two years. (See articles 593 and 594.) In determining the period for which a taxpayer has held stock or securities the acquisition of which (or the contract or option to acquire which) resulted in the nondeductibility (under section 118 of the Revenue Act of 1932 or the Revenue Act of 1928, relating to wash sales) of the loss from the sale or other disposition of substantially identical stock or securities, there shall be included the period for which he held the stock or securities the loss from the sale or other disposition of which was not deductible.

"Capital gain" is taxable gain from the sale or exchange of capital assets consummated after December 31, 1921. "Capital loss" is deductible loss resulting from the sale or exchange of capital assets. See article 591 for the basis for determining such gain or loss, and articles 605 and 606 as to adjustments for improvements, depreciation, and other items. "Capital deductions" are deductions properly allocable to or chargeable against capital assets sold or exchanged during the taxable year. Capital net gain" is the excess of the total amount of capital gain over the sum of (1) capital deductions and capital losses, and (2) the amount, if any, by which the ordinary deductions exceed the gross income computed without including capital gain.

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Example: A in 1932 sold an office building for $1,000,000, which he had bought in 1921 for $500,000 and on which there was depreciation aggregating $100,000, and stock in a mining company for $10,000, which he had purchased in 1925 for $20,000. Without regard to capital deductions his capital gain would be $600,000, his capital loss $10,000, and his capital net gain $590,000. If his other net income (ordinary net income) in 1932 was $50,000, he may, instead of paying normal tax and surtax on his total net income of $640,000, segregate these transactions in his return and pay a tax of 122 per cent of his capital net gain of $590,000 plus the normal tax and surtax upon his ordinary net income of $50,000. If, on the other hand, A sustained a net loss of $50,000 in his business, had a capital gain of $600,000, and a capital loss of $10,000, his capital net gain would be $540,000. In such a case, A may, instead of paying normal tax and surtax upon his total net income of $540,000, pay a tax of 1212 per cent upon this amount.

The credit for taxes allowed by section 131 (see articles 691698) is a credit against the total tax, however computed, but the credits allowed by section 25 are allowed "for the purpose of the normal tax only " and may not be applied against capital net gain, although they may be applied against "ordinary net income" in computing the amount of the tax.

Example: If B, a married person, had capital net gain of $60,000 and ordinary net income of $2,000, his $2,500 personal exemption would more than offset his ordinary net income, but he may not apply any part of it to reduce his capital net gain.

Residential property held by the taxpayer for more than two years but not primarily for sale in the course of his trade or business is included within the definition of capital assets; hence, a taxpayer (other than a corporation) selling such property at a profit may elect to be taxed under section 101. A loss from the sale of such property is a "capital loss" only to the extent that it is an allowable deduction under section 23 (e) and article 171.

A nonresident alien individual or a citizen entitled to the benefits of section 251 may elect to be taxed under section 101 with respect to gain from sales or exchanges of property within the United States.

ART. 502. Returns of capital net gain.-Segregation of transactions for the purposes of section 101 (a) is required only where the taxpayer elects to be taxed under that subdivision. When a taxpayer elects to be taxed under section 101 (a) for any taxable year, he must attach to his return of income for such year an accurate statement under oath showing all items of capital gain, capital loss, and capital deductions in such manner as will clearly show the exact amount of his capital net gain for the taxable year. Each transaction must be separately shown and the capital items with respect thereto grouped together in order that the capital gain derived or the capital loss sustained from each capital transaction will readily appear. In the case of sales or exchanges of securities or any other property, the statement must show how long the property was held by the taxpayer immediately preceding the sale or exchange.

ART. 503. Capital net losses.-Section 101 (b) provides for the determination of the tax in the case of any taxpayer (other than a corporation, but including the members of a partnership, an estate or trust, or the beneficiaries thereof) who in any taxable year sustains a capital net loss. A "capital net loss" is the excess of the sum of the capital losses plus the capital deductions as defined in article 501, over the total amount of capital gain as therein defined. It is to be noted that, while the tax provided in section 101 (a) in the case of a capital net gain is to be imposed at the election of the taxpayer, the limitation with respect to a capital net loss provided in section 101 (b) will be applied irrespective of the taxpayer's clection.

