(1) All property, whether or not connected with trade or business, except:

(a) stock in trade or other property which would properly be included in inventory,

(b) property held primarily for sale to customers in ordinary course of trade or business,

(c) property used in trade or business of a character which is subject to allowance for depreciation,

(d) real property used in trade or business, (e) Government obligations issued on or after Mar. 1, 1941, on a discount basis and payable without interest at a fixed maturity date not exceeding 1 year from date of issue, and

(f) a copyright, a literary, musical, or artistic composition, or similar property (but not a patent or invention) created by the taxpayer.

(2) Gains and losses are considered as from capital assets, under certain conditions, with respect to:

(a) Worthless stock and other securities. (Sec. 23(g) (2) and 23(k) (2)).

(b) Nonbusiness bad debts. (Sec. 23 (k) (4)).

(c) Retirement of certain bonds, etc. (Sec.
117 (f)).

(d) Short sales (sec. 117(g) and 117(1)).
(e) Failure to exercise options. (Sec. 117(g)).
(f) Sale, exchange, and involuntary con-
version of certain business property 22
and involuntary conversion of capital
assets, all held more than 6 months, if
gains exceed losses. (Sec. 117 (j)).

(g) Sales or exchanges of securities by
dealers, must be identified for invest-
ment.23 (Sec. 117(n)).

(h) Certain termination payments to employee. (Sec. 117 (p)).

(1) Total distribution of employees' trust on separation. (Sec. 165 (b)). (3) Gains and losses are not considered as from capital assets, under certain conditions, with respect to:

(a) Tax-exempt sale or exchange of residence. (Sec. 112(n)).

(b) Certain gains from sale or exchange of amortized emergency facilities. (Sec. 117(g)(3)).

(c) Property referred to in item (2) (1) above, if losses exceed gains.

(d) Gain from certain sales or exchanges of stock in a collapsible corporation. (Sec. 117(m)).

(e) Gain from sale or exchange of depreciable property between spouses or between an individual and a controlled corporation. (Sec. 117(0)).

(f) Loss from wash sales of stock or securities, not deductible. (Sec. 118). Same as 1951 act except: 22

(1) (f) was added for taxable years beginning after Sept. 23, 1950,

(2)(g) was added for transactions made after Nov. 19, 1951,

(2) (h) was added for taxable years beginning after 1950,

(3)(a) was added for taxable years ending

after 1950,

(3)(b) was added for taxable years ending

after 1949,

(3)(d) was added for gains realized after 1949, and

(3)(e) was added for transactions made after May 3, 1951.

(Net short-term capital gain is fully taxable at the normal tax and surtax rates.

If the net long-term capital gain exceeds the net short-term capital loss, there is allowed as a deduction from gross income an amount equal to 50 percent of the excess long-term gain. The entire excess is taxed at 26 percent 24 if the alternative tax is less than the regular normal tax and surtax. Alternative tax is computed on net income reduced for this purpose by 50 percent of the excess long-term capital gain, at regular normal tax and surtax rates, plus 26 percent 24 of the excess long-term gain.

Net short-term capital gain is fully taxable at the normal tax and surtax rates. Net long-term capital gain or the excess of net longterm capital gain over net short-term capital loss is taxed at 50 percent, if such tax plus the tax on net income reduced by such capital gain (alternative tax) is less than the regular tax on net income; otherwise, such capital gain is taxed at normal tax and surtax rates.

1 For income years 1913-43, see Statistics of Income for 1950, part 1, pp. 308-309 and 318-321.

2 Revenue Acts passed after Feb. 10, 1939 (the date of the enactment of the Internal Revenue Code) are not complete taxing statutes in themselves, but consist of amendments to the Code. There is no one effective date for all provisions of each act; some of the provisions are retroactive, others apply to the current tax period, while still others are effective for future taxable years.

Gross income, in general, includes all gains, profits, and income derived from any source whatever except such as is specifically exempt from income tax.

(a) The following items, under certain conditions, are among the exclusions from gross income for the entire period beginning 1944 or before:

Proceeds of life insurance policies paid upon the death of the insured.

Wholly tax-exempt interest.

Value of property acquired by gift, bequest, devise, or descent.
Amounts received as return of premiums paid under life in-
surance, endowment, or annuity contracts.
Compensation for injuries or sickness.

Amounts received as compensation, family allotments and allowances, or as pensions from the United States for service of beneficiary or another in military or naval forces of the United States in time of war.

Rental value of a dwelling house furnished to a minister of the gospel.

Receipts of shipowners' mutual protection and indemnity associations.

Income from sources within a possession of the United States, but not received within the United States, of citizens, except, beginning in 1951, an employee of the United States or any agency thereof, deriving a large percentage of his gross income from sources within the possession.

