tained, the additional exemption applies. If, moreover, through force of circumstances a parent is obliged to maintain his dependent children with relatives or in a boarding house while he lives elsewhere, the additional exemption may still apply. If, however, without necessity the dependent continuously makes his home elsewhere, his benefactor is not the head of a family, irrespective of the question of support. A resident alien with children abroad is not thereby entitled to credit as the head of a family. As to the amount of the exemption, see article 25-3.

ART. 25-5. Personal exemption of married person.-In the case of a married man or married woman the joint exemption replaces the individual exemption only if the man lives with his wife or the woman lives with her husband. 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 Act 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 husband at a sanatorium or asylum on account 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 within the meaning of the Act, irrespective of their personal relations. A resident alien with a wife residing abroad is not entitled to the joint exemption.

ART. 25-6. Credit for dependents.-A taxpayer, other than a nonresident alien who is not a resident of Canada or Mexico (see section 213), receives a credit of $400 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 18, or (b) incapable of self-support because defective.

The credit 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 receive half or more of their support from a trust fund or other separate source is not entitled to the credit.

ART. 25-7. Personal exemption and credit for dependents where status changes. If the status of the taxpayer changes during the taxable year, the personal exemption allowed by section 25 (b) (1) to a single person, a head of a family, or a married person living with husband or wife, and the credit for dependents allowed by section 25 (b)(2) will be apportioned according to the number of months during which the taxpayer occupied each status. A taxpayer not having the status

of a head of a family or the status of a married person living with husband or wife shall be considered as having the status of a single person. For the purpose of the apportionment of the personal exemption and credit for dependents a fractional part of a month shall be disregarded unless it amounts to more than half a month, in which case it shall be considered as a month. In general the personal exemption and credit for dependents allowable to any taxpayer will be the sum of the amounts apportioned to the several periods of the taxable year during which each status was occupied.

Example (1): A, who had been single during the preceding months of 1934, married B on July 20 and lived with her during the remainder of the year. If a joint return is made by A and B on the calendar year basis for 1934, the personal exemption will be $2,208.33; that is, z of $1,000 for A while single, plus of $1,000 for B while single, plus of $2,500 for the period during which they were married. If separate returns are made by A and B on the calendar year basis for 1934, each may claim a personal exemption of $1,104.17; that is, 2 of $1,000, plus 1⁄2 of 1⁄2 of $2,500. In the latter case, however, the joint exemption of 1⁄2 of $2,500 may by agreement be taken either by A or B or divided between them in any proportion.

2

Example (2): A and B, who were heads of families during the first six months of 1934, were married on July 1, 1934, and lived together during the remainder of the year. If a joint return is made by A and B on the calendar year basis for 1934, the personal exemption will be $3,750; that is, 12 of $2,500 for A while the head of a family, plus 2 of $2,500 for B while the head of a family, plus 1⁄2 of $2,500 for the period during which they were married and living together. If separate returns are made by A and B on the calendar year basis for 1934, each may claim a personal exemption of $1,875; that is, 1⁄2 of $2,500, plus 1⁄2 of 1⁄2 of $2,500. In the latter case, however, the joint exemption of 11⁄2 of $2,500 may by agreement be taken either by A or B or divided between them in any proportion.

Example (3): A and B were married and living together until November 30, 1934, when B, the wife, died. They had no dependents. The executor or administrator in making a return for B, may claim a personal exemption of $1,229.16; that is, 12 of 11 of $2,500, or $1,145.83, for the period from the beginning of the taxable year to the date of the decedent's death, plus of $1,000, or $83.33, for the period from the date of the decedent's death to the close of the taxable year. If A, the surviving spouse, makes a return for 1934 on the calendar year basis, he may claim a personal exemption of $1.229.16; that is, 11⁄2 of 13 of $2,500, or $1,145.83, plus of $1,000, or $83.33. However, the combined personal exemption of A and

B for the period during which they were married and living together, that is, 11 of $2,500, or $2,291.67, may by agreement be taken either by A, or by B's executor or administrator in behalf of B, or divided between them in any proportion.

Example (4): A furnished the chief support of a child under 18 years of age until the death of the child on June 20, 1934. If A makes a return on the calendar year basis for 1934, he is entitled, in addition to the personal exemption allowed under section 25 (b) (1), to a credit for dependents in the amount of $200; that is, 1⁄2 of $400. Example (5): A and B were married and living together until June 30, 1934, when A, the husband, died. Prior to the date of death, A was the chief support of a child 10 years of age. B, the surviving spouse, was the chief support of the child during the remainder of the year. If B makes a return for 1934 on the calendar year basis, she is entitled, in addition to a personal exemption, to a credit for dependents in the amount of $200; that is, of $400. The executor or administrator in making a return for A is entitled, in addition to a personal exemption, to a credit for dependents in the amount of $200; that is, 11⁄2 of $400.

SEC. 26. CREDITS OF CORPORATION AGAINST NET INCOME.

For the purpose only of the tax imposed by section 13 there shall be allowed as a credit against net income the amount received as interest upon obligations of the United States or of corporations organized under Act of Congress which is allowed to an individual as a credit for purposes of normal tax by section 25 (a) (2) or (3). ART. 26-1. Credit allowed corporations.-A corporation is entitled to a credit against net income for the purpose of the tax imposed by section 13 of the amount received as interest upon obligations of the United States or of corporations organized under Act of Congress which is included in gross income under section 22 and which is allowed to an individual as a credit for purposes of the normal tax by section 25(a) (2) or (3). Accordingly, a corporation is not required to pay on interest received upon such obligations, the tax imposed by section 13.

As to the allowance of credit against net income in the case of foreign corporations, see section 233.

CHAPTER VI

CREDITS AGAINST TAX

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.

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.

SEC. 33. CREDIT FOR OVERPAYMENTS.

For credit against the tax of overpayments of taxes imposed by this title for other taxable years, see section 322.

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CHAPTER VII

ACCOUNTING PERIODS AND METHODS

Part IV-Accounting Periods and Methods of Accounting

SEC. 41. GENERAL RULE.

The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. If the taxpayer's annual accounting period is other than a fiscal year as defined in section 48 or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year. (For use of inventories, see section 22 (c).)

ART. 41-1. Computation of net income.-Net income must be computed with respect to a fixed period. Usually that period is 12 months and is known as the taxable year. Items of income and of expenditures which as gross income and deductions are elements in the computation of net income need not be in the form of cash. It is sufficient that such items, if otherwise properly included in the computation, can be valued in terms of money. The time as of which any item of gross income or any deduction is to be accounted for must be determined in the light of the fundamental rule that the computation shall be made in such a manner as clearly reflects the taxpayer's income. If the method of accounting regularly employed by him in keeping his books clearly reflects his income, it is to be followed with respect to the time as of which items of gross income and deductions are to be accounted for. (See articles 42-1 to 42-3.) If the taxpayer does not regularly employ a method of accounting which clearly reflects his income, the computation shall be made in such manner as in the opinion of the Commissioner clearly reflects it.

ART. 41-2. Bases of computation and changes in accounting methods.Approved standard methods of accounting will ordinarily be regarded as clearly reflecting income. A method of accounting will not, however, be regarded as clearly reflecting income unless all items of gross income and all deductions are treated with reasonable consistency. See section 48 for definitions of "paid or accrued" and "paid or incurred." All items of gross income shall