of the outstanding stock of the corporation is owned, directly or indirectly, by or for an individual entitled to the use of the property; whether such right is obtained directly from the corporation or by means of a sublease or other arrangement.

Sec. 502. (g) Rents.-Rents, unless constituting 50 per centum or more of the gross income. For the purposes of this subsection the term "rents" means compensation, however designated, for the use of, or right to use, property, and the interest on debts owed to the corporation, to the extent such debts represent the price for which real property held primarily for sale to customers in the ordinary course of its trade or business was sold or exchanged by the corporation; but does not include amounts constituting personal holding company income under subsection (f).

Sec. 502. (h) Mineral, oil, or gas royalties.— Mineral, oil, or gas royalties, unless (1) constituting 50 per centum or more of the gross income, and (2) the deductions allowable under Section 23 (a) (relating to expenses) other than compensation for personal services rendered by shareholders, constitute 15 per centum or more of the gross income.

Section 502, supra, originated 1934 as Sec. 351 (b) (1), R. A. of 1934.

For any amendments prior to 1944, see-
Eighth Edition, p. 425,

Ninth Edition, p. 668.

Sec. 503. Stock ownership.

Sec. 503. (a) Constructive ownership.-For the purpose of determining whether a corporation is a personal holding company, insofar as such determination is based on stock ownership under section 501 (a) (2), section 502 (e), or section 502 (f)—

Sec. 503. (a) (1) Stock not owned by individual.-Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by its shareholders, partners, or beneficiaries.

Sec. 503. (a) (2) Family and partnership ownership.-An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family or by or for his partner. For the purposes of this paragraph the family of an individual includes only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.

Sec. 503. (a) (3) Options.-If any person has an option to acquire stock such stock shall be considered as owned by such person. For the purposes of this paragraph an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock.

Sec. 503. (a) (4) Application of family-partnershin and option rules.-Paragraphs (2) and (3) shall be applied—

(A) For the purposes of the stock ownership requirement provided in section 501 (a) (2), if, but

only if, the effect is to make the corporation a personal holding company;

(B) For the purposes of section 502 (e) (relating to personal service contracts), or of section 502 (f) (relating to the use of property by shareholders), if, but only if, the effect is to make the amounts therein referred to includible under such subsection as personal holding company income.

Sec. 503. (a) (5) Constructive ownership as actual ownership.-Stock constructively owned by a person by reason of the application of paragraph (1) or (3) shall, for the purpose of applying paragraph (1) or (2), be treated as actually owned by such person; but stock constructively owned by an individual by reason of the application of paragraph (2) shall not be treated as owned by him for the purpose of again applying such paragraph in order to make another the constructive owner of such stock.

Sec. 503. (a) (6) Option rule in lieu of family and partnership rule.-If stock may be considered as owned by an individual under either paragraph (2) or (3) it shall be considered as owned by him under paragraph (3).

Sec. 503. (b) Convertible securities.-Outstanding securities convertible into stock (whether or not convertible during the taxable year) shall be considered as outstanding stock

Sec. 503. (b) (1) For the purpose of the stock ownership requirement provided in section 501 (a) (2), but only if the effect of the inclusion of all such securities is to make the corporation a personal holding company;

Sec. 503. (b) (2) For the purpose of section 502 (e) (relating to personal service contracts), but only if the effect of the inclusion of all such securities is to make the amounts therein referred to includible under such subsection as personal holding company income; and

Sec. 503. (b) (3) For the purpose of section 502 (f) (relating to the use of property by shareholders), but only if the effect of the inclusion of all such securities is to make the amounts therein referred to includible under such subsection as personal holding company income.

The requirement in paragraphs (1), (2), and (3) that all convertible securities must be included if any are to be included shall be subject to the exception that, where some of the outstanding securities are convertible only after a later date than in the case of others, the class having the earlier conversion date may be included although the others are not included, but no convertible securities shall be included unless all outstanding securities having a prior conversion date are also included.

Section 503, supra, originated 1934 as Sec. 351 (b) (1), R. A. of 1934.

For any amendments prior to 1944, see

Eighth Edition, p. 430,
Ninth Edition, p. 672.

Sec. 504. Undistributed subchapter A net in

come.

