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r

SP CI L TT NTION drected to the cautonary notce on ths page that pnb-


shed rungs of the ureau do not have the force and effect
of Treasury Decsons and that they are appcabe ony to facts presented n the pubshed case
Treasury Department : : :
ureau of Interna Revenue
Interna Revenue uetn
Cumuatve uetn 1940-1
NU RY- UN , 1940
7
IN T IS ISSU
Pafe
Introductory Notes .... |f I.W W RSft v U,
Contents TIPD prr
Rungs Nos. 10127-10304
oard of Ta ppeas . . . LOOMNGTON 1-9
Income Ta
Part I ( . Interna Revenue Code and 1939 ct
. 1938 ct)
Part n (1937 and 193 cts) 95-101
Part ID (1935 and 1934 or Pror cts) .... 105-188
mpoyment Ta es 189-219
Msceaneous Ta es
state and Gft Ta es 220-235
Capta Stock Ta es 23 -24
Saes Ta es ( coho, etc.) 247-2 8
Msceaneous Rungs 2 9-323
Inde 325-335
Tbe rungs reported n the Interna Revenue uetn arc for the nformaton of ta payer and ther connse as
bowng the trend of offca opnon n the admnstraton of the oreau ot Interna Revenue the rung other than
Treasury Decsons have none of the force or effect of Treasury Decsons and do not commt the Department to
sty nterpretaton of the aw whch has not been formay approved and promugated by the Secretary of the
Treasury. ach rung embodes the admnstratve appcaton of the aw and Treasury
state of facts upon whch a partcuar case rests. It s especay to be noted that the sam
eery be reached n another case uness a the matera facts arc dentca wth those of the reported case. s t s
not aways feasbe to f
to the entre
rungs pu
Offcers
bed n another case uness a the matera facts arc dentca wth those of the reported case. s t s
asbe to pubsh a compete statement of the facts underyng each rung, there can be no assurance
case s dentca wth the reported case. s bearng out ths dstncton, t may be observed that the
hed from tme to tme may appear to reverse rungs prevousy pubshed.
I of the ureau of Interna Revenue are especay cautu
merey on the bass of smarty to a pubshed rung, and shoud base ther |udgment ou the appcaton of a per-
of the aw and Treasury Decsons to a tbe facts n each case. These rungs shoud be used as
the reguatons and Treasury Decsons prevousy
the Pocy of the ureau of Interna Revenue
of the Chef Connse for the ureau of Interna
a rung or decson upon a nove queston or upon a queston n regard
to whch there e sts no prevousy pubshed rung or decson, or for other reasons, are of such mportance aa
to be of genera nterest. It s aso the pocy of the ureau to pubsh a rungs or decsons whch revoke, modfy,
revok
amend, or affect n any manner whatever any pubshed rung or decson. In many nstances opnon , of tha
n|e for the ureau of Interna Revenue are not of genera nterest because they announce
ng or no new constructon of the revenue aws hut smpy nopy rungs aready made pubc to certan
Chef Counse for the ureau of Interna
stuatons of fact whch are wthout speca sgnfcance. It s not the pocy of the ureau to pubsh such opnons.
Therefore, the r
Interna Revenue
or empoyee of the ureau of Interna Reveoue as a precedent n tbe
specfcay
Chef Courts ... _._ _

numbers assgned to the pubshed .opnons of the Chef Counse for the ureau of
arc not consecutve. No unpubshed rung or decson w be cted
edent
have
5
cay ndcated, a pubshed rungs and decsons
f Counse for the ureau of nterna Revenue. /
or reed upon by any offcer
of other cases. Uness otherwss
consderaton and approva of the
UNIT D ST T S GO RNM NT PRINTING O IC : W S INGTON : 1940
ar sae by the Superntendent of Documents, Washngton, D. C - - - - See bach of tte for prces
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The Interna Revenue uetn servce for 1940 w consst of weeky
buetns and semannua cumuatve buetns.
The weeky buetns w contan the rungs and decsons to be
made pubc and a Treasury Department decsons (known as Treasury
decsons) pertanng to Interna Revenue matters. The semannua
cumuatve buetns w contan a rungs and decsons (ncudng
Treasury decsons) pubshed durng the prevous s months.
The compete uetn servce may be obtaned, on a subscrpton
bass, from the Superntendent of Documents, Government Prntng
Offce, Washngton, D. C, for 3 per year foregn, 4.25. Snge
copes of the weeky uetn, 5 cents each.
New subscrbers and others desrng to obtan the 1919, 1920, and
1921 Income Ta Servce may do so from the Superntendent of Docu-
ments at prces as foows: Dgest of Income Ta Rungs No. 19
(contanng dgests of a rungs appearng n Cumuatve uetns
1 to 5, ncusve), 50 cents per copy Cumuatve uetns Nos. 1 to 5,
contanng n fu a rungs pubshed snce pr, 1919, to and n-
cudng December, 1921, as foows: No. 1, 30 cents No. 2, 25 cents
No. 3, 30 cents No. 4, 30 cents No. 5, 25 cents.
Persons desrng to obtan the Saes Ta Cumuatve uetns for
anuary- une and uy-December, 1921, may procure them from the
Superntendent of Documents at 5 cents per copy.
Persons desrng to obtan the Interna Revenue uetn servce for
the years 1922 to 1939, ncusve, may do so at prces as foows:
Cumuatve uetn.

Prce.
Year.
rst
months.
Second
months.
(cents)
1922 ---
1-1
1-2
40, 30
II-
11-2
30,40
1924,
III-
III- 2
50, 50
40, 35
40, 30
40, 40
1925
I - 1
I - 2
-2
-
I-1
I-2
1928
vn-
II-2
35, 50
1929 . .- -
III-
IU-2
50, 55
1 930
I -
1 -2
50, 50
-
I-1
II-1
-2
I-2
II-2
05,30
.SO, 30
30, 50
III-1
III-2
50, 0
1S3 -
I -1
-1
I -2
-2
50, 50
55, 45
0, 50
0, 50
1937
1937- 1
1937- 2
1938
1938- 1
1938- 2

1939-1:
Part _--
1939-2
0
50
1
Port 9
1940-1
30

prces as foows: Dgest No. 13 (1922-1924), 0 cents Dgest No. 17


(1925), 25 cents Dgest No. 21 (192 ), 15 cents Dgest No. 22 (1925-
1927), 35 cents: and Dgest (ncome ta rungs ony, pr, 1919, to
December, 1930, ncusve), 1.50.
nqures n regard to these pubcatons and subscrptons shoud
be sent to the Superntendent of
Offce, Washngton, D. C
cnts, Government Prntng
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INTRODUCTORY NOT S.
The Interna Revenue Cumuatve uetn 1940-1, n addton to
a decs ons of the Treasury Department (caed Treasury decsons)
pertanng to Interna Revenue matters, contans opnons of the
Chef Counse, and rungs and decsons pertanng to ncome, estate,
gft, saes, capta stock, e cess profts, empoyment, soca securty, and
msceaneous ta es, as ndcated on the tte page of ths uetn, pub-
shed n the weeky uetns (1940, Nos. 1 to 2 , ncusve) for the
perod anuary 1 to une 30, 1940. It aso contans a cumuatve st
of announcements reatng to decsons of the Unted States oard of
Ta ppeas pubshed n the Interna Revenue uetn Servce from
anuary 1 to une 30, 1940.
Income Ta rungs are prnted n three parts. The rungs n
Part I are prnted as Part I, (Interna Revenue Code and Revenue
ct of 1939) and (Revenue ct of 1938), the aw headngs
/correspondng wth the sectons of the Code and 1939 and 1938 cts,
respectvey, and the reguatons headngs correspondng wth the
secton headngs of Reguatons 103 and the artce headngs of
Reguatons 101. Rungs under the Revenue cts of 1937 and 193
are prnted as Part II, the aw headngs correspondng wth the
secton headngs of those cts and the reguatons headngs corre-
spondng wth the .artce headngs of Reguatons 94. Rungs
under the Revenue cts of 1935 and 1934 or pror cts are prnted
as Part III, the aw headngs correspondng wth the secton head-
ngs of the Revenue ct of 1934 and the reguatons headngs cor-
respondng wth the artce headngs of Reguatons 8 .
Rungs under Ttes III and I of the Soca Securty ct and
under Subchapters and C, Chapter 9, of the Interna Revenue
Code n force pror to anuary 1, 1940, arc pubshed under artce
headngs of Reguatons 91 and 90, respectvey rungs under Sub-
chapters and C, Chapter 9, of the Code n force on and after anuary
1, 1940, are pubshed under the secton headngs of Reguatons 10
and 107, respectvey rungs under the Carrers Ta ng ct of 1937
and under Subchapter , Chapter 9, of the Interna Revenue Code
are pubshed under the artce headngs of Reguatons 100 and
rungs under Tte III of the Revenue ct of 193 Ta on Un|ust
nrchment are coded under the sectons of that ct and the artce
headngs of Reguatons 95.
R I TIONS.
The foowng abbrevatons are used throughout the uetn:
, , C, etc. The names of ndvduas.
. R. M. Commttee on ppeas and Revew memorandum.
. R. R. Commttee on ppeas and Revew recommendaton.
. T. coho Ta Unt.
. T. . oard of Ta ppeas.
C. . Cumuatve uetn.
Ct. D. Court decson.
C. S. T. Capta Stock Ta Dvson.
C. T. Ta es on mpoyment by Carrers.
D. C. Treasury Department crcuar.
( I)
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I
. T state Ta Dvson.
G. C. M. Genera Counse s, ssstant Genera Counse s, or Ch Counse s
memorandum.
I. R. . Interna Revenue uetn.
I. T. Income Ta Unt.
M, N, , Y, Z, etc. The names of corporatons, paces, or busnesses, accord-
ng to conte t.
Mm.- Mmeographed etter.
MS. Msceaneous Dvson.
O. or L. O. Soctor s aw opnon.
O. D. Offce decson.
Op. . G. Opnon of the ttorney Genera.
P. T. Processng Ta Dvson.
S. T. Saes Ta Dvson.
S. Sver Ta Dvson.
S. M. Soctor s memorandum.
So. Op. Soctor s opnon.
S. R. Soctor s recommendaton.
S. S. T. Ta es on mpoyment by others than Carrers.
T. Tobacco Dvson.
T. . M. dvsory Ta oard memorandum.
T. . R. dvsory Ta oard recommendaton.
T. D. Treasury decson.
and y are used to represent certan numbers, and when used wth the word
doars represent sums of money.
The practce of promugatng Treasury decsons that embody
court decsons reatng to the nterna revenue has been dscontnued.
ereafter opnons of the courts, wth approprate headnotes for the
nformaton and gudance of ta payers and offcers and empoyees of
the ureau of Interna Revenue, w be pubshed n the Interna
Revenue uetn wthout forma approva and promugaton by the
Secretary of the Treasury.
NNOUNC M NT R L TING TO O RD O T PP LS D CISIONS.
Under the provsons of the recent Revenue cts, reatng to ap-
peas to the oard of Ta ppeas, the Commssoner may acquesce
n the decson of the oard or he may, f the appea was heard by
the oard pror to the passage of the 192 ct, cause to be nsttuted
a proceedng n court for the coecton of any part of a ta deter-
mned by the Commssoner to be due but dsaowed by the oard,
provded that such proceedng s commenced wthn one year after
fna decson of the oard. s to appeas heard by the oard after
the passage of the 192 ct, the Commssoner may, wthn s months
after the oard s decson s rendered, fe a petton for a revew of
the decson by a Crcut Court of ppeas or by the Unted States
Court of ppeas for the Dstrct of Coumba however, as to dec-
sons rendered on and after une 7, 1932, pettons for revew must be
fed wthn three months after the decson s rendered. In order
that ta payers and the genera pubc may be nformed as to whether
or not the Commssoner has acquesced n a decson of the oard of
Ta ppeas dsaowng a ta determned by the Commssoner to be
due, announcement w be made n the weeky uetn at the earest
practcabe date. notce that the Commssoner has acquesced or
has nonacqucsced n a oard decson reates, however, ony to the
ssue or ssues decded n favor of the ta payer. Decsons so ac-
quesced n shoud be reed upon by offcers and empoyees of the
ureau of Interna Revenue as precedents n the dsposton of other
cases before the ureau.
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CONT NTS
ng.
Treasury decsons:
4958
4950
4900
49S7.III
4871
4972
4973
4974
Court decsons:
1431
1432 _
1433
1434
1423
143
1437
1438
1439
1440
144
1442...
1443
1444
1445
144
1447
1448
1449..
1450
1451
1452
1453
1451
145S
145
1457
1458
Chef Counse s
21718
217 8
21799
218 0
21890
21915
2192
219
219 8
21993
22034
220 9
22113
oard of Ta ppeas:
1205
1542
9832
71 37
71903
Rung No.
1940-1-10134
1940-2-10137
1940-2-1013
19IO-3-10142
1910-4-10152
1940- -101 0
1940-8-10184
1940-10-10195
1940-11-10203
1940-12-10210
1940-14-10224
1940-20-102(50
1940-21-10257
1940-22-10274
1940-22-10289
1940-24-10294
1940-25-10299
1940-1-10128
1940-3-10143
1940-3-1014
1940-4-10150
1940-4-10149
194O-5-10157
1940-5-1015
1940-8-101 8
1940-7-10173
1940-7-10175
1940-7-1017
1940-8-10182
1940-10-10193
1940-11-10199
1940-11-10200
1940-11-10201
1940-11-10202
1940-13-1021
1940-14-10220
1940-15-10229
1940-15-10230
1940-17-10241
1940-19-10253
1940-19-10254
1940 20-10258
1940 23-10281
1940-23-10283
1940-25-10303
1940-17-10210
1940-4-10148
1940-2-10138
194O-2-10139
1940-8-10179
1940-18-1024
1940-13-10213
1940-25-10298
19W-11-10198
1940-1 -10237
1940-19-10251
1040-18-10247
1940-25-10297
1940-24-10289
1940-24-10293
1940-2 -10302
1940-8-10177
1940-13-10212
1940-8-10177
1940-8-10177
1940-13-10212
1940-13-10212
1940-25-10295
Pafo.
74
33
n
382
49
2n
27
13
220
271
43
M
174
23
47

2 9
13
151
237
127
118
18
U1
15
109
22,1
m
349
244
1 ,. ,
1 2
178
187
138
.r,
IIS
134
1 8
172
175
2
108
2 8
123
07
110
2
158
159
181
85
IIS
157
180
7
150
90
100
242
12.1
2
2
2
2
3
2
5
Rung.
oardofTfu ppeas Con.
783 3
79850
80052
81417
83178.
83179.
83180.
83181.
85040.
8517 .
85389.
8577 .
85880.
899 1.
85 4.
8 105.
8 77 .
87138.
87354.
87378.
87 38.
87799.
880 7.
88103.
88290.
8800 .
8801 .
88772.
88773.
88978.
89143.
89 0 .
89703.
89854.
89942.
90002.
90078.
90079.
90174.
90248.
90305.
90354.
90452.
904 .
904S .
90487.
90592..
90 24.
90 72.
90749.
90750.
90751.
9084 .
908 1.
91010.
91102.
91284.
91398.
91412.
91415.
91494.
9149 .
91501.
91543.
91 18.
91 8 .
91793.
Rung No.
Page.
1940-15-1022

1940-1 -10234
5
1940-3-10140

1940-9-10185
M
194O-O-101 4
8
1940- -101 4
9
1940- -101 4
9
1910- -101 4
9
1940-2 -10300

1940-14-10217
9
1940-22-10248
2
1940-18-10244
8.7
1940-2 -10300

1940-3-10140
3
1940-4-1014
8
1940-8-10177

1940-17-10238
,7
1940-22-102 8
.
1940-2-10135

1910-17-10238
,7
1940-19-10250
1
1940-17-10238
7
1910-12-10204

1940-1-10127

1940-22-102 8
2
194O-12-102O4
4,
1940-17-10238
,7
1940-2 -1 100
4
1940-2 -10300
4
1910-22-102 8
5
1940-12-10204
7
194O-24-10285

1940-2-10135
1.2
1940-9-10185
4
19411-9-1018
8
1940-9-10185
8,4
194O-3-I0I40
7
1940-9-10185
4
1940-9-10185
4
1940-1 -10234
7
1940-1-10127

1940-1-10127
2
1940-12-10204
8
1910-14-10217
1,2,3.
5, 7,8
1940-9-10185
2.
1940-14-10217
1,2,3,
.7,8
1940-14-10217
1.2,1,
5, 7.8
1940-14-10217
3
1940-14-10217
2,
1U40-1-10127
2
1910-1 -10234
7,3
1940-1 -10234
7,8
1940-1 -10234
7,8
8
1940-0-101 1
19 M-10127
4
19411-0-101 4
7
1940-7-10171
7
1940-11-1019
8
1940-7-10171

1940-15-10225
7
1940-1-10127
2
1940-22-102 8
3
1940-1-10127
3
f 1940-15-10225
,
( 1940-25-10295
,
1940-17-10218
2
1940-13-10212
4
1940-24-10285
4
1940-8-10177
7
1940-14-10217
5
( )
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I
Rung.
Rung No.
Page.
Rung.
Rung No.
oard of Ta ppeas
Contnued.
91840.
9184
91958
91977
92052
92115.
92177
92212
92225
92289
92331
9230
92387
92414
92429
92435
92489
925 2.
92575
92588
92000
92 04
927 5
92801
92881
92S82
92883
93013
9302
93041
93077
93134
93148
931 4
93208
93209
93210
93211
93231
93232
93248
93257
93330
93331
93332
93333
93334
93335
93404
M O
93575
83018
937 8
93809
93810
93811
93812
93822
93854.
93855
9385
93857
93894
93914
93915
9391
93917
93918
93919
93920
94017
94088
9-1248
94401
94442
94443
94985
95082
1940-14-10217
1940-12-10204
1940-24-10285
1940-15-10225
1940-17-10238
1940-22-102 8
1940-21-102 1
1940-7-10171
1940-12-10204
1940-10-10190
1940- -101 4
1940-4-1014
1940- -101 4
1940-5-10153
1940-13-10212
1940-10-10190
1940-5-10153
1940-2-10135
1940-17-10238
1940-4-1014
1940-25-10295
1940-2-10135
1940-5-10153
1940- -101 4
194O-3-10140
1040-3-10140
1940-3-10140
1940-5-10153
1940-17-10238
1940-13-10212
1940-8-10177
1940-5-10153
1940-15-10225
1940-25-10295
1040-1-10140
1940-19-10250
1940-19-10250
1940-19-10250
1940-19-10250
1940-7-10171
1940-7-10171
1940-13-10212
1940-9-10185
1940-14-10217
1940-7-10171
194O-7-10171
1940-7-10171
1940-7-10171
1940-7-10171
1940-19-10250
1940-17-10238
1940-18-10244
1940-14-10217
1940-18-10244
1940-1 -10234
1940-1 -10234
194O-1 -10234
1940-1 -10234
1940-9-10185
1940-22-102 8
1940-22-102 8
1940-22-102 8
194O-22-102 8
1040-10-10190
1940-10-10190
1940-10-10190
1940-10-10190
1910-10-19190
1940-10-10190
1940-10-10190
1940-10-10190
1940-22-102 8
1940-10-10190
1940-8-10177
1940-4-1014
1940-25-10295
1940-25-10295
1940-5-10153
194O-17-10238
194O-17-10238
1040-2 -10300
4
8
1,4,5,0
1
3
2,7
3.4
2
7
2
8
1
8
7
5
5
5,0
1
3
4
0
2
,7
,8