In the case of any taxpayer, other than a corporation, who sustains a capital net loss for any taxable year, there shall be levied,

collected, and paid, in lieu of the normal tax and the surtax imposed by sections 11, 12, 102, and 211, a tax determined as follows:

A partial tax will first be computed upon the basis of the ordinary net income, as defined in section 101 (c) (7) and article 501, at the rates and in the manner provided in sections 11, 12, 102, and 211, and the total tax will be this amount minus 121⁄2 per cent of the capital net loss, but in no case shall the tax under section 101 (b) be less than the tax computed without regard to the provisions of section 101. The application of this paragraph may be illustrated by the following example:

Example: During 1932, A had an ordinary net income of $20,000 and a capital net loss of $13,000. He was entitled to a personal exemption of $1,000. The tax computed under section 101 (b) without applying the provision that in no case shall the tax under section 101 (b) be less than the tax computed without regard to the provisions of section 101, would be $175, computed as follows:

1, 625

175

Less: 122 per cent of the capital net loss (122 per cent of $13,000)_.

Amount of tax

The tax computed without regard to the provisions of section 101 (b) would be $330, computed as follows:

The correct amount of A's tax is $330, since that amount is greater than the tax computed under section 101 (b) without applying the provision that in no case shall the tax under section 101 (b) be less than the tax computed without regard to the provisions of section 101.

SEC. 102. SALE OF MINES AND OIL OR GAS WELLS.

(a) In the case of a bona fide sale of mines, oil or gas wells, or any interest therein, where the principal value of the property has been demonstrated by prospecting or exploration and discovery work done by the taxpayer, the portion of the tax imposed by section 12 of this title attributable to such sale shall not exceed 16 per centum of the selling price of such property or interest.

(b) For limitation to 12 per centum rate of tax, see section 101. ART. 511. Surtax on sale of mineral deposits.—Where the taxpayer by prospecting and locating claims, or by exploring and discovering undeveloped claims, has demonstrated the principal value of mines or oil or gas wells which prior to his efforts had a relatively minor value, the portion of the surtax attributable to a sale of such property or of the taxpayer's interest therein shall not exceed 16 per cent of the selling price. Exploration work alone without discovery is not sufficient to bring a case within this provision. (See article 234.) Shares of stock in a corporation owning mines or oil or gas wells do not constitute an interest in such property. To determine the application of this provision to a particular case, the taxpayer should first compute the surtax in the ordinary way upon his net income, including his net income from any such sale. The proportion of the surtax indicated by the ratio which the taxpayer's net income from the sale of the property, or his interest therein, bears to his total net income is the portion of the surtax attributable to such sale, and if it exceeds 16 per cent of the selling price of the property or interest, such portion of the surtax shall be reduced to that amount.

SEC. 103. EXEMPTIONS FROM TAX ON CORPORATIONS.

The following organizations shall be exempt from taxation under this title

(1) Labor, agricultural, or horticultural organizations;

(2) Mutual savings banks not having a capital stock represented by shares;

(3) Fraternal beneficiary societies, orders, or associations, (A) operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge sys

tem; and (B) providing for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their dependents;

(4) Domestic building and loan associations substantially all the business of which is confined to making loans to members; and cooperative banks without capital stock organized and operated for mutual purposes and without profit;

(5) Cemetery companies owned and operated exclusively for the benefit of their members or which are not operated for profit; and any corporation chartered solely for burial purposes as a cemetery corporation and not permitted by its charter to engage in any business not necessarily incident to that purpose, no part of the net earnings of which inures to the benefit of any private shareholder or individual;

(6) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual;

(7) Business leagues, chambers of commerce, real-estate boards, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual;

(8) Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes;

(9) Clubs organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net earnings of which inures to the benefit of any private shareholder;

(10) Benevolent life insurance associations of a purely local character, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations; but only if 85 per centum or more of the income consists of amounts collected from members for the sole purpose of meeting losses and expenses; (11) Farmers' or other mutual hail, cyclone, casualty, or fire insurance companies or associations (including interinsurers and reciprocal underwriters) the income of which is used or held for the purpose of paying losses or expenses;

(12) Farmers', fruit growers', or like associations organized and operated on a cooperative basis (a) for the purpose of marketing the products of members or other producers, and turning back to them the proceeds of sales, less the necessary marketing expenses, on the basis of either the quantity or the value of the products furnished by them, or (b) for the purpose of purchasing supplies and equipment for the use of members or other persons, and turning over such supplies and equipment to them at actual cost, plus necessary expenses. Exemption shall not be denied any such association because it has capital stock, if the dividend rate of such