gross income of his wife is less than $5,000, and if each is required to file a return, the husband and the wife must each elect to pay the optional tax imposed under section 3 or neither may so elect. If the separate adjusted gross income of each spouse is $5,000 or more, then neither spouse can elect to pay the optional tax imposed under section 3. If the adjusted gross income of one spouse is $5,000 or more and that of the other spouse is less than $5,000, the election to pay the optional tax imposed under section 3 may be exercised by the spouse having adjusted gross income of less than $5,000 only if the spouse having adjusted gross income of $5,000 or more, in computing taxable income, uses the standard deduction provided by section 141. If the spouse having adjusted gross income of $5,000 or more does not use the standard deduction, then the spouse having adjusted gross income of less than $5,000 may not elect to pay the optional tax and must compute taxable income without regard to the standard deduction. Accordingly, if the spouse having adjusted gross income of $5,000 or more itemizes the deductions allowed by sections 161 and 211 in computing taxable income, the spouse having adjusted gross income of less than $5,000 must also compute taxable income by itemizing the deductions allowed by sections 161 and 211, and must pay the tax imposed by section 1. For rules relative to the election to take the standard deduction by husband and wife, see part IV (section 141 and following), subchapter B, chapter 1 of the Code, and the regulations thereunder.

(b) Taxable years beginning after December 31, 1963. (1) In the case of a husband and wife filing a separate return for a taxable year beginning after December 31, 1963, the optional tax imposed by section 3 shall be

(i) For taxable years beginning in 1964, the lesser of the tax shown in Table IV (relating to the 10-percent standard deduction for married persons filing separate returns) or Table V (relating to the minimum standard deduction for married persons filing separate returns) of section 3(a), and

(ii) For taxable years beginning after December 31, 1964, the lesser of the tax shown in Table IV (relating to the 10percent standard deduction for married persons filing separate returns) or Table

V (relating to the minimum standard deduction for married persons filing separate returns) of section 3(b).

(2) If the tax of one spouse is determined with regard to the 10-percent standard deduction provided for in Table IV of section 3(a) or 3(b) or if such spouse in computing taxable income uses the 10-percent standard deduction provided for in section 141(b), then the minimum standard deduction provided for in Table V of section 3(a) or 3(b) shall not apply in the case of the other spouse, if such spouse elects to pay the optional tax imposed under section (3). Thus, if a husband and wife compute their tax with reference to the standard deduction, one cannot elect to use the 10-percent standard deduction and the other elect to use the minimum standard deduction. However, an individual described in section 141(d) (2) may elect pursuant to such section and the regulations thereunder to pay the tax shown in Table V of section 3(a) or 3(b) in lieu of the tax shown in Table IV of section 3(a) or 3(b). See section 141(d) and the regulations thereunder for rules relating to the standard deduction in the case of married individuals filing separate returns.

(c) Determination of marital status. For the purpose of applying the restrictions upon the right of a married person to elect to pay the tax under section 3, the determination of marital status is made as the close of the taxpayer's taxable year or, if his spouse died during such year, as of the date of death, and a person legally separated from his spouse under a decree of divorce or separate maintenance on the last day of his taxable year (or the date of death of his spouse, whichever is applicable) is not considered married. See section 143 and the regulations thereunder.

[T.D. 6792, 30 F.R. 529, Jan. 15, 1965]

§ 1.4-4 Short taxable year caused by death.

An individual making a return for a period of less than 12 months on account of a change in his accounting period may not elect to pay the optional tax under section 3. However, the fact that the taxable year is less than 12 months does not prevent the determination of the tax for the taxable year under section 3 if the short taxable year results from the death of the taxpayer.

§ 1.5 Statutory provisions; cross references relating to tax on individuals. individuals—(a) Other rates of tax on indi

SEC. 5. Cross references relating to tax on individuals-(a) Other rates of tax on individuals, etc. (1) For rates of tax on nonresident aliens, see section 671.

(2) For doubling of tax on citizens of certain foreign countries, see section 891. (3) For alternative tax in case of capital gain, see section 1201 (b).

(4) For rate of withholding in the case of nonresident aliens, see section 441.

(b) Special limitations on tax. (1) For

limitation on surtax attributable to sales of oil or gas properties, see section 632.

(2) For limitation on tax in case of income of members of Armed Forces on death, see section 692.

(3) For limitation on tax where an individual chooses the benefits of income averaging, see section 1301.

(4) For computation of tax where taxpayer restores substantial amount held under claim of right, see section 1341.

(5) For limitation on surtax attributable to claims against the United States involving acquisitions of property, see section 1347. [Sec. 5 as amended by sec. 232(f) (2), Rev. Act 1964 (78 Stat. 111)]

[T.D. 6500, 25 F.R. 11402, Nov. 26, 1960, as amended by T.D. 6885, 31 F.R. 7802, June 2, 1966]

TAX ON CORPORATIONS

$ 1.11 Statutory provisions; tax imposed. SEC. 11. Tax imposed—(a) Corporations in general. A tax is hereby imposed for each taxable year on the taxable income of every corporation. The tax shall consist of a normal tax computed under subsection (b) and a surtax computed under subsection (c).

