mentality of any of the foregoing, lack of funds appropriated to pay such remuneration; or (iv) any other event determined to be similar in nature under regulations prescribed by the Commissioner with the approval of the Secretary; and (B) wages or salaries which are received or accrued during the taxable year by an employee for services performed prior to the taxable year for his employer and which constitute retroactive wage or salary increases ordered, recommended, or approved by any Federal or State agency, and made retroactive to any period prior to the taxable year; and (C) payments which are received or accrued during the taxable year as the result of an alleged violation by an employer of any State or Federal law relating to labor standards or practices, and which are determined under regulations prescribed by the Commissioner with the approval of the Secretary to be attributable to a prior taxable year. Amounts not includible in gross income under this chapter shall not constitute "back pay."

(b) Technical amendment. The title of section 107 is amended by adding at the end thereof the following: "And Back Pay."

(c) Taxable years to which applicable. The amendments made by this section shall be effective with respect to taxable years beginning after December 31, 1940.

§ 29.107-3 Back pay attributable to prior taxable years. Section 107 (d) (2) defines "back pay" and section 107 (d) (1) limits the amount of tax resulting from the inclusion of such back pay in gross income for the year in which it is received or accrued. Back pay includes compensation, wages, salaries, pensions and retirement pay received or accrued during the taxable year by an employee for services performed prior to the taxable year for his employer and which would have been paid prior to the taxable year but for the intervention of any one of the following events: (1) bankruptcy or receivership of the employer; (2) dispute as to the liability of the employer to pay such remuneration, which is determined after the commencement of court proceedings; (3) if the employer is the United States, a State, a Territory, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any of the foregoing, lack of funds appropriated to pay such remuneration; or (4) any other event determined to be similar in nature under these regulations. As to what constitutes bankruptcy and receivership proceedings see § 29.274–1.

An event will be considered similar in nature to those events specified in section 107 (d) (2) (A) (i), (ii) and (iii) only if the circumstances are unusual, if

they are of the type specified therein, if they operate to defer payment of the remuneration for the services performed, and if payment, except for such circumstances, would have been made prior to the taxable year in which received or accrued. For the purposes of this section the term "back pay" does not include remuneration which is deemed to be constructively received in the taxable year or years in which the services were performed, remuneration paid in the current year in accordance with the usual practice or custom of the employer even though received in respect of services performed in a prior year or years, additional compensation for past services where there was no prior agreement or legal obligation to pay such additional compensation, or any amount which is not includible in gross income under chapter 1.

The term "back pay" also embraces retroactive wage or salary increases received or accrued in respect of services performed by an employee for his employer in a prior taxable year which have been ordered, recommended, or approved by any Federal or State agency such as, but not limited to, the War Labor Board or any regional War Labor Board, the Salary Stabilization Unit of the Bureau of Internal Revenue, and boards authorized by the Railway Labor Act (44 Stat. 577), as amended (45 U.S.C., 1940 ed., ch. 8), comparable State organizations, and United States and State courts; payments made as a result of alleged violations of sections 6 and 7 of the Fair Labor Standards Act of 1938 (52 Stat. 1062 and 1063, as amended; 29 U.S.C., 1940 ed., secs. 206 and 207), and made retroactive to any period prior to the taxable year; and payments which are received or accrued during the taxable year arising out of an alleged violation by an employer of any State or Federal law relating to labor standards or practices, such as payments received to effectuate the policies of the National Labor Relations Act (49 Stat. 449), as amended (29 U.S.C., 1940 ed., secs. 151-166). The term "wage or salary increases" as used in this section includes payments not made until after the close of the taxable year on account of regulations, orders, or rulings under the Inflation Control Act of 1942 (56 Stat. 765; 50 U.S.C., App., Sup., secs. 961-971) even though the total amount paid for the services rendered does not exceed the amount payable by contract or under established policy.

An individual must compute his net income for any taxable year to which back pay is attributable, even though he was not required to make a return for such year. Thus, all amounts properly includible as gross income for any taxable year to which back pay is attributable must be included in the computation.