For the purposes of this subchapter the term “undistributed subchapter A net income" means the subchapter A net income (as defined in section 505) minus

Sec. 504 (a) The amount of the dividends paid credit provided in section 27 (a) without the benefit of paragraphs (3) and (4) thereof (computed without its reduction under section 27 (b) (1), by the amount of the credit provided in section 26 (a), relating to interest on certain obligations of the United States and Government corporations); but, in the computation of the dividends paid credit for the purposes of this subchapter, the amount allowed under subsection (c) of this section or of section 405 of the Revenue Act of 1938 in the computation of the tax under this subchapter or under Title 1A of the Revenue Act of 1938 for any preceding taxable year beginning after Dec. 31, 1937 shall be considered as a dividend paid in such preceding taxable year and not in the year of distribution;

Sec. 504. (b) Amounts used or irrevocably set aside to pay or to retire indebtedness of any kind incurred prior to January 1, 1934, if such amounts are reasonable with reference to the size and terms of such indebtedness;

Sec. 504. (c) Dividends paid after the close of the taxable year and before the 15th day of the third month following the close of the taxable year, if claimed under this subsection in the return, but only to the extent to which such dividends would have been includible in the computation of the basic surtax credit for the taxable year if distributed during such taxable year; but the amount allowed under this subsection shall not exceed either:

Sec. 504. (c) (1) The undistributed subchapter A net income for the taxable year computed without regard to this subsection; or

Sec. 504. (c) (2) 10 per centum of the sum of— (A) The dividends paid during the taxable year (reduced by the amount allowed under this subsection in the computation of the tax under this subchapter for the taxable year preceding the taxable year or, in the case of a taxable year beginning in 1939, by the amount allowed under section 405 (c) of the Revenue Act of 1938 in the computation of the tax under Title 1A of such Act for a taxable year beginning prior to January 1, 1939); and

(B) The consent dividends credit for the taxable year.

Sec. 504. (d) Amounts distributed before January 1, 1944, in redemption of preferred stock outstanding before January 1, 1934 (including any preferred stock issued after January 1, 1934, in lieu of such previously outstanding preferred stock) if such distributions are made by a corporation the aggregate of whose gross sales and gross receipts arising from manufacturing, commercial, processing, and service operations during the four-year period immediately

before January 1, 1934, exceeded the aggregate of its gross receipts from dividends, interest, royalties, annuities, and gains from the sale or exchange of stock or securities during such period.

Section 504, supra, originated 1934 as Sec. 351
(b) (2), R. A. of 1934.

For any amendments prior to 1944, see-
Eighth Edition, p. 434,

Ninth Edition, p. 676.

Sec. 505. Subchapter A net income.

For the purposes of this subchapter the term "Subchapter A Net Income" means the net income with the following adjustments:

Sec. 505. (a) Additional deductions.-There shall be allowed as deductions—

Sec. 505. (a) (1) Federal income, war-profits, and excess-profits taxes paid or accrued during the taxable year to the extent not allowed as a deduction under section 23; but not including the tax imposed by section 102, section 500, or a section of a prior income-tax law corresponding to either of such sections.

Sec. 505. (a) (2) In lieu of the deduction allowed by section 23 (q), contributions or gifts, payment of which is made within the taxable year to or for the use of donees described in section 23 (q) for the purposes therein specified, to an amount which does not exceed 15 per centum of the taxpayer's net income, computed without the benefit of this paragraph and section 23 (q), and without the deduction of the amount disallowed under subsection (b) of this section. "For the purposes of the preceding sentence, payment of any contribution or gift shall be considered as made within the taxable year if and only if it is considered for the purposes of section 23 (q) as made within such year."

Sec. 505 (a), I. R. C., supra, amended by Sec. 3 (b), H. R. 5268, Act of Oct. 25, 1949 by adding language in italics.

Retroactivity

Sec. 3 (c) of said Act makes amendment applicable to taxable years beginning after Dec. 31, 1942. See fn. 6a following Sec. 102 (d) (1) (B), I. R. C., supra, with reference to applicability of amendment in case of election.

Sec. 505. (a) (3) In the case of a corporation organized prior to January 1, 1936, to take over the assets and liabilities of the estate of a decedent, amounts paid in liquidation of any liability of the corporation based on the liability of the decedent to make contributions or gifts to or for the use of donees described in section 23 (o) for the purposes therein specified, to the extent such liability of the decedent existed prior to January 1, 1934. No deduction shall be allowed under paragraph (2) of this subsection for a taxable year for which a deduction is allowed under this paragraph.

