692 INCOME TAX . COMPUTATION OF NET INCOME - Contd . Ante, p . 889. Tax -f ree cov ena nt bonds. Post, p. 723. Credits allowed in- dividuals . Normal tax only . Dividends from do- mestic corporations subject to tax herein . China Trade Act corporations, etc ., ex- c epted . Port, p. 738 . Interest on Federal securities . Ante, p . 686. Interest on obliga- tions o f Feder al in- s trume ntali ties . Ante, p. 686 . Earned income credit . Ea rned inco me de- fini tions . "Earned income ." "Earned income de- ductions . 73d CONGRESS . SESS . II. CS I. 277 . MAY 10, 1934. inheritance shall not be reduced or diminished by any deduction for shrinkage (by whatever name called) in the value of su ch interest due to the lapse of time, nor by any deduction allowed by this Act (except the deductions provided for in subsections (1) and (m) of section 23) for the purpose of computing the net income of an estate or trust but not allowed under the laws of such State, Territ ory, Dis trict of Columbi a, posse ssion of the Uni ted Stat es, or fore ign c ountry for the p urpose of computing the income to which such holder is entitled . (c) TAX WITHHELD ON TAX- FREE C OVENAN T BOND S .-For n on- deductibility of tax withheld on tax-free covenant bonds, see section 143 (a) (3) . SEC . 25. CREDITS OF INDIVIDUAL AGAINST NET INCOME . (a) CREDITS FOR NORMAL TAX ONLY.--There shall be allowed for the pu rpose of the nor mal tax, but not for the surtax, the fol lowing credits against the net income (1) DIVIDENDS .-The amount received as dividends from a domestic corporation which is subject to taxation under this title . The credit allowed by this paragraph shall not be allowed in respect of dividends received from a corporation organized under the C hina Trade Act, 1922, or fr om a corporation which und er section 251 is taxable only on its gross income from sources within the United States by reason of its receiving a large per- centage of its gross income from sources within a possession of the United States . (2) INTEREST ON UNITED STATES OBLIGATIONS . -- T h e amount received as interest upon obligations of the United States which is included in gross income under section 22 . (3) IN TERE ST ON OB LIGA TION S OF INSTRUMENTALITIES OF THE UN ITED STATES .-The amount received as inter est o n obl igatio ns of a corporation organized under Act of Congress, if (A) such corporation is an instrumentality of the United States
and (B) such interest is included in gross income under section 22; and (C) under the Act authorizing the issue thereof, as amended and supplemented, such interest is exempt from normal tax . (4) EARNED INCOME CREDIT .--10 per centum of the amount of the earned net income, but not in excess of 10 per centum of the amount of the net income . (5) E ARNED INCOME DEFINITIONS.-For the purposes of this se ctio n- (A) " Earned income " means wages, salaries, professional fees, and other amounts received as compensation for personal services actually rendered, but does not include any amount not included in gross income, nor that part of the compensation derived by the taxpayer for personal services rendered by him toa corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered . In the case of a tax- payer engaged in a trade or business in which both personal services and capital are material income producing factors, a reasonable allowance as compensation for the personal services actually rendered by the taxpayer, not in excess of 20 per centum of his share of the net profits of such trade or business, shall b e consid ered as earned i ncome . (B) " Earned income deductions " means such deductions as are allowed by section 23 for the purpose of computing net income, and are properly allocable to or chargeable against earned income.