For the purpose of determining under section 107 (d) the particular taxable year or years to which the back pay is attributable and, if such back pay is attributable to more than one taxable year, the amount thereof which is attributable to each of such taxable years, the following rules will be applicable:

(1) Back pay, as defined under section 107 (d) (2) (A), shall be deemed to be attributable to a particular taxable year in the amount and to the extent that it would have been paid in such year except for the intervention of one of the events described in section 107 (d) (2) (A).

(2) Back pay, as defined under section 107 (d) (2) (B), shall be deemed to be attributable to a particular taxable year in the amount and to the extent that it would have been paid in such year had the wage or salary increase as described in section 107 (d) (2) (B) been actually put into effect on the date to which it was first made retroactive.

(3) Back pay, as defined under section 107 (d) (2) (C), shall be deemed to be attributable to a particular taxable year in the amount and to the extent that it represents payments in respect of the alleged violation described in section 107 (d) (2) (C) which occurred in such year or which continued during any part of such year.

(4) In those cases where a computation has been made by, or under the direction of, a Federal or State agency (including any Federal or State court) under which the back pay was awarded, which indicates that particular portions of such back pay are attributable to certain definite periods of time, such computation shall be accepted as the appropriate apportionment for the purposes of these regulations.

(5) Where no such computation has been made as provided in (4), and where the apportionment cannot be accurately made upon consideration of all the attendant circumstances in accordance with the applicable rule prescribed in (1), (2), or (3), then in proper cases the back

pay shall be apportioned to each of the taxable years within which fall one or more calendar months included within the entire period for which such back pay has been paid, as if such back pay had been received or accrued in equal portions in each of such calendar months. For the purposes of this section, a fractional part of a month is to be disregarded unless it amounts to more than half a month, in which case it is to be considered as a month.

The first step in determining whether section 107 (d) is applicable is the determination of the percentage which the back pay is of the gross income of the taxpayer for the current taxable year. It must exceed 15 per centum of such gross income. The amount of the tax attributable to such back pay is the difference between the tax for the taxable year computed with the inclusion of such back pay in gross income and the tax for such taxable year computed without including such back pay in such gross income.

The amount of the tax attributable to 'such back pay in each taxable year is the difference between the tax for such taxable year computed with the inclusion in gross income of the portion of such back pay attributable to such taxable year and the tax for such taxable year computed without including any part of such back pay in gross income.

The tax for the current taxable year is (1) the tax computed with the inclusion in gross income of the entire back pay received or accrued in the taxable year, or (2) the tax computed without including any such back pay in gross income for the current taxable year, plus the aggregate of the increases in the taxes which would have resulted from the inclusion of the respective portions of such back pay in gross income for each taxable year to which each such portion is respectively attributable, whichever is the smaller.

This may be illustrated by the following example in which the taxpayer makes his returns on the cash receipts and disbursements basis, and in which it is assumed that he is entitled to use and uses for the taxable years 1944 and 1941 the alternative tax provided in Supplement

T:

Example. In 1944 a single person with no dependents who makes his income tax returns on the calendar year basis receives $2,900, which amount constitutes his adjusted gross income. Of this amount $500 consti

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tutes back pay. His tax for the calendar year 1944 on $2,900 would be $490. On $2,400 ($2,900 minus $500) the tax would be $384. That part of the tax for 1944 attributable to back pay is therefore $106 ($490 minus $384). Of the back pay $300 is attributable to the year 1941. During such year he had received $2,000. For such year the amount of tax on $2,000 is $104. The amount of tax which he would have paid for such year had he included in gross income the portion of back pay attributable to such year would be $130. The increase in the tax for such year would be $26 ($130 minus $104).