(b) Normal tax-(1) Taxable years beginning before July 1, 1964. In the case of a taxable year beginning before July 1, 1964, the normal tax is equal to 30 percent of the taxable income.

(2) Taxable years beginning after June 30, 1964. In the case of a taxable year beginning after June 30, 1964, the normal tax is equal to 25 percent of the taxable income.

(c) Surtax. The surtax is equal to 22 percent of the amount by which the taxable income (computed without regard to the deduction, if any, provided in section 242 for partially tax-exempt interest) exceeds $25,000.

(d) Exceptions. Subsection (a) shall not apply to a corporation subject to a tax imposed by

(1) Section 594 (relating to mutual savings banks conducting life insurance business),

(2) Subchapter L (sec. 801 and following, relating to insurance companies),

(8) Subchapter M (sec. 851 and following, relating to regulated investment companies and real estate investment trusts), or

(4) Section 881 (a) (relating to foreign corporations not engaged in business in United States).

[Sec. 11 as amended by sec. 2, Tax Rate Extension Act 1955 (69 Stat. 114); sec. 2, Tax Rate Extension Act 1956 (70 Stat. 66); sec. 2, Tax Rate Extension Act 1957 (71 Stat. 9); sec. 2, Tax Rate Extension Act 1958 (72 Stat. 259); sec. 2, Tax Rate Extension Act 1959 (73 Stat. 157); sec. 201, Public Debt and Tax Rate Extension Act 1960 (74 Stat. 290); sec. 2, Tax Rate Extension Act 1961 (75 Stat. 193); sec. 2, Tax Rate Extension Act 1962 (76 Stat. 114); sec. 2, Tax Rate Extension Act 1963 (77 Stat. 72)]

[T.D. 6500, 25 F.R. 11402, Nov. 26, 1960, as amended by T.D. 6598, 27 F.R. 4092, Apr. 28, 1962; TD. 6681, 28 F.R. 11181, Oct. 17, 1963] § 1.11-1 Tax on corporations.

For

(a) Every corporation, foreign or domestic, is liable to the tax imposed under section 11 except (1) corporations described in section 11(d); (2) corporations expressly exempt from all taxation under subtitle A of the Code (see section 501); and (3) corporations subject to tax under section 511(a). definition of the terms "corporation", "domestic", and "foreign", see section 7701(a) (3), (4), and (5), respectively. It is immaterial that a domestic corporation subject to the tax imposed by section 11 may derive no income from sources within the United States. The tax imposed by section 11 is payable upon the basis of returns rendered by the corporations liable thereto, except that in some cases a tax is to be paid at the source of the income. See subchapter A (section 6001 and following), chapter 61 of the Code, and section 1442.

(b) The tax imposed by section 11 consists of a normal tax and a surtax. The normal tax and the surtax are both computed upon the taxable income of the corporation for the taxable year, that is, upon the gross income of the corporation minus the deductions allowed by chapter 1 of the Code. ever, the deduction provided in section 242 for partially tax-exempt interest is not allowed in computing the taxable income subject to the surtax.

How

(c) The normal tax is computed by applying to the taxable income the rate of tax in effect for the taxable year.

(d) The surtax is at the rate of 22 percent and is upon the taxable income (computed without regard to the deduction, if any, provided in section 242 for partially tax-exempt interest) in excess of $25,000. However, in certain circumstances the $25,000 exemption from surtax may be disallowed in whole or in part. See sections 269 and 1551 and the regulations thereunder.

(e) The computation of the tax on corporations imposed under section 11 may be illustrated by the following example:

Example. The X Corporation, a domestic corporation, has gross income of $86,000 for the calendar year 1955. The gross income includes interest of $5,000 on United States obligations for which a deduction under section 242 is allowable in determining taxIt able income subject to the normal tax. has other deductions of $11,000. The tax of the X Corporation under section 11 for the calendar year 1955 is $32,000 ($21.000 normal tax and $11,000 surtax) computed as follows:

Computation of Normal Tax

Gross income..

Deductions:

Partially tax-exempt in

terest--

Other

$86, 000

Taxable income..

Normal tax (30 percent of $70,000)

Computation of Surtaz

thereunder. For additional tax on corporations improperly accumulating surplus, see part I (section 531 and following), subchapter G, chapter 1 of the Code, and the regulations thereunder. For treatment of China Trade Act corporations, see sections 941 and 942 and the regulations thereunder. For treatment of Western Hemisphere trade corporations, see sections 921 and 922 and the regulations thereunder. For treatment of capital gains and losses, see subchapter P (section 1201 and following), chapter 1 of the Code. For computation of the tax for a taxable year during which a change in the tax rates occurs, see section 21 and the regulations thereunder.