Earned income from sources outside the United States. (Also see note 4(e), below.)

Compensation of employees of foreign governments.
Income exempt under treaty.

Amounts received under Federal old-age and survivors insurance benefits, Title II, Social Security Act.

Disability pay for sickness or injury resulting from active service in the armed forces of any country. Mustering-out payments with respect to service in the military or naval forces of the United States. Compensation for services of a minor is excluded from the

1943 through 1948

Active service pay, not exceeding $1,500, of commissioned officers in the military or naval forces of the United States. 1950 and thereafter

Beginning June 25, 1950, all pay of enlisted men and warrant officers and the first $200 per month paid to commissioned officers for active service in combat zones (designated by the President).

(c) The following pertains to certain salaries which are to be included in gross income, as indicated:

If a taxpayer, including a partnership, receives in one taxable year at least 80 percent of the compensation earned from personal services, covering a period of 36 calendar months or more from the beginning to the completion of such services, the tax attributable to any part of such compensation included in his gross income is not greater than the aggregate of taxes which would have been paid had the compensation been included in his gross income ratably over the period preceding the date of receipt or accrual. Taxes attributable to income from an artistic work or invention and back pay are also subject to certain limitations.

(d) Net income of individuals and fiduciaries means the excess of gross income over deductions as defined in the various Revenue acts.

An optional standard deduction is provided in lieu of nonbusiness deductions. If the adjusted gross income is less than $5,000, the standard deduction is approximately 10 percent thereof and is allowed automatically through use of the optional tax. If the adjusted gross income is $5,000 or more, the standard deduction for 1944-47 is $500 and for 1948 and thereafter is the smaller of $1,000 or 10 percent of the adjusted gross income, except that for a married person filing a separate return the standard deduction is $500. Citizens deriving a large percentage of their

not allowed the standard deduction. (In Statistics of Income neither the net income nor the standard deduction is tabulated for those individuals who elect the standard deduction.)

No deductions are reported on Form W-2 for 1944-47, Form 1040A for 1948-51, or short-form 1040; however, the optional tax on such returns makes allowance for deductions. (See note 13, below.) Variations in certain other deductions allowable occurred between 1944 and 1951 with respect to:

(1) Amortization of emergency facilities. (Sec. 23(t) and 172
of the Code.) (The amount of amortization deduction,
tabulated separately in Statistics of Income for 1945
only, is included in business deductions.)
(11) Loss on sale or exchange of capital assets. (See table C,
p. 157.)
(iii) Net operating loss. (Sec. 23(s) and 170.) (The net oper-
ating loss deduction, tabulated separately among busi-
ness deductions in Statistics of Income for 1945 only
and among sources of income and loss for 1951, is only
the amount carried forward.)

(iv) Medical expenses. (Sec. 23(x).)
(v) Blindness. (Sec. 25(b) and 23(y).)

(a) A citizen or resident of the United States who elects to pay the optional tax (see note 13 below) may file Form W-2 for 1944 47 or Form 1040A for 1948 and thereafter if his gross income is less than $5,000 and consists entirely of wages subject to withholding or of such wages and not more than a total of $100 of other income from wages, dividends, and interest. A married couple may file a joint return for the optional tax if their combined incomes do not exceed the preceding limitations (see (b) below; the optional tax is not allowed if either spouse itemizes deductions.

(b) The amount of income for which married persons are required to file a return is the separate gross income of husband or wife. Husband and wife file separate returns unless the combined income is included in a joint return; a joint return may be filed even though one spouse has no income; a joint return may not be filed if either spouse is a nonresident alien or if the husband and wife have different taxable years except, beginning in 1948, if one or both die during the year and the survivor does not remarry, the executor, generally, may file the joint return; otherwise, the status as husband and wife is determined as of the last day of the taxable year.

A person with less than the required amount of gross income, which includes wages subject to withholding, should file a return to claim refund of tax withheld unless such income is included in a joint return.

(c) Income from an estate or trust is required to be reported on the fiduciary income tax return, Form 1041, the requirements for filing being the same as for a single person except that a return is required for every estate or trust of which any beneficiary is a nonresident alien and that a return must be filed by every trust having a net income of $100 or more or the indicated gross income regardless of amount of net income.

(d) Returns are permitted for a fiscal year other than that ending December 31, except on Form W-2 for 1944-47 or on Form 1040A for 1948 and subsequent years.

(e) Exceptions to general requirements for filing returns are made with respect to:

(1)

Citizens deriving a large percentage of their gross income from possessions. (Sec. 251(g) and 251 (J) of the Code.) (11) Nonresident citizens with earned income from sources outside the United States. (Sec. 51(a), 116(a), and

116(h).)