The remainder of the back pay, $200, is attributable to the calendar year 1940. During such year his net income was $1,800. For such year the amount of tax, including the defense tax, on $1,800 is $36.08 and the amount of tax, including the defense tax, which he would have paid for such year had he included in gross income the portion of back pay attributable to such year would be $44. The increase in the tax for such year would be $7.92 (844 minus $36.08). The aggregate of increases in the taxes for the calendar years 1941 and 1940 would be $33.92. The tax for the calendar year 1944 is the smaller of $384 plus (1) $106 or (2) $33.92. Since $33.92 is smaller than $106 the tax for the calendar year 1944 is $417.92 ($384 plus $33.92).

Section 6 (d) (3) of the Current Tax Payment Act of 1943, as amended by section 506 (b) of the Revenue Act of 1943, provides that section 107 of the Internal Revenue Code shall be applied without regard to subsections (a) and (b) of section 6 of the Current Tax Payment Act of 1943. For example, a taxpayer who had received or accrued compensation including back pay in 1943 determines his income tax, including the victory tax, for such year in the manner provided in section 107 of the Internal Revenue Code before the application of section 6. In the process of determining such tax, portions of such compensation are attributable to prior years and the limitation upon the increase in the tax for 1943 attributable to such compensation is determined by reference to the tax for the respective years computed upon the portion of such compensation allocable to such years. While all of such compensation is included in gross income for 1942 or 1943, as the case may be, such compensation is attributable to prior years without regard to section 6 of the Current Tax Payment Act of 1943. This may be illustrated by the following example in which the taxpayer makes his returns on the cash receipts and disbursements basis, and in which it is assumed that he is entitled to use and

uses for the taxable years 1943, 1942 and 1941 the alternative tax provided in Supplement T:

Example. In 1943 a single person (not the head of a family) who makes his income tax returns on a calendar year basis receives $2,200. Of this amount $600 constitutes back pay. Including the victory tax, his tax liability for 1943 on $2,200 would be $342.10. On $1,600 ($2,200 minus $600) the tax liability would be $216.60. That part of the tax liability for the calendar year 1943 attributable to back pay is therefore $125.50 (8342.10 minus $216.60). Of the back pay $400 is attributable to the calendar year 1942. During such year he had received $1,000. For the calendar year 1942 the amount of tax liability on $1,000 is $76. The amount of tax liability for such year had he included in gross income the portion of back pay attributable to the calendar year 1942 would be $145. The increase in the tax liability for such year would be $69 ($145 minus $76).

The remainder of the back pay, $200, is attributable to the calendar year 1941. During such year he had received $1,000. For such year the amount of tax on $1,000 is $18, and the amount of tax which he would have paid for such year had he included in gross income the portion of back pay attributable to the year 1941 would be $35. The increase in the tax for such year would be $17 ($35 minus $18). The aggregate of the increases in the taxes for the calendar years 1942 and 1941 would be $86. The tax Hability for the calendar year 1943 is the smaller of $216.60 plus (1) $125.50 or (2) $86. Since 886 is smaller than $125.50, the tax liability for the calendar year 1943, prior to the application of section 6 of the Current Tax Payment Act of 1943, is $302.60. For the application of section 6 of the Current Tax Payment Act of 1943, see the regulations thereunder, set forth in Treasury Decision 5300, approved October 1, 1943, and amendments thereto.

[T.D. 5389, July 10, 1944, 9 F.R. 7744] [Insert following statutory quotation immediately preceding sec. 109 of I.R.C.; T.D. 5401, Aug. 26, 1944, 9 F.R. 104501

SEC. 108. CERTAIN FISCAL YEAR TAXPAYERS. (Revenue Act of 1943, Title I.)

(a) In general. Section 108 (relating to certain fiscal years) is amended to read as follows:

SEC. 108. FISCAL YEAR TAXPAYERS.

(b) Taxable years beginning in 1943 and ending in 1944. In the case of a taxable year beginning in 1943 and ending in 1944, the tax imposed by sections 11, 12, 13, 14, 15, and 450 shall be

(1) Corporations. In the case of a corporation, an amount equal to the sum of—

(A) that portion of a tentative tax, computed as if the law applicable to taxable years beginning on January 1, 1943, were applicable to such taxable year, which the

number of days in such taxable year prior to January 1, 1944, bears to the total number of days in such taxable year, plus

(B) that portion of a tentative tax, computed as if the law applicable to taxable years beginning on January 1, 1944, were applicable to such taxable year, which the number of days in such taxable year after December 31, 1943, bears to the total number of days in such taxable year.

