able year with respect to dividends unpaid and accumulated for a prior taxable year, such distribution will be deemed to have been made with respect to the earliest year or years for which there are dividends unpaid and accumulated Thus, if a public utility makes a distribution with respect to a prior taxable year, it shall be considered that such distribution was made with respect to the earliest year or years for which there are dividends unpaid and accumu. lated, whether or not the public utility states that the distribution was made with respect to such year or years and even though the public utility states that the distribution was made with respect to a later year. Even though it has dividends unpaid and accumulated with respect to a taxable year ending prior to October 1, 1942, a public utility may, however, receive credit for dividends paid with respect to the current taxable year. If there are no dividends unpaid and accumulated with respect to a taxable year ending prior to October 1, 1942, a public utility may receive credit for dividends paid with respect to a prior taxable year which ended after October 1, 1942; and such credit may be in addition to a credit for dividends paid with respect to the current taxable year. However, if local law or its own charter requires a public utility to pay all unpaid and accumulated dividends before any dividends can be paid with respect to the current taxable year, such public utility will not receive credit for any distribution in the current taxable year to the extent that there are dividends unpaid and accumulated with respect to taxable years ending prior to October 1, 1942.

(c) Stock issued on or after October 1, 1942. In the case of taxable years beginning after December 31, 1943, stock issued on or after October 1, 1942 under certain circumstances will be considered as having been issued prior to October 1, 1942 for purposes of the credit provided in section 26 (h). If the new stock is issued on or after October 1, 1942 to refund or replace bonds or debentures which were issued prior to October 1, 1942, or to refund or replace other stock which was preferred stock within the meaning of section 26 (h) (2) (B), such new stock shall be considered as having been issued prior to October 1, 1942. If stock is issued to refund or replace stock which was preferred stock within the meaning of section

26 (h). (2) (B), it shall be immaterial whether the preferred stock so refunded or replaced was issued before, on, or after October 1, 1942. If stock issued on or after October 1, 1942 to refund or replace stock, which was issued prior to October 1, 1942 and which was preferred stock within the meaning of section 26 (h) (2) (B), is not itself preferred stock within the meaning of section 26 (h) (2) (B), no stock issued to refund or replace such stock can be considered preferred stock for purposes of the credit provided in section 26 (h).

In the case of any stock issued on or after October 1, 1942 to refund or replace bonds or debentures issued prior to October 1, 1942, or to refund or replace other stock which was preferred stock within the meaning of section 26 (h) (2) (B), only that portion of the stock issued on or after October 1, 1942 will be considered as having been issued prior to October 1, 1942, the par or stated value of which does not exceed the par, stated, or face value of such bonds, debentures, or other preferred stock which the new stock was issued to refund or replace. In such case no shares of the new stock issued on or after October 1, 1942 shall be earmarked in determining the credit allowable under section 26 (h), but the appropriate allocable portion of the total amount of dividends paid on such stock will be allowable as a credit under such section.

EXAMPLE. If a public utility has outstanding 1,000 bonds which were issued prior to October 1, 1942 and each of which has a face value of $100 and if on or after October 1, 1942 each of such bonds is retired in exchange for one and one-tenth shares of stock issued on or after October 1, 1942 and having a par value of $100 per share, only ten-elevenths of the dividends paid on the stock thus issued in exchange for the bonds will be considered as having been paid on stock which was issued prior to October 1, 1942. If a dividend of $6 a share is paid on such stock during the taxable year, a credit of $6,000 will be allowable under the provisions of section 26 (h). Likewise, if stock which is issued on or after October 1, 1942 has no par value but a stated value of $50 per share and such stock is issued in a ratio of three shares to one share to refund or replace preferred stock having a par value of $100 per share, only two-thirds of the dividends paid on the new shares of stock will be considered as having been paid on stock which was issued prior to October 1, 1942. If a total of $27,000 is paid as a dividend on such new stock during the taxable year a credit of $18,000 will be allowable under the provisions of section 26 (h).

