for hotel accommodations and meals while the expenses of his home go on without appreciable abatement.

IMPROVEMENTS AND BETTERMENTS. In computing net income, no deduction is allowed for any amount paid out for new buildings or for permanent improvements or betterments or for furniture or fixtures made to increase the value of any property or estate. This is a reasonable limitation, since amounts of capital invested in improvements and betterments add to the value of the property. The subject of this paragraph and the following paragraph is discussed more fully elsewhere in this book.44

RESTORATION OF PROPERTY. No deduction is allowed to citizens and residents for any amount expended in restoring property or making good the exhaustion thereof for which an allowance is or has been made.45 This is also a reasonable limitation since if such property is subject to wear or tear and depletion, the additional amount so invested in the property may be taken into consideration in computing the allowance for depreciation and depletion.

INSURANCE ON EMPLOYEES. No deduction is permitted for any amount paid in premiums on any life insurance policy covering the life of any employee or any person financially interested in any trade or business carried on by citizens and residents, when the taxpayer is directly or indirectly a beneficiary under such policy.46 This subject is more generally discussed elsewhere in this book.47

Credit of Dividends. For the purpose of computing the normal tax only, there may be deducted from net income amounts received as dividends from a corporation taxable upon its net income under the law, and amounts received as dividends from a personal-service corporation

43 Revenue Act of 1918, § 215 (b); Reg. 45, Art. 293. 44 See Chapter 26 on Deductions-In General.

45 Revenue Act of 1918, § 215 (e).

46 Revenue Act of 1918, § 215 (d).

47 See Chapter 26 on Deductions-In General.

out of earnings or profits upon which income tax has been imposed.48

Personal Exemption. The personal exemption is allowed in all cases to citizens and residents. It may be said to be an arbitrary sum allowed for personal, living or family expenses.49 A corporation has no right to claim this exemption; a non-resident alien individual may secure personal exemption on certain conditions.50 In the case of a single person the amount of the personal exemption is $1,000 and in the case of the head of the family or a married person living with husband or wife, $2,000. The husband and wife living together are permitted but one personal exemption of $2,000 against their aggregate net income; and in case they make separate returns; such personal exemption may be taken by either or divided between them.51 A taxpayer receives a credit of $200 for each person (other than husband or wife), whether related to him or not and whether living with him or not, dependent upon and receiving his chief support from the taxpayer, provided the dependent is either (a) under the age of 18 years or (b) incapable of self-support because mentally or physically defective. The credit for dependents is based upon actual financial dependency and not mere legal dependency. It may accrue to a taxpayer who is not the head of a family. But a father whose children received half or more of their support from a trust fund or other separate source is not entitled to the credit.52

HEAD OF FAMILY. This phrase in the law is defined by ruling to include any person who actually supports and maintains one or more individuals who are closely connected with him (or her) by blood relationship, relation

48 Revenue Act of 1918, § 216 (a) (b); Reg. 45, Art. 301.

49 Such expenses are expressly stated not to be deductible in the Revenue Act of 1918. See § 215 (a). See also Revenue Act of 1916, § 5 (a).

50 Reg. 45, Art. 305. See Chapter 5 on Non-resident Aliens.

51 Revenue Act of 1918, § 216 (c).

52 Revenue Act of 1918, § 216 (d); Reg. 45, Art. 304. Formerly this exemption was limited to dependent children,

ship by marriage, or by adoption, and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation.53 Such head of a family is entitled to the same personal exemption as married persons. As indicated by the above definition, the head of a family may be a single or married person, a widow, widower, brother, sister, or other relative by blood, marriage or adoption.54 The rulings hold that residence with the dependents is an essential factor in order to claim the exemption allowed to a head of a family but temporary absence will not destroy that status. Thus, if a father is absent on business or at war or a child, or other dependent is away only temporarily at school or on a visit, the common home being still maintained, the additional exemption applies. If, however, the dependent continuously makes his home elsewhere, his benefactor is not the head of a family, irrespective of the question of support.55