3
3
3
4.8

5
8
1,2, ,7
2,7
2,7
2,7
2,4
4
2
3,4

4
4
3
1
4
7,8
3
5,0
,9
3

5
5
5

I
4
1
3
1,4
3
2

8
2
e

7
7
5,7
3
3
0
oard of Ta ppeas
Contnued.
05298
05300
95871
95880
95922
9509
9 0 1
9 1 4
9 315
9 331
9 358
9 470
9 741
9 742
78 ,
97232 ,
97247
973
075
Offce decsons (I. T.):
3311
3342
3343
3344 ,
3345
334
3347
3348
3340
3350
3351
3352
3353
3354
3355
335
3357 ,
3358 ,
3359
33 0
33 1
33 2
33 3
33 4.
33 5
33
33 7
33 8.
3309
3370.
3371
3372
3373
3374
3375
337
3377
3378
3379
3380
3381 ,
3382
3383
3384
3385
338
3387
Offce decsons (S. S. T.)
381
382
383 .
384
385.
38
387
388
389
390
391
392
393
1040-2 -10300
1940-2 -10300
1940-25-10295
1040-23-1027
1940-13-10212
1940-8-10177
1940-0-10185
1940-15-10225
1040-10-10250
1940-4-1014
1040-25-10295
1940-22-102 8
1940-5-10153
1040-5-10153
1940-18-10244
1940-15-10225
1940-25-10295
1940-21-102 1
194O-2O-1025
1940-1-10130
1940-3-10141
1940-4 10147
1010-5-10154
1940-5-10155
19-10-0-101 5
1910- -101 0
1040- -101 7
194O- -10170
1940-7-10172
1040-8-10178
1040-8-10180
1010-9-1018
1910-9-10187
1940-10-10191
104O-11-10197
1040-12-10205
1040-12-10200
1940-12-10207
1940-12-10208
1940-13-10214
1940-14-10218
1910-14-10219
1940-15-1022
1910-15-10227
194O-15-10228
1940-1 -1023
1010-17-10239
1940-17-10243
1940-18-10245
1940-10-10252
1940-2O-10257
1940-21-102 2
1940-21-102 3
1940-21-1112 4
1940-21-102 5
19MI-22-10273
1940-22-10270
1940-23-10277
1940-23-10378
1910-23-10280
1940-24-1028
1940-24-10287
1940-24-10288
1940-21-10290
1040-25-1020
1040-2 -10301
1940-1-10133
1340-4-10151
1040-5-10158
1040-0-101 9
1940 12 10209
1940-13-10215
194O-20-10259
1940-21-102
1940-22-10271
1940-23-10282
1940-24-10291
1940-24-10292
1040-20-10304
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II
s( .T.):
14
19
e
17
Offce decsons (S. T.):
895
888
807
889
899
900
ODcedecsons (M.S.):
221
222
223
224
No. Page
1940-3-10144
221
1940-5-10159
234
1940-17-10242
232
1910-22-10272
231
1940-7-10174
257
1940-8-10183
252
1940-9-10188
25
1040-10-10192
255
1940-15-10231
251
1940-19-10255
247
1940-1-10132
300
1940-5-10103
301
1940-10-10191
302
1940-14-10223
303
1940-18-10248
30t
1940-23-10284
305
Rung.
Rung No.
1940-1-10131
30
1940-5-101 1
30
194O-9-10189
30
1940-14-10222
307
1940-18-10249
307
1910-22-10275
307
1940-15-10232
2Sd
1940-5-101 2
52
1940-23-10279
2
1940-1-10129
189
1940-8-10181
203
1910-14-10221
198
1940-1 -10235
14
1940-12-10211
308
1940-15-10233
288
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CONT NTS O CUMUL TI ULL TINS (I. T.) 1 o 5 S. T. O 1920 ND 1921: INT R-
N L R NU 1-1, 1-2. 11-1. II 2. I 1, III-2. I -1. I -2, -, -2. I-1. I-2. II-I. -2, III 1,
1II-2.I -1.I -2. -. -2. I-1. I-2, II-1, II-2, III 1, LI-2. I -1. I -2, -1. -2. 1937-1.
1937-2. 1938-1, 193S-2. 1339-1 (P RT 1 ND P RT 2), 1939-2, 1940-1.
Cumuatve uetn.
Rung Nos.
Income Ta :
December, 1919 (No. 1)
anuarv- une, 1920 (No. 2)
uy-December, 1920 (No. 3)
anuarv- une, 1921 (No. 4)
uv-Dccember, 1921 (No. 5) -
Saes Ta :
1920 (S. T. 1-20)..-
anuarv- une, 1921 ---
uy-December, 1921
Interna Revenue uetn:
anuarv- une, 1922 (No. 1-1).-
uv-Decembcr, 1922 (No. 1-2)
anuarv- une, 1923 (No. II-)
uv-December, 1923 (No. 11-2)
anuary- une, 1924 (No. I 1)-
uy-December, 1924 (No. I-2)
anuarv- une, 1925 (No. I -1)
uy-December, 1925 (No. I -2)
anuarv- une, 192 (No. -)
uv-D ecember, 192 (No. -2)
anuarv- une, 1927 (No. I-1)
uy-December, 1927 (No. I-2)
anuarv- une, 1928 (No. II-1)
uv-D ecember, 1928 (No. II-2)
anuarv- une, 1929 (No. III-1)
uv-Decembcr, 1929 (No. III-2)
anuarv- une, 1930 (No. I -1)
uv-Dccember, 1930 (No. I -2)
anuarv- une, 1931 (No. -)
uv-December, 1931 (No. -2)
anuarv- une, 1932 (No. I-1)
uv-Decembcr, 1932 (No. I-2)
anuarv- une, 1933 (No. II-1)
uv-December, 1933 (No. II-2)
anuarv- une, 1934 (No. III-1)..
uy-December, 1934 (No. III-2)
anuary- une, 1935 (No. I -1)
uv-December, 1935 (No. I -2)
anuarv- une, 193 (No. -1)
uy-December, 193 (No. -2)..
anuarv- une, 1937 (1937-1)
uv-December, 1937 (1937-2)
anuarv- une, 1938 (1938-1)..-
uv-December, 1938 (1938-2)
anuarv- une, 1939 (1939-1 Part 1 and Part 2)
uv-December, 1939 (1939-2) --.
anuarv- une, 1940 (1940-1).
1- 55
5 -1033
1034-13 8
13 9-1710
1711-199
1-112
113-2 5
2 -35
1-383
384- 5
-95
957-127
1277-1 41
1 42-1949
1950-2251
2252-2523
2524-2813
2814-302
3027-3291
3292-3557
3558-3784
3785-4052
4053-4248
4249-4487
4488-4083
4 84-4887
4888-5124
512,5-5338
5339-5531
5532-59 1
59 2- 2 2
2 3- 581
582- 871
872-7224
7225-75 3
75 4-7884
7885-8149
8150-8459
84 0-8792
8793-9118
9119 9424
9425-9 54
9 55-989
9897-1012
10127-10304
(vm)
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O RD O T PP LS.
CUMUL TI LIST O NNOUNC M NTS R L TING TO
D CISIONS O T UNIT D ST T S O RD O T
PP LS PU LIS D IN T INT RN L R NU UL-
L TIN S R IC ROM NU RY 1, 1940, TO UN 30, 1940,
INCLUSI .
nnouncements reatng to the acquescence or nonacqueseonce of the Commssoner In
decsons of the Unted States oard of Ta ppeas, as pubshed n tho weeky Interna
Revenue uetns from December 22, 1924, to December 31, 1931, Incusve, are prnted n
Cumuatve uetn -2, pages 1-10 . Those prnted n weeky uetns from anuary 1,1932,
to December 31.1939, ncusve, are pubshed n Cumuatve uetn 1939-2, pages 1-73. The
st beow, therefore, contans ony such announcements pubshed n the weeky uetns from
anuary 1,1940, to une 30, 1940, ncusve.
1940-2 -10300
The Commssoner acquesces n the foowng decsons of the
Unted States oard of Ta ppeas:
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Page.
bbott, ohn, e ecutor of estate of Rchard .
Traser 1
en, Laura, estate of
nderson, ohn, transferee of estate of rank O.
urrdge
pe rewng Co., Inc
ugustus, zabeth G
.
aker, Inc., mert
enaga et us., rthur .
ack Motor Co., Tne
ondhoders Commttee 4.
rggs- an Co
rookman, Murray.
c.
Carter, Shrey, estate of
Cavett et a., ., e ecutors of estate of W.
aes
T.
91958
89703
93334
91977
9 001
923
94401
87 38
97232
90452
9048
90487
925 2
95871
93917
93208
41
40
40
40
40
40
3
41
40
40
41
40
40
228
721
944
1109
1200
554
838
300
881
894
557
749
1244
cquescence reates ony to the oard s mathematca formua for apportonment of the dvdend credt
between the estate and the dstrbutees.
1 state ta decson.
1 Nonacquescence pubshed n Cumuatve uetn 1938-1, page 35, wthdrawn.
cquescence does not reate to Issue respectng bases for deprecaton of pettoners assets.
cquescence s ony as to the Issue, Do certan dvdends decared and credted on the stock of the
Loca udng and Loan ssocaton and made avaabe to the pettoners n anuary, 1935, but apped
by them aganst the purchase of stock n the Loca edera Savngs and Loan ssocaton nto whch the
bundng and oan assocaton was converted, represent ncome In 1935 sub|ect to norma ta and surta
Rung No. 10300 Incudes a acquescence and nonacquescenoe notces pubshed n the Interna
Revenue uetn servce from anuary 1,1940, to une 30,1940.
(1)
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cqu escences Cont n ued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Caborne et a., ustn Legh, e ecutors of the
estate of Laura en 1
Coumba O Gas Co.2
Comb5 Lumber Co
Cooedge, Norman
Cooper, ugene ., admnstrator of the estate of
Lews . Cooper
Cooper, Lews ., estate of
Crawford Musc Corporaton
D.
Daas Tte Guaranty Co.1
Dashe, C. R.
Davson- oseph Campau Reaty Co., Inc
Dean, Mason L.
usts, ugustus . .
.
erree, C. .7
rst Mortgage onds 8
cschmann, Raou II
oreman, rank C
rend, enry, estate of
rend et a., Mton ., trustees of estate of enry
rend
G.
G. . R. O Corporaton
Gardner, . Ws9
George ros. Co
Gmore, een, estate of, transferee of estate of
rank O. urrdge
Graff, verett D
Grm, Cfford D.
89703
90 24
91.143
922S9
94088
94088
85389
88290
904
7505
973
1205
9832
71 37
1542
90452
9048
90487
90305
93915
90 72
91415
90 72
91415
92 04
92115
93248
93231
92212
93919
40
41
41
40
40
40
40
40
3
41
35
30
32
40
40
40
40
40
40
41
41
40
40
40
aes, George . 93210 40
aes, Mrs. Oncta 93209 40
aes, r., W. T. 93211 40
aes, W. T., estate of11 93208 40
stnte ta decson.
1 cquescence does not reate to ssue pertanng to aocaton of cost of equpment on the property n
queston.
3 cquescence reates ony to the ssue whether or not pettoner s an nsurance company as that term
s used n secton 701 (c)2 of the Revenue ct of 1934.
Nonacquescence pubshed n Cumuatve uetn 1937-2, page 3 , wthdrawn.
Pror nonacquescence pubshed n Cumuatve uetn 1937-2, page 3f, wthdrawn.
8 Pror nonacquescence pubshed n Cumuatve uetn I -2, page 30 (193.5), wthdrawn.
7 Nonacquescence pubshed n Cumuatve uetn I -2, page 30 (1935), wthdrawn.
1 cquescence does not reate to ssue respectng bases for deprecaton of pettoners assets.
Oft ta decson.
10 cquescence reates ony to the ssue, If the benefcares of a certan trust be treated as donees, were
the gfts made to them gfts of present nterests or future nterests
u cquescence s ony as to the ssue, Do certan dvdends decared and credted on the stock of the
Loca udng and Loan ssocaton and made avaabe to the pettoners n anuary, 1935, but apped
b| them aganst the purchase of stock n the Loca edera Savngs and Loan ssocaton nto whch the
budng and oan assocaton was converted, represent ncome n 1935 sub|ect to norma ta and surta
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3
cquesc e nces Cont nued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
ggns, ugene
ooper, ames P., estate of 2
ooper, Mathde ., admnstratr of estate of
ames P. ooper 1 1
uey Php ardware Co
umme-Ross bre Corporaton
yde, Suffok erks, Marguerte
ohnston, . dward.
.
aufmann, oe W
aufmann, Mdred __
eer, Charotte
esser O Gas Co...
nowes, dwn C.
Legg, Mdred Sheppard, estate of
M.
MacConau|they, arry
Macon, Dubn Savannah Raroad Co_
Marborough ouse, Inc., et a.
Marborough Investment Co.4.
Mart-he, Louse, transferee of estate of rank O.
urrdge
Martn, Thomas W
McCormac, Gertrude ., trustee for . . Mc-
Cormac, r
McCormac, r., . . (trust)
Morton, rthur
Mott, Dee urey
N.
Norweb, mery May odcn _
80052
859 1
8577
8577
92801
93077
81417
93257
937 8
95082
95083
9302
93041
91495
89942
92052
90592
90452
9048
90487
90452
9048
90487
93333
9391
93920
93920
91494
71903
92575
39
41
41
40
40
40
41
41
41
41
41
40
40
41
40
40
40
40
40
40
40
41
35
41
40
41
41
38
Patton, T. 93918
Pttsburg Cannera, Ine - 935 0
Punkett, Theodore R 94017
Pupn, Mchae L, estate of 17 92177
1 state ta decson.
cquescence reates ony to the determnaton of the vaue of the stock of Wam . ooper Sons
Co. on ugust 3, 1933.
cquescence on the foowng ssue s as to resut ony: In determnng the net ncome of a trust cur-
renty dstrbutabe to the benefcares, shoud there be ncuded the rent due under a ong-term ease,
the essee havng mproved the premses wth an offce budng whch woud become the essor s property
on forfeture, the trust on the accrua bass havng accrued the rent but aso havng charged t to a reserve
for uncoected rents
cquescence does not reate to ssue respectng bases for deprecaton of pettoners assets.
1 Nonacquescenoe pubshed n Cumuatve uetn 1937-1, page 43, wthdrawn.
Gft ta decson.
Pror nonacquescenoe pubshed n Cumuatve uetn 1939-1, (Part 1), page GO, wthdrawn.
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4
cqt|bscbnces Contnued.
Docket
No.
oard of Ta ppeas.
oume.
R.
Rosenstock, nna, ndvduay and as e ecutr of
estate of Isaac M. Rosenstock 1
Rosenstock, Isaac M., estate of1
Ross, ndrew .
Rotorte Corporaton _
Rowey, dward G., transferee of estate of rank
O. urrdge
S.
Safe Depost Trust Co. of atmore, e ecutor of
estate of Mdred Sheppard Legg 1
Seavey arshem rokerage Co
Shenandoah aey Natona ank (Shrey Carter
estate)
Sherman, Dors ond34
Smon, ose, estate of 1
Smon et a., ose P., e ecutors
Smth, Chares G
Smth, arvara Pubs, admnstratr of estate of
Mchae I. Pupn 1 5
Smvth, r., rancs G., transferee of estate of rank
(). urrdge
Smyth, erbert C, transferee of estate of rank O.
urrdge
Smyth, erbert C, admnstrator of the estate of
een Gmore, transferee of estate of rank O.
urrdge
Spor, Sr., Cvpran .. estate of 1
Sprngford, erbert
Staey, ugustus .3
Staey, mma L.
Stern , son L. S.I
Suffok erks, Marguerte yde 7 -
Sutana O Corporaton (Deaware)
Swastka O Gas Co
Terhune, Wesey .
Thatcher, Lester ., transferee of estate of rank
O. urrdge
Traser, Rchard ., estate of 8
91 8
91 8
9 470
88 0
93332
89942
91 18
93917
95300
91840
91840
93914
92177
93331
93232
93231
925SS
97247
88772
88773
93134
81417
93257
90078
41
41
41
40
40
40
41
40
41
40
111
40
38
10
40
40
40
41
11
11
40
40
40
908 1
40
797
93894
40
749
93335
40
944
91958
41
228
SUS20
40
1240
state ta decson.
Un|ust enrchment ta decson.
3 Gft ta decson.
cquescence reates ony to the year 1039.
s Pror nonacqucscence pubshed n Cumuatve uetn 1939-1, fPart 1), nape 00, wthdrawn.
9 cquescence reates ony to the ssue, Is the pettoner ta abe on the ncome of a trust whch was
created for the support and mantenance of hs wfe and mnor chd
T cquescence on the foowng ssue s as to resut ony: In determnng the net ncome of a trust cur-
renty dstrbutabe to the benefcares, shoud there be ncuded t he rent due under a ong-term ease the
essee havng mproved the premses wth an offce budng whch woud become the essor -- property on
forfeture, the trust on the accrua bass havng accrued the rent but aso havng charged t to a reserve for
uncoected rents
4 cquescence reates ony to tho oard s mathematca formua for apportonment of the dvdend credt
between the estate and tho dstrbutees.
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5
cqt|escences Contnued.
oard of Ta ppeas.
Ta payer.
Docket
No.
U.
oume.
Page.
Unted States dety Guaranty Co..
91398
40
1010
W.
87354
39
9 2
92435
40
1248
79850
3
314
Wof, dth
92429
41
1231
Wood, Orrn G.
92489
40
904
Y.
78345
84
48
The Commssoner does NOT acquesce n the foowng decsons of
the Unted States oard of Ta ppeas:
Ta payer.
Docket
No.
oard of Ta ppeas.
oume. Page.
bbott, ohn, e ecutor of estate of Rchard .
Traser -
abama sphatc Lmestone Co
en, r., et a., ona
en, r., et a ., ona, e ecutors
en, . Wadegh, estate of.
en, ohn
en et a., ctor
ng, Noyes, ., estate of4
.
e et a., Maude ., e ecutors of estate of Ida .
Whte -
emhemer Co., S. . M.
ngham, Mary Ly ( ager), estate of
ondhoders Commttee 7.
onfs, . G., estate of
onfs Trust, . G.
91958
91793
93809
93811
93811
93812
93810
8713
93575
88978
94985
90452
9048
90487
91501
93148
41
41
41
41
41
41
40
40
40
40
228
324
20
191
25
249
823
881
1079
1085
Nonacquescence pubshed In Cumuatve uetn 1937-2, page , wthdrawn.
Gft ta decson.
cquescence reates ony to the ssues nvovng (1) the vauaton of 388 shares of rown Paper M
stock, and (2) the queston whether the renqushment of a power to prevent future amendments to a trust
Instrument consttutes a compete gft.
1 cquescence reates ony to ths Issue: Was the e change of certan certfcates of ownershp n a trust
for underyng portfoo stock represented thore by an e change of dfferent assets, resutng n a capta oss
Prevous nonacquescence pubshed n Cumuatve uetn -2, page 51 (193 ), wthdrawn wth respect
to ths ssue ony.
Nonacquescence reates ony to that part of the oard s opnon whch hods, wthout supportng ev-
dence, that gans on the sae of corpus of the estate consttuted ncome avaabe for dstrbuton to the
benefcares.
state ta decson.
7 Nonacquescence reates to Issue pertanng to bases for deprecaton of pettoner s assets.
1 Prevous acquescence pubshed n Interna Revenue uetn 1940-15, page 1, wthdrawn.
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Nonacqt|escences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
onfs et a., een G., e ecutors of estate of . G.
onfs 1
ranch, Caude R
rdgeport Cty Trust Co. et a., The, e ecutors of
estate of Noves . ng 2
uck, sworth
urnett, O. L
c.
Carng odng Co_
Caspersen, reda R
Cavett et a., ., e ecutors of estate of W. T. aes .
Chamberan, Park
Chase Natona ank of the Cty of New York,
The, trustee under agreements wth mercan
Depostor Corporaton
Coona Trust Co. et a., e ecutors
Coumba O Gas Co.4
Corporate Investment Co
Corpus Chrst Termna Co .
Cushman, Louse C, transferee of estate of Mary
W. Cushman 2
Cushman, Mary W., estate of 2.
D.
Daas Tte Guaranty Co.s
Deerng, rank C, estate of
Deerng et a., oseph Godfrey, e ecutors of the
estate of rank C. Deerng
Deaware Termna Corporaton
Denhom Mc ay Co
Denver Natona ank et a., trustees u/w . G.
onfs 1
Durkhemcr, S.
.
mhrst, Dorothy Whtney.
rb et a., rthur L., e ecutors of estate of Ges W.
Mead 9
wng, Sherman
91501
94248
8713
93330
90248
8 77
87378
88 1
927 5
93208
880 7
93854
93855
9385
93857
93 48
90 24
783 3
88103
92881
928S2
92883
904
9599
9599
8 105
89 0
93148
95209
85040
85880
95298
975
93013
40
40
41
41
40
41
40
40
41
41
41
41
40
38
40
40
40
40
40
40
39
40
41
41
41
10
1 Prevous acquescence pubshed n Interna Revenue uetn 1940-15, page 1, wthdrawn.
1 state ta decson.
N onacqueseeuce s ony as to the ssue, Is the cash receved by pettoners n 1935 from the Loca edera
Pavngs and Loan ssocaton, whch s admtted to be Income, ta abe as ordnary ncome or as capta
gan
Nonacquesccnce reates to ssue pertanng to aocaton of cost of equpment on the pro|erty n queston.
1 Nonacquesccnce reates ony to the ssue nvovng the ta abty of an amount of WO.OOO transferred
from Premum reserve account to Undvded profts account pursuant to resouton of the board
of drectors on uy 5, 193-1.
Gft ta decson.
G
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2
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1
3
-
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1
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2

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2

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7
Nonacquescences Contnued
Ta payer.
.
onds 1 - --
rst Trust 4 Depost Co. et a., guardans
ower et u ., ohn O
razer, rederc
G.
Gardner, . Ws
Goodman, dwn
Greene, . Crawford, guardan of estate of ce .
Lester 1
Grote et u ., en
.
aes, George .4
aes, Mrs. Oneta
aes, r., W. T.4
aes, W. T., estate of4
artford-Connectcut Trust Co., The, e tr. of
estate of Mary W. Cushman
ercues Motor Corporaton
offman, atherne M
offman, W. W -
offman et u ., W. W
ooper, ames P., estate of 4
ooper, Mathde ., admnstratr of estate of
ames P. ooper 44
ughes Too Co. -
.
ohnson et a., Thomas M., trustees
onas, Louse
.
ogg, Cornea . W., e ecutr of estate of
rederck R. eogg 5
eogg, rederck R., estate of4
enan et a., Wam R., r., trustees u/w Mary
Ly ( ager) ngham
yce, . S., estate of
yce, M. P., admnstrator
napp, George O
Docket
No.
oard of Ta ppeas.
oume
90452
9048
90487
90749
90750
90751
911 2
91412
92115
87799
93404
9 315
94442
94443
93210
93209
93211
93208
92882
92225
9 741
90742
92414
8577
8577
90002
8 77
87378
88 1
91010
89143
89143
O- .N.-,
90174
90174
91099
40
41
40
41
11
11
11
41
40
40
40
40
41
41
40
11
40
40
40
40
41
11
40
Nonacquescence reates to ssue pertanng to bases for deprecaton of pettoner s assets.
1 Gft ta decson.
Nonacquescence reates ony to the ssue, n the case of a gft of reeurtes n trust, shoud the trust be
treated as the donee, resutng n ony one e cuson, or shoud the benefcares be treated as donees, resut-
ng u one e cuson for each benefcary
1 Nonacquescence s ony as to the ssue, Is the cash receved by pettoners n 1935 from the Loca edera
avngsand Loan ssocaton, whch s admtted to be ncome, ta abe as ordnary ncome or as capta gan
state ta decson.
Nonacquescence reates ony to the ssue. Was the sum of 132,3 15.73, representng the net proceeds of
certan fe nsurance poces assgned by the decedent to a certan trust, pro ery ncudbe n the gross
estate ard, If so, may the sum of 40,000 be e cuded under the provsons of secton 302( ) of the Rev-
enue ct of 182
G
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2
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1
3
-
0
1
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2
2