Whether or not stock issued on or after October 1, 1942 was issued to refund or replace bonds or debentures issued prior to October 1, 1942, or to refund or replace other preferred stock, is in each case a question of fact. Among the factors to be considered is whether such stock is new in an economic sense to the corporation or whether it was issued merely to take the place, directly or indirectly, of bonds, debentures, or other preferred stock of such corporation. It is not necessary that the new stock be issued in exchange for such bonds, debentures, or other preferred stock. The mere fact that the bonds, debentures, or other preferred stock remain in existence for a short period of time after the issuance of the new stock (or were retired before the issuance of the new stock) does not necessarily mean that such new stock was not issued to refund or replace such bonds, debentures, or other preferred stock. It is necessary to consider the entire transaction, including the issuance of the new stock, the date of such issuance, the retirement of the old bonds, debentures, or preferred stock, and the date of such retirement, in order to determine whether such new stock really was issued to take the place of bonds, debentures, or other preferred stock of the corporation or whether it represents something essentially new in an economic sense in the corporation's financial structure. If, for example, a public utility, which has outstanding bonds issued prior to October 1, 1942, issues new stock on March 1, 1944 in order to secure funds with which to retire such bonds and with the money paid in for such stock retires the bonds on April 1, 1944, such stock may be considered as having been issued to refund or replace bonds issued prior to October 1, 1942. Whether the money used to retire the bonds can be traced back and identified as the money paid in for the stock will have evidentiary value, but will not be conclusive, in determining whether the stock was issued to refund or replace the bonds. Similarly, whether the amount of money used to retire the bonds was smaller than, equal to, or greater than that paid in for the stock, or whether the entire issue of bonds is retired, will be important, but not decisive, in making such determination.

Stock issued on or after October 1, 1942 by a corporation to refund or replace bonds or debentures of a second corporation which were issued prior to October 1, 1942, or to refund or replace

other preferred stock of such second corporation, may be considered as having been issued prior to October 1, 1942 if such new stock was issued (1) in a transaction which is a reorganization within the meaning of section 112 (g) (1); or (2) in a transaction to which section 112 (b) (10), relating to reorganization of certain insolvent corporations, or so much of section 112 (d) or (e) as relates to section 112 (b) (10), is applicable; or (3) in a transaction which is subject to the provisions of Supplement R, relating to exchanges and distributions in obedience to orders of the Securities and Exchange Commission. Whether the stock actually was issued to refund or replace bonds or debentures of the second corporation issued prior to October 1, 1942, or to refund or replace preferred stock of such second corporation, shall be determined under the same principles as if only one corporation were involved. A corporation may issue stock to refund or replace its own bonds, debentures, or other preferred stock in a transaction which is a reorganization within the meaning of section 112 (g) (1), in a transaction to which section 112 (b) (10), or so much of section 112 (d) or (e) as relates to section 112 (b) (10), is applicable, or in a transaction which is subject to the provisions of Supplement R. The provisions of this subsection, in addition, are applicable in case a corporation issues stock on or after October 1, 1942 to refund or replace its own bonds, debentures, or other preferred stock even though the issuance of such stock may not fall within one of the categories enumerated above.

Even though stock issued on or after October 1, 1942 is considered as having been issued prior to October 1, 1942 by reason of having been issued to refund or replace bonds or debentures issued prior to October 1, 1942, or to refund or respect of dividends paid on such stock, will not be deemed to be preferred stock within the meaning of section 26 (h) (2) (B), and no credit will be allowable in respect of dividends paid on such stock, unless the stock fulfills all the other requirements of a preferred stock set forth in section 26 (h) (2) (B) and in paragraph (a) of this section.

CODIFICATION: § 29.26-5 was amended in the following respects, by Treasury Decision 5384, June 30, 1944, 9 F.R. 7370:

1. The heading “(a) In general" was inserted immediately after the existing head

note, and the first sentence of the section was amended, as set forth above.

