[Code of Federal Regulations]
[Title 26, Volume 10]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.941-3]

[Page 199-200]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.941-3  Illustration of principles.

    The application of section 941 may be illustrated by the following 
example:

    Example. (1) The A Company, a China Trade Act corporation, has 
taxable income (computed without regard to the deduction under section 
941) for the calendar year 1954 of $200,000 and receives no dividends 
from domestic corporations. All of its stock on December 31, 1954, is 
owned on that date by persons resident in Formosa, Hong Kong, the United 
States, or possessions of the United States, or individual citizens of 
the United States. It distributes a special dividend amounting to 
$100,000 on February 15, 1955,

[[Page 200]]

which is certified by the Secretary of Commerce as provided in section 
941(b). For the purpose of the tax imposed by section 11, it is 
necessary in this example to make two computations, first, without 
allowing the special deduction from taxable income on account of income 
derived from sources within Formosa and Hong Kong, and, second, allowing 
such deduction. The computations are as follows:
    (2) First computation; without allowing the special deduction from 
taxable income.

Taxable income...............................................   $200,000
Normal tax (section 11 (b))..................................     60,000
Surtax (section 11 (c))......................................     38,500
Total income tax.............................................     98,500


    (3) Second computation; allowing the special deduction from taxable 
income.

Taxable income.............................................     $200,000



Since the total taxable income is derived from sources within Formosa 
and Hong Kong and since the par value of the shares of stock of the 
corporation owned on the last day of the taxable year by (a) persons 
resident in Formosa, Hong Kong, the United States, or possessions of the 
United States, and (b) individual citizens of the United States wherever 
resident, is 100 percent of the par value of the total number of shares 
of stock of the corporation outstanding on that day, 100 percent of such 
taxable income is deductible.

Special deduction from taxable income......................     $200,000
Amount of income subject to tax under section 11...........         None


    (4) Since the special dividend ($100,000) exceeds the diminution of 
the tax ($98,500) on account of the allowance of the special deduction 
from taxable income, the entire amount of the special deduction is 
allowable and the corporation has no income tax liability for 1954.