(iii) Nonresident aliens. (Sec. 217.)
(iv) Servicemen abroad or in combat areas. (Sec. 53 and
3804.)

(v) Minors. (Sec. 51(a) and 22(m).)

Exemptions for citizens and resident aliens are termed "normaltax exemption" and "surtax exemption" for 1944-45 and "exemption" for 1946 and thereafter. Beginning 1948, additional exemptions are allowed for age 65 or more and for blindness of the taxpayer and/or spouse (if a joint return is filed).

Exemption is allowed as a credit against net income for purposes of both normal tax and surtax, except that for 1944-45 on a joint return where the adjusted gross income of one spouse is less than $500 the normal-tax exemption is $500 plus the adjusted gross income of such spouse.

Marital status is determined as of the close of the taxable year, or if one spouse dies during the year as of the time of such death, and no proration of exemption is required.

For exemption status of nonresident aliens, see Statistics of Income, part 1, 1950, p. 315, note 20.

• Exemptions on a joint return are allowed for both husband and wife even though one spouse has less than $600 of income or has no income.

'The exemption for a married person filing separately and, for taxable years beginning after October 31, 1951, for a head of household (defined in note 16, below) is the same as that for a single person.

A credit of $100 against the net income of a trust is substituted for the exemption.

For 1944-50, an exemption is allowed citizens and resident aliens

whose support was received from the taxpayer and whose gross income for the taxable year is less than $500; beginning 1951, the gross income limitation is $600.

Credits for dependents are allowed for surtax only, 1944-45, and for both normal tax and surtax, 1946 and thereafter.

The credit for dependents is not applicable to citizens deriving a large percentage of their gross income from sources within a possession of the United States.

10 Beginning 1951, for persons having income of $400 or more from self-employment, see table D, p. 158.

11 The exemption is $500 for each spouse, except that for 1944-45, on joint returns where adjusted gross income of one spouse is less than $500, the normal-tax exemption is $500 plus the adjusted gross income of such spouse.

12 In the case of a rate change during fiscal years not shown, the total tax is prorated; for fiscal years beginning before October 1, 1950, and ending after September 30, 1950 (except calendar 1950), a tentative tax is computed under the law in effect for each taxable year and the 2 tentative taxes are then prorated according to the number of calendar months before October 1, 1950 and after September 30, 1950; similarly, for fiscal years beginning before November 1, 1951 and ending after October 31, 1951 (except calendar 1951), the tentative taxes are prorated according to the number of months before November 1, 1951 and after October 31, 1951.

13 Before 1948, on a joint return of married persons, tax rates are applied to the combined incomes. For 1948 and thereafter, the combined normal tax and surtax is twice the combined normal tax and surtax that would be determined if the total net income of husband and wife and the applicable credits against net income, listed in notes 14 and 15, were reduced by one-half.

In lieu of the normal tax and surtax imposed by sections 11 and 12 of the Code, a citizen or resident may elect to pay the optional tax under section 400 (also see note 4 (a)) if his adjusted gross income is less than $5,000. The optional tax or the standard deduction is not allowed to either husband or wife if the net income of one of the spouses is determined without regard to the standard deduction. The optional tax makes allowance for exemptions and standard deduction. Ten percent of the midpoint of each income bracket is allowed for the deductions, after which the tax is computed in the regular manner and rounded to the nearest dollar. The optional tax table for 1951 is among the facsimiles of return forms on p. 166. For tables for 1941-50, see Statistics of Income for 1950, pp. 323-328. For 1944-45, where the return includes gross income of both spouses the tax in the table must be reduced by 3 percent of the smaller adjusted gross income but not by more than $15.

In case of an optional tax change during a fiscal year, the optional tax is prorated in the same manner as provided for the regular tax. The optional tax is applicable for taxable years of less than 12 months if the short period is not due to a change in accounting period.

For 1946 through calendar year 1950, the normal tax and surtax rates result in tentative normal tax and surtax (see note 17).

14 The normal tax rate is applied to the balance of net income after deducting the following credits (however, for optional tax paid in lieu of normal tax and surtax, see note 13):

(a) Normal-tax exemption (for taxpayer and spouse), 1944-45, and all exemptions, 1946 and thereafter.

(b) Dividends on share accounts in Federal savings and loan associations issued prior to Mar. 28, 1942.

(c) Interest on obligations issued after Sept. 1, 1917 and before March 1, 1941, by the United States or any instrumentality thereof (other than Treasury notes of the National defense series), to the extent that such interest is required to be included in gross income.

15 Surtax rates are applied to surtax net income which for 1944 45 is net income less surtax exemptions for taxpayer, spouse, and dependents, and for 1946 and thereafter is net income less all exemptions.

