husband and wife make separate returns, the personal exemption may be taken by either or divided between them. (d) Credit for dependents.-$400 for each person (other than husband or wife) dependent upon and receiving his chief support from the taxpayer if such dependent person is under eighteen years of age or is incapable of self-support because mentally or physically defective. (e) Change of status. (1) The credit for dependents shall be determined by the status of the taxpayer on the last day of his taxable year. (2) The personal exemption allowed by subsection (c) of this section shall, in case the status of the taxpayer changes during his taxable year, be the sum of an amount which bears the same ratio to $1,500 as the number of months during which the taxpayer was single bears to twelve months, plus an amount which bears the same ratio to $3,500 as the number of months during which the taxpayer was a married person living with husband or wife or was the head of a family bears to twelve months. For the purposes of this paragraph 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. (3) In the case of an individual who dies during the taxable year, the personal exemption and the credit for dependents shall be determined by his status at the time of his death, and in such case full credits shall be allowed to the surviving spouse, if any, according to his or her status at the close of the taxable year. ART. 291. Credits of individual against net income.-(a) For the purpose of computing the normal tax the taxpayer's net income as determined pursuant to sections 21-24 is first reduced by the sum of the allowable credits. These include dividends (as defined in section 115 and article 621) received from a domestic corporation (other than a corporation entitled to the benefits of section 251, or other than a corporation organized under the China Trade Act, 1922), or from a foreign corporation when it is shown to the satisfaction of the Commissioner that more than 50 per cent of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the United States as determined under the provisions of section 119 (see articles 671–684); interest not entirely exempt from tax (and hence included in gross income) received upon obligations of the United States; a personal exemption; and a credit for dependents. Consequently, the normal tax does not apply to the dividends just described nor to interest on any obligations of the United States. (See section 22 (b) (4) and articles 87 and 88.) For the purpose of computing the surtax the taxpayer's net income is entitled to none of these credits. (b) A single person is entitled to a personal exemption of $1,500 and the head of a family or a married person living with husband or wife to $3,500, regardless of the amount of the net income. A husband and wife living together have but one personal exemption, which is $3,500. If they make separate returns, such exemption may be taken by either or divided between them. ART. 292. Personal exemption of head of family.-A head of a family is an individual who actually supports and maintains in one household one or more individuals who are closely connected with him by blood relationship, relationship by marriage, or by adoption, and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation. In the absence of continuous actual residence together, whether or not a person with dependent relatives is a head of a family within the meaning of the Act must depend on the character of the separation. If a father is absent on business, or a child or other dependent is away at school or on a visit, the common home being still maintained, 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 291. ART. 293. 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. 294. Credit for dependents.-A taxpayer, other than a nonresident alien who is not a resident of Canada or Mexico (see section 214), 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. 295. Date determining exemption.-(a) The status of the taxpayer on the last day of his taxable year determines his right to the credit for dependents allowed by section 25 (d). If he is then the chief support of a dependent who is under 18 years of age, or who is incapable of self-support because mentally or physically defective, the credit for dependents may be taken. (b) The credit allowed by section 25 (c) to a single person, a head of a family, or a married person living with husband or wife, will, in case the status of the taxpayer changes during the taxable year, be prorated according to the period during which the taxpayer occupied each status. The credit for any taxable year in such a case will thus be the sum of (1) an amount which bears the same ratio to $1,500 as the number of months the taxpayer was single bears to 12 months, plus (2) an amount which bears the same ratio to $3,500 as the number of months during which the taxpayer was a married person living with husband or wife or was the head of a family bears to 12 months. A fractional part of a month will be disregarded for this computation, unless it amounts to more than one-half month, in which case it will be considered to be a month. Example: A, who had been single during the preceding months of 1928, married B on July 20 and lived with her during the balance of the year. If a joint return is made by A and B on a calendar year basis for 1928, the personal exemption will be $3,208.33; that is, of $1,500 for A while single, plus of $1,500 for B while single, plus of $3,500 for the period during which they were married. If separate returns are made by A and B on a calendar year basis for 1928, each may claim a personal exemption of $1,604.17; that is, of $1,500, plus 1⁄2 of of $3,500. In the latter case, the joint exemption, or of $3,500, may be taken either by A or B or divided between them. (c) If an individual dies during the taxable year, his executor or administrator in making a return for him is entitled to claim his full personal exemption according to his status at the time of his death. If a husband or wife so dies the joint personal exemption may be used by the executor or administrator in making a return for the decedent, and an undiminished personal exemption, according to the status of the survivor at the end of the taxable year, may be claimed in the survivor's return. SEC. 26. CREDITS OF CORPORATION AGAINST NET INCOME. For the purpose only of the tax imposed by section 13 there shall be allowed the following credits: (a) The amount received as interest upon obligations of the United States which is included in gross income under section 22; and (b) In the case of a domestic corporation the net income of which is $25,000 or less, a specific credit of $3,000; but if the net income is more than $25,000 the tax imposed by section 13 shall not exceed the tax which would be payable if the $3,000 credit were allowed, plus the amount of the net income in excess of $25,000. ART. 301. Credits 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 which is included in gross income under section 22. Accordingly a corporation is not required to pay any income tax on interest received upon obligations of the United States. A domestic corporation having a net income of $25,000 or less is allowed a credit of $3,000 against such net income for the purpose of the tax imposed by section 13. To lessen the inequality between the tax upon net income of $25,000 and upon net income slightly in excess of that amount, section 26 (b) provides that the tax shall not exceed the tax which would be payable if the $3,000 credit were allowed, plus the amount of the net income in excess of $25,000. This provision affects only those cases in which the net income is between $25,000 and $25,360 for the calendar year 1928 and subsequent years. See section 47 (e) for the manner of applying the $3,000 credit when a return is filed for a period of less than 12 months. As to the allowance of credits against net income in the case of foreign corporations, see section 233. PART III-CREDITS AGAINST TAX SEC. 31. EARNED INCOME CREDIT. (a) Definitions. For the purposes of this section (1) "Earned income' means wages, salaries, professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensa- (2) "Earned income deductions means such deductions as are allowed by section 23 for the purpose of computing net income, and are properly allocable to or chargeable against earned income. (3) "Earned net income means the excess of the amount of the earned income over the sum of the earned income deductions. If the taxpayer's net income is not more than $5,000, his entire net income shall be considered to be earned net income, and if his net income is more than $5,000, his earned net income shall not be considered to be less than $5,000. In no case shall the earned net income be considered to be more than $30,000. (b) Allowance of credit. In the case of an individual the tax shall be credited with 25 per centum of the amount of tax which would be payable if his earned net income constituted his entire net income; but in no case shall the credit allowed under this subsection exceed 25 per centum of his normal tax plus 25 per centum of the surtax which would be payable if his earned net income constituted his entire net income. This credit shall be in addition to all other credits against the tax. ART. 311. Earned income credit. In the case of an individual the tax shall, in addition to the credits provided in section 131 (see articles 691-698), be credited with 25 per cent of the amount of the tax which would be payable if his earned net income constituted his entire net income. In no case, however, shall this credit exceed 25 per cent of his normal tax plus 25 per cent of the surtax which would be payable if his earned net income constituted his entire net income. As to the earned income credit of the members of a partnership, see section 185 and article 921. ART. 312. Definitions and limitations.-The term "earned income " means wages, salaries, professional fees, and other amounts received as compensation for personal services actually rendered. In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income-producing factors, a reasonable allowance as compensation for the personal services actually rendered by the taxpayer shall be considered as earned income, but the total amount which shall be treated as the earned income of the taxpayer from such a trade or business shall, in no case, exceed 20 per |