0
4
:
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2

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8
8
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8
Nonacquescences Contnued
Ta payer.
Lester, ce ., an ncompetent, estate of 1.
Lpe, Gordon C
Lpe, Suzanne
Lpe, r., Ward C
M.
Marborough ouse, Inc., et a. .
orou
Marborough Investment Co.1.
McGovern, Inc., Patrck
Mead, Ges W.f estate of 1.
Mchgan Sca Co
Mueer Co., C. ...
N.
Natona ank of Commerce of San ntono, Te ..
Nebraska rdge Suppy Lumber Co
Newport Industres, Inc
P.
Pamer, Careton
Phoen State ank Trust Co., trustee under
deed of trust from Mary W. Cushman, as
trustee and transferee
Prouty, Ove .
Reaty Operators, Inc
Rhodes et a., ugh D., admnstrators of estate of
Mame D. Rhodes
Rhodes, Mame D., estate of
Rubnsten, Wton 1
Rust, r., et a., . L., e ecutors of estate of . L.
Rust
Rust, . L., estate of
S.
Sherman, Dors ond 14..
Sobe, Inc., N
Spor Co., Inc., C.
Sten, Nathan
Stern, son L. S.s
Docket
No.
93404
9 315
90750
00751
90749
90452
9048
90487
90452
9048
90487
9184
975
9 78
859 4
9 331
931 4
9084
92331
89854
92SS3
9 1 4
92387
91284
91284
95922
95880
95880
95300
93822
90354
83178
93134
oard of Ta ppeas.
oume.
41
41
10
40
40
11
11
40
40
40
40
40
40
41
40
41
41
-11
41
11
11
111
40
40
40
1 Gft ta decson.
Nonacqucsccncc reates to Issue pertanng to bases for deprecaton of pettoner s assets.
1 state ta decson.
Nonacquesccnoe reates ony to the year 193 .
Nonacquescence reates ony to tn ssue, where termnaton of a trust coud occur ony at the eecton
of the Rrantor wth concurrence of attorneys who represented two persons ntcrcstoU n the trust, Is the
nterest of the attorneys a substanta adverse nterest
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9
Nonacquesoences Contnued.
Docket
No
oard of Ta ppeas.
oume.
Page.
Straus, redrch
Straus, Meer
Straus, Mortz
Swope, Lorenzo W., estate of
T.
Thompson, Mary ., e ecutr of estate of Wam
G. Thompson 1
Thompson, Wam G., estate of1
Trco Securtes Corporaton
Trascr, Rchard ., estate of2
W.
Waker, Wam T. -
Whte, Ida ., estate of
Wood, Orrn G.
83181
S3 ISO
83179
93 48
90358
9 358
8517
91958
92 00
93575
92489
40
41
41
41
11
11
40
41
40
847
213
901
901
30
228
7 2
525
904
1 state ta d
1 Nonacquksccnce reates ony to that part of the oard s opnon whch hods, wthout supportng
evdence, that gans on the sae of corpus of the estate consttuted ncome avaabe for dstrbuton to the
benefcares.
1 Gft ta decson.
Nonacqucscence reates ony to the Issue, s the vaue of fe nsurance |wces obe determned by the
t to purchase smar contracts as determned by the Commssoner, or s the vaue mted to the cash
r vaue as contended by pettoner
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INCOM T RULINGS. P RT I.
. INT RN L R NU COD ND R NU CT O 1039.
C PT R 1. INCOM T .
SU C PT R . G N R L PRO ISIONS.
P RT II. COMPUT TION O N T INCOM .
S CTION 22(a). GROSS INCOM : G N R L
D INITION.
( so Secton 113(a).) 1940-12-10205
The transfer of securtes by the M Company to a penson trust
for the beneft of ts empoyees resuted n ta abe ncome to the
company to the e tent that the far market vaue of the securtes at
the tme of transfer e ceeded the cost or other bass thereof to the
company. The bass for determnng gan or oss upon the sae of
such securtes by the trustee w be the far market vaue of the
securtes at the tme of the transfer to the trust.
dvce s requested whether the transfer of securtes by the M
Company to a penson trust for the beneft of ts empoyees, the market
vaue of the securtes at the tme of transfer beng n e cess of cost
or other bass, resuted n ta abe ncome to the company to the e tent
of the dfference between such market vaue and the cost or other
bass| aso, whether ncome w accrue to the trust n the event the
securtes are sod by the trustee for an amount n e cess of the bass
at whch they were contrbuted to the trust.
In the opnon of ths offce, the M Company derved ta abe ncome
upon the transfer of securtes to a penson trust for the beneft of ts
empoyees to the e tent that the far market vaue of the securtes
at the tme of transfer e ceeded the cost or other bass thereof to the
company. (See generay secton 19.22(a)-1 of Reguatons 103 and
G. C. M. 1 51, C. . -2, 130 (193 ).)
The bass for determnng gan or oss upon the sae of such secur-
tes by the trustee w be the far market vaue of the securtes at the
tme of the transfer to the trust.
The amount receved by the M Company from a foregn purchas-
ng commsson (actng as agent for a foregn country) upon e ecu-
ton of an agreement between the company and the purchasng
commsson does not consttute ta abe ncome to the company at
that tme.
I. T. 3357
INT RN L R NU COD .
1940- -10170
I. T. 3349
(11)
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19.22(a)-2.
12
dvce s requested as to the proper treatment for edera ncome
ta purposes of an amount receved by the M Company from a
foregn purchasng commsson (actng as agent for a foregn coun-
try) upon the e ecuton of an agreement negotated between that
company and the commsson, reatve to the purchase and sae of
a certan product, for the manufacture of whch the M Company w
be requred to construct a new unt at ts pant.
The agreement rectes that to assst n the fnancng of the erecton
of the new pant the foregn purchasng commsson has ent to the
M Company the sum of doars, evdenced by the M Company s
nonnegotabe promssory note to the sad commsson, of even date
therewth, payabe n 10 years or upon termnaton of the agreement
(by canceaton or otherwse), whchever sha frst occur. The
agreement, however, contans certan provsons reatve to payment
by the purchasng commsson to the M Company, upon termnaton
or canceaton of the agreement, of certan sums of money whch,
f not otherwse pad to the M Company, may be offset aganst the
obgaton represented by the company s note.
It s hed, upon the bass of the facts presented, that the amount
of doars receved by the M Company upon e ecuton of the con-
tract, whch amount was advanced by the purchasng commsson,
does not consttute ta abe ncome to the M Company at that tme.
Secton 19.22(a)-: What ncuded n gross ncome.
INT RN L R NU COD .
Meage aowance of member of State egsature. (See I. T. 33 8,
page 29 )
Secton 19.22(a)-2: Compensaton for persona 1940-24-1028
servces. I. T. 3382
( so Secton 23(a), Secton 19.23 (a)-1, and
Secton 23(c), Secton 19.23(c)-.)
INT RN L R NU COD .
Where the Phadepha ncome ta on saares, wages, comms-
sons, and other compensaton earned after anuary 1, 1940, s pad
by the empoyer wthout deducton therefor from the empoyee s
compensaton, the amount thereof consttutes addtona compen-
saton and, as such, s ncudbe n the gross ncome of the empoyee
for edera ncome ta purposes and may be deducted by the em-
poyer as a busness e pense. The amount of ta thus assumed
and pad by the empoyer for the empoyee s deductbe by the
empoyee as a ta under secton 23(c) of the Interna Revenue Code.
dvce s requested concernng the proper treatment for edera
ncome ta purposes of the amount of the ta mposed by the cty of
Phadepha on saares, wages, commssons, and other compensaton
earned after anuary 1, 1940, where the ta s assumed and pad by
the empoyer n addton to the empoyee s reguar compensaton.
The ta s mposed under an ncome ta ordnance passed by the
cty counc of Phadepha and approved by ts actng mayor on
December 13. 1939, pursuant to authorty granted by an enabng act
enacted by the Pennsyvana State Legsature on ugust 5, 1932
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13 5 19.22(a)-3
(P. L. 45, tra Sesson, 1932). The pertnent provsons of the
ordnance are set forth n L T. 3370 (page 32, ths uetn). s n-
dcated n that rung, the ta es mposed by the ordnance (secton
2) of per cent on saares, wages, commssons, and other com-
pensaton earned after anuary 1, 1940, are deductbe by the em-
poyees whether pad by them or wthhed by ther empoyers from
ther saares, wages, commssons, or other compensaton. Whe
the empoyer n the nstant case dd not wthhod the amount of the
ta (as requred under secton 4 of the ordnance), but assumed and
pad the ta wthout deducton from the empoyee s reguar compen-
saton, the ta so assumed and pad by the empoyer s, nevertheess,
the ta of the empoyee.
Secton 23(c) of the Interna Revenue Code provdes that n com-
putng net ncome there sha be aowed as deductons ta es pad
or accrued wthn the ta abe year, wth certan e ceptons not ma-
tera here. Secton 19.23(c)- of Reguatons 103 states that n
genera ta es are deductbe ony by the person upon whom they are
mposed.
In vew of the foregong, the amount of the ta assumed and pad
bv the empoyer n the nstant case s not deductbe by the empover
s a ta under secton 23(c), supra. (I. T. 3154, C. . 1938-1, 118.)
owever, snce the assumpton and payment of the ta by the em-
poyer wthout deducton from the empoyee s reguar compensaton
manfesty was as addtona compensaton for persona servces
actuay rendered, the amount thereof s deductbe by the empoyer
nnder secton 23(a) of the Code as a part of hs ordnary and neces-
sary busness e penses. (I. T. 3154, supra.)
Consstenty, the amount of the ta thus assumed and pad by
the empoyer for the empoyee as addtona compensaton to the em-
poyee s ncudbe as such n the empoyee s gross ncome under
secton 22(a) of the Code. (I. T. 3154, supra Od Coony Trust Co.
. Commssoner, 279 U. S., 71 , Ct. D. 80, C. . III-2, 222 (1929),
and decsons cted theren.) urthermore, the amount of the ta
thus assumed and pad by the empoyer for the empoyee s deductbe
by the empovee as a ta under secton 23(c), supra. (I. T. 3370,
sapra Mm. 4595, C. . 1937-1, 3.) The ta n ths case s ds-
tngushabe n ths respect from the ta es nvoved n Od Coony
Trust Co. v. Commssoner, supra, and I. T. 3154, supra, whch were
nondeductbe for edera ncome ta purposes under e press statu-
tory provsons.
Secton 19.22 (a)-3: Compensaton pad other 1940-10-10195
than n cash. T. D. 49 5
TITL 2 INT RN L R NU . CII PT R I, SU C PT R , P RTS 3, 9, ND
19. INCOM T .
Reguatons 103, 101, 04, 8 , and 77, amended. Compensaton
pad other than n cash.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. G.
To Coectors of Interna Revenue and Others Concerned:
Secton 19.22 (a)-3 of Reguatons 103 Part 19, Tte 2 , Code of
edera Reguatons, 1940 Sup. , artce 22(a)-3 of Reguatons 101
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19.22(a)-3.
14
Part 9, Tte 2 , Code of edera Reguatons, 1939 Sup. , artce
22(a)-3 of Reguatons 94, as amended by Treasury Decson 4724,
approved anuary 18, 1937 C. . 1937-1, 58 Part 3, Tte 2 , Code
of edera Reguatons , artce 22(a)-3 of Reguatons 8 , as
amended by such Treasury Decson 4724, and artce 53 of Regua-
tons 77, as amended by such Treasury Decson 4724, are amended
by strkng out the fourth sentence n such secton and n each of such
artces readng as foows:
If vng quarters such as camps are furnshed to empoyees for the convenence
of the empoyer, the ratabe vaue need not be added to the cash compensaton
of the empoyees, but f a person receves as compensaton for servces rendered
a saary and n addton thereto vng quarters, the vaue to such person of
the quarters furnshed consttutes ncome sub|ect to tu .
and by substtutng n eu thereof the foowng two sentences:
If a person receves as compensaton for servces rendered a saary and n
addton thereto vng quarters or meas, the vaue to such person of the
quarters and meas so furnshed consttutes ncome sub|ect to ta . If, however,
vng quarters or meas are furnshed to empoyees for the convenence of the
empoyer, the vaue thereof need not be computed and added to the compensaton
otherwse receved by the empoyees.
(Ths Treasury decson s prescrbed pursuant to sectons 22(a)
and 2 of the Interna Revenue Code (53 Stat, Part 1) and of sec-
tons 22(a) and 02 of the Revenue cts of 1938, 193 , 1034, and 1932
(52 Stat., 457, 480, 49 Stat., 1 57, 1 73, 48 Stat., 8 , 700, 47 Stat.,
178,191 2 U. S. C, 22, 2, and Sup.).)
Gtnr T. evepno,
C ommssoner of Interna Revenue.
pproved ebruary 29, 1940.
. Moruenthau, r.,
Secretary of the Treasury.
( ed wth the Dvson of the edera Regster March 1, 1940, 10.40 a. m.)
Secton 19.22(a)-3: Compensaton pad other 1940-1 -10235
than n cash. Mm. 5023
Ta abty of compensaton other than n cash vng quarters
furnshed empoyees.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, March 22, 191,0.
Coectors of Interna Revenue, Interna Revenue gents n Charge,
and Others Concerned:
1. Treasury Decson 49 5, approved ebruary 29, 1940 (page 13,
ths uetn), amends artce 53 of Reguatons 77, as amended by
Treasury Decson 4724, approved anuary 18,1937 C. . 1937-1, 58 ,
artces 22(a)-3 of Reguatons 8 and 94, as amended by such Treas-
ury Decson 4724, artce 22(a)-3 of Reguatons 101, and secton
19.22(a)-3 of Reguatons 103, by strkng out the fourth sentence n
each of such artces and such secton, whch reads as foows:
If vng quarters such as enmps are furnshed to empoyees for the convenence
of the empoyer, the ratabe vaue need not he added to the cash compensaton of
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15
19.22(a)-3.
the empoyees, but f a person receves as compensaton for servces rendered a
saary and n addton thereto vng quarters, the vaue to such person of the
quarters furnshed consttutes ncome sub|ect to ta .
and substtutng n eu thereof the foowng two sentences:
If a person receves as compensaton for servces rendered a saary and n add-
ton thereto vng quarters or meas, the vaue to such person of the quarters
and meas so furnshed consttutes ncome sub|ect to ta . If, however, vng
quarters or meas are furnshed to empoyees for the convenence of the empoyer,
the vaue thereof need not be computed and added to the compensaton otherwse
receved by the empoyees.
2. The purpose of the foregong amendments of the severa regu-
atons mentoned s to carfy the poston of the ureau on the
queston as to the crcumstances under whch the vaue of vng
quarters or meas furnshed to empoyees by ther empoyer s to be
ncuded n the gross ncome of the empoyees. cept as ndcated
beow, f vng quarters or meas are furnshed to an empoyee, the
vaue thereof to hm consttutes ncome sub|ect to ta and must,
therefore, be ncuded n hs gross ncome as compensaton. If, how-
ever, the vng quarters or meas furnshed are not compensatory or
are furnshed for the convenence of the empoyer, the vaue thereof
need not be added to the compensaton otherwse receved by the
empoyee.
3. s a genera rue, the test of convenence of the empoyer
s satsfed f vng quarters or meas are furnshed to an empoyee
who s requred to accept such quarters and meas n order to perform
propery hs dutes. or e ampe, f an empoyee s sub|ect to m-
medate servce at any tme durng the 24 hou-s of the day and,
therefore, can not obtan quarters or meas esewhere wthout ma-
tera nterference wth hs dutes and on that account s requred by
the empoyer to accept quarters or meas furnshed by the empoyer,
the vaue thereof need not be ncuded n the gross ncome of the
empoyee. (See O. D. 915, C. . 4, 85 (1921).)
4. The renta vaue of vng quarters furnshed by a State to ts
Governor need not be added to the compensaton otherwse receved
by hm for the performance of hs offca dutes.
5. or e ampes of crcumstances under whch vng quarters or
aowances therefor are not compensatory see the ffth sentence of
secton 19.22(a)-3 of Reguatons 103 and the correspondng sentence
of pror reguatons, G. C. M. 14710 (C. . I -1, 44 (1935)), and
G. C. M. 1483 (C. . I -1, 45 (1935)), reatng to edera foregn
servce empoyees. or further e ampes of crcumstances under
whch t has been hed that quarters were furnshed for the con-
venence of the empoyer and the vaue thereof need not be ncuded
n the gross ncome of the empoyees, see O. D. 814 (C. . 4, 84
(1921)), reatng to fshermen and canners, and I. T. 2253 (C. .
-, 32 (192 )), reatng to househod servants.
. Inqures regardng ths mmeograph shoud refer to the number
thereof and the symbos IT: TM.
Gut T. everng,
C ommssoner.
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19.22(a)-7
1
Secton 19.22 (a) -7: Gross ncome of farmers. 1940-23-10277
( so Secton 143, Secton 19.143-1.) I. T. 3379
INT RN L R NU COD ND R NU CTS O 193 ND 1038.
mounts receved under the So Conservaton and Domestc
otment ct, as amended, the Prce d|ustment ct of 1038,
secton 303 of the grcutura d|ustment ct, as amended, and
the Sugar ct of 1937 consttute ta abe ncome to the recpents
for edera ncome ta purposes. Payments made under those cts
to nonresdent aen owners of and ocated n the Unted States
are sub|ect to deducton and wthhodng of ta at the source at
the rate of 5 per cent when made to nonresdent aen resdents of
Canada and at the rate of 10 per cent when made to a other non-
resdent aens.
dvce s requested as to the ta abty of, and the appcaton of
secton 143(b) of the Interna Revenue Code and secton 143(b) of
the Revenue cts of 193 and 1938 to, payments made under the
So Conservaton and Domestc otment ct, as amended (Pubc,
No. 4 1, Seventy-fourth Congress), the Prce d|ustment ct of
1938 (Tte of Pubc Resouton No. 122, Seventy-ffth Congress),
ecton 303 of the grcutura d|ustment ct, as amended (Pubc,
No. 430, Seventy-ffth Congress), and the Sugar ct of 1937 (Pubc,
No. 414, Seventy-ffth Congress).
Payments under the So Conservaton and Domestc otment
ct, as amended, accrue to persons who, as andowners, tenants, or
sharecroppers, compy wth certan requrements concernng acreages
devoted to so-depetng or so-conservng crops or perform certan
so-budng practces on farms ocated n the contnenta Unted
States or n the Terrtores of the Unted States.
Under the Prce d|ustment ct of 1938, payments are made to
wheat, cotton, corn, and rce producers whose acreage panted to any
such commodty for harvest on the farm n 1939 was not n e cess of
the farm acreage aotment estabshed for that commodty under
the 1939 agrcutura conservaton program. Smar payments wth
respect to 1940 crops are to be made pursuant to secton 303 of the
grcutura d|ustment ct of 1938, as amended.
Payments under the Sugar ct of 1937 are made to producers of
sugar beets and sugar cane who do not empoy chd abor, who pay
the wages for farm abor determned by the Secretary of grcuture
to be far and reasonabe, who hod ther marketngs wthn the farm
proportonate share, who carry out such farmng practces as are
determned by the Secretary of grcuture to be so-conservng,
and, n the case of producers who are aso processors of sugar beets
and sugar cane, who pay for such sugar beets and sugar cane a prce
determned bv the Secretary of grcuture to be far and reasonabe.
In I. T. 27 7 (C. . III-1, 35 (1934)) t was hed that the renta
or beneft payments made to producers under the provsons of the
grcutura d|ustment ct for the reducton n acreage, or the
reducton n producton for market of any basc agrcutura com-
modty specfed n secton 11 of the ct, as amended, consttute ta -
abe ncome to the recpents for edera ncome ta purposes. It
was aso hed n I. T. 2992 (C. . -2, 75 (193 )) that payments or
grants made to agrcutura producers pursuant to the provsons of
the ct entted n ct to provde for the protecton of and re-
sources aganst so eroson, and for other purposes (Pubc, No.
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17
13.22(b) (2)-2.
4 , Seventy-fourth Congress), as amended by the So Conservaton
and Domestc otment ct, supra, consttute ta abe ncome to the
recpents for edera ncome ta purposes.
mounts receved by persons who, as andowners, tenants, or share-
croppers, compy wth the requrements concernng acreage devoted
to so-depetng or so-conservng crops or perform certan so-
budng practces, who pant wheat, cotton, corn, and rce for harvest
n an acreage not n e cess of the farm acreage aotment estabshed
for the commodty under the 1939 and 1940 agrcutura conservaton
program, who hod ther marketngs of sugar beets and sugar cane
wthn the farm proportonate share (whe not empoyng chd
abor and whe payng the wages for farm abor determned by the
Secretary of grcuture to be far and reasonabe) and, n the case
of producers who are aso processors of sugar beets and sugar cane,
who pay for such sugar beets and sugar cane a prce determned by
the Secretary of grcuture to be far and reasonabe, consttute
payments smar, for edera ncome ta purposes, to the payments
consdered n I. T. 27 7, supra, and I. T. 2992, supra. ence, t s
hed that the amounts receved under the cts cted n the frst
paragraph of ths rung consttute ta abe ncome to the recpents
for edera ncome ta purposes.
Under secton 143(b) of the Interna evenue Code and secton
143(b) of the Revenue cts of 193 and 1938, a dsbursng offcers
and empoyees of the Unted States are requred to deduct and wth-
hod ncome ta at the rate of 10 per cent (the rate of 10 per cent
has been reduced to 5 per cent n the case of resdents of Canada
under the terms of the ta conventon between the Unted States
and Canada) from payments to nonresdent aens of nterest (e -
cept nterest on deposts wth persons carryng on the bankng bus-
ness pad to persons not engaged n busness n the Unted States
and not havng an offce or pace of busness theren), dvdends, rent,
saares, wages, premums, annutes, compensatons, remuneratons,
emouments, or other f ed or determnabe annua or perodca gans,
profts, and ncome from sources wthn the Unted States.
The amounts receved under the above cts by nonresdent aen
owners of and ocated n the Unted States consttute f ed or de-
termnabe annua or perodca ncome from sources wthn the
Unted States. (See sectons 119(a)4, 143(b), and 211(a) of the
Interna Revenue Code and the Revenue cts of 193 and 1938
cf. I. T. 297 , C. . -1, 138 (193 ).) Such payments, therefore,
are sub|ect to deducton and wthhodng of ta at the source at the
rate of 5 per cent when made to nonresdent aen resdents of
Canada and at the rate of 10 per cent when made to a other non-
resdent aens.
S CTION 22(b). GROSS INCOM : CLUSIONS
ROM GROSS INCOM .
Secton 19.22(b) (2)-2: nnutes.
INT RN L R NU COD .
Treatment of annuty contracts and payments thereon n connecton
wth severa trusts (not quafed under secton 1 5) mantaned for
the beneft of empoyees. (See I. T. 334 , page 2.)
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19.22(b) (2)-2.
18
Secton 19.22(b) (2)-2: nnutes. 1940-14-10218
I. T. 33 2
INT RN L R NU COD .
mounts deducted from the saares of muncpa empoyees and
pad nto the muncpa empoyees annuty and beneft fund of the
cty of R, State of Inos, pursuant to the act of the Genera ssem-
by of the State of Inos, approved une 29, 1921, as amended,
shoud be ncuded n the gross ncome of the empoyees for edera
ncome ta purposes.
dvce s requested wth respect to the ncuson n gross ncome of
the amounts deducted from the saares of muncpa empoyees and
pad nto the muncpa empoyees annuty and beneft fund of the
cty of R, State of Inos (herenafter referred to as the fund), pur-
suant to the act of the Genera ssemby of the State of Inos,
approved une 29, 1921| as amended.
In support of the poston that such amounts shoud not be ncuded
n gross ncome, the case of ughes v. Traeger (2 4 111., 12,10 N. .,
431) s cted. In that case the Supreme Court of Inos construed the
act of the genera assemby of that State, approved May 31, 1911,
provdng for the deducton of a specfed amount from the saares
and wages of certan muncpa empoyees for the estabshment and
mantenance of a penson fund for such empoyees. The court stated
that the amounts deducted dd not become the property of the em-
poyee and coud not be controed or dsposed of by hm. owever,
the act of May 31, 1911, was superseded as to ctes of over 200,000
nhabtants by an act, approved une 29, 1921, entted n act to
provde for the creaton, settng apart, mantenance, and admnstra-
ton of a muncpa empoyees annuty and beneft fund n ctes hav-
ng a popuaton e ceedng 200,000 nhabtants, and was ater repeaed
by an act approved ebruary 21, 1931. (See Laws of Inos, 1921,
pagp 205, and Laws of Inos, 1931, page 85 .)
The act of une 29, 1921, as amended, provdes n part as foows:
Sec. 1 . (c) ach such deducton from saary and correspondng contrbuton
by the cty sha be aocated to the account of and credted to the future entrant
for whose beneft t s made for age and servce annuty purposes.