Sec. 505. (b) Deductions not allowed.-The aggregate of the deductions allowed under section 23 (a), relating to expenses, and section 23 (1), relating to depreciation, which are allocable to the oper

ation and maintenance of property owned or operated by the corporation, shall be allowed only in an amount equal to the rent or other compensation received for the use of, or the right to use, the property, unless it is established (under regulations prescribed by the Commissioner with the approval of the Secretary) to the satisfaction of the Commissioner:

Sec. 505. (b) (1) That the rent or other compensation received was the highest obtainable, or, if none was received, that none was obtainable;

Sec. 505. (b) (2) That the property was held in the course of a business carried on bona fide for profit; and

Sec. 505. (b) (3) Either that there was reasonable expectation that the operation of the property would result in a profit, or that the property was necessary to the conduct of the business.

Sec. 505. (c) Net loss carry-over disallowed.— The deduction for net operating losses provided in section 23 (s) shall not be allowed.

Sec. 505. (d) 1941 capital loss carry-over denied.-The net income shall be computed without regard to section 117 (e) (2).

Sec. 505. (e) Income not placed on annual basis.-The net income shall be computed without regard to section 47 (c).

Section 505, supra, originated 1934 as Sec. 351 (b) (3), R. A. of 1934.

For any amendments prior to 1944, see

Eighth Edition, p. 438,

Ninth Edition, p. 682.

Sec. 506. Deficiency dividends—Credits and refunds.

Sec. 506. (a) Credit against unpaid deficiency. -If the amount of a deficiency with respect to the tax imposed by this subchapter for any taxable year has been established

Sec. 506. (a) (1) by a decision of the Board of Tax Appeals which has become final; or

Sec. 506. (a) (2) by a closing agreement made under section 3760; or

Sec. 506. (a) (3) by a final judgment in a suit to which the United States is a party;

then a deficiency dividend credit shall be allowed against the amount of the deficiency so established and all interest, additional amounts, and additions to the tax provided by law not paid on or before the date when claim for a deficiency dividend credit is filed under subsection (d). The amount of such credit shall be 65 per centum of the amount of deficiency dividends, as defined in subsection (c), not in excess of $2,000, plus 75 per centum of the amount of such dividends in excess of $2,000; but such credit shall not exceed the portion of the deficiency so established which is not paid on or before the date of the closing agreement, or the date

the decision of the Board or the judgment becomes final, as the case may be. Such credit shall be allowed as of the date the claim for deficiency diviIdend credit is filed.

Sec. 506. (b) Credit or refund of deficiency paid.-When the Commissioner has determined that there is a deficiency with respect to the tax imposed by this subchapter and the corporation has paid any portion of such asserted deficiency and it has been established

(1) by a decision of the Board of Tax Appeals which has become final; or

(2) by a closing agreement made under section 3760; or

(3) by a final judgment in a suit against the United States for refund

(A) if such suit is brought within six months after the corporation became entitled to bring suit, and

(B) if claim for refund was filed within six months after the payment of such amount;

that any portion of the amount so paid was the whole or a part of a deficiency at the time when paid, then there shall be credited or refunded to the corporation an amount equal to 65 per centum of the amount of deficiency dividends not in excess of $2,000, plus 75 per centum of the amount of such dividends in excess of $2,000, but such credit or refund shall not exceed the portion so paid by the corporation. Such credit or refund shall be made as provided in section 322 but without regard to subsection (b) or subsection (c) thereof. No interest shall be allowed on such credit or refund. No credit or refund shall be made under this subsection with respect to any amount of tax paid after the date of the closing agreement, or the date the decision of the Board or the judgment becomes final, as the case may be.

Sec. 506. (c) Deficiency dividends.

Sec. 506. (c) (1) Definition.-For the purposes, of this subchapter, the term "deficiency dividends" means the amount of the dividends paid, on or after the date of the closing agreement or on or after the date the decision of the Board or the judgment becomes final, as the case may be, and prior to filing claim under subsection (d), which would have been includible, in the computation of the basic surtax credit for the taxable year with respect to which the deficiency was asserted if distributed during such taxable year. No dividends shall be considered as deficiency dividends for the purposes of allowance of credit under subsection (a) unless (under regulations prescribed by the Commissioner with the approval of the Secretary) the corporation files, within thirty days after the date of the closing agreement, or the date upon which the decision of the Board or judgment becomes final, as the case may be, notification (which specifies the amount of the credit intended to be claimed) of its intention to have the dividends so considered.

(A) FOR TAXABLE YEAR IN WHICH PAID.-Deficiency dividends paid in any taxable year (to the extent of the portion thereof with respect to which the credit under subsection (a) or the credit or refund under subsection (b), or both, of this section or section 407 of the Revenue Act of 1938, are allowed) shall be subtracted from the basic surtax credit for such year, but only for the purpose of computing the tax under this subchapter for such year and succeeding years.