(2) Taxpayers other than corporations. In the case of a taxpayer other than a corporation, an amount equal to the sum of—

(A) that portion of a tentative tax, computed as if the law applicable to taxable years beginning on January 1, 1943, were applicable to such taxable year, which the number of days in such taxable year prior to January 1, 1944, bears to the total number of days in such taxable year, plus

(B) that portion of a tentative tax, computed as if the law applicable to taxable years beginning on January 1, 1944, were applicable to such taxable year, which the number of days in such taxable year after December 31, 1943, bears to the total number of days in such taxable year.

(c) Special classes of taxpayers. This section shall not apply to an insurance company subject to Supplement G, an investment company subject to Supplement Q, or a Western Hemisphere Trade Corporation, as defined in section 109.

(b) Taxable years to which applicable. Section 108 (a) of the Internal Revenue Code, as amended by subsection (a) of this section, shall be applicable to taxable years beginning in 1941 and ending after June 30, 1942. The other amendments made by subsection (a) of this section shall be applicable only to taxable years beginning in 1943 and ending in 1944.

§ 29.108-1 Computation of tax for taxable years beginning in 1943 and ending in 1944. For a taxable year beginning in 1943 and ending in 1944, the normal tax, surtax, and victory tax imposed by sections 11, 12, and 450 upon taxpayers other than corporations, and the normal tax and surtax imposed by sections 13, 14, and 15 upon corporations shall be computed as follows:

(a) Corporations. In the case of a corporation, the normal tax and the surtax shall be the sum of the following:

(1) That portion of a tentative normal tax and surtax, computed under the law applicable to taxable years beginning on January 1, 1943, which the number of days prior to January 1, 1944, in the taxable year of the taxpayer bears to the total number of days in such taxable year, and

(2) That portion of a tentative normal tax and surtax, computed under the law applicable to taxable years beginning on

January 1, 1944, which the number of days after December 31, 1943, in the taxable year of the taxpayer bears to the total number of days in such taxable year.

(b) Taxpayers other than corporations. In the case of a taxpayer other than a corporation, the normal tax, surtax, and victory tax shall be the sum of the following:

(1) That portion of a tentative normal tax, surtax, and victory tax, computed under the law applicable to taxable years beginning on January 1, 1943, which the number of days prior to January 1, 1944, in the taxable year of the taxpayer bears to the total number of days in such taxable year, and

(2) That portion of a tentative normal tax and surtax, computed under the law applicable to taxable years beginning on January 1, 1944, which the number of days after December 31, 1943, in the taxable year of the taxpayer bears to the total number of days in such taxable year.

The provisions of section 108 apply to estates, trusts, and nonresident alien individuals whose tax is computed under sections 11 and 12. The method of computation prescribed in section 108 is not applicable, however, to an insurance company subject to Supplement G, an investment company subject to Supplement Q, or a Western Hemisphere Trade Corporation as defined in section 109.

The provisions of section 108 apply to a taxable year beginning in 1943 and ending in 1944, whether or not such taxable year is one of less than 12 months. In the case of a taxpayer, whether a corporation or a taxpayer other than a corporation, which is subject to the provisions of section 108 (b) and which due to a change in accounting period has a taxable year of less than 12 months, the net income shall be placed upon an annual basis under the provisions of section 47 (c) (1) for the purpose of both tentative tax computations under section 108 (b) (1) (A) and (B) or section 108 (b) (2) (A) and (B), or shall be computed under the exception in section 47 (c) (2), for the purpose of both such tentative tax computations. Regardless of the method adopted, the amounts of the tentative normal tax and surtax so computed upon the basis of 12 months' income shall be properly reduced under section 47 (c) in order to determine the tentative taxes under section 108 (b)

