(b) Dividends received from another personal holding company amount to $25,000.

(c) Federal income tax (including the surtax under section 14 of the Act but not including excess-profits tax imposed by section 106 of the Revenue Act of 1935) aggregates $15,000.

(d) Contributions or gifts not otherwise allowed as a deduction, to or for the use of donees described in section 23 (o) for the purposes therein specified, amount to $1,000.

(e) No gains from sales or exchanges of capital assets were realized during the year but losses in the amount of $11,000 were sustained, of which only $2,000 was allowed under section 117(d) as a deduction in computing the taxable net income, thus leaving a balance of $9,000 of the $11,000 item of capital losses not allowable as a deduction from 1936 gross income.

The "adjusted net income" of the M Corporation, as contemplated in section 351 (b) (3), is as follows:

From the net income ($150,000) should be subtracted the aggregate of the above items, $15,000, $1,000, and $9,000 (a total of $25,000), which leaves a resulting "adjusted net income" of $125,000. In addition to the above-stated facts, the M Corporation set aside $5,000 of its "adjusted net income" ($125,000) to apply toward the retirement of its bonded indebtedness of $50,000 incurred prior to January 1, 1934; and also distributed to its shareholders $50,000 as dividends during the taxable year 1936.

In determining the "undistributed adjusted net income,” as contemplated in section 351(b)(2), there will be subtracted from the "adjusted net income" ($125,000), the $75,000 aggregate sum of the following items: (a) 20 percent of the $100,000 excess of the $125,000 adjusted net income over the $25,000 dividend income received during the year from another personal holding company, 20 percent of $100,000 or $20,000; (b) the $5,000 item set aside to apply toward the retirement of its bonded indebtedness of $50,000, incurred prior to January 1, 1934; and (c) the $50,000 of dividends distributed to its shareholders during the taxable year 1936. This leaves $50,000 ($125,000 less $75,000) as the "undistributed adjusted net income", contemplated in section 351 (b) (2), on which the 8 percent and the 18 percent surtax rates of brackets (1) and (2) of section 351 (a) apply, making the 1936 surtax of the M Corporation, $8,800.

ART. 351-7. Payment of surtax on pro rata shares.-The surtax imposed by section 351 does not apply to any taxable year if (1) all the shareholders of the corporation, that is, every shareholder of record as of the last day of the taxable year, include at the time of filing their returns, in their gross income their entire pro rata shares,

whether distributed or not, of the adjusted net income of the corporation for the taxable year of such corporation ending with or during their taxable years (amended returns for such purpose may not be used) and (2) 90 percent or more of the corporation's adjusted net income is included in the gross income of shareholders other than corporations-i. e., taxpayers subject to normal tax and surtax on individuals. Thus if the adjusted net income were $100,000 and other corporations, shareholders of record as of the last day of the taxable year, owned in the aggregate 11 percent of the stock in the taxpayer corporation, the pro rata shares of shareholders other than corporations would be $89,000. Since such sum would be less than 90 percent of the adjusted net income the election of the shareholders to be taxed under section 351(d) would not be available. If all the shareholders elect to adopt this alternative method, the pro rata shares of the corporation's adjusted net income so included in the gross income of a shareholder shall be treated as a dividend received, and any subsequent distribution made by the corporation out of the earnings or profits for such taxable year shall, if distributed to any shareholder who has so included in his gross income his distributive share, be exempt from tax in the amount of the share so included. The tax imposed by section 351 is in addition to, and is separate and distinct from, the normal tax imposed by section 13 and the surtax imposed by section 14, both of which apply notwithstanding the election of all the shareholders, under section 351(d), to include in their gross income their entire pro rata share of the adjusted net income of the corporation.

ART. 351-8. Return and payment of tax.-A separate return is required for the surtax imposed under section 351. Such return shall be made on Form 1120H. In the case of a personal holding company which is a domestic corporation, the return is required to be made within the time prescribed in section 53 and in the case of a foreign corporation within the time prescribed in section 235. The tax shown by the corporation on its return must be paid in the case of a domestic corporation within the time prescribed in section 56 and in the case of a foreign corporation within the time prescribed in section 236. The same provisions of law relating to the period of limitation for assessment and collection which govern the taxes imposed by Title I also apply to the surtax imposed under Title IA. However, since the surtax imposed under Title IA is a distinct and separate tax from those imposed under Title I, the making of a return under Title I will not start the period of limitation for assessment of the surtax imposed under Title IA. If the corporation subject to section 351 fails to make a return, the tax may be assessed at any time. If the

Commissioner finds a deficiency in respect of the tax imposed by section 351, he is required to follow the same procedure which applies to deficiencies in income tax under Title I. The penalties applicable to the income taxes imposed under Title I, as well as the provisions of Title I relating to interest and additions to the tax, also apply to the surtax imposed by section 351. The administrative provisions applicable to the surtax imposed by section 351 are not confined to those contained in Title I but embrace all administrative provisions of law which have any application to income taxes.