(e-e) ach amount credted to any future entrant In accordance
wth the foregong provson of ths secton sha be mproved to the credt of
such future entrant by nterest at the rate of four (4) per cent per annum durng
a tme thereafter that such future entrant sha be n the servce, unt such
future entrant sha attan an age of s ty-fve ( 5) years.

Skc. 39. (a) 1. ny muncpa empoyee, wthout regard to the perod of tme
he sha have served, who sha resgn or be dscharged from the servce after the
1st day n the month of anuary of the frst year after the year n whch ths act
sh come n force and effect n such cty, and before he sha become ffty-fve
(55) years of age, and any muncpa empoyee, who sha have served ess than
ten (10) years, who sha resgn or be dscharged from the servce after the 1st
day n the month of anuary of the frst year after the year n whch ths act
sha come n force and effect n such cty and before he sha have become s ty
(00) years of age, sha have a rght to have refunded to hm the entre amount
whch sha have accumuated to hs credt for age and servce annuty and
wdow s annuty purposes on (he date of such resgnaton or dscharge from the
servce from amounts deducted from hs saary n accordance wth the provsons
of ths act.
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19
19.2(2b-))2(2.
The act of May 31,1911, dd not contan provsons smar to those
quoted. Therefore, even f t be conceded that the Inos Supreme
Court n the case of ughes v. Traeger, supra, ad down a rue of
property whch woud be controng n the determnaton of a sm-
ar queston under the act of May 31, 1911, t s the opnon of ths
offce that the decson of the court n that case woud not of necessty
be foowed by the Unted States courts n cases arsng under the
act approved une 29,1921, the pertnent provsons of whch are ma-
teray dfferent from those of the prpr act.
Ths offce s aso of the opnon that the rghts of the benefcares
under the fund are not dstngushabe from the rghts of benefcares
under the Cv Servce Retrement ct and smar egsaton. The
ureau has consstenty hed that deductons made from saares of
cv servce empoyees to be apped to the purchase of retrement
annutes are to be ncuded n the gross ncome of such empoyees.
(See T. D. 3112, C. . 4, 7 (1921).) smar concuson was
reached wth respect to amounts wthhed from the saares of mer-
can foregn servce offcers (I. T. 21C2, C. . I -1, 29 (1925)).
In vew of the foregong, t s hed that the gross amount of the
saares of the muncpa empoyees of the cty of R, State of Inos,
wthout dmnuton for the amounts deducted therefrom and pad nto
the fund, are to be ncuded n the gross ncome of the empoyees for
edera ncome ta purposes. It foows, therefore, that the amounts
refunded to the empoyees from the fund n the event that they do
not become egbe for annutes are not to be treated as compensa-
ton for such purposes.
Wth regard to the ta abty of retrement annutes receved by
the empoyees, t s hed that such annutes are ta abe to the e tent
provded n secton 22(b) 2 of the Interna Revenue Code.
Wth respect to annutes pad from the fund to benefcares of
the empoyees, t s hed that such annuty payments are ta abe to
the benefcares on the same bass as to the retred empoyees.
Secton- 19.22(b) (2)-2: nnutes. 1940-15-1022
I. T. 33 4
INT RN L R NU COD .
Treatment for edera ncome ta purposes of annutes receved
n 1939 by retred muncpa empoyees.
dvce s requested reatve to the ta abty for edera ncome
ta purposes of annuty payments receved n 1939 by a retred em-
poyee of the cty of S.
The queston arses under secton 22(b)2 of the Interna Revenue
Code, reatng to annutes, whch secton provdes n part as foows:
mounts receved as an annuty under an annuty or endowment
contract sha be ncuded n gross ncome e cept that there sha be e cuded
from gross ncome the e cess of the amount receved n the ta abe year over
an amount equa to 3 per centum of the aggregate premums or consderaton
pad for such annuty unt the aggregate amount e cuded from
gross ncome under ths chapter or pror ncome ta aws n respect to such
annuty equas the aggregate premums or consderaton pad for such
annuty.
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19.22(b) (2)-2.)
20
Smar provsons are contaned n the Revenue cts of 1934, 193G,
and 1938.
In the present case the empoyee retred n 1934 and receves an
annuty of 2,000. The amount of the annuty receved by hm n
1934 and 1935 equaed the amount of 4,000 whch he had pad nto
the retrement fund. The queston presented s whether the retred
empoyee, a snge person, shoud ncude n gross ncome for 1939
the fu amount of the annuty of 2,000, or whether for the year
1939 he shoud ncude ony 3- per cent of 4,000, the consderaton
pad by hm for the annuty, and ony 3 per cent of 4,000 for each
year thereafter unt the tota consderaton pad by hm has been
e cuded from gross ncome n 1939 and subsequent years.
Pror to the year 1939 a retred muncpa empoyee dd not ncude
any part of such an annuty n hs edera ncome ta returns. It s
contended, however, that because no part of the retred empoyee s
annuty was e cuded from gross ncome for the years pror to 1939
on account of the statutory provsons contaned n secton 22(b)2
of the Revenue cts of 1934, 193C, and 1938, 3 per cent of 4,000, or
120, shoud be ncuded n gross ncome for edera ncome ta
purposes for 1939, and 1,880 e cuded that a ke amount ( 120)
shoud be ncuded n gross ncome for 1940 that n 1941, 1,7 0
(the remander of the tota consderaton not prevousy e cuded)
w be ncudbe n gross ncome and that thereafter a tota of
2,000 w be requred to be ncuded n gross ncome each year.
The evdent ntent of the above-quoted provsons of aw s to
provde that unt the capta nvested, that s, the amounts contrb-
uted to the retrement fund by an annutant (the empoyee n the
nstant case) are recovered, t can not be sad that the annutant s
recevng ncome other than the ncome of 3 per cent upon the capta
nvested by hm, and for that reason t s provded that any amount
n e cess of the estmated return (3 per cent) on the amount nvested
sha be e cuded from gross ncome unt the aggregate amount so
e cuded equas the aggregate premums or consderaton pad for
the annuty. It s apparent n the nstant case that the empoyee,
who retred n 1934 and had pad nto the retrement fund 4,000,
and had, from 1934 up to and ncudng 1938, receved 2,000 a year,
has recovered ta -free the entre amount pad by hm nto the retre-
ment fund. Therefore, t s hed, under the facts presented, that
the tota amount of 2,000 receved by the retred empoyee n 1939
shoud be ncuded n gross ncome for edera ncome ta purposes
for that year.
In the case of an empoyee who retred n 1937, hs annuty to
become effectve on anuary 1,1938, the resut s dfferent. In such a
case, the provsons of secton 22(b)2 of the Interna Revenue Code
shoud be apped n the foowng manner: In 1939 and subsequent
years, the empoyee recevng the annuty of 2,000 must ncude n
gross ncome the ta abe porton of hs annuty. In determnng
such ta abe porton, t shoud be consdered that n the year 1938
he receved as ncome an amount equa to 3 per cent of the aggregate
premums or consderaton pad for hs annuty, or 120, wth the
resut that 1,880 was e cuded from gross ncome for that year.
Then for 1939 he shoud return for edera ncome ta purposes 3 per
cent of the consderaton pad, that s. 120, and e cude from gross
ncome 1,880 of the annuty of 2,000 receved by hm n that year.
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21
19.22(b) (4)-4.
On s ch bass, 3,7 0 of the consderaton pad for the annuty w
have been recovered n 1938 and 1939. or the year 1940, 1,700 s
ncudbe n gross ncome, the retred empoyee havng aready re-
covered a but 240 of the tota consderaton of 4,000 pad by hm
for the annuty. It s apparent that had the empoyee retred n
193 , the annuty to become effectve on anuary 1, 1937, t woud
be for the year 1939 that he woud ncude n gross ncome 1,7 0
and, further, that f he had retred n 1935 and hs annuty became
effectve on anuary 1, 193 , the tota amount of 2,000 woud be
ncudbe n gross ncome for 1939.
Secton 19.22(b) (4)-4: Interest upon Unted 1940-4-10147
States obgatons. I. T. 3343
INT RN L R NU COD .
empton of nterest (ncrement n vaue) on Unted States sav-
ngs bonds n the ease of an ndvdua who keops hs accounts and
makes hs edera ncome ta returns ou the cash recepts and ds-
bursements bass.
Where an ndvdua ctzen or resdent aen of the Unted States,
reguary empoyng the cash recepts and dsbursements bass n
makng edera ncome ta returns, purchases each year, durng a
perod of 10 years, Unted States savngs bonds n an amount not n
e cess of 5,000 (purchase prce) whch mature 10 years from date
of ssue and surrenders them for redempton at maturty, the nterest
(ncrement n vaue) receved therefrom, L e., on such bonds of a
prncpa amount (purchase prce) not n e cess of 5,000, s then
ncome and s whoy e empt from ncome ta aton, ncudng ed-
era surta , e cess-profts ta , and war-profts ta , provded he cams
no e empton from any edera surta , e cess-profts ta , or war-
profts ta wth respect to any nterest receved (actuay or construc-
tvey) n the same ta abe year on account of other bonds whch were
ssued under the authorty of the Second Lberty ond ct, as
amended. (See I. T. 2958, C. . -1, 120 (193 ) I. T. 32 2, C. .
1939-1 (Part 1), 9 and I. T. 3324, C. . 1939-2, 135.)
In the case of the death of such ta payer, however, nterest accrued
but not receved up to the date of hs death s ncome for the ta abe
year or perod n whch fas the date of hs death, as we as any nter-
est receved by hm durng that ta abe perod. (Secton 42, Interna
Revenue Code.) The nterest (ncrement n vaue) accrued on un-
redeemed Unted States savngs bonds s shown n a tabe of redemp-
ton vaues thereon. (Cf. G. C. M. 15875, C. . I -2, 100 (1935).)
s nterest on Unted States savngs bonds to the e tent that t s on
an amount of such bonds the prncpa (purchase prce) of whch
does not e ceed n the aggregate 5,000 (and provded no e empton
from edera surta , e cess-profts ta , or war-profts ta , s camed
for the ta abe perod wth respect to nterest on account of other
bonds whch were ssued under the authorty of the Second Lberty
ond ct, as amended), beng w-hoy e empt from ncome ta aton,
sha be e cuded from hs gross ncome and net ncome. (Sectons
21 and 22(b)4, Interna Revenue Code.) The baance, f any, of hs
nterest on Unted States savngs bonds, beng not e empt from ed-
era surta (or from any edera e cess-profts or war-profts ta es
then mposed), sha be mcuded n hs gross ncome and net ncome
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I 19.22(d)- .
22
(sectons 21 and 22(b)4, supra), but, nasmuch as nterest on Unted
States savngs bonds s e empt, wthout mt, from norma ta , a
credt for the amount of such nterest ncuded n hs gross ncome
and net ncome sha be aowed, for the purpose of the norma ta
ony, aganst hs net ncome. (Secton 25 (a) 1, Interna Revenue
Code.)
Whether or not the nterest on Unted States savngs bonds s whoy
e empt, there must be submtted n the ta payer s edera ncome ta
return a statement showng the number and amount of such obga-
tons owned by hm and the ncome therefrom, n such form and wth
such nformaton as the Commssoner may requre. (Secton 22(b)4,
supra.)
Secton 19.22(b) (4)-4: Interest upon Unted 1940-10-10191
States obgatons. I. T. 3355
INT RN L R NU COD .
Interest upon bonds ssued under the provsons of secton 15c
of the Tennessee aey uthorty ct of 1933, whch was added by
the ct of uy 2 , 1939, s sub|ect to edera ncome ta .
dvce s requested as to the status, for edera ncome ta pur-
poses, of nterest upon bonds of the Tennessee aey uthorty,
ssued under secton 15c of the ct of uy 2 , 1939 (Pubc, No. 224,
Seventy-s th Congress, chapter 3 , frst sesson), whch amended
the Tennessee aev uthorty ct of 1933 (48 Stat,, 58), as
amended by the ct of ugust 31,1935 (49 Stat., 1075).
Secton 5c of the Tennessee aey uthorty ct of 1933, whch
was added by the ct of uy 2 1939, supra, authorzes the ssuance
by the Tennessee aey uthorty, wth the approva of the Secre-
tary of the Treasury, of bonds not to e ceed n the aggregate
01,500,000.
Under secton 22(b)4 of the Interna Revenue Code, reatng to
ta -free nterest, t s provded that nterest upon obgatons of a
corporaton organzed under an ct of Congress, f such corporaton
s an nstrumentaty of the Unted States, sha be e empt from
ta aton ony f and to the e tent provded for n the cts authorz-
ng the ssue thereof. There s no provson n the ct of uy 2 ,
1939, whereby the nterest upon bonds ssued under the provsons of
secton 15c of the Tennessee aey uthorty ct of 1933, as
amended, s e empt from edera ncome ta . It foows, there-
fore, that the nterest upon such bonds s sub|ect to edera ncome
ta .
S CTION 22(d) ( M ND D Y S CTION 219. R NU
CT O 1939). GROSS INCOM : IN NTORI S
IN C RT IN INDUSTRI S.
Secton 19.22(d)-: Inventores under eectve 1940-2-10137
method. T. D. 4959
TITL 2 INT RN L R NU . C PT R I, SU C PT R , P RT 9, SU -
P RT SU C PT R , P RT 4 5, SU P RT . INCOM T .
Reguatons reatng to eectve method of takng Inventores for
years begnnng subsequent to December 31, 1938.
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23
5 19.22(d)- .
Treasury Department,
Offce or Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 101 (Part 9, Subpart , Tte 2 ,
Code of edera Reguatons), as made appcabe to tbe Interna
Revenue Code (53 Stat., Part 1) by Treasury Decson 4885, approved
ebruary 11,1939 C. . 1939-1 (Part 1), 39 (Part 4 5, Subpart 13,
Tte 2 , Code of edera Reguatons), to secton 219 of the Revenue
ct of 1939 (Pubc, No. 155, Seventy-s th Congress, frst sesson)
amendng secton 22(d) of the Interna Revenue Code, such regua-
tons are amended as foows:
(1) The foowng s nserted mmedatey precedng artce
22(d)- (secton 9.22(d)-, Tte 2 , Code of edera Reguatons),
as made appcabe to the Interna Revenue Code:
Secton 219. Inventores (Revenue ct of 1930).
Sec. 219. Inventores.
(a) mendment to Code, Secton 22(d) of the Interna Revenue
Code (reatng to nventores n certan ndustres) s amended to read
as foows:
(d) (1) ta payer may use the foowng method (whether or not
such method has been prescrbed under subsecton (c)) n nventoryng
goods specfed n the appcaton requred under paragraph (2) :
( ) Inventory them at cost
( ) Treat those remanng on hand at the cose of the ta abe
year as beng: rst, those ncuded n the openng nventory of the
ta abe year (n the order of acquston) to the e tent thereof,
and second, those acqured n the ta abe year and
(C) Treat those ncuded n the openng nventory of the ta -
abe year n whch such method s frst used as havng been ac-
qured at the same tme and determne ther cost by the average
cost method.
(2) The method descrbed n paragraph (1) may be used
( ) Ony n nventoryng goods (requred under subsecton (c)
to be nventored) specfed n an appcaton to use such method
fed at such tme and n such manner as the Commssoner may
prescrbe and
( ) Ony f the ta payer estabshes to the satsfacton of the
Commssoner that the ta payer has used no procedure other than
that specfed n subparagraphs ( ) and (C) of paragraph (1) n
nventoryng (to ascertan ncome, proft, or oss, for credt pur-
poses, or for the purpose of reports to sharehoders, partners, or
other propretors, or to benefcares) such goods for any perod
begnnng wth or durng the frst ta abe year for whch the
method descrbed n paragraph (1) s to be used.
(3) The change to, and the use of, such method sha be n accord-
ance wth such reguatons as the Commssoner, wth the approva of
the Secretary, may prescrbe as necessary n order that the use of such
method may ceary refect ncome.
(4) In determnng ncome for the ta abe year precedng the
ta abe year for whch such method s frst used, the cosng nventory
of such precedng year of the goods specfed n such appcaton sha
be at cost.
(5) If a ta payer, havng comped wth paragraph (2), uses the
method descrbed n paragraph (1) for any ta abe year, then such
method sha be used n a subsequent ta abe years uness
( ) Wth the approva of the Commssoner a change to a df-
ferent method s authorzed or
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19.22(d)-.
24
( ) The Commssoner determnes that the ta payer has used
for any perod begnnng wth or durng any subsequent ta abe
year some procedure other than that specfed n subparagraph
( ) of paragraph (1) n nventoryng (for ascertanng ncome,
proft, or oss, for credt purposes, or for the purpose of reports to
sharehoders, partners, or other propretors, or to benefcares)
the goods specfed n the appcaton, and requres a change to a
method dfferent from that prescrbed n paragraph (1) begnnng
wth such subsequent ta abe year or any ta abe year thereafter.
In ether of the above cases, the change to, and the use of, the df-
ferent method sha be n accordance wth such reguatons as the
Commssoner, wth the approva of the Secretary, may prescrbe aa
necessary n order that the use of such method may ceary refect
Income.
(b) Ta abe Years to Whch ppcabe. The amendment made
by subsecton (a) sha be appcabe to ta abe years begnnng after
December 31, 1938.
(c) mendment to 1938 ct. Secton 22(d) of the Revenue ct of
1938 (reatng to nventores In certan Industres) s amended to
read as foows:
(d) If the Inventory method descrbed n secton 22(d)(1), ts
amended, of the Interna Revenue Code s used for the frst ta abe
year begnnng after December 31, 1938, then, n determnng ncome
for the precedng ta abe year, the cosng nventory of such year of
the goods specfed n the appcaton under secton 22(d)(2), as
amended, of such Code sha be at cost.
(2) rtce 22(c)- secton 9.22(c)-, Tte 2 , Code of edera
Reguatons s amended by nsertng at the end thereof the words,
( ut see artce 22(d)-.)
(3) rtce 22(c)-2 secton 9.22(c)-2, Tte 2 , Code of edera
Reguatons s amended by nsertng at the end of the frst sentence
e cept ns to those goods nventored under the eectve method authorzed by
secton 22(d),
so that the sentence so amended w read as foows:
In respect of norma goods, whchever bass s adopted must be apped wth
reasonabe consstency to the entre nventory e cept as to those goods nven-
tored under the eectve method authorzed by secton 22(d).
(4) rtce 22(c)-2 s further amended by nsertng n eu of the
s th sentence of the fourth paragraph thereof the foowng
sentence:
ut see secton 22(d) as to nventores under eectve method.
(5) rtce 22(c)-7 secton 9.22(c)-7, Tte 2 , Code of edera
Reguatons s amended by nsertng n eu of the ast sentence
thereof the foowng sentence:
See secton 22(d) as to nventores under eectve method.
( ) rtces 22(d)- to 22(d)-4 sectons 9.22(d)- to 9.22(d)-4,
Tte 2 , Code of edera Reguatons , ncusve, are strcken out
and there s substtuted n eu thereof the foowng:
rt. 22(d)-1 secton 9.22(d)-, Tte 2 , Code of edera Reguatons, 1939
Sup. . Inventores under eectve method. ny ta payer permtted or requred to
take Inventores pursuant to the provsons of secton 22(c) of the Interna Reve-
nue Code, and pursuant to the provsons of artces 22(c)- to 22(c)-8 of these
reguatons sectons 9.22(c)- to 9.22(c)-8, Tte 2 , Code of edera Regua-
tons may eect wth respect to those goods specfed n hs appcaton and
of the fourth
words,
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25
19.22(d)- .
propery sub|ect to nventory to compute hs openng and cosng nventores n
accordance wth the method provded by secton 22(d) of the Code as amended
by secton 219 of the Revenue ct of 1939. Under ths eectve nventory method,
the ta payer s permtted to treat those goods remanng on hand at the cose
of the ta abe year as beng:
rst, those ncuded n the openng nventory of the ta abe year, n the
order of acquston and to the e tent thereof, and
Second, those acqured durng the ta abe year.
Ths eectve nventory method s not dependent upon the character of the busness
n whch the ta payer s engaged, or upon the dentty or want of dentty
through commngng of any of the goods on hand, and may be adopted by the
ta payer as of the cose of any ta abe year begnnng after December 31, 1938.
If the eectve nventory method s used by a ta payer who reguary and
consstenty, n a manner smar to hedgng on a futures market, matches pur-
chases wth saes, then frm purchase and saes contracts (. e., those not egay
sub|ect to canceaton by ether party) entered nto at f ed prces on or before
the date of the nventory may be ncuded n purchases or saes, as the case may
be, for the purpose of determnng the cost of goods sod and the resutng proft
or oss, provded that ths practce s reguary and consstenty adhered to by the
ta p yer and that, n the opnon of the Commssoner, ncome s ceary refected
thereby.
bt. 22(d)-2 secton 9.22fd)-2. Tte 2 . Code of edera Reguatons, 1939
Sup. . Requrements ncdent to adopton and use of eectve method. The adop-
ton and use of the eectve nventory method s. by statute and by these regu-
atons, made sub|ect to the foowng requrements:
(1) The ta payer sha fe pursuant to these reguatons an appcaton to
use such method specfyng wth partcuarty the goods to whch t s to be
apped
(2) The nventory sha be taken at cost regardess of market vaues
) Goods of the specfed type ncuded n the openng nventory of the ta -
abe year for whch the method s frst used sha be consdered as havng been
acqured at the same tme and at a unt cost equa to the actua cost of the
aggregate dvded by the number of unts on hand, such actua cost of the
aggregate beng determned pursuant to the nventory method empoyed by the