(1) (A) and (B) or section 108 (b) (2) (A) and (B). However, in the case of a taxpayer, whether a corporation or a taxpayer other than a corporation, which is subject to the provisions of section 108 (b) and which due to any reason other than a change in accounting period has a taxable year of less than 12 months, the net income shall not be placed on an annual basis under section 47 (c) (1) and shall not be computed under the exception in section 47 (c) (2). In any case in which the taxpayer, whether a corporation or a taxpayer other than a corporation, which is subject to the provisions of section 108 (b) has an excess of net long-term capital gains over net short-term capital losses, the alternative tax under section 117 (c) shall be an amount equal to the sum of the proper portions of the tentative taxes determined under section 108 (b) (1) (A) and (B) or section 108 (b) (2) (A) and (B), as the case may be, by computing each such tentative tax pursuant to the alternative tax computation provided in section 117 (c), regardless of whether either tentative tax so computed on the alternative basis is larger or smaller than the tentative tax computed without regard to section 117 (c).

In the case of a corporation whose taxable year begins in 1943 and ends in 1944, the credit under section 26 (e) for income subject to the tax imposed by Subchapter E of Chapter 2 (the excess profits tax), for the purposes of the first tentative tax computation provided in section 108 (b) (1) (A), shall be the adjusted excess profits net income used in computing the first tentative excess profits tax provided in section 710 (a) (6) (A), and for the purposes of the second tentative tax computation provided in section 108 (b) (1) (B), shall be the adjusted excess profits net income used in computing the second tentative excess profits tax provided in section 710 (a) (6) (B) with the following exceptions:

In the case of a taxable year of a corporation of less than twelve months, the credit under section 26 (e) for income subject to excess profits tax, for the purpose of both tentative taxes under section 108 (b) (1) (A) and (B), shall be an amount computed as provided in §§ 29.47-1 or 29.47-2 (a) or (b), depending upon whether or not such taxable year is a year of less than 12 months because of a change in accounting period and upon whether the net income has

been placed on an annual basis under section 47 (c) (1) or has been computed as the net income for a 12-month period under the exception contained in section 47 (c) (2).

In the case of a corporation computing its excess profits tax under section 721 (relating to abnormalities in income in the taxable period), section 726 (relating to corporations completing contracts under the Merchant Marine Act of 1936), section 731 (relating to corporations engaged in mining strategic minerals), or section 736 (b) (relating to corporations with income from longterm contracts), such credit for income subject tot excess profits tax shall be in the case of the tentative tax computed under section 108 (b) (1) (A), the amount of which the first tentative excess profits tax computed under the provisions of section 710 (a) (6) (A) without regard to the 80 percent limitation provided in section 710 (a) (1) (B) is 90 percent, and in the case of the tentative tax computed under section 108 (b) (1) (B), the amount of which the second tentative excess profits tax, similarly computed under the provisions of section 710 (a) (6) (B), is 95 percent.

With respect to the credit for income subject to the excess profits tax imposed by Chapter 2 E in case the corporation is entitled to use the excess profits credit based upon a constructive average base period net income, see § 29.26-4.

In the case of a taxpayer, whether a corporation or a taxpayer other than a corporation, subject to the provisions of section 108 (b), any credit against the tax otherwise imposed by sections 11, 12, 13, 14, 15, and 450, such as the credit for taxes paid to a foreign country or possession of the United States under section 131, shall be deducted from, and any limitations contained in such credit shall be based upon, the tax computed under section 108 (b). However, in those instances in which a taxpayer other than a corporation computes the second tentative tax under section 108 (b) (2) (B) by taking into account the optional standard deduction under section 23 (aa) as added by section 9 of the Individual Income Tax Act of 1944, the following credits shall be computed only with respect to that portion of the first tentative tax determined under section 108 (b) (2) (A): All credits under section 131 with respect to taxes of foreign countries and possessions, and all