the case of an individual who dies during the taxable year, such credits 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 period for which such survivor makes return of income.

Section 216 (a), section 234 (a) (6), and section 325 (a). Credit or deduction allowed for dividends received from foreign corporations the net income of which is in part subject to income tax.

Under the wording of these sections a taxpayer who receives a dividend from a corporation who receives no income from sources within the United States must pay full normal or corporation tax upon such dividend, but if any portion-however small-of the income of the foreign corporation is derived from sources within the United States the entire dividend is an allowable credit to the individual who receives the dividend.

It has been suggested that under this condition of the law a foreign corporation has only to make such arrangements as will result in securing a small amount of income from sources within the United States in order to exempt from income tax all dividends paid to American stockholders, and that the law should be amended so that this credit to the American stockholder shall be limited to that proportion of the dividend which the net income of the foreign corporation subject to income tax bears to its entire taxable income.

It is further urged in support of this suggestion that the taxability of the dividend has important reactions upon the invested capital of any American stockholder subject to profits tax because of the fact that stock of a foreign corporation is an admissible asset if the dividend be in any part subject to tax, whereas it is an inadmissible asset if the dividend is exempt.

It has been suggested that these changes could be accomplished by an amendment in substantially the following form:

(1) That subdivision (a) of section 216 be amended by striking out the semicolon and substituting therefor a colon and the following:

Provided, That in the case of dividends received from a foreign corporation there shall be credited under this subdivision only that proportion of such dividends which the net income of such foreign corporation subject to income tax under this act for the year ending prior to the beginning of the taxable year in which such dividends were declared (or so much of such years as the corporation was in existence) bears to its entire taxable income for the same year as computed for purposes of income tax under this act;

(2) That paragraph (6) of subdivision (a) of section 234 be amended by striking out the semicolon and substituting therefor a colon and the following:

Provided, That in the case of dividends received from a foreign corporation there shall be deducted a proportion thereof computed in the manner prescribed in subdivision (a) of section 216;

(3) That the definition of "inadmissible assets" in section 325 be amended by striking out the semicolon at the end thereof and adding a colon and the following:

Provided, That in the case of capital invested in stock of a foreign corporation a part thereof shall be deemed inadmissible assets equal to the part of the dividends deductible under the provisions of paragraph 6 of subdivision (a) of section 234;

Section 226. Returns when accounting period changes.

Section 226 provides for returns of income for fractional parts of years in cases in which there is a change from fiscal year to calendar year, calendar year to fiscal year, or one fiscal year to another, and in cases of the first income tax returns of taxpayers. By section 239 the provisions of this section are made applicable to corporations. Section 226 provides for a corresponding reduction of credits in the case of individuals and section 239 in the case of corporations. Provisions for reduction of war and excess-profits credits are contained in sections 305 and 311. Section 326 contains a provision with respect to invested capital which effects a proper adjustment of the rates of profits taxes in cases of fractional parts of years. There is, however, no provision in the case of individuals, which adjusts the rates of surtaxes in cases of fractional parts of years.

It has been suggested that provision should also be made for the adjustment of the rates of surtaxes in the cases of individuals making return for fractional parts of years.

It is urged in support of this suggestion that an individual who makes a return for a fractional part of a year secures a lower rate of surtax than would be applied to him if he made return for an entire year.

It has been suggested that this change could be accomplished by an amendment in substantially the following form:

Amend section 226 by adding at the end thereof a new paragraph as follows:

In the case of a return for a fractional part of a year the surtax shall be such part of a surtax computed upon an amount twelve times the average monthly income for the fractional part of the year included in the return as the number of months in such period is of twelve months.

Section 233. For suggestions relating to this section see suggestions under section 213.

Section 234. For suggestions relating to this section, see suggestions under sections 214 and 216.

Section 234 (a) (3). Taxes paid by obligors of tax-free covenant bonds deductible as interest.

The Treasury Department in article 31, regulations 45, in defining what shall be included in gross income, requires that the amount of income tax paid for a bondholder by an obligor pursuant to a tax-free covenant in its bonds is in the nature of additional interest paid the bondholder and must be included in his gross income.

Inasmuch as the corporation is prohibited by statute from deducting the amounts so paid on tax-free covenant bonds and the recipient of the interest is required to take up the amount so paid as additional income, it is suggested that the proviso in paragraph 3 of subdivision (a) of section 234 should be amended to permit the corporation to deduct the amounts paid on account of its tax-free covenant bonds as interest paid. The corporation not being entitled to deduct these amounts pays income, war-profits, and excess-profits taxes on such amounts, and the individual is required to take them up and pay both normal and additional taxes. In this way it is suggested that the Government is receiving the normal tax twice on the same item of income.