ta payer under the reguatons appcabe to the precedng ta abe year
(4) Goods of the specfed type on hand as of the cose of the ta abe year n
e cess of what were on hand as of the begnnng of the ta abe year sha be
ncuded n the cosng nventory, regardess of dentfcaton wth specfc
nvoces, at costs determned as foows:
(a) y reference to the actua cost of the goods most recenty purchased
or produced:
( ) y reference to the actua cost of the goods purchased or produced
durng the ta abe year n the order of acquston :
(r) y appcaton of an average unt cost equa to the aggregate cost of
a of the goods purchased or produced throughout the ta abe year dvded
by the tota number of unts so purchased or produced, the goods refected
n such nventory ncrease beng consdered for the purposes of secton
22(d) as havng been acqured a at the same tme or
(d) Pursuant to any other proper method whch, n the opnon of the
Commssoner, ceary refects ncome.
Whchever of the severa methods of vaung the nventory ncrease s adopted
by the ta payer and approved by the Commssoner In accordance wt these
reguatons sha be consstenty adhered to n a subsequent ta abe years so
ong as the eectve nventory method s used by the ta payer
ampe 1: Suppose that the ta payer adopts the eectve nventory method for
the ta abe year 1939 wth an openng nventory of 10 unts at 10 cents per unt,
that t makes 1939 purchases of 10 unts as foows:
anuary 1 11 11
pr 2 12 24
uy 3 13 39
October 4 14 5
25220 40 -2
Totas: 10 130
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19.22(d)- .
2
and that t has a 1939 cosng nventory of 15 unts. Ths cosng nventory, de-
pendng upon the ta payers method of vaung nventory ncreases, w be
computed as foows:
(o) Most recent purchases
10 10
4 14 (October)
1 13 ( uy)
Totas: 15
or
( ) In order of acquston
10 10
1 11 ( anuary)
2 12 ( pr)
2 13 ( uy)
Totas: 15
or
(c) t an annua average
10 10 100
5 13 (130/10) 5
Totas: 15 1 5
ampe 2: Suppose, n addton to the facts stated n e ampe 1, that there s
a 1940 cosng nventory of 13 unts. Ths cosng nventory, beng determned
whoy by reference to the openng nventory, and beng taken n the order of
acquston, and dependng upon the ta payer s method of vaung ts nventory
ncrease for the precedng ta abe year, w be computed as foows:
(o) In case the ncrease was taken as most recent purchases
10 10 (from 1938) 100
1 13 ( uy, 1939) 13
2 14 (October, 1939) 28
Totas: 13 141
or
( ) In case the ncrease was taken n order of acquston
10 10 (from 1938) 100
1 11 ( anuary, 1939) 11
2 12 ( pr, 1939) 24
Totas: 13 135
or
(c) In case ncrease was taken on bass of an average
10 10 (from 1938) 100
3 13 (from 1939) 39
Totas: 13 139
(5) The ta payer sha estabsh to the satsfacton of the Commssoner
that the ta payer has not, n the ta abe year for whch the eectve nventory
method s frst used or n any subsequent ta abe year, used n determnng
ncome, proft, or oss, for credt purposes, or for the purpose of reports to
sharehoders, partners, or other propretors, or to benefcares, any nventory
method other than that referred to n artce 22(d)- secton 9.22(d)-, Tte
2 , Code of edera Reguatons, 1939 Sup. or at varance wth the requrement
referred to n paragraph (3) of ths artce, the ta payer s use of market vaue
n eu of cost not beng consdered at varance wth ths requrement
( ) Goods of the specfed type on hand as of the cose of the ta abe year
precedng the ta abe year for whch ths nventory method s frst used,
whether such precedng ta abe year began before or after December 31, 1938,
sha be ncuded n the ta payer s nventory for such precedng ta abe year
at cost
100
5
13
1 9
100
11
24
2
1 1
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27
19.22(d)- .
(7) The eectve nventory method, once adopted by the ta payer wth the
approva of the Commssoner, sha be adhered to n a subsequent ta abe
years uness
(a) change to a dfferent method s approved by the Commssoner or
(Z) The Commssoner determnes that the ta payer has used n ascer-
tanng ncome, proft, or oss, for credt purposes, or for the purpose of
reports to sharehoders, partners, or other propretors, or to benefcares,
and for years subsequent to hs adopton of the eectve nventory method,
an nventory method at varance wth that referred to n artce 22(d)-
and requres of the ta payer a change to a dfferent method for such sub-
sequent ta abe year or any ta abe year thereafter
(8) The ta payer sha mantan such accountng records as w enabe the
Commssoner ready to verfy the ta payer s nventory computatons as we
as hs compance wth these severa requrements.
bt. 22(d)-3 secton 9.22(d)-3, Tte 2t, Code of edera Reguatons, 1939
Sup. . Tme and manner of makng eecton. The eectve nventory method may
1 adopted and used ony f the ta payer fes wth hs return for the ta abe
year as of the cose of whch the method s frst to be used (or, f such return
s fed pror to the nneteth day after the approva of these reguatons, then
at any tme pror to the e praton of such nneteth day), n trpcate on orm
70 (revsed), aud pursuant to the nstructons prnted thereon and to the re-
qnrements of these reguatons, a statement of hs eecton to use such nventory
method. Such statement sha be accompaned by an anayss of a nventores
of the ta payer as of the begnnng and as of the end of the ta abe year for
whch the eectve method s proposed frst to be used, and aso as of the begn-
nng of the precedng ta abe year. In the case of a manufacturer, ths anayss
sha show n deta the manner n whch costs are convputed wth respect to raw
materas, goods n process, and fnshed goods, segregatng the products
(whether n process or fnshed goods nto natura groups on the bass of
ether (1) smarty n factory processes through whch they pass, or (2) sm-
arty of raw materas used, or (3) smarty n stye, shape, or use of fnshed
products. ach group of products sha be ceary descrbed.
The ta payer sha submt for the consderaton of the Commssoner n con-
necton wth the ta payer s adopton or use of the eectve nventory method
such other detaed nformaton wth respect to hs busness or accountng sys-
tem as may be at any tme requested by the Commssoner.
s a condton to the ta payer s use of the eectve nventory method, the
Commssoner may requre that the method be used wth respect to goods other
than those specfed n the ta payer s statement of eecton f, n the opnon of
the Commssoner, the use of such method wth respect to such other goods s
essenta to a cear refecton of ncome.
Whether or not the ta payer s appcaton for the ndopton and use of the
eectve nventory method shoud be approved, and whether or not such method,
once adopted, may be contnued, and the proprety of a computatons nc-
denta to the use of such method w be determned by the Commssoner n
connecton wth the e amnaton of the ta payer s returns.
kt. 22(d)-4 secton 9.22(d) , Tte 2 , Code of edera Reguatons, 1939
Sup. . d|ustments to be made bu ta payer. ta payer may not change to the
eectve method of takng nventores uness, at the tme he fes hs appcaton
for the adopton of such method, he agrees to such ad|ustments ncdent to the
change to or from such method, or ncdent to the use of such method, n the
nventores of pror ta abe years or otherwse, as the Commssoner upon the
e amnaton of the ta payer s returns may deem necessary n order that the
true ncome of the ta payer w be ceary refected for the years nvoved.
bt. 22(d)-5 secton 9.22 (d)-5, Tte 2 , Code of edera Reguatons, 1939
Sup. . Revocaton of eecton, n eecton made to adopt and use the eectve
nventory method s rrevocabe, and the method once adopted sha be used n
a subsequent ta abe years, uness the use of another method be requred by
the Commssoner, or authorzed by hm pursuant to a wrtten appcaton
therefor fed wth hm as provded n artce -11-2 of these reguatons secton
9.41-2, Tte 2 , Code of edera Reguatons .
bt. 22(d)-C secton 9.22(d)- , Tte 2 . Code of edera Reguatons, 1939
Sup. . Change from eectve nventory method. If the ta payer s granted per-
msson by the Commssoner to dscontnue the use of the eectve method of
takng nventores, and thereafter to pursue some other method, or f the ta -
payer s requred by the Commssoner to dscontnue the use of the eectve
method by reason of the ta payer s faure to conform to the requrements
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19.23(a)- .
28
detaed n artce 22(d)-2, the nventory of the specfed goods for the frst ta -
abe year affected by the change and for each ta abe year thereafter sha be
taken
(a) In conformty wth the method used by the ta payer under secton
22(c) In nventoryng goods not ncuded n hs eectve nventory compu-
tatons or
( ) If the eectve nventory method was used by the ta payer wth
respect to a of hs goods sub|ect to nventory, then n conformty wth the
nventory method used by the ta payer pror to hs adopton of the eectve
nventory method or
(c) If the ta payer had not used nventores pror to hs adopton of the
eectve nventory method and had no goods currenty sub|ect to nventory-
by a method other than the eectve method, then n conformty wth such
nventory method as may be seected by the ta payer and approved by the
Commssoner as resutng n a cear refecton of ncome or
(d) In any event, n conformty wth any nventory method to whch the
ta payer may change pursuant to appcaton approved by the Commssoner.
(Ths Treasury decson s ssued under the authorty of secton
22(d) of the Interna Revenue Code (53 Stat., Part 1) as amended
by secton 219 of the Revenue ct of 1939 (Pubc, No. 155, Seventy-
s th Congress, frst sesson) and secton 2 of the sad Interna
Revenue Code,)
ohn L. Suvan,
ctng Commssoner of Interna Revenue.
pproved December 28, 1939.
ohn W. anes,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster December 29, 1939, 12.44 p. m.)
S CTION 23(a). D DUCTIONS ROM GROSS
INCOM : P NS S.
Secton 19.23(a)-: usness e penses. 1940-21-102 2
I. T. 3373
INT RN L R NU COD .
The cost of hemets, rubber coats, and rubber boots requred to
be purchased and worn by cty fremen, and the cost of rubber coats
and rubber boots requred to be purchased and worn by cty poce-
. men, consttute aowabe deductons for edera ncome ta
purposes.
dvce s requested whether the cost of hemets, rubber coats, and
rubber boots requred to be purchased and worn by fremen, and the
cost of rubber coats and rubber boots requred to be purchased and
worn by pocemen, a empoyees of the cty of R, are aowabe
deductons for edera ncome ta purposes.
The ureau hods that where certan artces of wearng appare are
specfcay requred by the ta payer s busness, beng used soey n
hs busness, and such artces are not adaptabe to genera or con-
tnued wear to the e tent that they may be sad to repace the wearer s
reguar cothng, the cost thereof s a deductbe busness e pense.
(See G. C. M. 19 2, C. . 1938-1, 118, and G. C. M. 19790, C. .
1938-1, 118.) Ths rue appes to hemets, rubber coats, and rubber
boots purchased and worn by fremen and pocemen n the empoy
of the cty of R. The cost of such artces s, therefore, an aowabe
deducton for edera ncome ta purposes.
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29
19.23(a)-2.
Secton 19.23(a)-2: usness e penses. 194( -23-10278
L T.3380
INT RN L R NU COD .
Traveng e penses ncurred by teachers on sabbatca eave, who
receve compensaton whe engaged n the requred traveng and
who must report reatve to ther trave, are deductbe for edera
ncome ta purposes.
dvce s requested whether traveng e penses ncurred by teach-
ers durng sabbatca eave are deductbe for edera ncome ta
purposes.
The traveng referred to s requred of teachers bv the board of
educaton. ach month a report must be sent n by the teacher
showng the paces vsted by hm and the amount of tme spent n
each pace. Not more than 30 days are aowed for traveng n any
one State. monthy saary s pad to the teacher durng sabbatca
eave, whch eave s permtted after seven years of contnuous
teachng.
Secton 23(a) of the Interna Revenue Code provdes that n
computng net ncome there sha be aowed as deductons the ord-
nary and necessary e penses pad or ncurred durng the ta abe
year, ncudng traveng e penses whe away from home n pursut
of the ndvdua s trade or busness. It s accordngy hed that
traveng e penses ncurred by teachers on sabbatca eave, who
receve compensaton whe engaged n requred traveng and who
must report reatve to ther trave, are deductbe for edera ncome
ta purposes.
Secton 19.23(a)-: usness e penses.
INT RN L R NU COD .
Ctv of Phadepha empovee s ta pad by the empoyer for the
empoyee. (See I. T. 3382, page 12.)
Secton 19.23(a)-2: Traveng e penses. 1940-17-10239
( so Secton 22(a), Secton 19.22(a)-.) I. T. 33 8
INT RN L R NU COD .
ote e penses ncurred by a member of the State egsature of
the State of R whe away from home performng hs egsatve
dutes durng the sesson of the State egsature are deductbe n
determnng hs net ncome for edera ncome ta purposes. The
meage aowance receved by hm shoud be ncuded n gross
ncome and the actua e pense ncurred n trave to perform hs
egsatve dutes s deductbe.
dvce s requested whether a member of the egsature of the State
of R may deduct from hs gross ncome the hote e penses ncurred
by hm whe away from home durng the perod the State egsature
s n sesson, and whether hs meage aowance shoud be ncuded
n gross ncome. It appears that the State egsature meets nfre-
quenty and s n sesson for a very short tme.
It s hed that a member of the egsature of the State of R, who
s away from home whe he s engaged n the performance of egs-
atve dutes n the State capta, may deduct hs hote e penses n-
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19.23(c)- .
30
curred durng such perod. It s aso hed that hs meage aowance
shoud be ncuded n gross ncome and that hs actua e pense of
trave to perform hs egsatve dutes may be deducted.
Secton 19.23(a)- : Compensaton for persona servces.
INT RN L R NU COD .
Deductbty of contrbutons to severa trusts (not quafed under
secton 1 5) mantaned for the beneft of empoyees. (See 1. T.
334 , page 2.)
S CTION 23(b). D DUCTIONS ROM GROSS
INCOM : INT R ST.
Secton 19.23(b)-: Interest. 1940-20-102 0
T. D. 49 9
TITL 2 INT RN L R NU . C PT R I, SU C PT R , P RT 10.
INCOM T .
mendng secton 19.23(b)- of Reguatons 103 reatve to the
deductbty of Maryand and Pennsyvana ground rents.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
The ast sentence of the second paragraph of secton 19.83(b) 1
of Reguatons 103 Part 19, Tte 2 , Code of edera Reguatons,
1940 Sup. s hereby amended to read as, foows:
Payments of Maryand or Pennsyvana ground rents are deductbe as nterest
f the ground rent s redeemabe, but are treated as rent If the ground rent
Is rredeemabe and n such case are deductbe ony to the e tent they con-
sttute a proper busness e pense.
(Ths Treasury decson s ssued under the authorty contaned n
sectons 23 and 2 of the Interna Revenue Code (53 Stat., 12, 32).)
Gut T. everng,
Commssoner of Interna Revenue.
pproved May , 1940.
ohn L. Suvan,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster May 7, 1940, 3.14 p. m.)
S CTION 23(c). D DUCTIONS ROM GROSS
INCOM : T S G N R LLY.
Secton 19.23(c)-: Ta es. 1910-12-1020
L T.3358
INT RN L R NU COD .
The cost of the stamps whch are requred by the aws of the
8t :te of New ampshre to be purchased and aff ed to packages of
tobacco products s an aowabe deducton as a ta n the return of
the dstrbutor or deaer purchasng and aff ng the stamps.
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31
19.23(0-1.
dvce s requested reatve to the deductbty for edera ncome
ta purposes of the ta mposed on tobacco products by the Sate of
New ampshre n 1939.
The aw under whch the ta s mposed s contaned n chapter 1 7,
sectons 1 to 19, ncusve, approved une 7,1939, as amended by chap-
ter 180, approved une 14, 1939, of the New ampshre Pubc cts
and ont Resoutons of the Legsature of 1939.
Under the provsons of those statutes, any person n the State of
New ampshre who s engaged n the busness of seng tobacco
products must secure a cense. Wth the e cepton of certan non-
resdents engaged n the busness of seng and shppng tobacco
products nto the State, stamps are sod ony to censed dstrbutors
and censed deaers. It s cear that under the State aw the ta s
mposed upon the dstrbutors or deaers who, n purchasng and aff -
ng the stamps, pay the ta .
Secton 23(c) of the Interna Revenue Code provdes that n com-
putng net ncome there sha be aowed as deductons ta es pad or
accrued wthn the ta abe year, wth certan e ceptons not here
matera. Secton 19.23(e)- of Reguatons 103, ssued under the
Interna Revenue Code, states that n genera ta es are deductbe ony
by the person upon whom they are mposed.
It s hed that for edera ncome ta purposes the cost of the stamps
whch are requred by the aws of the State of New ampshre to be
purchased and aff ed to packages of tobacco products s an aowabe
deducton as a ta n the return of the dstrbutor or deaer purchasng
and aff ng the stamps. The cost of the stamps, however, may not
be deducted separatey as a ta f t s ncuded as a part of the busness
e pense of the dstrbutor or deaer, or s otherwse used to reduce hs
net ncome. To the purchaser or consumer of the tobacco products,
the cost of the stamps s merey addtona cost of the artce purchased.
Secton 19.23(c)-1: Ta es. 1940-15-10227
I. T. 33 5
INT RN L R NU COD .
mounts deposted n parkng meters n the Dstrct of Coumba
are not aowabe deductons as ta es under secton 23(c) of the
Interna terenne Code. If, however, amounts deposted n the
meters represent e pendtures n connecton wth the ta payer s
trade or busness, such amounts may be deducted as a busness
e pense.
dvce s requested whether the amounts deposted by ta payers n
parkng meters n the Dstrct of Coumba consttute aowabe
deductons as ta es for edera ncome ta purposes.
Secton 11 of the ct of pr 4,1938 (52 Stat., 15 ,192), provdes:
Sec. 11. The Commssoners of the Dstrct of Coumba are hereby author-
zed and empowered, n ther dscreton, to secure and to nsta e permentay,
at no e pense to the sad Dstrct, mechanca parkng meters or devces on the
streets, avenues, roads, hghways, and other pubc spaces n the Dstrct of
Coumba under the |ursdcton and contro of sad Commssoners, such nsta-
atons to be mted to a near footage not to e ceed the tota of the permeters
of four normay szed squares n such Dstrct and sad Commssoners are
authorzed and empowered to make and enforce rues and reguatons for the
contro of the parkng of vehces on such streets, avenues, roads, hghways, and
other pubc spaces, and as an ad to such reguaton and contro of the park-
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19.23(c)- .
32
ng of vehces the Commssoners may prescrbe fees for the prvege of park-
ng vehces where sad meters or devces are nstaed.
The Commssoners are further authorzed and empowered to pay the pur-
chase prce and cost of nstaaton of the sad meters or devces from the fees
coected, whch are hereby approprated for such purpose, for the fsca years
1938 and 1939, and thereafter such meters or devces sha become the prop-
erty of sad Dstrct, and a fees coected sha be pad to the coector of ta es
for depost n the Treasury of the Unted States to the credt of the revenues of
sad Dstrct.
The queston whether a partcuar charge s to be regarded as a
ta depends upon ts rea nature. In 2 Rung Case Law, page 17,
the genera rue dstngushng ta aton from reguatons s stated n
the foowng anguage:
4. Ta aton dstngushed from reguaton. Some governments derve a
consderabe revenue from a |udcous e ercse of the power of reguaton but
snce a ta s a charge mposed for the purpose of rasng revenue, a charge
prmary mposed for the purpose of reguaton s not a ta , and s not sub.ect
to the consttutona mtatons upon the power of ta aton. If the
prmary purpose oS the egsature n mposng such a charge s to reguate the
occupaton or the act, the charge s not a ta , even f It produces revenue for
the pubc.
In the nstant case the staute ceary shows that the fee prescrbed
s for reguatory purposes and s not for the purpose of rasng reve-
nue. ccordngy, t s hed that amounts deposted by ta payers n
parkng meters n the Dstrct of Coumba are not aowabe deduc-
tons as ta es under secton 23(c) of the Interna Revenue Code. If,
however, amounts deposted n the meters represent e pendtures n
connecton wth the ta payer s trade or busness, such amounts may
be deducted as a busness e pense.
Secton 19.23(c)-1: Ta es. 1940-18-10245
I. T. 3370
INT RN L R NU COD .
Deductbty for edera ncome ta purposes of ncome ta es
mposed by the cty of Phadepha.
dvce s requested concernng the deductbty for edera ncome
ta purposes of ncome ta es mposed by the cty of Phadepha.
Under authorty granted by an enabng act enacted by the Penn-
syvana State Legsature on ugust 15. 1932, the cty counc of
Phadepha passed an ncome ta ordnance approved by the actng
mayor on December 13, 1939. The pertnent provsons of the ord-
nance are quoted beow:
Sec. 2. Imposton of ta . n annua ta for genera revenue purposes of
1 per centum s hereby mposed on (a) saares, wages, commssons and
other compensaton earned after anuary 1, 1940, by resdents of Pha-
depha and on ( ) saares, wages, commssons and other compensaton earned
after anuary 1, 1940, by nonresdents of Phadepha for work done or servces
performed or rendered n Phadepha and on (c) the net profts earned after
anuary 1, 1039, of busnesses, professons or other actvtes conducted by such
resdents, and on (rf) the net profts earned after anuary 1, 1939, of busnesses,
professons or other actvtes conducted n Phadepha by nonresdents.