If taxpayer elects to pay the alternative tax, net income subject to surtax does not include net long-term capital gain or the excess of net long-term capital gain over net short-term capital loss.

16 For taxable years beginning after Oct. 31, 1951, head of household receives approximately half the benefits of income-splitting given to a joint return. A head of household is a single individual who maintains in his home an unmarried child, grandchild, stepchild, or any person whom he claims as a dependent.

17 For 1946 through calendar year 1950, statutory reductions are taken into account, and the combined rates so computed are rounded. For 1946 and 1947, the tentative normal tax and surtax are reduced by 5 percent thereof. For 1948-49, the combined tentative normal tax and surtax is reduced by 17 percent of the first $400, plus 12 percent of the next $99,600, plus 9.75 percent of the excess over $100,000. For calendar year 1950, the combined normal tax and surtax is reduced by 13 percent of the first $400, plus 9 percent of the next $99,600, plus 7.3 percent of the excess over $100,000.

18 The rate limitation shown is the combined normal tax and surtax after statutory reduction, if any (see note 17), but before tax credits, as percent of net income. The tax credits relate to income tax paid at source on interest from tax-free covenant bonds and to income tax paid to a foreign country or possession of the

19 Before 1948, the lowest bracket of surtax net income for a married couple filing jointly is $2,000, and the highest bracket is $200,000.

20 For income years 1922-43, see Statistics of Income for 1950, part 1, pages 330-331.

21 These treatments apply to the net amount, that is the net gain or the net loss, of each taxpayer, resulting from the sales of all capital assets in a similar category.

22 "Property used in trade or business" includes real estate and depreciable property not inventoriable or held primarily for business sale; excludes items (1) (f), (3) (b), and (3) (e) in the table; includes cutting of certain timber (also coal, beginning 1951) disposed of by the owner under a contract by which he retains an economic interest in such property, certain unharvested crops for taxable years beginning after 1950, and livestock held for draft, breeding, or dairy purposes for 12 months or more (6 months, for taxable years beginning before 1951).

23 Effective for transactions made after Nov. 19, 1951.

24 25 percent for taxable years beginning after Oct. 19, 1951, and before Nov. 1, 1951.

25 Net capital gain is the excess of (1) the sum of the gains from sales or exchanges of capital assets, plus net income of the taxpayer or $1,000, whichever is smaller, over (2) the losses from such sales or exchanges.

28 Net earnings from self-employment is gross income derived from trade or business less allowable deductions attributable thereto plus share of partnership income (or loss). Excludes income from services as public official, railroad worker, minister or member of religious order, or employee, and income from certain professions, real estate rentals and interest and dividends received from securities except those of dealers, and gain or loss from sale or exchange of capital assets and certain other property. Involuntary business property loss and net operating loss are not allowable deductions.

27 Beginning 1951, a citizen or resident of the United States having net earnings from self-employment of $400 or more is required to file a return on Form 1040, computing the tax on separate Schedule C.

The amount of income for which married persons are required to file a return is the separate net earnings of husband or wife. The self-employment tax of husband and wife filing a joint return is the sum of the taxes computed on the separate self-employment income of each spouse.

Returns are permitted for a fiscal year other than that ending Dec. 31.

Members of the Armed Forces may defer filing returns under certain conditions. (Sec. 53 and 3804 of the Code.)

28 Maximum self-employment net income is the indicated amount minus any wages received from which social security tax has been withheld by the employer. The excess of net earnings from selfemployment over the maximum amount $3,600 is not taxable..

20 For calendar years 1924-25 and June 7, 1932 through 1943, see Statistics of Income for 1950, part 1, pages 341-342.

30 A return is required by individuals for gifts whether transferred directly or indirectly, whether in trust or otherwise, and whether of present or future interest, and for transfers of property sold for less than a fair consideration.

A return is required for gifts to any one donee exceeding $3,000, except that a return is required for a gift of future interest regardless of value.

31 Value of gift-for residents and nonresident citizens, property wherever situated; for nonresident aliens, property situated in the United States only.

32 An annual exclusion for each donee not exceeding $3,000, but which is not applicable against gifts of future interest in any year. 33 The specific exemption may be taken in a single year or over a period of years at the option of the donor.

34 Net gifts mean the excess of total gifts for the year over the sum of charitable deduction and specific exemption and, in addition, the annual exclusion for each donee and also, after April 2, 1948, the marital deduction.

Beginning April 3, 1948, by consent of both spouses who are residents or citizens of the United States, gifts made by one spouse to a third person may, for the purpose of the gift tax, be considered as made one-half by each spouse.

35 Tax for current year is the excess of tax on the aggregate net gifts made subsequent to June 6, 1932, over a tax on aggregate net gifts exclusive of current year gifts.