2. In the first sentence of the second paragraph, the phrase "except as provided in paragraph (c) of this section for taxable years beginning after December 31, 1943" was inserted after "October 1, 1942".

3. Paragraphs (b) and (c) were added.

§ 29.27 (g)-1 Dividends paid credit for distributions in liquidation.

CODIFICATION: In § 29.27 (g)-1 (a), there was inserted immediately before the period at the end of subparagraph (2) the following, by Treasury Decision 5356, Apr. 19, 1944, 9 F.R. 4323: "or the gain is taxed as provided in section 112 (b) (7).”

[Insert following statutory quotation immediately preceding sec. 35 of I.R.C.; T.D. 5350, Mar. 22, 1944, 9 F.R. 3254] (Revenue Act of

SEC. 106. VICTORY TAX. 1943, Title I.)

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(c) Technical amendments.

(2) Section 34 (cross reference) is repealed. SEC. 101. TAXABLE YEARS TO WHICH AMENDMENTS APPLICABLE. (Revenue Act of 1943, Title I.)

Except as otherwise expressly provided, the amendments made by this title shall be applicable only with respect to taxable years beginning after December 31, 1943.

§ 29.35-1 Credit for tax withheld on wages. The tax deducted and withheld at the source upon wages under subchapter D of chapter 9 is allowable as a credit against the tax imposed by chapter 1 upon the recipient of the income. If the tax has actually been withheld at the source, credit or refund shall be made to the recipient of the income even though such tax has not been paid over to the Government by the employer. See section 322. For the purpose of the credit, the recipient of the income is the person subject to tax imposed under chapter 1 upon the wages from which the tax was withheld. For instance, if a husband and wife domiciled in a State recognized as a community property State for Federal tax purposes make separate returns, each reporting for income tax purposes one-half of the wages received by the husband, each spouse is entitled to onehalf of the credit allowable for the tax withheld at source with respect to such Similarly, if the wages of a wages. minor child are includible in the gross income of a parent of such child, the amount of income tax withheld at the source on such wages shall be allowed as a credit against the tax imposed upon the parent.

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The credit shall be allowed against the tax imposed by chapter 1 for the taxable year of the recipient of the income which begins in such calendar year. If such recipient has more than one taxable year beginning in such calendar year, the credit shall be allowed against the tax for the last taxable year so beginning. [T.D. 5325, Jan. 8, 1944, 9 F.R. 367] CODIFICATION: § 29.35-1 was inserted immediately following section 35, I.R.C. ACCOUNTING AND METHODS OF ACCOUNTING § 29.42-1 When included in gross income-(a) In general. Except as otherwise stated in this paragraph, such items as claims for compensation under canceled Government contracts constitute income for the year in which they are allowed or their value is otherwise definitely determined, if the return is rendered on the accrual basis; or for the year in which received, if the return is rendered on the basis of cash receipts and disbursements. In the case of a termination of a war contract as defined by section 3 of the Contract Settlement Act of 1944 (or the termination of any other Government contract as to which the right to compensation is definitely fixed and the measure thereof is determinable with reasonable accuracy), if the return is rendered on a basis other than cash receipts and disbursements, compensation for the termination shall, unless a different method of reporting is prescribed or approved by the Commissioner, constitute income for the taxable year in which falls the effective date of the termination, except that if any part of the compensation is attributable to cost, expenses, or losses incurred in a subsequent year such part of the compensation shall be returned as income for the subsequent year. [Substituted for last sentence by T.D. 5405, Sept. 22, 1944, 9 F.R. 11736]

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§ 29.44-5 Gain or loss upon disposition of installment obligations.

CODIFICATION: In § 29.44-5, the words "24 months" were deleted from the third paragraph (commencing the "If taxpayer,

*") and the words "6 months" were substituted therefor, by Treasury Decision 5334, Feb. 28, 1944, 9 F.R. 2434.

