$3,591,000 upon surtax net incomes of $5,000,000; and upon surtax net incomes in excess of $5,000,000, 75 per centum in addition of such excess.

(c) TAX ON PERSONAL HOLDING COMPANIES.-For surtax on personal holding companies, see section 351.

(d) AVOIDANCE OF SURTAXES BY INCORPORATION. For surtax on corporations which accumulate surplus to avoid surtax on stockholders, see section 102.

SEC. 13. NORMAL TAX ON CORPORATIONS.

(a) DEFINITION.-As used in this title the term “normal-tax net income" means the net income minus the sum of—

(1) INTEREST ON OBLIGATIONS OF THE UNITED STATES AND ITS INSTRUMENTALITIES.-The credit provided in section 26 (a).

(2) DIVIDENDS RECEIVED.—The credit provided in section 26 (b). Such credit shall not be allowed in the case of a mutual investment company, as defined in section 48.

(3) DIVIDENDS PAID.-In the case of a mutual investment company the credit provided in section 27, computed without the benefit of subsection (b) thereof (relating to dividend carry-over).

(a) (b) RATE OF TAX IMPOSITION OF TAX.-There shall be levied, collected, and paid for each taxable year upon the normal-tax net income (in excess of the eredit against net income provided in section 26) of every corporation, a normal tax as follows:

Upon normal-tax net incomes not in excess of $2,000, 121 8 per centum.

$250 $160 upon normal-tax net incomes of $2,000; and upon normal-tax net incomes in excess of $2,000 and not in excess of $15,000, 13 11 per centum in addition of such excess.

$1,940 $1,590 upon normal-tax net incomes of $15,000; and upon normal-tax net incomes in excess of $15,000 and not in excess of $40,000, 14 13 per centum in addition of such excess.

$5,440 $4,840 upon normal-tax net incomes of $40,000; and upon normal-tax net incomes in excess of $40,000, 15 per centum in addition of such excess.

NOTE.-Section 102 (a) of the Revenue Act of 1935, approved August 30, 1935, amended the above subsection of the 1934 Act. Section 107 of the 1935 Act provided that the amendment should apply only in the case of taxable years beginning after December 31, 1935. The above subsection of the 1934 Act, prior to its amendment by the 1935 Act, read as follows:

(a) RATE OF TAX.-There shall be levied, collected, and paid for each taxable year upon the net income of every corporation, a tax of 1334 per centum of the amount of the net income in excess of the credit against net income provided in section 26.

b) (c) EXEMPT CORPORATIONS.-For corporations exempt from tax taxation under this title, see section 101. (e) TAX ON PERSONAL HOLDING COMPANIES. For surtax on personal holding companies, see section 351.

(d) IMPROPER ACCUMULATION OF SURPLUS. For surtax on corporations which accumulate surplus to avoid surtax on stockholders, see section 102.

(d) BANKS AND TRUST COMPANIES.-For rate of tax on certain banks and trust companies, see section 104.

SEC. 14. SURTAX ON UNDISTRIBUTED PROFITS.

(a) DEFINITIONS.—As used in this title—

(1) The term "adjusted net income" means the net income minus the sum of—

(A) The normal tax imposed by section 13.

(B) The credit provided in section 26 (a), relating to interest on certain obligations of the United States and Government corporations.

(C) In the case of a holding company affiliate (as defined in section 2 of the Banking Act of 1933), the amount allowed as a credit under section 26 (d).

(D) In the case of a national mortgage association created under Title III of the National Housing Act, the amount allowed as a credit under section 26 (e).

(2) The term "undistributed net income" means the adjusted net income minus the sum of the dividends paid

credit provided in section 27 and the credit provided in section 26 (c), relating to contracts restricting dividends.

(b) IMPOSITION OF TAX.-There shall be levied, collected, and paid for each taxable year upon the net income of every corporation a surtax equal to the sum of the following, subject to the application of the specific credit as provided in subsection (c):

7 per centum of the portion of the undistributed net income which is not in excess of 10 per centum of the adjusted net income.

12 per centum of the portion of the undistributed net income which is in excess of 10 per centum and not in excess of 20 per centum of the adjusted net income.

17 per centum of the portion of the undistributed net income which is in excess of 20 per centum and not in excess of 40 per centum of the adjusted net income.

22 per centum of the portion of the undistributed net income which is in excess of 40 per centum and not in excess of 60 per centum of the adjusted net income.

27 per centum of the portion of the undistributed net income which is in excess of 60 per centum of the adjusted net income.

(c) ADJUSTED NET INCOME LESS THAN $50,000.

(1) SPECIFIC CREDIT.—If the adjusted net income is less than $50,000 there shall be allowed a specific credit equal to the portion of the undistributed net income which is in excess of 10 per centum of the adjusted net income and not in excess of $5,000, such credit to be applied as provided in paragraph (2).

(2) APPLICATION OF SPECIFIC CREDIT.—If the corporation is entitled to a specific credit, the tax shall be equal to the sum of the following:

(A) A tax computed under subsection (b) upon the amount of the undistributed net income reduced by the amount of the specific credit, plus

(B) 7 per centum of the amount of the specific credit.

(d) EXEMPTION FROM SURTAX.-The following corporations shall not be subject to the surtax imposed by this section:

(1) Banks as defined in section 104.

(2) Domestic corporations which for any portion of the taxable year are in bankruptcy under the laws of the United States, or are insolvent and in receivership in any court of the United States or of any State, Territory, or the District of Columbia.

(3) Insurance companies subject to the tax imposed under section 201, 204, or 207.

(4) Foreign corporations.

(5) Corporations which, by reason of deriving a large portion of their gross income from sources within a possession of the United States, are entitled to the benefits of section 251.

(6) Corporations organized under the China Trade Act, 1922.

(7) Joint Stock Land Banks organized under the Federal Farm Loan Act, as amended.

(e) EXEMPT CORPORATIONS.-For corporations exempt from taxation under this title, see section 101.

(f) TAX ON PERSONAL HOLDING COMPANIES.—For surtax on personal holding companies, see section 351. (g) IMPROPER ACCUMULATION OF SURPLUS.—For surtax on corporations which accumulate surplus to avoid surtax on stockholders, see section 102.

Part II-Computation of Net Income

SEC. 21. NET INCOME.

"Net income" means the gross income computed under section 22, less the deductions allowed by section 23.

SEC. 22. GROSS INCOME.

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(a) GENERAL DEFINITION.-"Gross income" cludes gains, profits, and income derived from salaries, wages, or compensation for personal service, of what

ever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. In the case of Presidents of the United States and judges of courts of the United States taking office after June 6, 1932, the compensation received as such shall be included in gross income; and all Acts fixing the compensation of such Presidents and judges are hereby amended accordingly.

(b) EXCLUSIONS FROM GROSS INCOME.-The following items shall not be included in gross income and shall be exempt from taxation under this title:

(1) LIFE INSURANCE.-Amounts received under a life insurance contract paid by reason of the death of the insured, whether in a single sum or otherwise (but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income);

(2) ANNUITIES, ETC.-Amounts received (other than amounts paid by reason of the death of the insured and interest payments on such amounts and other than amounts received as annuities) under a life insurance or endowment contract, but if such amounts (when added to amounts received before the taxable year under such contract) exceed the aggregate premiums or consideration paid (whether or not paid during the taxable year) then the excess shall be included in gross income. Amounts received as an annuity under an annuity or endowment contract shall be included in gross income; except that there shall be excluded from gross income the excess of the amount received in the taxable year over an amount equal to 3 per centum of the aggregate premiums or consideration paid for such annuity (whether