or is incapable of self-support because mentally or physically defective.

(e) Change of status.—If the status of the taxpayer, in so far as it affects the personal exemption or credit for dependents, changes during the taxable year, the personal exemption and credit shall be appor tioned, under rules and regulations prescribed by the Commissioner with the approval of the Secretary, in accordance with the number of months before and after such change. For the purpose of such apportionment 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.

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 which is subject to taxation under Title I of the Act (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 3-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 $1,000 and the head of a family or a married person living with husband or wife to $2,500, regardless of the amount of the net income. A husband and wife living together have but one personal exemption, which is $2,500. If they make separate returns, each may claim onehalf of the personal exemption, or such exemption may, in accordance with an agreement entered into by them, be taken by either or divided between them in any proportion.

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. 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 (c) 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 (d) 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 1932, 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 1932, the personal exemption will be $2,208.33; that is, 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 1932, each may claim a personal exemption of $1,104.17; that is, of $1,000, plus 1⁄2 of of $2,500. In the latter case, however, the joint exemption of of $2,500 may by agreement be taken either by A or B or divided between them in any proportion.

Example (2): A and B, who were heads of families during the first six months of 1932, were married on July 1, 1932, 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 1932, the personal exemption will be $3,750; that is, 1⁄2 of $2,500 for A while the head of a family, plus 1⁄2 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 1932, each may claim a personal exemption of $1,875; that is, 1⁄2 of $2,500, plus 2 of 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.

Example (3): A and B were married and living together until November 30, 1932, wher 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, 1⁄2 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 1932 on the calendar year basis, he may claim a personal exemption of $1,229.16; that is, 1⁄2 of 11 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, 11⁄2 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, 1932. If A files a return on the calendar year basis for 1932, he is entitled, in addition to the personal exemption allowed under section 25 (c), to a credit for dependents in the amount of $200; that is, 11⁄2 of $400.

Example (5): A and B were married and living together until June 30, 1932, 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 1932 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, f1⁄2 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 which is included in gross income under section 22.

ART. 301. 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 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.

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

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. ERRONEOUS PAYMENTS.

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

(b) Fiscal year ending in 1932.-For credit against the tax of amounts of tax paid for a fiscal year beginning in 1931 and ending in 1932, see section 132.

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. 321. 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 331-333.) If