Probably should read "77 (m)" which is section 205 (m) of Title 11, Bankruptcy.

2 Section 205 of Title 11, Bankruptcy.

(12) Recovery of bad debts, prior taxes, and delinquency amounts.

Income attributable to the recovery during the taxable year of a bad debt, prior tax, or delinquency amount, to the extent of the amount of the recovery exclusion with respect to such debt, tax, or amount. For the purposes of this paragraph:

(A) Definition of bad debt.

The term "bad debt" means a debt on account of worthlessness or partial worthlessness of which a deduction was allowed for a prior taxable year.

(B) Definition of prior tax.

The term "prior tax" means a tax on account of which a deduction or credit was allowed for a prior taxable year.

(C) Definition of delinquency amount.

means an

The term "delinquency amount" amount paid or accrued on account of which a deduction or credit was allowed for a prior taxable year and which is attributable to failure to file return with respect to a tax, or pay a tax, within the time required by the law under which the tax is imposed, or to failure to file return with respect to a tax or pay a tax.

(D) Definition of recovery exclusion.

The term "recovery exclusion", with respect to a bad debt, prior tax, or delinquency amount, means the amount, determined in accordance with regulations prescribed by the Commissioner with the approval of the Secretary, of the deductions or credits allowed, on account of such bad debt, prior tax, or delinquency amount, which did not result in a reduction of the taxpayer's tax under this chapter (not including the tax under section 102) or corresponding provisions of prior revenue laws, reduced by the amount excludible in previous taxable years with respect to such debt, tax, or amount under this paragraph.

(E) Special rules in case of section 102 tax and personal holding company tax.

In the application of subparagraphs (A), (B), (C), and (D) in determining the tax under section 102 or Subchapter A of Chapter 2, a recovery exclusion allowed for the purposes of Chapter 1 shall be allowed for the purpose of such section or subchapter whether or not the bad debt, prior tax, or delinquency amount resulted in a reduction of the section 102 tax or Subchapter A tax for the prior taxable year; and in the case of a bad debt, prior tax, or delinquency amount not allowable as a deduction or credit for the prior taxable year under Chapter 1 (except section 102) but allowable for the same taxable year under such section or subchapter a recovery exclusion shall be allowable for the purposes of such section or subchapter if such bad debt, prior tax, or delinquency amount did not result in a reduction of the tax under such section 102 or such Subchapter A. As used in this subparagraph references to Chapter 1, section 102, and Subchapter A in the case of taxable years not subject to the Internal Revenue Code, shall be held to be made to corresponding provisions of prior revenue Acts.

(13) Additional allowance for certain members of the armed forces.

(A) Enlisted personnel.

Compensation received for active service as a member below the grade of commissioned officer in the armed forces of the United States for any month during any part of which such member

(i) served in a combat zone after June 24, 1950, and prior to January 1, 1954, or

(ii) was hospitalized as a result of wounds, disease, or injury incurred while serving in a combat zone prior to January 1, 1954; but this clause shall not apply for any month during any part of which there are no combatant activities in any combat zone as determined under subparagraph (C) (iii) of this paragraph.

(B) Commissioned officers.

So much of the compensation as does not exceed $200 received for active service as a commissioned officer in the armed forces of the United States for any month during any part of which such officer(i) served in a combat zone after June 24, 1950, and prior to January 1, 1954, or

(ii) was hospitalized as a result of wounds, disease, or injury incurred while serving in a combat zone prior to January 1, 1954; but this clause shall not apply for any month during any part of which there are no combatant activities in any combat zone as determined under subparagraph (C) (iii) of this paragraph.

(C) Definitions.

For the purposes of this paragraph

(i) the term "commissioned officer" does not include a commissioned warrant officer;

(ii) the term "combat zone" means any area which the President of the United States by Executive Order designates, for the purposes of this paragraph, as an area in which Armed Forces of the United States are or have (after June 24, 1950) engaged in combat;

(iii) service is performed in a combat zone only if performed on or after the date designated by the President by Executive Order as the date of the commencing of combatant activities in such zone, and on or before the date designated by the President by Executive Order as the date of the termination of combatant activities in such zone, except that June 25, 1950, shall be considered the date of the commencing of combatant activities in the combat zone designated in Executive Order 10195; and

(iv) the term "compensation" does not include pensions and retirement pay.

(14) Mustering-out payments for military and naval personnel.

