SEC. 24. ITEMS NOT DEDUCTIBLE. (a) GENERAL RULE.-In computing net income no deduction shall in any case be allowed in respect of (1) Personal, living, or family expenses, except extraordinary medical expenses deductible under section 23 (x); (2) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate; (3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; (4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer when the taxpayer is directly or indirectly a beneficiary under such policy; (5) Any amount otherwise allowable as a deduction which is allocable to one or more classes of income other than interest (whether or not any amount of income of that class or classes is received or accrued) wholly exempt from the taxes imposed by this chapter, or any amount otherwise allowable under section 23 (a) (2) which is allocable to interest (whether or not any amount of such interest is received or accrued) wholly exempt from the taxes imposed by this chapter: (6) Any amount paid or accrued on indebtedness incurred or continued to purchase a single premium life insurance or endowment contract. For the purposes of this paragraph, if substantially all the premiums on a life insurance or endowment contract are paid within a period of four years from the date on whic such contract is purchased, such contract shall be considered a single premium life insurance or endowment contract; or (7) Amounts paid or accrued for such taxes and carrying charges as, under regulations prescribed by the Commissioner with the approval of the Secretary, are chargeable to capital account with respect to property, if the taxpayer elects, in accordance with such regulations, to treat such taxes or charges as so chargeable. (b) LOSSES FROM SALES OR EXCHANGES OF PROPERTY.— (1) LOSSES DISALLOWED. In computing net income no deduction shall in any case be allowed in respect of losses from sales or exchanges of property, directly or indirectly (A) Between members of a family, as defined in paragraph (2) (D); (B) Except in the case of distributions in liquidation, between an individual and a corporation more than 50 per centum in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; (D) Between a grantor and a fiduciary of any trust; (E) Between the fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust; or (F) Between a fiduciary of a trust and a beneficiary of such trust. (2) STOCK OWNERSHIP, FAMILY, AND PARTNERSHIP RULE.-For the purposes of determining, in applying paragraph (1), the ownership of stock— (A) Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust, shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries; (B) An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family; (C) An individual owning (otherwise than by the application of subparagraph (B)) any stock in a corporation shall be considered as owning the stock owned, directly or indirectly, by or for his partner; (D) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and (E) Constructive Ownership as Actual Ownership.-Stock constructively owned by a person by reason of the application of subparagraph (A) shall, for the purpose of applying subparagraph (A), (B), or (C), be treated as actually owned by such person, but stock constructively owned by an individual by reason of the application of subparagraph (B) or (C) shall not be treated as owned by him for the purpose of again applying either of such subparagraphs in order to make another the constructive owner of such stock. (c) UNPAID EXPenses and INTEREST.—In computing net income no deduction shall be allowed under section 23 (a), relating to expenses incurred, or under section 23 (b), relating to interest accrued (1) If such expenses or interest are not paid within the taxable year or within two and one half months after the close thereof; and (2) If, by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not, unless paid, includible in the gross income of such person for the taxable year in which or with which the taxable year of the taxpayer ends; and (3) If, at the close of the taxable year of the taxpayer or at any time within two and one half months thereafter, both the taxpayer and the person to whom the payment is to be made are persons between whom losses would be disallowed under section 24 (b). (d) HOLDERS OF LIFE OR TERMINABLE INTEREST.-Amounts paid under the laws of any State, Territory, District of Columbia, possession of the United States, or foreign country as income to the holder of a life of terminable interest acquired by gift, bequest, or inheritance shall not be reduced or diminished by any deduction for shrinkage (by whatever name called) in the value of such interest due to the lapse of time, nor by any deduction allowed by this chapter (except the deductions provided for in subsections (1) and (m) of section 23) for the purpose of computing the net income of an estate or trust but not allowed under the laws of such State, Territory, District of Columbia, possession of the United States, or foreign country for the purpose of computing the income to which such holder is entitled. (e) TAX WITHHELD ON TAX-FREE COVENANT BONDS. For nondeductibility of tax withheld on tax-free covenant bonds, see section 143 (a) (3). SEC. 25. CREDITS OF INDIVIDUAL AGAINST NET INCOME. (a) CREDITS FOR NORMAL TAX ONLY.-There shall be allowed for the purpose of the normal tax, but not for the surtax, the following credits against the net income: (1) INTEREST ON UNITED States obligatIONS.-The amount received as interest upon obligations of the United States, if such interest is included in gross income under section 22, and if, under the Act authorizing the issue of such obligations, as amended and supplemented, such interest is exempt from normal tax. (2) INTEREST ON OBLIGATIONS OF INSTRUMENTALITIES OF THE UNITED STATES.-The amount received as interest on obligations of a corporation organized under Act of Congress, if (A) such corporation is an instrumentality of the United States; and (B) such interest is included in gross income under section 22; and (C) under the Act authorizing the issue thereof, as amended and supplemented, such interest is exempt from normal tax. (For reduction of credit under paragraph (1) or (2) on account of amortizable bond premium, see section 125.) (3) NORMAL TAX EXEMPTION.