[Insert following statutory quotation immediately preceding § 29.45-1; T.D. 5426, Dec. 29, 1944, 10 F.R. 24]

(b) Technical amendment. Section 45 relating to allocation of income and deductions) is amended by striking out "gross income or deductions" and inserting in lieu thereof "gross income, deductions, credits, or allowances".

(c) Taxable years to which applicable. The amendments made by this section shall be effective with respect to taxable years beginning after December 31, 1943. The determination of the law applicable to prior taxable years shall be made as if this section had not been enacted and without inferences drawn from the fact that the amendment made by this section is not expressly made applicable to prior taxable years.

§ 29.45-1 Determination of the net taxable net income of a controlled taxpayer-(a) Definitions.

(6) It does not mean the income, the deductions, the credits, the allowances, or the item or element of income, deductions, credits, or allowances, resulting to the controlled taxpayer by reason of the particular contract, transaction, or arrangement, the controlled taxpayer, or the interests controlling it, chose to make (even though such contract, transaction, or arrangement be legally binding upon the parties thereto).

(b) Scope and purpose.

It is not intended (except in the case of the computation of consolidated net income under a consolidated return) to effect in any case such a distribution, apportionment, or allocation of gross income, deductions, credits, or allowances, or any item of gross income, deductions, credits, or allowances, as would produce a result equivalent to a computation of consolidated net income under section 141.

CODIFICATION: § 29.45-1 was amended in the following respects, by Treasury Decision 5426, Dec. 29, 1944, 10 F.R. 24:

1. In paragraph (a) (6), the last sentence was amended to read as set forth above.

2. In paragraph (b), the words "gross income or deductions," were deleted from the third sentence, and the words "gross income, deductions, credits, or allowances" were substituted in lieu thereof.

3. The second sentence of the third paragraph of paragraph (b) was amended to read as set forth above.

4. In paragraph (c), the last three words "income or deductions" in the second sentence of the first paragraph were deleted and the words "income, deductions, credits, or allowances" substituted in lieu thereof.

SEC. 104. REDUCTION OF CREDITS IN CASE OF SHORT YEAR LIMITED TO JEOPARDY. (Revenue Act of 1943, Title I.)

Section 47 (e) (relating to reduction of personal exemption and credit for dependents in case of short taxable year) is amended by striking out ", except a return made under subsection (a), on account of a change in the accounting period" and inserting in lieu thereof "under section 146 (a) (1)".

SEC. 101. TAXABLE YEARS TO WHICH AMENDMENTS APPLICABLE. (Revenue Act of 1943, Title I.)

Except as otherwise expressly provided, the amendments made by this title shall be applicable only with respect to taxable years beginning after December 31, 1943.

SEC. 10. CREDITS AGAINST NET INCOME. dividual Income Tax Act of 1944, Part I.)

(In

(c) Reduction of credits in case of jeopardy. Section 47 (e) (relating to reduction of certain credits against net income in case of Jeopardy) is amended by striking out "personal exemption and credit for dependents" and inserting in lieu thereof "normal tax exemption and surtax exemptions"; and by striking out "the full credits provided" and inserting in lieu thereof "the full normal tax exemption (in the case of the normal tax) and the full surtax exemptions (in the case of the surtax)".

SEC. 2. TAXABLE YEARS TO WHICH APPLICABLE. (Individual Income Tax Act of 1944, Part I.) Except as otherwise expressly provided, the amendments made by this part shall be applicable with respect to taxable years beginning after December 31, 1943.

§ 29.47-1 Returns for periods of less than 12 months. No return can be made for a period of more than 12 months. A separate return for a fractional part of a year is therefore required wherever there is a change, with the approval of the Commissioner, in the basis of computing net income from one taxable year to another taxable year. The periods to be covered by such separate returns in the several cases are stated in section 47 (a). The requirements with respect to the filing of a separate return and the payment of tax for a part of a year are the same as for the filing of a return and the payment of tax for a full tax