(B) FOR PRIOR TAXABLE YEAR.-Deficiency dividends paid in any taxable year (to the extent of the portion thereof with respect to which the credit under subsection (a), or the credit or refund under subsection (b), or both of this section or section 407 of the Revenue Act of 1938, are allowed) shall not be allowed under section 504 (c) in the computation of the tax under this subchapter for any taxable year preceding the taxable year in which paid.

Sec. 506. (d) Claim required.-No deficiency dividends credit shall be allowed under subsection (a) and no credit or refund shall be made under subsection (b) unless (under regulations prescribed by the Commissioner with the approval of the Secretary) claim therefor is filed within sixty days after the date of the closing agreement, or the date upon which the decision of the Board or judgment becomes final, as the case may be.

Sec. 506. (e) Suspension of statute of limitations and stay of collection.

Sec. 506. (e) (1) Suspension of running of statute.-If the corporation files a notification, as provided in subsection (c), to have dividends considered as deficiency dividends, the running of the statute of limitations provided in section 275 or 276 on the making of assessments and the bringing of distraint or a proceeding in court for collection, in respect of the deficiency and all interest, additional amounts, and additions to the tax provided by law, shall be suspended for a period of two years after the date of the filing of such notification.

Sec. 506. (e) (2) Stay of collection.-In the case of any deficiency with respect to the tax imposed by this subchapter established as provided in subsection (a)

(A) The collection of the deficiency and all interest, additional amounts, and additions to the tax provided for by law shall, except in cases of jeopardy, be stayed until the expiration of thirty days. after the date of the closing agreement, or the date upon which the decision of the Board or judgment becomes final, as the case may be.

(B) If notification has been filed, as provided in subsection (c), the collection of such part of the deficiency as is not in excess of either the credit allowable under subsection (a) or the amount which, in the notification, is specified as intended to be claimed as credit, shall, except in cases of jeopardy, be stayed until the expiration of sixty days after the

date of the closing agreement, or the date upon which the decision of the Board or judgment becomes final, as the case may be.

(C) If claim for deficiency dividend credit is filed under subsection (d), the collection of such part of the deficiency as is not in excess of either the credit allowable under subsection (a) or the amount claimed, shall be stayed until the date the claim for credit is disallowed (in whole or in part), and if disallowed in part collection shall be made only of the part disallowed.

No distraint or proceeding in court shall be begun for the collection of an amount the collection of which is stayed under subparagraph (A), (B), or (C) during the period for which the collection of such amount is stayed.

Sec. 506. (f) Credit or refund denied if fraud, etc.-No deficiency dividend credit shall be allowed under subsection (a) and no credit or refund shall be made under subsection (b) if the closing agreement, decision of the Board, or judgment contains a finding that any part of the deficiency is due to fraud with intent to evade tax, or to failure to file the return under this subchapter within the time prescribed by law or prescribed by the Commissioner in pursuance of law, unless it is shown that such failure to file is due to reasonable cause and not due to willful neglect.

Sec. 506. (g) Rate for taxable years 1939, 1940, and 1941.-If the deficiency is established or determined for a taxable year which begins after December 31, 1939, and does not begin after December 31, 1941, the rates under subsections (a) and (b) used in determining the amount of the credit or refund shall be 712 per centum in lieu of 65 per centum and 822 per centum in lieu of 75 per centum.

Sec. 506. (h) Rate for taxable years after 1941. -If the deficiency is established or determined for a taxable year which begins after December 31, 1941, the rates under subsections (a) and (b) used in determining the amount of the credit or refund shall be 75 per centum in lieu of 65 per centum and 85 per centum in lieu of 75 per centum.

Sec. 506. (j) Additional credit or refund for prior taxable year.