ART. 351-9. Determination of tax, assessment, collection.-The determination, assessment, and collection of the tax imposed by section 351, and the examination of returns and claims in connection therewith, will be made under such procedure as may be prescribed from time to time by the Commissioner.

CHAPTER XXXV

GENERAL PROVISIONS-DEFINITIONS

Title VIII-General Provisions

SEC. 1001. DEFINITIONS.

(a) When used in this Act

(1) The term "person" means an individual, a trust or estate, a partnership, or a corporation.

(2) The term "corporation" includes associations, joint-stock companies, and insurance companies.

(3) The term "partnership" includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this Act, a trust or estate or a corporation; and the term "partner" includes a member in such a syndicate, group, pool, joint venture, or organization.

(4) The term "domestic" when applied to a corporation or partnership means created or organized in the United States or under the law of the United States or of any State or Territory.

(5) The term "foreign" when applied to a corporation or partnership means a corporation or partnership which is not domestic.

(6) The term "fiduciary" means a guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person.

(7) The term "withholding agent" means any person required to deduct and withhold any tax under the provisions of section 143 or 144.

(8) The term "stock" includes the share in an association, jointstock company, or insurance company.

(9) The term "shareholder" includes a member in an association, joint-stock company, or insurance company.

(10) The term "United States" when used in a geographical sense includes only the States, the Territories of Alaska and Hawaii, and the District of Columbia.

(11) The term "Secretary" means the Secretary of the Treasury. (12) The term "Commissioner" means the Commissioner of Internal Revenue.

(13) The term "collector" means collector of internal revenue. (14) The term "taxpayer" means any person subject to a tax imposed by this Act.

(b) The terms "includes" and "including" when used in a definition contained in this Act shall not be deemed to exclude other things otherwise within the meaning of the term defined.

(464)

ART. 1001-1. Classification of taxables.-For the purpose of taxation the Act makes its own classification and prescribes its own standards of classification. Local law is of no importance in this connection. Thus a trust may be classed as a trust or as an association (and, therefore, as a corporation), depending upon its nature or its activities. (See article 1001-3.) The term "partnership" is not limited to the common law meaning of partnership, but is broader in its scope and includes groups not commonly called partnerships. (See article 1001-4.) The term "corporation" is not limited to the artificial entity usually known as a corporation, but includes also an association, a trust classed as an association because of its nature or its activities, a joint-stock company, an insurance company, and certain kinds of partnerships. (See articles 1001-2 and 1001-4.) The definitions, terms, and classifications, as set forth in section 1001, shall have the same respective meaning and scope in these regulations.

ART. 1001-2. Association.-The term "association" is not used in the Act in any narrow or technical sense. It includes any organization, created for the transaction of designated affairs, or the attainment of some object, which, like a corporation, continues notwithstanding that its members or participants change, and the affairs of which, like corporate affairs, are conducted by a single individual, a committee, a board, or some other group, acting in a representative capacity. It is immaterial whether such organization is created by an agreement, a declaration of trust, a statute, or otherwise. It includes a voluntary association, a joint-stock association or company, a "business" trust, a "Massachusetts" trust, a "common law" trust, an "investment" trust (whether of the fixed or the management type), an interinsurance exchange operating through an attorney in fact, a partnership association, and any other type of organization (by whatever name known) which is not, within the meaning of the Act, a trust or an estate, or a partnership. If the conduct of the affairs of a corporation continues after the expiration of its charter, or the termination of its existence, it becomes an association.

ART. 1001-3. Association distinguished from trust.-The term "trust," as used in the Act, refers to an ordinary trust, namely, one created by will or by declaration of the trustees or the grantor, the trustees of which take title to the property for the purpose of protecting or conserving it as customarily required under the ordinary rules applied in chancery and probate courts. The beneficiaries of such a trust generally do no more than accept the benefits thereof and are not the voluntary planners or creators of the trust arrangement. Even though the beneficiaries do create such a trust, it is ordinarily Art. 1001-3 § 1001