It has been suggested that this change can be accomplished by an amendment in substantially the following form:

Amend paragraph 3 of subdivision (a) of section 234 by striking out the semicolon at the end thereof and inserting a comma and the following: "but such tax may be deducted by the obligor as interest;"

Section 250 (d). Limitation upon the reexamination and amendment of income tax-returns.

This section of the law has been held by the department to impose a five-year limitation upon the assessment or reopening of income taxes, and upon the beginning of any suit or proceeding for the collection of any income tax, only to taxes due under the revenue act of 1918 and not to taxes due under prior income tax laws.

It has been suggested that it would be expedient to extend this limitation to taxes due under all income tax laws which have been imposed, except in the case of false or fraudulent returns, as now provided with respect to the taxes due under the revenue act of 1918.

It has been suggested that this change could be accomplished by an amendment in substantially the following form:

Strike out subdivision (d) of section 250 and insert in lieu thereof:

(d) Except in the case of false or fraudulent returns with intent to evade the tax, the amount of tax due under any return under this or prior acts shall be determined and assessed by the Commissioner within five years after the return was due or was made, and no suit or proceeding for the collection of any tax shall be begun after the expiration of five years after the date when the return was due or was made. In the case of such false or fraudulent returns, the amount of tax due may be determined at any time after the return is filed, and the tax may be collected at any time after it becomes due.

Section 250 (e). Interest payment rate of one-half per cent per month and abatement of 5 per cent penalty in the case of bona fide claims for abatement made applicable to claims still pending under prior acts.

There are a few income tax cases of bona fide claims for abatement still pending under prior acts.

It has been suggested that the more liberal rule adopted in the revenue act of 1918 should apply in such cases.

This rule provides that with respect to any amount of income tax which is the subject of a bona fide claim for abatement the 5 per cent penalty shall not attach and the interest from the time the amount was due until the claim is decided shall be at the rate of one-half of 1 per cent per month.

It has been suggested that this change could be accomplished by an amendment in substantially the following form:

Strike out the first paragraph of subdivision (e) of section 250 and insert the following:

(e) If any income tax under this or prior acts remains unpaid after the date when it is due, and for ten days after notice and demand by the collector, then, except in the case of estates of insane, deceased, or insolvent persons, there shall be added as part of the tax the sum of 5 per centum on the amount due but unpaid, plus interest at the rate of 1 per centum per month upon such amount from the time it became due: Provided, That as to any such amount which is the subject of a bona fide claim for abatement such sum of 5 per centum shall not be added and the interest from the time the amount was due until the claim is decided shall be at the rate of one-half of 1 per centum per month.

TITLE III-WAR-PROFITS AND EXCESS-PROFITS TAX.

Section 302. Adjustment of the limitation provided by this section in the case of returns covering less than twelve months. Doubt exists whether, in the application of section 302, the limits or brackets of $3,000 and $20,000, respectively, should be reduced when the taxpayer makes return for less than one year. If such reduction be not made, a discriminatory advantage is conferred on the taxpayer who makes return for less than 12 months. In order to set this doubt at rest it has been suggested that there be inserted in section 302 a specific statement to the effect that if the return is made for less than 12 months, the limiting amounts of $3,000 and $20,000 as used in this section shall be correspondingly or proportionately reduced.

It has been suggested that this change could be accomplished by an amendment in substantially the following form:

Amend section 302 by adding a new paragraph at the end thereof, as follows:

In cases in which a return is made for less than a twelve-month period, the limiting amounts of $3,000 and $20,000 as used in this section shall be reduced to an amount equal to the same number of twelfths of such limiting amounts as the number of calendar months for which the return is made.

Section 325. For suggestions relating to this section, see suggestions under section 216.

Section 326 (a) (3). Federal income and excess profits taxes in computation of invested capital.

This section of the law provides that in computing invested capital there may be included therein the "paid in or earned surplus and undivided profits; not including surplus and undivided profits earned during the year." The interpretation placed upon the statute by the Treasury Department is that for the purpose of computing invested capital, Federal income and war profits and excess profits taxes are deemed to have been paid out of the net income of the taxable year for which they are levied, and that amounts payable on account of such taxes for the preceding year may be included in the computation of invested capital only until such taxes become due and payable.