Sec. 4. Coecton at source.- ach empoyer wthn the cty of Phadepha
who empoys one or more persons ou a saary, wage, commsson or other com-
pensaton bass sha deduct, monthy or more often than monthy, at the tme
of the payment thereof, the ta of 1 per centum of saares, wages, com-
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33
I 19.23(c)- .
mssons or other compensaton due by te sad empoyer to the sad em-
poyee and sha, on or before the 15th day of the month ne t foowng the sad
deducton make a return and pay to the recever of ta es the amount of ta
so deducted.
Secton 23(c) of the Interna Revenue Code provdes that n com-
putng net ncome there sha be aowed as deductons ta es pad or
accrued wthn the ta abe year, wth certan e ceptons not here
matera.
In accordance wth the provsons of the Interna Revenue Code
referred to above, t s hed that ncome ta es pad by an ndvdua
ta payer or wthhed by hs empoyer from hs saary, wages, com-
mssons, or compensaton under the Phadepha ncome, ta ord-
nance approved December 13, 1039, are deductbe as ta es n hs
edera ncome ta return for the vear n whch pad by hm or
wthhed by the empoyer. (See-1. T. 1273, C. . 1-1, 125 (1922).)
ta payer dervng net profts earned after anuary 1, 1939, from
busnesses, professons or other actvtes and empoyng the
accrua method of accountng, whose returns are made on the caendar
year bass, may cam a deducton for the Phadepha ncome ta as
an accrued abty as of December 31, 1939, the end of hs ta abe
year. owever, a ta payer dervng such profts and empoyng the
accrua method of accountng, whose returns are made on the fsca
year bass, s not entted to the beneft of such deducton for hs fsca
year ended n 1939 because the ta can not be hed to have accrued
pror to December 13. 1939, the date the Phadepha ncome ta
ordnance was approved. (See O. D. 505, C. . 2, 121 (1920).)
Therefore, a ta payer empoyng the accrua method of accountng
who derves ncome from busnesses, professons or other actvtes
and makes hs return on the fsca year bass may cam as a deducton
for hs ta abe year endng n 1910 the Phadepha ncome ta es wth
respect to the ncome earned durng the perod anuary 1,1939, to the
cose of hs fsca year n 1939, as we as such ta es for hs fsca year
endng n 1940. (See I. T. 2281, C. . -, 58 (192 ), and G. C. M.
8553, C. . I -2, 109 (1930).) If the ta es are deducted as a bus-
ness e pense or otherwse used to reduce hs net ncome, they may not
be deducted separatey as ta es.
Secton 19.23(c)-1: Ta es. 1940-20-10257
I. T. 3372
INT RN , R NU COD .
The cost of the stamps whch are requred by the aws of the
cty of New York and the State of New York to be purchased and
aff ed to packages of cgarettes s an aowabe deducton as a ta
n the return of the deaer purchasng and aff ng the stamps.
dvce s requested as to the deductbty for edera ncome ta
purposes of the cgarette ta es mposed by the cty of New York
and the State of New York.
The aw under whch the ta es are mposed by the cty of New
York s contaned n No. 23 of the Loca Laws of the Cty of New
York for the year 1938, approved une 30, 1938, as amended. The
aw s entted oca aw To amend the admnstratve code of
the cty of New York, n reaton to rasng revenue for the purposo
of reevng the peope of the cty of New York from the hardshps
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19.23(c)- .
and sufferng caused by unempoyment and the effects thereof on
the pubc heath and -wefare, by mposng a ta upon saes of
cgarettes n the cty of New York, to enabe such cty to defray the
cost of grantng unempoyment work and home reef. The pro-
vsons of the aw pertnent to the present queston are contaned n
Tte T, sectons T41-1.0, T41-2.0, T41-3.0, subsecton a, T41 .0 and
T41-9.0, as amended. Secton T41-2.0 of the aw provdes n sub-
secton a that the ta sha be pad upon every sae of cgarettes at
reta, and n subsecton c that a deaers sha be abe to the cty
as ta payers for the payment of the ta and sha pay the ta by
purchasng stamps from the treasurer.
The aw under whch the ta es are mposed by the State of New
York s contaned n chapter 470 of the Laws of New York, 1939,
entted n act to amend the ta aw, by mposng, temporary, a
ta upon saes of cgarettes, provdng for the appcaton of the
revenues from such source, and makng an appropraton for the
department of ta aton and fnance. The aw was approved May 17,
1939, but the ta mposed thereby dd not become effectve unt
uy 1, 1939. The pertnent provsons of the aw are contaned In
rtce , sectons 470, 471, 47 , and 481. Secton 471 of the New
York State cgarette ta aw provdes that the ta s mposed and
sha be pad on a cgarettes possessed n the State by any person
for sae on and after uy 1, 1939. It s aso provded that the ta es
sha be mposed upon ony one sae of the same package of cgarettes
n New York.
Secton 23(c) of the Interna Revenue Code provdes that n com-
putng net ncome there sha be aowed as deductons ta es pad or
accrued wthn the ta abe year, wth certan e ceptons not here
matera. Secton 19.23(c)- of Reguatons 103, reatng to the
Interna Revenue Code, states that n genera ta es are deductbe
ony by the person upon whom they are mposed.
or edera ncome ta purposes, the cost of the stamps whch are
requred by the aws of the cty of New York and the State of New
York to be purchased and aff ed to packages of cgarettes s an
aowabe deducton as a ta n the return of the deaer purchasng
and aff ng the stamps. The cost of the stamps, however, may not
be deducted separatey as a ta f t s ncuded as a part of the
busness e pense of the deaer or s otherwse used to reduce hs net
ncome. To the purchaser or consumer of the cgarettes, the cost of
the stamps s merey addtona cost of the artce purchased.
Secton 19.23(c)-1: Ta es. 1940-21-102 3
I. T. 3374
INT RN L R NU COD .
Rea and persona property ta es In the State of Washngton
accrue for the year 1939 and subsequent years as of anuary 1 of
each year.
dvce s requested reatve to the deductbty by ta payers who
keep ther accounts on the accrua bass of property ta es mposed
by the State of Washngton for 1939 and subsequent years.
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35 19.23(0-1.
I. T. 3224 (C. . 938-2, 144) hods (syabus):
Rea and persona property ta es assessed n the State of Washngton for
the year 1937 shoud be accrued for edera Income ta purposes us of March
1, 37, n accordance wth G. C. M. 0( C7 (C. . III-2. 94 (1 29)). Rea and
persona pro erty ta es assessed n the State of Washngton for the year UYM
shoud be accrued as of anuary 1, 193S, n accordance wth the aw as changed
by chapter 122, Laws of Washngton, 1037.
The aw of the State of Washngton reatng to ta es on rea and
persona property was changed n 1939 (Laws of Washngton,
Twenty-s th Sesson, chapters 13 and 20 ), but an e amnaton of
those provsons of aw dscoses that they do not affect the bass of
the rung pubshed as I. T. 3224, supra. Inasmuch as the changes
n the e stng aw made by chapters 13 and 20 , Laws of Washng-
ton, 1939, do not affect the concuson reached n I. T. 3224 that prop-
erty ta es n the State of Washngton for the year 1938 shoud be
accrued as of anuary 1, 1938, such accrua date ( anuary 1) s
appcabe to 1939 and subsequent years.
though the ta es assessed as of anuary 1, 1939, are, under sec-
ton 2, chapter 13 , Laws of Washngton, 1939, known and desg-
nated as ta es of the year 1940, they are nevertheess generay
accruabe as of anuary 1, 1939.
Secton 19.23(c)-: Ta es. 1940-21-102 4
I. T. 3375
INT RN L R NU COD .
The cost of stamps requred by the aws of the State of Te as to
be purchased and aff ed to packages of cgarettes s an aowabe
deducton as a ta n the return of the frst seer wthn the State
purchasng and aff ng the stamps.
dvce s requested as to the deductbty for edera ncome ta
purposes of cgarette ta es mposed pursuant to Te as Laws of 1933,
chapter 241, as amended.
The aw under whch the ta es are mposed s contaned n artce
7017c of ernon s Cv Statutes of the State of Te as, nnotated.
The pertnent provsons of aw are contaned n secton 1, subdv-
sons (a), (e), (m), (n), (o), and (p) secton 2, paragraph 1 sec-
ton 3, paragraphs 2 and 3 secton 3 and secton 9(a).
Under secton 2 of the Te as cgarette ta act, t s provded that
the ta es sha be pad ony once by the person makng the frst
sae of the cgarettes n Te as. Under secton (m) of the act,
the term dstrbutor ncudes every person n the State of Te as
who manufactures or produces cgarettes, or who shps, transports, or
mports nto the State, or n any manner acqures or possesses cga-
rettes, and makes a frst sae of the same n the State. Dstrbu-
tor aso ncudes every person n the State who n any manner ac-
qures or possesses unstamped cgarettes for the purpose of makng
a frst sae of the cgarettes wthn the. State.
Secton 23(c) of the Interna Revenue Code provdes that n com-
putng net ncome there sha be aowed as deductons ta es pad or
accrued wthn the ta abe year, wth certan e ceptons not here
matera. Secton 19.23 (c)- of Reguatons 103, reatng to the
Interna Revenue Code, states that n genera ta es are deductbe
ony by the person upon whom they are mposed.
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19.23(c)- .
3
rom an e amnaton of the State aw, t s evdent that the per-
son who pays the ta by aff ng the stamps requred by the act s
the ta payer and s the ony one who s entted to a deducton for
such payment for edera ncome ta purposes. The ta s pad but
once, that s by the person makng the frst sae of cgarettes wthn
the State. The act defnes the person makng the frst sae as the
dstrbutor.
or edera ncome ta purposes, therefore, the cost of the stamps
s an aowabe deducton as a ta n the return of the frst seer
wthn the State of cgarettes to whch he has aff ed the stamps as
requred by the State aw. The amount pad for the stamps may
not be deducted separatey as a ta f t s ncuded as a part of the
busness e pense pf the ta payer or s otherwse used to reduce hs
net ncome. Wth respect to the purchaser or consumer of cgarettes,
the addtona amount pad for the cgarettes because of the stamp
ta pad by the frst seer s merey addtona cost of the artce
purchased.
Secton 19.23 (c)-1: Ta es. 1940-21-102 5
I. T. 337
INT RN L R NU COD .
Ta es Imposed under the Dstrct of Coumba Income Ta ct,
approved uy 2 , 1939, are deductbe for edera ncome ta pur-
poses n the year n whch pad or accrued.
dvce s requested as to the deductbty for edera ncome ta
purposes of the Dstrct of Coumba ncome ta .
The aw under whch the ta s mposed s contaned n Tte II
of Pubc, No. 225, chapter 307, Seventy-s th Congress, frst sesson,
entted n ct to provde revenue for the Dstrct of Coumba,
and for other purposes, and was approved uy 2 1939. The pert-
nent provsons of the aw are contaned n secton 1 and secton
2 (a), (b), and (c).
Secton 23(c) of the Interna evenue Code provdes that n com-
putng net ncome there sha be aowed as deductons ta es pad
or accrued wthn the ta abe year, wth certan e ceptons not here
matera. Secton 19.23 (c)- of Reguatons 103, reatng to the In-
terna Revenue Code, states that n genera ta es are deductbe ony
by the person upon whom they are mposed.
It s hed that the Dstrct of Coumba ncome ta s deductbe
for edera ncome ta purposes n the year n whch t s actuay
pad bv a ta payer who empoys the cash recepts and dsbursements
method of accountng. ta payer empoyng the accrua method
of accountng shoud deduct the Dstrct of Coumba ncome ta n
the year n whch t accrues.
Secton 19.23 (c) -1: Ta es. 1940-22-10270
I. T. 3378
INT RN L R NU COD .
The manufacturers e cse ta on gasone Imposed by secton
3412 of the Interna Revenue Code s deductbe for edera ncome
ta purposes by the manufacturer, producer, or Importer.
The ta on gasone mposed by the aw of the Terrtory of
awa s deductbe by the dstrbutor.
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37
19.23(c)- .
dvce s requested concernng the deductbty for edera ncome
ta purposes of the manufacturers e cse ta on gasone mposed by
secton 3412 of the Interna Revenue Code and the ta on gasone
mposed by the aw of the Terrtory of awa.
secton 3412 of the Interna Revenue Code reads n part as foows:
(a) There sha be Imposed on gasone sod by the producer or Importer
thereof, or by any producer of gasone, a ta of 1 cent a gaon, e cept that
under reguatons prescrbed by the Commssoner wth the approva of the
Secretary the ta sha not appy n the case of saes to a producer of gasone.
(b) If a producer or mporter uses (otherwse than n the producton of gaso-
ne) gasone sod to hm free of ta , or produced or mported by hm, such
use sha for the purposes of ths chapter Chapter 29 be consdered a sae.
ny person to whom gasone s sod ta -free under ths secton sha be consd-
ered the producer of such gasone.
Secton 23(c) of the Interna Revenue Code provdes that n com-
putng net ncome there sha be aowed as deductons ta es pad or
accrued wthn the ta abe year, wth certan e ceptons not here
matera. Secton 19.23(c)- of Reguatons 103, reatng to the n-
come ta under the Interna Revenue Code, states that n genera
ta es are deductbe ony by the person upon whom they are mposed.
The manufacturers e cse ta on gasone mposed by secton 3112
of the Interna Revenue Code s ceary mposed upon the manu-
facturer, producer, or mporter, and s, therefore, deductbe by hm
for edera ncome ta purposes. (See Mn. 3988, C. . I-2, 2o
(1932).) The ta s not deductbe from gross ncome n the return
of the consumer even though the amount thereof s passed on to hm.
The aw under whch the ta on gasone s mposed by the Terr-
tory of awa s found n chapter 4 of the Laws of the Terrtory
of awa, Reguar Sesson of 1939, effectve as of uy 1, 1939, and
reads n part as foows:
Sec. 2013. Dstrbutors to pay certan cense ta s. (a) very dstrbutor
sha, n addton to any other ta es provded by aw, pay a cense ta to the
treasurer of 4 cents for each gaon of qud fue refned, manufac-
tured, produced or compounded by such dstrbutor and sod or used by hm n
the Terrtory, or mported by such dstrbutor, or acqured by hm from per-
sons not censed dstrbutors, and sod or used by hm n the Terrtory .
No provson s made for refund of any porton of the ta pad
wth respect to the sae of gasone (ncuded n the term qud
fue ).
Under the above-quoted provsons of awaan aw, the ta of 4
cents requred to be pad on each gaon of gasone s a cense ta
mposed upon and payabe by the dstrbutor. The ta s. therefore,
deductbe by hm for edera ncome ta purposes. The amount of
such ta , whch s ncuded as a part of the cost of the gasone, s not
deductbe by the consumer.
Secton 19.23(c)-: Ta es.
INT RN L R NU COD .
Cty of Phadepha empoyee s ta pad by the empoyer for the
empoyee. (See I. T. 3382, page 12.)
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19.23(m)-.
38
Secton 19.23 (c) -1: Ta es. 1940-24-10287
L T. 3383
INT RN L R NU COD .
The stamp ta , effectve une 1, 1939, mposed upon the sae
of tobacco products In Rhode Isand s a ta upon the sae by the
dstrbutor or deaer and s deductbe by hm as a ta under sec-
ton 23(c) of the Interna Revenue Code.
dvce s requested as to who s entted to deduct for edera n-
come ta purposes the ta mposed upon the sae of tobacco products
n Rhode Isand. The ta s mposed by chapter 3 of the 1939 Ses-
son Laws of the State of Rhode Isand and Provdence Pantatons
entted n act mposng a ta upon the sae of tobacco products,
effectve une 1, 1939.
Secton 1 of the act provdes that whenever used n the act, the
word dstrbutor sha mean any person engaged n the State n
manufacturng, mportng, or procurng tobacco products for sae
to deaers n the State any person who purchases tobacco products
for the purpose of resae n the State, provded at east 75 per cent
of a tobacco products sod s purchased drecty from the manufac-
turers thereof and any person engaged n operatng 50 or more ma-
chnes for vendng tobacco products who sha se drect to the
consumer by means of such machnes.
Secton of the act mposes a ta on a tobacco products sod
or hed for sae n the State by any person, the payment thereof
to be evdenced by stamps aff ed to the packages contanng the
tobacco products. Secton 11 of the act provdes that each
dstrbutor sha aff , or cause to be aff ed, to each package of
tobacco products sod or dstrbuted by hm stamps of the proper
denomnatons.
Under the provsons of the act n queston, t s hed that the ta
thereby mposed s a ta upon the sae of tobacco products by the
dstrbutor or deaer, and for edera ncome ta purposes the ta
s deductbe by hm under secton 23(c) of the Interna Revenue
Code. When added to the sae prce of the tobacco products, the
ta s merey an addtona cost to the purchaser or consumer and
s not deductbe by hm.
S CTION 23(m). D DUCTIONS ROM GROSS
INCOM : D PL TION.
Secton 19.23(m)-: Depeton of mnes, o and 1940-2-1013
gas wes, other natura deposts and tmber T. D. 49 0
.deprecaton of mprovements.
TITL 2 INT RN L R NU . C PT R I, SU C PT R , P RT 0
SU C PT R , P RT 4 5, SU P RT . INCOM T .
mendng Reguatons 101 as made appcabe to the Interna
Revenue Code by Treasury Decson 4885 fC. . 1939-1 (Part 1),
31) n so far as snch reguatons prescrbe rues reatve to the
aowance of depeton and deprecaton deductons under sec-
tons 2.3 (m) and 114 of the Interna Revenue Code.
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39
19.23(m)-.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Reguatons 101 Part 9, Tte 2 , Code of edera Reguatons,
1939 Sup. , as made appcabe to the Interna Revenue Code by
Treasury Decson 4885, approved ebruary 11, 1939 C. . 1939-1
(Part 1), 39 Part 4 5, Subpart of such Tte 2 , n so far ua
they prescrbe rues reatve to the aowance of depeton and do-
recaton deductons under sectons 23 (m) and 114 of the Interna
fvenue Code, are hereby amended as foows:
(1) The second, thrd, and fourth paragraphs of artce 23(m)-
secton 9.23(m)- are amended to read as foows:
Under such provsons, the owner of an economc nterest n mnera deposts
or standng tmber s aowed annua depeton deductons. n economc
nterest s possessed n every case n whch the ta payer has acqured, by
nvestment, any nterest n mnera n pace or standng tmber and secures,
by any form of ega reatonshp, ncome derved from the severance and sae
of the mnera or tmber, to whch he must ook for a return of hs capta.
Lut a person who has no capta nvestment n the mnera depost or standng
mber docs not possess an economc nterest merey because, through a con-
tractua reaton to the owner, he possesses a mere economc adrantage derved