HUSBAND AND WIFE. A husband and wife living together are entitled to an exemption of $2,000 only against their aggregate net income, and in case they make separate returns, such personal exemption of $2,000 may be taken by either or divided between them.56 In the case of a married man or married woman the joint exemption replaces the individual exemptions only if his wife lives with him or her husband lives with her. In the absence of continuous actual residence together, whether or not a man or woman has a wife or husband living with him or her within the meaning of the statute must depend on the character of the separation. If merely occasionally and temporarily a wife is away on a visit or a husband is away on business, the joint home being maintained, the additional exemption applies. The unavoidable absence of a wife or a husband at a sanitarium or asylum on ac

53 Reg. 45, Art. 302; T. D. 2427.

54 Reg. 33 Rev., Art. 14.

55 Reg. 45, Art. 302; T. D. 2692. 56 Revenue Act of 1918, § 216 (c).

count of illness does not preclude claiming the exemption. If, however, the husband voluntarily and continuously makes his home at one place and the wife hers at another, they are not living together for the purpose of the statute, irrespective of their personal relations.57

RESIDENT ALIENS. Resident aliens claiming exemption because of families or wives residing abroad are not heads of families or married men or women with wives or husbands living with them within the meaning of the statute, and they are in no case entitled to more than their individual exemptions of $1,000.58

STATUS OF CLAIMANT. The status (single, married or head of a family) of the individual claiming the personal exemption is determined as of the close of the year. 59 Thus, where either husband or wife dies during the year, the survivor, in making a return at the end of the year, will be allowed the exemption applicable to single persons or heads of families, and the executor or administrator of the deceased, in making a return for the deceased, may claim the exemption according to the status of the deceased at the time of his death, from the net income received between the first of the year and the date of death no matter how short the period. Where an individual makes a return for a period of less than twelve months by reason of changing from a calendar to a fiscal year basis for making returns, it seems that the personal exemption should be prorated. In the instructions appearing on the forms of individual returns for 1919 appears a statement indicating that these exemptions should be prorated if there was a change in the status of the taxpayer during the year, but there is nothing in the recent regulations to indicate a change in the long-established rule that the exemption depends upon the status of the taxpayer at

57 Reg. 45, Art. 303; T. D. 2692. 58 Reg. 45, Art. 302; T. D. 2692. 59 Reg. 33 Rev., Art. 14.

60 T. D. 2090; T. D. 2135; Reg. 33 Rev., Art. 14.

the end of the year; and nothing in the new law to indicate an intent on the part of Congress to change that rule.

NOT APPLICABLE TO SURTAX. The personal exemption is not to be deducted from the net income of the individual in assessing the surtax.61

Credit Against Tax. The amount of any income, warprofits and excess-profits taxes paid (or accrued) during the taxable year to any foreign country upon income derived from sources therein, is allowed as a credit against the tax of citizens, resident or non-resident. The amount of such taxes paid (or accrued) during the taxable year by a resident alien to a foreign country of which he is a citizen is allowed as a credit against his tax if such country in imposing such taxes allows a similar credit to citizens of the United States residing in such country. The amount of any income, war-profits and excess-profits taxes paid during the taxable year to any possession of the United States is allowed as a credit against the tax of all citizens and residents. In the case of any such citizen or resident 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 of the estate or trust paid during the taxable year to a foreign country or to any possession of the United States, as the case may be, is allowed as a credit. The credits specified in this paragraph are only allowed if the taxpayer furnishes evidence satisfactory to the Commissioner showing the amount of income derived from sources within such foreign country or possession and all other information necessary for the computation thereof. If accrued taxes when paid differ from the amounts claimed as credits or if any tax paid is refunded provision is made that the taxpayer notify the Commissioner of such fact, in which case a redetermination of the tax paid is had, as is more particularly set forth in another chapter.6 62

61 Revenue Act of 1918, § 216; Reg. 45, Art. 301.

62 Revenue Act of 1918, § 222; Reg. 45, Arts. 381-384. See Chapter 33.