Amounts received during the taxable year as mustering-out payments with respect to service in the military or naval forces of the United States. (15) Payments to encourage exploration, development, and mining for defense purposes.

An amount paid to a taxpayer by the United States (or any agency or instrumentality thereof), whether by grant or loan, and whether or not repayable, for

the encouragement of exploration, development or mining of critical and strategic minerals or metals pursuant to or in connection with any undertaking approved by the United States (or any of its agencies or instrumentalities) and for which an accounting is made or required to be made to an appropriate governmental agency, and the forgiveness or discharge of any of such amount. Any expenditures (other than expenditures made after the repayment of such grant or loan) attributable to such grant or loan shall not be deductible by the taxpayer as an expense nor increase the basis of the taxpayer's property either for determining gain or loss on sale, exchange, or other disposition or for computing depletion or depreciation, but upon the repayment of any portion of any such grant or loan which has been expended in accordance with the terms thereof such deductions and such increase in basis shall to the extent of such repayment be allowed as if made at the time of such repayment.

(16) Sports programs conducted for the American National Red Cross.

In the case of a taxpayer which is a corporation primarily engaged in the furnishing of sports programs, amounts received as proceeds from a sports program conducted by the taxpayer if—

(A) the taxpayer agrees in writing with the American National Red Cross to conduct such sports program exclusively for the benefit of the American National Red Cross;

(B) the taxpayer turns over to the American National Red Cross the proceeds from such sports program, minus the expenses paid or incurred by the taxpayer (1) which would not have been so paid or incurred but for such sports program, and (ii) which would be allowable as deductions under section 23 (a) (1) (A) but for the last sentence thereof; and (C) the facilities used for such program are not regularly used during the taxable year for the conduct of sports programs to which this paragraph applies.

As used in this paragraph, the term "proceeds from such sports program" includes all amounts paid for admission to the sports program, plus all proceeds received by the taxpayer from such program or activities carried on in connection therewith.

(c) Inventories.

Whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income. (d) Method of inventorying goods.

(1) A taxpayer may use the following method (whether or not such method has been prescribed under subsection (c)) in inventorying goods specified in the application required under paragraph (2):

(A) Inventory them at cost;

(B) Treat those remaining on hand at the close of the taxable year as being: First, those included in the opening inventory of the taxable year (in the order of acquisition) to the extent thereof, and second, those acquired in the taxable year; and

(C) Treat those included in the opening inventory of the taxable year in which such method is first used as having been acquired at the same time and determine their cost by the average cost method.

(2) The method described in paragraph (1) may be used

(A) Only in inventorying goods (required under subsection (c) to be inventoried) specified in an application to use such method filed at such time and in such manner as the Commissioner may prescribe; and

(B) Only if the taxpayer establishes to the satisfaction of the Commissioner that the taxpayer has used no procedure other than that specified in subparagraphs (B) and (C) of paragraph (1) in inventorying such goods to ascertain the income, profit, or loss of the first taxable year for which the method described in paragraph (1) is to be used, for the purpose of a report or statement covering such taxable year (i) to shareholders, partners, or other proprietors, or to beneficiaries, or (ii) for credit purposes.

(3) The change to, and the use of, such method shall be in accordance with such regulations as the Commissioner, with the approval of the Secretary, may prescribe as necessary in order that the use of such method may clearly reflect income.

(4) In determining income for the taxable year preceding the taxable year for which such method is first used, the closing inventory of such preceding year of the goods specified in such application shall be at cost.

(5) If a taxpayer, having complied with paragraph (2), uses the method described in paragraph (1) for any taxable year, then such method shall be used in all subsequent taxable years unless

(A) With the approval of the Commissioner a change to a different method is authorized; or

(B) The Commissioner determines that the taxpayer has used for any such subsequent taxable year some procedure other than that specified in subpagraph1 (B) of paragraph (1) in inventorying the goods specified in the application to ascertain the income, profit, or loss of such subsequent taxable year for the purpose of a report or statement covering such taxable year (i) to shareholders, partners, or other proprietors, or beneficiaries, or (ii) for credit purposes; and requires a change to a method different from that prescribed in paragraph (1) beginning with such subsequent taxable year or any taxable year thereafter.

In either of the above cases, the change to, and the use of, the different method shall be in accordance with such regulations as the Commissioner, with the approval of the Secretary, may prescribe as necessary in order that the use of such method may clearly reflect income.

1 So in original. Probably should read "subparagraph".