from producton. Thus, an agreement between the owner of an economc
nterest and another enttng the atter to purchase the product upon produc-
ton or to share n the net ncome derved from the nterest of such owner
does not convey a depetabe economc nterest.
The ad|usted bass of deprecabe property s returnabe through annua
deprecaton deductons. Deprecaton and depeton deductons on the prop-
erty of a corporaton are aowed to the corporaton and not to Its share-
hoders. ( ut see artce 115-0 secton 9.115- .) The prncpes governng
the apportonment of deprecaton n the case of property hed by one person
for fe wth remander to another person and n the case of property hed
In trust are aso appcabe to depeton. (See artce 23(1)-1 secton
9.23(1)-1 .)
(2) The frst sentence of artce 23(m)-(c) secton 9.23(m)-
1(c) s amended to read as foows:
The term mnera depost refers to mneras n pace.
(3) rtce 23(m)-(e) secton 9.23(m)-(e) , defnng the term
u operatng profts, s strcken out.
(4) The desgnaton of artce 23(m)-(/) secton 9.23(m)-(/)
s changed to (e).
(5) The desgnaton of artce 23(m)-( 7) secton 9.23(m)-( )
s changed to (/), and such artce s further amended to read as
foows:
(f) Gross ncome from the property, as used n secton 114(b) (3) and (4)
and artces 23(m)- to 23(m)-28 sectons 9.23(m)- to 9.23(m)-28 , ncusve,
means the amount for whch the ta payer ses the crude mnera product of the
property n the mmedate vcnty of the mne or we, but, f the product s trans-
ported or processed (other than by the processes e cepted beow) before sae, t
means the representatve market or fed prce (as of the date of sae) cf crude
mnera product of ke knd and grade before such transportaton or processng.
If there s no such representatve market or fed prce (as of the date of sae),
then there sha be used n eu thereof the representatve market or fed prce of
the frst marketabe product resutng from any process or processes (or, If the
product In ts crude state s merey transported, the prce for whch sod) mnus
the costs and proportonate profts attrbutabe to the transportaton and the
processes not sted beow. The processes e cepted are as foows:
(1) In the case of coa ceanng, breakng, szng, and oadng at the mne
for shpment
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19.23(m)-.
40
(2) In the case of suphur pumpng to vats, coong, breakng, and oadng
at the mn for shpment
(8) In the case of ron ore and ores whch are customary sod In the
form of the crude mnera product sortng or concentratng to brng to
shppng grade, and oadng at the mne for shpment and
(4) In the case of ead, znc, copper, god, or sver ores and ores whch
are not customary sod n the form of the crude mnera product crushng,
concentratng (by gravty or fotaton), and other processes to the e tent to
whch they do not benefcate the product n greater degree (n reaton to the
crude mnera product on the one hand and the refned product on the other)
than crushng and concentratng (by gravty or fotaton).
In case any of the e cepted processes are not apped n the mmedate vcnty
of the mnng dstrct n whch the mne s ocated, costs ncurred for transporta-
ton to the processng ocaton and, f transported by ta payer, the proportonate
profts attrbutabe to trausporaton shoud be subtracted from the sae prce of
the product to determne gross ncome from the property.
In the ease of o and gas, f the crude mnera product s not sod on the
property but s manufactured or converted nto a refned product or s trans-
ported from the property pror to the sae, then the gross ncome from the
property sha be assumed to be equvaent to the market or fed prce of the
o or gas before converson or transportaton.
In a cases there sha be e cuded n determnng the gross ncome from the
property an amount equa to any rents or royates whch were pad or ncurred
by the ta payer n respect of the property and are not otherwse e cuded from
the gross ncome from the property. If royates n the form of bonus pay-
ments have been pad n respect of the property n the ta abe year or any pror
years or f advanced royates have been pad n respect of the property n any
ta abe year endng pror to December 31, 1939, the amount e cuded from
gross ncome from the property for the current ta abe year on account of such
payments sha be an amount equa to that part of such payments whch s aoca-
be to the product sod durng the ta abe year. If advanced royates have been
pad n respect of the property n any ta abe year endng on or after December
31. 1939, the amount e cuded from gross ncome from the property for the
current ta abe year on account of such payments sha be an amount equa to the
deducton for such ta abe year taken on account of such payments pursuant to
artce 23(m)-10(e) secton 9.23(m)-10(e) .
( ) The desgnaton of artce 23(m)-(h) secton 9.23(m)-( )
s changed to (g), and (g) wherever appearng n the te t thereof s
changed to (/).
(7) The desgnaton of artce 23(m)-( ) secton 9.23(m)-()
s changed to ( ), and (g) appearng n the te t thereof s changed
to (/).
(8) The desgnaton of artce 23(m)-( ) secton 9.23(m)-O )
s changed to ( ), and the frst sentence thereof s further amended to
read as foows:
The property, as used n secton 114(b) (2), (3), and (4), and artces
23(m)- to 23(m)-19 sectons 9.23(m)- to 9.23(m)-19 , ncusve, means the
nterest owned by the ta payer n any mnera property.
(9) The second sentence of the frst paragraph of artce 23(m)-3
secton 9.23(m)-3 s amended to read as foows:
The vaue must be equtaby apportoned between the owners of the economc
nterests theren.
(10) The reference to ( ) appearng n the ast sentence of the thrd
paragraph of artce 23(m)-3 secton 9.23(m)-3 s changed to (g).
(11) The references to (g) and (h) appearng n artce 23(m)-4
secton 9 23(m)-4 are changed to (/) and (g), respectvey.
(12) The references to (g) and (h) appearng n the ast sentence of
the frst paragraph of artce 23(m)-5 secton 9.23(m)-5 are changed
to (/) and ((7), respectvey.
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41
19.23(m)-.
(13) rtce 23(m)- secton 9.23(m)- s amended to read as
foows:
bt. 23(m)- Sec. 9.23(m)-C . Determnaton of cost of deposts. In any
case n whch a depeton or deprecaton deducton s computed on the bass of
the cost or prce at whch any nterest n any mnera property was acqured,
the ta payer w be requred to show that the cost or prce at whch such
nterest was bought was f ed for the purpose of a bona fde purchase and sae,
by whch the nterest passed n fact as we as n form to an owner other than
the vendor. No fcttous or nfated cost or prce w be permtted to form the
bass of any cacuaton of a depeton or deprecaton deducton, and n de-
termnng whether the prce or cost at whch any purchase or sae was made
represented the actua market vaue of the nterest sod, due weght w be
gven to the reatonshp or connecton e stng between the person seng the
nterest and the buyer thereof.
(14) The second, thrd, and fourth sentences of artce 23(m)-7()
secton 9.23(m)-7( ) are amended as foows:
The factors essenta n the case of a mnera deposts are (1) the tota
e pected proft, (2) the rate at whch ths proft w be obtaned, and (3) the
rate of nterest commensurate wth the rsk for the partcuar depost. In case
of o and gas propertes the addtona factors are ( ) the tota quantty of o
and gas n terms of the prncpa or customary unt (or unts) pad for n the
product marketed, ( ) the quantty of o and gas e pected to be recovered
durng each operatng perod, (C) the average quaty or grade of the o and
gas reserves, (D) the aocaton of the tota e pected proft to the severa
processes or operatons necessary for the preparaton of the o and gas for
market, ( ) the probabe operatng fe of the depost n years, ( ) the de-
veopment cost, and (G) the operatng cost. In order to estmate the tota
e pected proft from the operaton of mnes t s necessary to determne the
quantty, quaty, and recoverabe mnera content of the deveoped, probabe,
and prospectve ore reserves n a cases.
(15) rtce 23(m)-7 (e) and (/) secton 9.23(m)-7 (e) and (/)
s amended to read as foows:
(e) The vaue of each mnera depost s measured by the e pected gross ncome
(the number of unts of mnera recoverabe n marketabe form mutped by
the estmated market prce per unt) ess the estmated operatng cost, reduced
to a present vaue as of the date as of whch the vauaton s made at the rate of
nterest commensurate wth the rsk for the operatng fe, and further reduced
by the vaue at that date of the deprecabe assets and of the capta addtons,
f any, necessary to reaze the profts. The deRree of rsk s generay owest In
caws where the factors of vauaton are fuy supported by the operatng record
of the mnera property pror to the date as of whch the vauaton s made
reatvey hgher rsks attach to apprasas upon any other bass.
(f) If. for the purpose of the equtabe apportonment of depeton among the
severa owners of economc nterests, the vaue of any mnera property must be
ascertaned as of any specfc date for the determnaton of the bass for depeton,
the vaues of the severa nterests theren may be determned separatey, but,
when determned as of the same date, sha together never e ceed the vaue at
that date of the mnera property n fee smpe.
(1 ) rtce 23(m)-10 secton 9.23(m)-10 s amended to read as
foows:
rt. 23(m)-10 Sec. 9.23(m)-10 . Depeton d|ustments of accounts based
on bonus or advanced royaty. (a) If a bonus n addton to royates s receved
upon the grant of rghts n mnera property, there sha be aowed to the payee
as a depeton deducton n respect of the bonus an amount equa to that propor-
ton of the bass for depeton as provded n secton 114(b) (1) or (2) whch
the amount of the bonus bears to the sum of the bonus and the royates e pected
to be receved. Such aowance sha be deducted from the payee s bass for
depeton, and the remander Is recoverabe through depeton deductons on the
bass of royates thereafter receved. In the case of the payor any payment
made for the acquston of an economc nterest n a mnera depost or standng
tmber consttutes a capta nvestment n the property recoverabe ony through
the depeton aowance.
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19.23(m)-.
42
( ) If the owner of operatng rghts In mnera property for a term of years
s requred to e tract and pay for, annuay, a specfed number of tons, or other
agreed unts of measurement, of such mnera, or to pay, annuay, a specfed
sum of money whch sha be apped n payment of the purchase prce or royaty
per unt of such mnera whenever the same sha thereafter be e tracted and
removed from the premses, the payee sha treat an amount equa to that part
of the bass for depeton aocabe to the number of unts so pad for n advance
of e tracton as an aowabe deducton from the gross ncome of the year n
whch such payment or payments sha be made but no deducton for depeton
by such payee sha be camed or aowed n any subsequent year on account of
the e tracton or remova n such year of any mnera so pad for n advance and
for whch deducton has once been made.
(c) If for any reason any grant of mnera rghts e pres or termnates or
s abandoned before the mnera whch has been pad for In advance has been
e tracted and removed, the grantor sha ad|ust hs capta account by restorng
thereto the depeton deductons made n pror years on account of royates on
mnera pad for but not removed, and a correspondng amount must be returned
as ncome for the year n whch such e praton, termnaton, or abandonment
occurs.
(d) In eu of the treatment provded for n paragraphs (a) and (h) above
the owner of an economc nterest n o and gas wes may take as a depeton
deducton n respect of any bonus or advanced royaty from the property for the
ta abe year 27M per cent of the amount thereof and the owner of an economc
nterest n suphur mnes, meta mnes, and coa mnes may take as a depeton
deducton n respect of any bonus or advanced royaty from the property for
the ta abe year begnnng after December 31, 1938, for whch he frst makes
return n respect of the property (and for subsequent ta abe years n case an
eecton to have depeton computed on a percentage bass has been e ercsed n
the proper return) 23 per cent, 15 per cent, and 5 per cent, respectvey, of the
amount thereof but the deducton sha not n any case e ceed 50 per cent of
the net ncome of the ta payer (computed wthout aowance for depeton)
from the property.
(e) If a essee or other owner of operatng rghts In one or more mnera
propertes s requred to pay royates on a specfed number of unts of mnera
annuay, whether or not e tracted wthn the year, and may appy any amounts
pad on account of unts not e tracted wthn the year aganst the royaty on
mnera thereafter e tracted, he may at hs opton treat the advanced royates
so pad or accrued n ether one of the foowng manners:
(1) s deductons from gross ncome for the year the advanced royates
are pad or accrue or
(2) s deductons from gross ncome for the year the mnera product n
respect of whch the advanced royates were pad s sod.
The opton contaned In ths paragraph sha appy ony to advanced royates
pad or neerued n ta abe years endng on or after December 31, 1930. very
ta payer must make an eecton as to the treatment of a such advanced
royates n hs return for the frst ta abe year endng on or after December
31, IWTO, n whch such amounts are pad or accrue. ta payer w be con-
sdered to have made an eecton n accordance wth the manner n whch such
tems are treated n the return. faure to deduct any such tems for the
year pad or accrued w consttute an eecton to have a such tems treated
n accordance wth paragraph (c (2) above. ny eecton made under ths
artce secton s bndng for a subsequent years and the ta payer must
treat a advanced royates pad or accrued n such subsequent years In the
same manner.
(17) rtce 23(m)-12(a) (2) secton 9.23(m)-12(a) (2) s
amended to read as foows:
(2) The nature of the ta payer s nterest n the property, accompaned by a
certfed copy of the nstrument or Instruments by whch t was acqured
(18) The references to (g) and (h) n artce 23(m)-13(a) (1)
and (2) secton 9.23(m)-13(a) (1) and (2) are changed to (/) and
(g), respectvey.
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43
19.23(m)-10.
(19) The frst sentence of artce 23(m)-17(a) secton 9.23(m)-
17(a) s amended to read as foows:
The Interna Revenue Code provdes that deductons for deprecaton of
mprovements ou mnng property may be taken accordng to the pecuar
condtons n each case.
(20) The frst sentence of artce 23(m)-18 secton 9.23(m)-18
s amended to read as foows:
Ta payers operatng o or gas propertes w, n addton to and apart from
the deducton aowabe for depeton as herenbefore provded, be permtted to
deduct a reasonabe aowance for deprecaton of physca property, such as
machnery, toos, equpment, ppes, etc., so far as not n confct wth the opton
e ercsed by the ta payer under artce 23(m)-1 secton S).23(m)-1 .
(21) The thrd sentence of artce 23(m)-20 secton 9.23(m)-20
s amended to read as foows:
The apportonment of deductons between the severa owners of economc
nterests n tmber propertes w be made as specfed n artce 23(m)-7
secton 9.23(m)-7 .
(22) The ast paragraph of artce 23(m)-25 secton 9.23 (m)-25
s amended to read as foows:
If, for the purpose of the equtabe apportonment of depeton among the
severa owners of. economc nterests, the vaue of any tmber property must be
ascertaned as of any specfc date for the determnaton of the bass for depe-
ton, the vaues of the severa nterests theren may be determned separatey,
but, when determned as of the same date, sha together never e ceed the vaue
at that date of the tmber property n fee smpe.
(Ths Treasury decson s ssued under the authorty contaned n
sectons 23(m), 2, and 114 of the Interna Revenue Code (53 Stat.,
14,32.45).)
ohn L. Suvan,
ctng Commssoner of Interna Revenue.
pproved anuary 3,1940.
erbert . Gaston,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster anuary 4, 1940, 10.03 a. m.)
Secton 19.23 (m)-10: Depeton d|ustments of 1940-14-10224
accounts based on bonus or advanced royaty. T. D. 49 8
TITL 20 INT RN L R NU . C PT R I, SU C PT R , P RT 19.
INCOM T .
mendng secton 19.23(m)-10(a) of Reguatons 103 so as to per-
mt amortzaton of cost of unproductve o and gas easehods n
ta abe years begnnng pror to anuary 1, 1940.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Secton 18.23(m)-10(a) of Reguatons 103 Part 19, Tte 2 , Code
of edera Reguatons, 1940 Sup. s hereby amended by addng at
the end thereof a new sentence readng as foows:
owever, a ta payer who for any ta abe year begnnng pror to anuary 1.
1940, woud, e cept for the provsons of the precedng sentence, have been per-
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19.24-4. 44
mtted to amortze the cost of unproductve easehods w be permtted to do so
for such ta abe year.
(Ths Treasury decson s ssued under the authorty contaned n
sectons 23 (m), 2, and 114 of the Interna Revenue Code (53 Stat.,
14, 32, 45).)
Gut T. everng,
Commssoner of Interna Revenue.
pproved March 25, 1940.
ohn L. Suvan,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster March 2 , 1940, 2.54 p. m.)
S CTION 23(o). D DUCTIONS ROM GROSS INCOM :
C RIT L ND OT R CONTRI UTIONS.
Secton 19.23(o)-: Contrbutons or gfts by ndvduas.
INT RN L R NU COD .
ase for determnng the 15 per cent mtaton where ta payer de-
rves a net ong-term capta gan or sustans a net ong-term capta
oss and computes hs ta under secton 117(c). (See I. T. 3345,
page 54.)
S CTION 24. IT MS NOT D DUCTI L .
Secton 19.24-4: mounts aocabe to e empt 1940-9-1018G
ncome, other than nterest. L T. 3353
INT RN L R NU COD .
State ncome ta es pad In 1939 ou compensaton receved n
1938 by offcers or empoyees of a State, or any potca subdvson
thereof, or any agency or nstrumentaty of any one or more of the
foregong, whch, under the provsons of the Pubc Saary Ta
ct of 1939, s not sub|ect to edera ncome ta , are not deductbe
from gross ncome by such offcers and empoyees n ther 1939 ed-
era ncome ta returns.
dvce s requested whether that part of the State ncome ta pad
n 1939, whch was appcabe to the saary receved n 1938 by an
offcer or empoyee, as such, of a State or any potca subdvson
thereof, or any agency or nstrumentaty of any one or more of the
foregong, s deductbe from gross ncome n the 1939 ncome ta
return fed by such offcer or empoyee.
Secton 24 of the Interna Revenue Code reads n part as foows:
Sec. 24. Items Not DrwTCTr.L .
(a) Genera R e. In computng net ncome no deducton sha n any case
be aowed n respect of