Sec. 506. (j) (1) Election to have a certain dividend considered as a deficiency dividend.— If a corporation was a personal holding company for any taxable year beginning after December 31, 1936, and prior to January 1, 1942, and its adjusted net income, Title 1A net income or Subchapter A net income, in the case of a tax imposed by Titles 1A of the Revenue Acts of 1936 and 1938, or Subchapter A of the Internal Revenue Code, as the case may be, exceeds the sum of (A) the earnings and profits accumulated after February 28, 1913, as of the beginning of the taxable year and (B) the earnings and profits of the taxable year (computed as of the close of the taxable year without diminution by

reason of any distributions made during the taxable year) and if prior to the date of enactment of the Revenue Act of 1942, the corporation paid all or any portion of the tax imposed by Title 1A or Subchapter A for any such taxable year or years then the corporation may elect, within six months after the date of enactment of the Revenue Act of 1942 to have the amount of a dividend paid within such six-month period considered as a deficiency dividend. Such election must be made by the filing of a claim (under regulations prescribed by the Commissioner with the approval of the Secretary) within such six-month period and after the payment of the dividend, specifying the taxable year or years with respect to which such dividend applies, setting forth the amount of the dividend to be apportioned to each taxable year, and claiming the benefit of this subsection by reason of such dividend.

Sec. 506. (j) (2) Effect of election.-If the corporation exercises the election authorized under paragraph (1) of this subsection

(A) The credit or refund shall be computed, and credited or refunded without interest, as provided in subsection (b) and at the rates provided therein or in subsection (g), as the case may be, but shall be subject to the limitations in subsection (f). In any case where a dividend is apportioned to more than one taxable year the credit or refund shall be determined for each taxable year on the basis of the amount of the dividend apportioned thereto; and

(B) The dividends paid credit for the taxable year in which paid and for a prior taxable year or years shall be determined as provided in subsection (c) (2).

Section 506, supra, originated 1938 as Sec. 407,
R. A. of 1938.

For any amendments prior to 1944, see

Eighth Edition, p. 440,

Ninth Edition, p. 686.

Sec. 507. Meaning of terms used.

Sec. 507. (a) General rule.-The terms used in this subchapter shall have the same meaning as when used in chapter 1.

Sec. 507. (b) Insurance companies other than life or mutual.-Notwithstanding subsection (a), the term "gross income", as used in this subchapter, means, in the case of an insurance company other than life or mutual, the gross income, as defined in section 204 (b) (1), increased by the amount of losses incurred, as defined in section 204 (b) (6), and the amount of expenses incurred, as defined in section 204 (b) (7), and decreased by the amount deductible under section 204 (c) (7) (relating to tax-free interest).

Sec. 508. Administrative provisions.

All provisions of law (including penalties) applicable in respect of the taxes imposed by chapter 1, shall insofar as not inconsistent with this subchapter, be applicable in respect of the tax imposed by this subchapter, except that the provisions of section 131 shall not be applicable.

Sec. 509. Improper accumulation of surplus. For surtax on corporations which accumulate surplus to avoid surtax on shareholders, see section 102.

Sec. 510. Foreign personal holding companies.
For provisions relating to foreign personal holding
companies and their shareholders, see Supplement
P of chapter 1.

Sections 507, 508, 509, 510, supra, originated 1934
as Secs. 351 (b) (4), 351 (c), 351 (d), 351 (e),
respectively, R. A. of 1934.

For any amendments prior to 1944, see-
Eighth Edition, pp. 444, 446,
Ninth Edition, pp. 698, 700.

Sec. 511. Publicity of returns.

For provisions with respect to publicity of returns under this subchapter, see subsection (a) (2) of section 55.

Repeal of Declared Value Excess-Profits Tax See note following Sec. 605, post, with respect to repeal of Secs. 600-605.

Sec. 600. Rate of tax.

Sec. 600 (a) In General.—

If any corporation is taxable under section 1200 with respect to any year ending June 30, there shall be imposed upon its net income for the income-tax taxable year ending after the close of such year, an declared value excess-profits tax equal to the sum of the following:

60 per centum of such portion of its net income for such income-tax taxable year as is in excess of 10 per centum and not in excess of 15 per centum of the declared value;

1310 per centum of such portion of its net income for such income-tax taxable year as is in excess of 15 per centum of the declared value.

Sec. 600. (b) Alternative tax.-If the net income for the taxable year includes any amount on account of war loss recoveries under section 127 (c), then, in lieu of the tax computed under subsection (a), the tax shall be a tax computed as follows:

Sec. 600. (b) (1) An amount computed under subsection (a), after excluding from net income the amount of the war loss recoveries, plus

Sec. 600. (b) (2) One and one-quarter per centum of the amount of the war loss recoveries included in the net income or of such portion of the net income as would be subject to the tax imposed by subsection (a) in the absence of this subsection, which ever is the lesser.

Sec. 600, I. R. C., supra, amended by Sec. 203, R. A. of 1945, by inserting before the first paragraph thereof "(a) In General-" and by adding subsection (b), supra.. Sec. 203 of said Act makes amend