20 CODIFICATION OF INTERNAL REVENUE LAWS (whether beginning on, before, or after January 1, 1939), exceeds the amount of the credit provided in section 26 (c) (relating to net operating losses), for such preceding taxable year (if begin- ning after December 31, 1937); and (4) Amounts used or irrevocably set aside to pay or to retire indebtedness of any kind, if such amounts are reasonable with respect to the size and terms of such indebtedness. As used in this paragraph the term "indebtedness" means only an indebted- ness of the corporation existing at the close of business on Decem- ber 31, 1937, and evidenced by a bond, note, debenture, certificate of indebtedness, mortgage, or deed of trust, issued by the cor- poration and in existence at the close of business on December 31, 1937, or by a bill of exchange accepted by the corporation prior to, and m existence at, the close of business on such date. Where the indebtedness is for a principal sum, with interest, no credit shall be allowed under this paragraph for amounts used or set aside to pay such interest. (b) BASIC SURTAX CREDIT. -As used in this chapter the term "basic surtax credit" means the sum of: (1) The dividends paid during the taxable year, increased by the consent dividends credit provided in section 28, and reduced by the amount of the credit provided in section 26 (a), relating to interest on certain obligations of the United States and Gov- ernment corporations; (2) The net operating loss credit provided in section 26 (c) (1) * (3) The bank affiliate credit provided in section 26 (d). The aggregate of the amounts under paragraphs (2) and (3) shall not exceed the adjusted net income for the taxable year. (c) DIVIDEND CARRY-OvER. -T here shall be computed with respect to each taxable year of a corporation a dividend carry-over to such year from the two preceding taxable years, which shall consist of the sum of- (1) The amount of the basic surtax credit for the second pre- ceding taxable year, relduced by the adjusted net income for such year, and further reduced by the amount, if any, by which the adjusted net income for the first preceding taxable year exceeds the sum of- (A) The basic surtax credit for such year; and (B) The excess, if any, of the basic surtax credit for the third preceding taxable year over the adjusted net income for such year; and (2) The amount, if any, by which the basic surtax credit for the first preceding taxable year exceeds the adjusted net income for such year. In the case of a preceding taxable year, referred to in this sub- section, which begins in 1937, the adjusted net income shall be the adjusted net income as defined in section 14 of the Revenue Act of 1936, and the basic surtax credit shall be only the dividends paid credit computed under the Revenue Act of 1936 without the benefit of the dividend carry-over provided in section 27 (b) of such Act. In the case of a preceding taxable year, referred to in this subsection, which begins in 1938, the adjusted net income shall be the adjusted net income as defined in section 13 (a) of the Revenue Act of 1938, 52 Stat. 455, and the basic surtax credit shall be the basic surtax credit as defined in section 27 of the Revenue Act of 1938, 52 Stat. 468. (d) DIVIDENDS IN KIND.- If a dividend is paid in property other than money (including stock of the corporation if held by the cor- poration as an investment) the amount with respect thereto which shall be used in computing the basic surtax credit shall be the adjusted basis of the property in the hands of the corporation at
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