-A normal tax exemption of $500. In the case of a joint return by husband and wife under section 51, the normal tax exemption shall be $1,000, except that if the adjusted gross income of one spouse is less than $500, the normal tax exemption shall be $500 plus the adjusted gross income of such spouse. [For normal tax exemptions of estates and trusts, see section 163 (a) (1). For credits of partners, see section 184.] (b) CREDITS FOR SURTAX ONLY. (1) CREDITS.-There shall be allowed for the purpose of the surtax, but not for the normal tax, the following credits against net income: (A) A surtax exemption of $500 for the taxpayer; [For surtax exemptions of estates and trusts, see section 163 (a) (1).] (B) A surtax exemption of $500 for the spouse of the taxpayer if (i) a joint return is made by the taxpayer and his spouse under section 51, in which case the surtax exemption of the spouses under subparagraph (A) and this subparagraph shall be only $1,000 in the aggregate, or (ii) a separate return is made by the taxpayer, and his spouse has no gross income for the calendar year in (2) Unless in each such consent the shareholder agrees that he will include as a taxable dividend, in his return for the taxable year in which or with which the taxable year of the corporation ends, a specific amount; and (3) Unless the consents filed are made by such of the shareholders and the amount specified in each consent is such that the consent distribution would not have been a preferential distribution and (A) If there was no partial distribution during the last month of the taxable year of the corporation, or (B) If there was such a partial distribution, then when considered in connection with such partial distribution; (4) Unless in each consent made by a shareholder who is taxable with respect to a dividend only if received from sources within the United States, such shareholder agrees that the specific amount stated in the consent shall be considered as a dividend received by him from sources within the United States; and (5) Unless each consent filed is accompanied by cash, or such other medium of payment as the Commissioner may by regulations authorize, in an amount equal to the amount that would be required by section 143 (b) or 144 to be deducted and withheld by the corporation if the amount specified in the consent had been, on the last day of the taxable year of the corporation, paid to the shareholder in cash as a dividend. The amount accompanying the consent shall be credited against the tax imposed by section 211 (a) * * * upon the shareholder. (e) CONSENT DISTRIBUTION AS PART OF ENTIRE DISTRIBUTION.— If during the last month of the taxable year with respect to which shareholders' consents are filed by the corporation under subsection (d) there is made a partial distribution, then, for the purposes of this chapter, such partial distribution and the consent distribution shall be considered as having been made in connection with each other and each shall be considered together with the other as one entire distribution. (f) TAXABILITY OF AMOUNTS SPECIFIED IN CONSENTS.-The total amount specified in a consent filed under subsection (d) shall be included as a taxable dividend in the gross income of the shareholder making such consent, and, if the shareholder is taxable with respect to a dividend only if received from sources within the United States, shall be included in the computation of his tax as a dividend received from sources within the United States; regardless of— (1) Whether he actually so includes it in his return; and (2) Whether the distribution by the corporation of an amount equal to the total sum included in all the consents filed, had actual distribution been made, would have been in whole or in part a taxable dividend; and (3) Whether the corporation is entitled to any consent dividends credit by reason of the filing of such consents, or to a credit less than the total sum included in all the consents filed. (h) BASIS OF STOCK IN HANDS OF SHAREHOLDERS.-The amount specified in a consent made under subsection (d) shall, for the purpose of adjusting the basis of the consent stock with respect to which the consent was given, be treated as having been reinvested by the shareholder as a contribution to the capital of the corporation; but only in an amount which bears the same ratio to the consent dividends credit of the corporation as the amount of such shareholders' consent stock bears to the total amount of consent stock with respect to which consents are made. (i) AMOUNTS NOT INCLUDED IN SHAREHOLDER'S RETURN.-The failure of a shareholder of consent stock to include in his gross income for the proper taxable year the amount specified in the consent made by him and filed by the corporation shall have the same effect, with respect to the deficiency resulting therefrom, as is provided in section 272 (f) with respect to a deficiency resulting from a mathematical error appearing on the face of the return. Part III-Credits Against Tax SEC. 31. TAXES OF FOREIGN COUNTRIES AND POSSESSIONS OF UNITED STATES. The amount of income, war-profits, and excess-profits taxes imposed by foreign countries or possessions of the United States shall be allowed as a credit against the tax, to the extent provided in section 131. [For credit in respect of a decedent, see section 126 (b).] SEC. 32. TAXES WITHHELD AT SOURCE. The amount of tax withheld at the source under section 143 shall be allowed as a credit against the tax. * [For disregard of this credit in determining credit for foreign, etc., taxes, see section 131 (i). For disregard of this credit in determining deficiencies, see section 271 (b) (1).] SEC. 33. CREDIT FOR OVERPAYMENTS. For credit against the tax of overpayments of taxes imposed by this chapter for other taxable years, see section 322. SEC. 35. CREDIT FOR TAX WITHHELD ON WAGES. The amount deducted and withheld as tax under Subchapter D of Chapter 9 during any calendar year upon the wages of any individual shall be allowed as a credit to the recipient of the income against the tax imposed by this chapter for the taxable year beginning in such calendar year. If more than one taxable year begins in any such calendar year such amount shall be allowed as a credit against the tax for the last taxable year so beginning. [For disregard of this credit in determining credit for foreign, etc., taxes, see section 131 (i). For disregard of this credit in determining deficiencies, see section 271 (b) (1).] |