"(b) The provisions of this section shall, with respect to such obligations and evidences of ownership, be considered as amendatory of and supplementary to the respective Acts or parts of Acts authorizing the issuance of such obligations and evidences of ownership, as amended and supplemented.

"(c) Nothing contained herein shall be construed to amend or repeal sections 114 and 115. of the Revenue Act of 1941."

The Public Debt Act of 1942 became effective March 28, 1942.] (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;

* * *

Dividends from China Trade Act corporations;

Compensation of employees of foreign governments;

(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;

(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.-The term "delinquency amount" means an 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 de

linquency amount, means the amount, determined in accord-
ance 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 delin-
quency amount, which did not result in a reduction of the
taxpayer's tax under this chapter
or correspond-
ing 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;

* * *

(13) ADDITIONAL ALLOWANCE FOR MILITARY AND NAVAL PERSONNEL. In the case of compensation received during any taxable year and before the termination of the present war as proclaimed by the President, by a member of the military or naval forces of the United States for active service in such forces during such war, or by a citizen or resident of the United States who is a member of the military or naval forces of any of the other United Nations for active service in such forces during such war, so much of such compensation as does not exceed $1,500;

[See also the note under section 3804.]

(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.

(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) (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 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 subparagraph (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 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. (6) INVOLUNTARY LI UIDATION AND REPLACEMENT OF INVENTORY.(A) Adjustment of Net Income and Resulting Tax. If, for any taxable year * * * prior to the termination of the present war as proclaimed by the President, the closing inventory of a taxpayer inventorying goods under the method provided in this subsection reflects a decrease from the opening inventory of such goods for such year, and if, at the time of the filing of the taxpayer's income tax return for such year the taxpayer elects to have the provisions of this paragraph apply and so notifies the Commissioner, and if, at the time of such election, it is established to the satisfaction of the Commissioner, in accordance with such regulations as the Commissioner may prescribe with the approval of the Secretary, that such decrease is attributable to the involuntary liquidation of such inventory as defined in subparagraph (B), and if the closing inventory of a subsequent taxable year, ending not more than three years after the termination of the present war as proclaimed by the President, reflects a replacement, in whole or in part, of the goods so previously liquidated, the net income of the taxpayer otherwise determined for the year of such involuntary liquidation shall be adjusted as follows:

* * *

(i) Increased by an amount equal to the excess, if any, of the aggregate cost of such goods reflected in the opening

inventory of the year of involuntary liquidation over the aggregate replacement cost; or

(ii) Decreased by an amount equal to the excess, if any, of the aggregate replacement cost of such goods over the aggregate cost thereof reflected in the opening inventory of the year of the involuntary liquidation. * * * The taxes imposed by this chapter for the year of such liquidation, for preceding taxable years, and for all taxable years intervening between the year of liquidation and the year of replacement, shall be redetermined, giving effect to such adjustments. Any increase in such taxes resulting from such adjustments shall be assessed and collected as a deficiency but without interest, and any overpayment so resulting shall be credited or refunded to the taxpayer without interest.

(B) Definition of Involuntary Liquidation.-The term "involuntary liquidation", as used in this paragraph, means the sale or other disposition of goods inventoried under the method described in this subsection, either voluntary or involuntary, coupled with a failure on the part of the taxpayer to purchase, manufacture, or otherwise produce and have on hand at the close of the taxable year in which such sale or other disposition occurred such goods as would, if on hand at the close of such taxable year, be subject to the application of the provisions of this subsection, if such failure on the part of the taxpayer is due, directly and exclusively, (i) to enemy capture or control of sources of limited foreign supply; (ii) to shipping or other transportation shortages; (iii) to material shortages resulting from priorities or allocations; (iv) to labor shortages; or (v) to other prevailing war conditions beyond the control of the taxpayer.

(C) Replacements. If, in the case of any taxpayer subject to the provisions of subparagraph (A), the closing inventory of the taxpayer for a taxable year, subsequent to the year of involuntary liquidation but prior to the complete replacement of the goods so liquidated, reflects an increase over the opening inventory of such goods for the taxable year, the goods reflecting such increase shall be considered, in the order of their acquisition, as having been acquired in replacement of the goods most recently liquidated (whether or not in a year of involuntary liquidation) and not previously replaced, and, if the liquidation was an involuntary liquidation, shall be taken into purchases and included in the closing inventory of the taxpayer for the year of replacement at the inventory cost basis of the goods replaced.

(D) Election Irrevocable.-An election by the taxpayer to have the provisions of this paragraph apply, once made, shall be irrevocable and shall be binding for the year of the involuntary liquidation and for all determinations for prior and subsequent taxable years insofar as they are related to the year of liquidation or replacement.

(E) Adjustment in Certain Cases.-If the adjustments specified in subparagraph (A) are, with respect to any taxable year, prevented, on the date of the filing of the income tax return of the taxpayer for the year of the replacement, or within three years from such date, by any provision or rule of law (other

* * *

than this subparagraph and other than section 3761, relating to
compromises), such adjustments shall nevertheless be made if,
in respect of the taxable year for which the adjustment is
sought, a notice of deficiency is mailed or a claim for refund is
filed, as the case may be, within three years after the date of the
filing of the income tax return for the year of replacement. If,
at the time of the mailing of such notice of deficiency or the filing
of such claim for refund, the adjustment is so prevented, then
the amount of the adjustment authorized by this paragraph shall
be limited to the increase or decrease of the tax imposed by this
chapter
previously determined for such taxable year
which results solely from the effect of subparagraph (A), and such
amount shall be assessed and collected, or credited or refunded,
in the same manner as if it were a deficiency or an overpayment,
as the case may be, for such taxable year and as if, on the date of
the filing of the income tax return for the year of the replacement,
three years remain before the expiration of the periods of limita-
tion upon assessment or the filing of claim for refund for the
taxable year. The tax previously determined shall be ascer-
tained in accordance with section 734 (d). The amount to be
assessed and collected under this paragraph in the same manner
as if it were a deficiency or to be credited or refunded in the same
manner as if it were an overpayment shall not be diminished by
any credit or set-off based upon any item, inclusion, deduction,
credit, exemption, gain, or loss, other than one resulting from the
effect of subparagraph (A). Such amount, if paid, shall not be
recovered by a claim or suit for refund or suit for erroneous refund
based upon any item, inclusion, deduction, credit, exemption,
gain, or loss, other than one resulting from the effect of sub-
paragraph (A).

(e) DISTRIBUTIONS BY CORPORATIONS.-Distributions by corporations shall be taxable to the shareholders as provided in section 115. (f) DETERMINATION OF GAIN OR LOSS.-In the case of a sale or other disposition of property, the gain or loss shall be computed as provided in section 111.

(g) GROSS INCOME FROM SOURCES WITHIN AND WITHOUT UNITED STATES.

For computation of gross income from sources within and without the United States, see section 119.

(h) FOREIGN PERSONAL HOLDING COMPANIES.

For provisions relating to gross income of foreign personal holding companies and of their shareholders, see section 334.

(i) CONSENT DIVIDENDS.

For inclusion in gross income of amounts specified in shareholders? consents, see section 28.

(j) INCOME FROM MORTGAGES MADE OR OBLIGATIONS ISSUED BY JOINT STOCK LAND BANKS.

For taxable status of income derived from mortgages made or obligations issued by joint stock land banks, see section 3799.

(k) ALIMONY, ETC., INCOME.-In the case of a wife who is divorced or legally separated from her husband under a decree of divorce or of separate maintenance, periodic payments (whether or not made at regular intervals) received subsequent to such decree in discharge of,