[T.D. 6500, 25 F.R. 11402, Nov. 26, 1960, as amended by T.D. 6681, 28 F.R. 11131, Oct. 17, 1963]

§ 1.12 Statutory provisions; cross references relating to tax on corporations. SEC. 12. Cross references relating to tax on corporations. (1) For tax on the unrelated business income of certain charitable and other corporations exempt from tax under this chapter, see section 511.

(2) For accumulated earnings tax and personal holding company tax, see parts I and II of subchapter G (sec. 531 and following).

(3) For doubling of tax on corporations of certain foreign countries, see section 891. (4) For alternative tax in case of capital gains, see section 1201 (a).

(5) For rate of withholding in case of foreign corporations, see section 1442.

(6) For withholding of tax on tax-free covenant bonds, see section 1451.

(7) For limitation on the $25,000 exemption from surtax provided in section 11 (c) see section 1551.

(8) For additional tax for corporations filing consolidated returns, see section 1503. CHANGES IN RATES DURING A TAXABLE YEAR § 1.21 Statutory provisions; effect of changes.

SEC. 21. Effect of changes-(a) General rule. If any rate of tax imposed by this chapter changes, and if the taxable year includes the effective date of the change (unless that date is the first day of the taxable year), then

(1) Tentative taxes shall be computed by applying the rate for the period before the effective date of the change, and the rate for the period on and after such date, to the taxable income for the entire taxable year; and

(2) The tax for such taxable year shall be the sum of that proportion of each tentative tax which the number of days in each

example, if a new tax is imposed for taxable years beginning on or after July 1, 1955, a computation under section 21 would not be required with respect to such new tax in the case of taxable years beginning before July 1, 1955, and ending on or after that date. If the effective date of the imposition of a new tax and the effective date of a change in rate of such tax fall in the same taxable year, section 21 is not applicable in computing the taxpayer's liability for such tax for such year unless the new tax is expressly imposed upon the taxpayer for a portion of his taxable year prior to the change in rate.

(e) If a husband and wife have different taxable years because of the death of either spouse, and if a joint return is filed with respect to the taxable year of each, then, for purposes of section 21, the joint return shall be treated as if the taxable years of both spouses ended on the date of the closing of the surviving spouse's taxable year. See section 6013 (c), relating to treatment of joint return after death of either spouse. Accordingly, if a change in the rate of tax is effective during the taxable year of the surviving spouse, the tentative taxes with respect to the joint return shall be computed on the basis of the number of days during which each rate of tax was in effect for the taxable year of the surviving spouse.

(f) Section 21 applies whether or not the taxpayer has a taxable year of less than 12 months. Moreover, section 21 applies whether or not the taxable income for a taxable year of less than 12 months is required to be placed on an annual basis under section 443. If the taxable income is required to be computed under section 443 (b) then the tentative taxes under section 21 are computed as provided in paragraph (1) or (2) of section 443 (b) and are reduced as provided in those paragraphs. The tentative taxes so computed and reduced are then apportioned as provided in section 21 (a) (2) to determine the tax for such taxable year as computed under section 21.

(g) If a taxpayer has made the election under section 441 (f) (relating to computation of taxable income on the basis of an annual accounting period varying from 52 to 53 weeks), the rules provided in section 441 (f) (2) shall be applicable for purposes of determining whether section 21 applies to the tax

able year of the taxpayer. Where a taxpayer has made the election under section 441 (f) and where section 21 applies to the taxable year of the taxpayer the computation under section 21 (a) (2) shall be made upon the basis of the actual number of days in the taxable year and in each period thereof.

(h) (1) Section 21 is applicable only if a rate of tax imposed by chapter 1 of the Code changes. Sections in which rates of tax are specified or incorporated by reference include the following: 1, 2, 3, 11, 511, 531, 541, 871, 881, and 1201. Section 21 is not applicable with respect to changes in the law relating to deductions from gross income, exclusions from or inclusions in gross income, or other items taken into account in determining the amount or character of income subject to tax. Moreover, section 21 is not applicable with respect to changes in the law relating to credits against the tax or with respect to changes in the law relating to limitations on the amount of tax. Section 21 is applicable, however, to all those computations specified in the section providing the rate of tax which are implicit in determining the rate. For example, if one of the tax brackets in section 1 (b) (1) is changed, section 21 is applicable to that change. Thus, if the bracket relating to "over $50,000 but not over $60,000" should be changed to increase the last sum specified, with corresponding changes being made in subsequent brackets, section 21 is applicable. Another example would be if the $25,000 amount specified in section 11 (c) were changed. Even though there were no other change in section 11 (c), this change would be considered a change in rate.

(2) Ordinarily, both the old and the new rates are applied to the same amount of taxable income. However, where the rate of tax is itself taken into account in determining taxable income (for example, the special deduction for Western Hemisphere trade corporations under section 922), the taxable income used in determining the tentative tax employing the rate before the effective date of change shall be determined by reference to that rate of tax, and the taxable income for the purpose of determining the tentative tax employing the rate for the period on and after the effective date of the change shall be determined by reference to the new tax rate.