(5) ny amount otherwse aowabe as a deducton whch s aocabe to one
or more casses of ncome other than nterest (whether or not any amount of
ncome of that cass or casses s receved or accrued) whoy e empt from the
ta es mposed by ths chapter.
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45
19.25-4.
It s the opnon of the ureau that secton 24(a)5 of the Interna
Revenue Code prohbts the deducton of any amount of ncome tu
pad to a State by an ndvdua whch s aocabe to compensaton
for persona servces, f such compensaton may not be ta ed on ac-
count of the provsons of sectons 201, 202 or 203 of the Pubc Saary
Ta ct of 1939.
In vew of the foregong, t s hed that State ncome ta es pad n
1939 wth respect to compensaton receved n 1938 by offcers or em-
poyees of a State, or any potca subdvson thereof, or any agency
or nstrumentaty of any one or more of the foregong, whch, under
the provsons of the Pubc Saary Ta ct of 1939, s not sub|ect
to edera ncome ta , are not deductbe from gross ncome n ther
1939 edera ncome ta returns.
S CTION 25 CR DITS O INDI IDU L
G INST N T INCOM .
Secton 19.25-2: arned ncome credt.
INT RN L R NU COD .
ase for determnng the earned ncome credt where ta payer de-
rves a net ong-term capta gan or sustans a net ong-term capta
oss and computes hs ta under secton 117(c). (See I. T. 3345,
page 54.)
Secton 19.25-4: Persona e empton of head 1940-12-10207
of famy. I. T. 3359
INT RN L R NU COD .
rst cousns by bood and cousns of esser degree are not cosey
connected by bood reatonshp wthn the meanng of secton
19.25-4 of Reguatons 103, reatng to the persona e empton of
the head of a famy.
dvce s requested whether frst and second cousns by bood are
a cosey connected by bood reatonshp wthn the meanng of sec-
ton 19.25-4 of Reguatons 103, reatng to the persona e empton
of the head of a famy.
Secton 19.25-4 of Reguatons 103, supra, reads n part as foows:
Persona e empton of head of famy. head of a famy s an ndvdua
who actuay supports and mantans n one househod one or more ndvduas
who are cosey connected wth hm by bood reatonshp, reatonshp by mar-
rage, or by adopton, and whose rght to e ercse famy contro and provde for
these dependent ndvduas s based upon some mora or ega obgaton.
It s hed that frst cousns by bood are not cosey connected
by bood reatonshp wthn the meanng of secton 19.25- of Regu-
atons 103, supra. It foows that cousns of esser degree are not
cosey connected by bood reatonshp wthn the meanng of that
secton of the reguatons.
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19.41-1.1 4
P IIT I . CCOUNTING P RIODS ND M T ODS O CCOUNTING.
S CTION 41. G N R L RUL .
Secton 19.41-1: Computaton of net ncome. 1940-5-10154
I. T. 3344
INT RN L R NU COD .
The foowng rates of e change are accepted hy the ureau of In-
terna Revenue as the current or market rates of e change prevang
as of December 30,1939:
Country or cty.
rgentna
ustraa
egum
raz
rtsh Inda
Canada
Che.
Chna (Shangha)
Coomba
Cuba
Denmark
ngand
nand
rance
Germany
Oreece
ong ong ._
ungary
Itay
Monetary unt
Peso
Pound
ega
Mres 1
It u pee
Doar
Peso1 .
Yuan
Peso
Peso
rono
Pound
Markka
ranc
Rechsmark.
Drachma
Doar
Pengo
Lra
aue n
terms of
Unted
States
money.
297733
15312.1
1 7281
f.0580
300878
RSOItO
051740
07 441
, W
880000
152075
950944
018200
022417
4IIMII
007081
24 233
17.T012
050471
Country or cty.
apan
Mevco
Netherands
New Zeaand
Norway
Panama
Peru
Phppne Isands-
Portuga _.
Rumana.. ___
South frca
Span
Strats Settements.
Sweden
Swtzerand __
Uruguay. .__
enezuea
Yugosava
Monetary unt.
Yen
Peso
Guder.
Pound..
rone...
aboa..
So.
Peso
scudo..
Leu
round..
Peseta..
Doar..
rona...
ranc. _
Peso
ovar.
Dnar...
Offca rate.
Controed rate.
Secton 19.41-1: Computaton of net ncome.
INT RN L R NU COD .
1940-17-10243
I. T. 33C9
Method to be used by pubshers of perodcas who keep ther
accounts and fe ther returns on the accrua bass n reportng
ncome and deductons wth respect to prepad subscrptons where
the subscrpton perod e tends beyond the ta abe year n whch the
subscrpton ncome s receved.
dvce s requested regardng the proper method to be used by
pubshers of perodcas who keep ther accounts and fe ther re-
turns on the accrua bass n reportng ncome and deductons wth
respect to prepad subscrptons where the subscrpton perod e tends
beyond the ta abe year n whch the subscrpton ncome s receved.
There are two methods empoyed by pubshers wth respect to such
ncome. y the frst method, the pubsher reports a of the ncome
receved from prepad subscrptons, whch cover perods e tendng
beyond the ta abe year, for the year of recept of the ncome. y
the second method, the pubsher reports an aquot part of the sub-
scrpton ncome for each year of the subscrpton perod.
It s hed that where a pubsher of perodcas has, over a perod
of years, foowed consstenty ether of the two methods outned
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47
19.44-5.
above, he may contnue to fe hs returns on such bass, he w not
be requred to change to the other bass, and hs net ncome for the
past years w not be redetermned on such other bass. owever,
f the pubsher uses the second method of reportng subscrpton n-
come, a e penses ncurred durng the year n whch the subscrptons
are obtaned, whch are appcabe to the obtanng of the subscrptons,
or to the subscrptons themseves, sha be spread aocaby over the
subscrpton perods n the same manner as the subscrpton ncome.
S CTION 44. INST LLM NT SIS.
Secton 19.44-5: Gan or oss upon dspos- 1940-22-102 9
ton of nstament obgatons. T. D. 4972
TITL 2 INT RN L R NU . C PT R I, SU C PT R . P RTS 3, 9, ND
19. INCOM T .
Reguatons 103,101, nnd 94, amended. Gan or oss upon dspos-
ton of nstament obgatons.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Secton 19.44-5 of Reguatons 103 Part 19, Tte 2 , Code of
edera Reguatons, 1940 Sup. , artce 44-5 of Reguatons 101,
as amended by Treasury Decson 4899, approved May 9, 1939 C. .
1939-1 (Part 1), 78 Part 9, Tte 2 , Code of edera Reguatons,
1939 Sup. , and artce 44-5 of Reguatons 94, as amended by Treas-
ury Decson 4899 Part 3, Tte 2 , Code of edera Reguatons and
1939 Sup. , are amended by substtutng for the ast sentence of the
ne t to the ast paragraph, whch reads as foows:
The bond on orm 1132 may be (1) e ecuted by a surety company hodng
a certfcate of authorty from the Secretary of the Treasury as an acceptabe
surety on edera bonds, or (2) secured by depost of bonds or notes of the
Unted States, or the nstament obgatons, n such amounts as the Comms-
soner may deem necessary to nsure coecton of the ta .
the foowng:
corporaton w not be accepted as a surety on such bond uness the corpora-
ton hods a certfcate of authorty from the Secretary of the Treasury as an
acceptabe surety on edera bonds. In eu of surety or suretes there may be
deposted bonds or notes of the Unted States.
(Ths Treasury decson s prescrbed pursuant to sectons 44(d)
and 2 of the Interna Revenue Code (53 Stat., 25, 32) sectons 44(d)
and 2 of the Revenue cts of 1938 and 193 (52 Stat., 473, 480,
49 Stat., 1 7, 1 73 2 U. S. C, 44, 2 Sup.) and secton 112 of the
Revenue ct of 192 , as amended by the ct of ebruary 4, 1935 (44
Stat., 122, 49 Stat., 22 U. S. C, 15, and Sup.).)
Guy T. everng,
Commssoner of Interna Revenue.
pproved May 22, 1940.
ohn L. Suvan,
ctng Secretary of the Treasury.
(fed wth the Dvson of the edera Regster May 23, 1940, 11.2 a. m.)
G
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19.51-4.
48
P RT . R TURNS ND P YM NT O T .
S CTION 51. INDI IDU L R TURNS.
Secton 19.51-4: erfcaton of returns. 1940-24-10288
L T. 3-384
INT RN L R NU COD .
Persons commssoned under the ct of Congress approved pr
25, 1935 ( 4 ) Stat., 1 2), to admnster oaths reatng to cams
aganst or appcatons to the Unted States of offcers and em-
poyees under the Nava stabshment may not admnster oaths
on edera ncome ta returns.
Nava offcers authorzed to admnster oaths for the purposes
of the Nava Servce may not admnster oaths on edera ncome
ta returns of cvan empoyees of (he Nava stabshment.
dvce s requested whether, tnder the provsons of the ct of
Congress approved pr 25, 1935 (49 Stat., 1 2), chef cerks at-
tached to fed servces of the Nava stabshment are authorzed
to admnster oaths on edera ncome ta returns of the cvan and
nava personne of that estabshment. dvce s aso requested
whether nava offcers may propery admnster oaths on edera
ncome ta returns of cvan empoyees of the Nava stabshment.
The above-mentoned ct of Congress authorzes certan desg-
nated personne of the Nava stabshment to admnster any oath
requred or authorzed by any aw of the Unted States, or regua-
ton promugated thereunder, reatng to any cam aganst or app-
caton to the Unted States of offcers and empoyees of the Nava
stabshment. The authorty conferred by the ct n queston s
restrcted specfcay to cams aganst or appcatons to the Unted
States. edera ncome ta returns do not consttute ether cams
or appcatons of the above descrpton.
Int. T. 2228 (C. . I -2, 104 (1925)) the ureau hed that the
authorty of an rmy offcer commssoned to admnster oaths, beng
mted and not genera, does not come wthn the purvew of secton
1002(d) of the Revenue ct of 1924, reatng to the admnstraton
of oaths requred by that ct. The ureau reguatons wth respect
to verfcaton of ncome ta returns are substantay dentca wth
the provsons n secton 1002(d), supra. (See second sentence n
secton 19.51-4, Reguatons 103.) Therefore, the poston taken n
I. T. 2228, supra, s appcabe n construng such reguatons.
On the bass of the foregong, snce the authorty granted under
the ct of pr 25, 1935, referred to above, s mtecf and not gen-
era, the persons commssoned thereunder to admnster oaths may
not admnster oaths on edera ncome ta returns.
Wth regard to the queston whether nava offcers authorzed to
admnster oaths may acknowedge edera ncome ta returns of
cvan empoyees of the Nava stabshment, the answer s aso
n the negatve. The ureau construes the phrase persons n the
nava or mtary servce of the Unted States, contaned n secton
19.51-4 of Reguatons 103, to mean ony the commssoned, non-
commssoned, and ensted personne of the nava and mtary
servces.
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49
19.55(b)-5.
S CTION 55. PU LICITY O R TURNS.
Secton 19.55(b)-5: Inspecton of orgna 1940-4-10152
returns. T. D. 49 2
TITL 2 INT RN L R NU . C PT R I, P RT 458, SU P RT .
INSP CTION O R TURNS.
Reguatons governng the nspecton by the Commttee on duca-
ton and Labor, Unted States Senate, of ncome, profts, and capta
stock ta returns and returns of empoyment ta on empoyers.
Treasury Department,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Secton 458.203. Pursuant to the provsons of sectons 55(a), 351,
and 503 of the Revenue ct of 193 , secton 358 of the Revenue ct of
193 as amended by the Revenue ct of 1937, sectons 55(a), 409,
01(e), and 02(c) of the Revenue ct of 1938, secton 905(c) of the
Soca Securty ct, and sectons 55(a), 1204, and 1 04(c) of the In-
terna Revenue Code, ncome, profts, and capta stock ta returns
made under the Revenue ct of 193 , under the Revenue ct of 193
as amended by the Revenue ct of 1937, under the Revenue ct of
1938, and under the Interna Revenue Code, and returns of empoy-
ment ta under Tte I of the Soca Securty ct and Subchapter C
of Chapter 9 of the Interna Revenue Code, may be nspected by the
Commttee on ducaton and Labor, Unted States Senate, or any duy
authorzed subcommttee thereof, for the purpose of, and to the e tent
necessary n the nvestgaton whch such commttee or subcommttee
s authorzed to make by Senate Resouton 2 , Seventy-fourth Con-
gress, second sesson, passed une , 193 . The nspecton of returns
heren authorzed may be by such commttee or subcommttee or by or
through such e amners or agents as such commttee or subcommttee
may desgnate or appont. Upon wrtten notce by the charman of
such commttee or subcommttee to the Secretary of the Treasury, gv-
ng the names and addresses of the ta payers whose returns t s
necessary to nspect and the ta abe perods covered by the returns,
the Secretary and any offcer or empoyee of the Treasury Department
sha furnsh such commttee or subcommttee wth any data reatng
to or contaned n any such return, or sha make such return avaabe
for nspecton by such commttee or subcommttee or by such e -
amners or agents as such commttee or subcommttee may desgnate
or appont, n the offce of the Commssoner of Interna Revenue.
ny nformaton thus obtaned by such commttee or subcommttee
whch s reevant or pertnent to the purpose of the nvestgaton, may
be submtted by such commttee or subcommttee to the Unted States
Senate.
. MORG NT U, r.,
Secretary of the Treasury.
pproved anuary 10,1940.
rankn D. Roosevet.
The Whte ouse.
( ed wth the Dvson of the edera Regster anuary 13, 1940, 12.10 p. m.)
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101.
50
CUTI ORD R UT ORIZ TION O COMMITT ON DUC TION ND
L OR, UNIT D ST T S S N T . TO INSP CT INCOM , PRO ITS, ND
C PIT L STOC T R TURNS ND R TURNS O MPLOYM NT T ON
MPLOY RS.
y vrtue of and pursuant to the authorty vested n me by sectons
55(a), 331, and 503 of the Revenue ct of 193 49 Stat., 1 48), secton
3r 8 of the Revenue ct of 193 as amended by the Revenue ct of
1937 (50 Stat., 813, 817), sectons 55(a), 409, 01(e), and 02(c) of the
Revenue ct of 1938 (5 2 Stat., 447, 478, 5 4, 5 , 5 8), sectons 55(a),
1204, and 1 04(c) of the Interna Revenue Code (53 Stat., Part 1), and
secton 905 of the Soca Securty ct (49 Stat., 20, 41), t s hereby
ordered that ncome, profts, and capta stock ta returns made under
the Revenue ct of 193 , under the Revenue ct of 193 as amended
by the Revenue ct of 1837, under the Revenue ct of 1938, and under
the Interna Revenue Code, and returns of empoyment ta on em-
poyers under Tte I of the Soca Securty ct and under Sub-
chapter C of Chapter 9 of the Interna Revenue Code sha be open
to nspecton by the Commttee on ducaton and Labor, Unted States
Senate, or any duy authorzed subcommttee thereof, whch com-
mttee or subcommttee s authorzed by Senate Resouton 2 ,
Seventy-fourth Congress, second sesson, passed une , 193 , to make
an nvestgaton of voatons of the rghts of free speech and assemby
and undue nterference wth the rght of abor to organze and bargan
coectvey such nspecton to be n accordance and upon compance
wth the rues and reguatons prescrbed by the Secretary of the Treas-
ury n the Treasury decson reatng to the nspecton of returns by
that commttee, or any duy authorzed subcommttee thereof, approved
by me ths date.
rankn D. Roosevet.
The Whte ouse,
anuary 10,1940.
(831S)
( ed wth the Dvson of the edera Regster anuary 13, 1S40, 12.10 p. u.)
SU C PT R C SUPPL M NT L PRO ISIONS.
SUPPL M NT . R T S O T .
S CTION 101. MPTIONS ROM T
ON CORPOR TIONS.
1940-12-10208
I. T. 33 0
INT RN L R NU COD .
edera savngs and oan assocatons meet the requrements of
secton 101(15) of the Interna Revenue Code and are entted to
e empton from edera ncome ta aton.
dvce s requested whether edera savngs and oan assocatons
are entted to e empton under secton 101(15) of the Interna Reve-
nue Code.
That secton provdes that corporatons organzed under ct of
Congress sha be e empt from ta aton under Chapter 1 (Income Ta )
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18.114-1.
of the Interna Revenue Code, f such corporatons are nstrumenta-
tes of the Unted States and f, under such ct, as amended and sup-
pemented, such corporatons are e empt from edera ncome ta es.
Subsecton (a) of secton 5 of the ome Owners Loan ct of 1933
(48 Stat., 128) authorzes the edera ome Loan ank oard, under
such rues and reguatons as t may prescrbe, to provde for the organ-
zaton, ncorporaton, e amnaton, operaton, and reguaton of asso-
catons to be known as edera savngs and oan assocatons, and
to ssue charters therefor. Subsecton (h) of secton 5 of the ome
Owners Loan ct of 1933 provdes, among other thngs, that such
assocatons ( edera savngs and oan assocatons), ncudng ther
franchses, capta, reserves, and surpus, and ther oans and ncome,
sha be e empt from a ta aton mposed by the Unted Statea
Secton 5(k) of the ome Owners Loan ct of 1933, as amended,
provdes, among other thngs, that when desgnated by the Secretary
of the Treasury, any edera savngs and oan assocaton may e
empoyed as fsca agent of the Government under such reguatons as
may be prescrbed by the Secretary, and that such an assocaton may
act as agent for any other nstrumentaty of the Unted States when
desgnated for that purpose by such nstrumentaty of the Unted
States. The Secretary of the Treasury has desgnated edera savngs
pnd oan assocatons as fsca agents of the Unted States for certan
purposes. In S. S. T. 2 (C. . 1937-1, 409) the ureau hed that
edera savngs and oan assocatons are nstrumentates of the
Unted States.
In vew of the foregong, t s hed that edera savngs and oan
assocatons meet the requrements of secton 101(15) of the Interna
Revenue Code and are entted to e empton from edera ncome
ta aton.
SUPPL M NT . COMPUT TION O N T INCOM .
S CTION 113(a). D UST D SIS OR D T RMINING
G IN OR LOSS: SIS (UN D UST D)
O PROP RTY.
INT RN L R NU COD .
Sae by trustee of securtes transferred by an empoyer company to
a penson trust. (See I. T. 3357, page 11.)
S CTION 114. SIS OR D PR CI TION
ND D PL TION.
Sectto 19.114 1: ass for aowance of depre-
caton and depeton.
INT RN L R NU COD .
Deveopment e penses n computng depeton based on a percent-
age of ncome n the case of o and gas wes. (See G. C. M. 2192 ,
page 157.)
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19.11 -1.
52
S CTION 11 . CLUSIONS ROM GROSS INCOM .
Secton 19.11 -1: Income of foregn governments, 19-40-5-101 2
ambassadors, and consus. Mn. 49 7 (Rev.)
empton from edera Income ta of compensaton receved (or
servces rendered n the Unted States by certan foregn consus
statoned n the Unted States and certan empoyees of foregn
consuates n the Unted States.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, anuary 18, 19 f.
Coectors of Interna Revenue. Interna Revenue gents n Charge,
and Other Offcers and mpoyees of the ureau of Interna
Re ven ue Concerned:
In vew of the certfcaton made by the Secretary of State under
secton 11 (h) of the Interna Revenue Code, the offca compensa-
ton for servces rendered wthn the Unted States of foregn con-
suar offcers statoned n the Unted States (who are not ctzens of
the Unted States) and the empoyees of foregn consuates n the
Unted States (who are not ctzens of the Unted States) of the fo-
owng countres s e empt from edera ncome ta :
bana, rgentna, ustraa, ova, raz. ugara. Canada,
Che, Chna, Coomba, Cuba, Czechosovaka, Denmark, Domncan
Repubc, Savador, cuador, gypt, nand, rance. Germany,
Great rtan and Northern Ireand, Greece, Guatemaa, at, on-
duras. ungary, Inda, Iraq, Iran, Ireand, Itay, apan. Latva,
Lbera, Lthuana, Me co, Morocco, Netherands, Netherands Indes,
New Zeaand, Ncaragua, Norway, Panama, Peru, Poand, Portuga,
Rumana, Sam, Span, Sweden, Swtzerand, Turkey, Unon of South
frca, Unon of Sovet Socast Repubcs, Uruguay, enezuea,
Yugosava.
In vew of the certfcaton referred to above, the offca compen-
saton for servces rendered wthn the Unted States of foregn
consuar offcers statoned n the Unted States (who are not ctzens
of the Unted States) of the foowng countres (but not the em-
poyees of ther consuates n the Unted States) s e empt from
edera ncome ta :
egum, Costa Rca, stona, Paraguay.
Correspondence reatng to the provsons of ths mmeograph
shoud refer to ts number and the symbos IT: TM.
Gt|y T. everng,
Commssoner.
Secton 19.11 -1: Income of foregn govern- 1940-23-10279
ments, ambassadors, and consus. Mm. 49 7 (Rev.)
empton from edera ncome ta of compensaton receved
for servces rendered n the Unted States by certan foregn
consus statoned n the Unted States and certan empoyees of
foregn consuates n the Unted States.
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53
19.117-2
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, May 10, 1040.
Coectors of Interna Revenue, Interna Revenue gents n Charge,
and Other Offcers and mpoyees of the ureau of Interna
Revenue Concerned:
In vew of the certfcaton made by the Secretary of State under
secton 11 (h) of the Interna Revenue Code, the offca compensa-
ton for servces rendered wthn the Unted States of foregn con-
suar offcers statoned n the Unted States (who are not ctzens of
the Unted States) and the empoyees of foregn consuates n the
Unted States (who are not ctzens of the Unted States) of the
foowng countres s e empt from edera ncome ta :
bana, rgentna, ustraa, egum, ova, raz, ugara,
Canada, Che, Chna, Coomba, Cuba, Czechosovaka, Denmark,
Domncan Repubc, Savador, cuador, gypt, nand, rance,
Germanv, Great rtan and Northern Ireand, Greece, Guatemaa,
at, onduras, ungary, Inda, Iraq, Iran, Ireand, Itay, apan,
Latva, Lbera, Lthuana, Me co, Morocco, Netherands, Nether-
ands Indes, New Zeaand, Ncaragua, Norway, Panama, Peru,
Poand, Portuga, Rumana, Sam, Span, Sweden, Swtzerand,
Turkey, LTnon of South frca, Unon of Sovet Socast Repubcs,
Uruguay, enezuea, Yugosava.
In vew of the certfcaton referred to above, the offca compen-
saton for servces rendered wthn the Unted States of foregn
consuar offcers statoned n the Unted States (who are not ctzens
of the Unted States) of the foowng countres (but not the em-
poyees of ther consuates n the Unted States) s e empt from
edera ncome ta :
Costa Rca, stona, Paraguay.
Correspondence reatng to the provsons of ths mmeograph
shoud refer to ts number and the symbos IT: TM.
Guy T. everng,
C ommssoner.
S CTION 117. C PIT L G INS ND LOSS S.
Secton 19.117-2: Percentage of capta gan or 1940-15-10228
oss taken nto account: Net oss carry-over. I. T. 33
( so Secton 1 2, Secton 19.1 2-1.)
nterna revenue code.
or the purpose of determnng the amount of a net short-term
capto oss whch may be carred forward under secton 117(e)
of the Interna Revenue Code n the case of an estate or trust,
the term net ncome, whch s prescrbed as the mtaton on
the amount whch may be carred forward, s the net ncome after
deducton of dstrbutons to the benefcares, as provded by sec-
ton 1 2(b) of the Code.
dvce s requested reatve to the amount of the net short-term
capta oss sustaned n the caendar year 1938 whch may be carred
forward to the caendar year 1939 n the case of the M Trust.
The return of the M Trust for the caendar year 1938 shows a gross
ncome of 200a doars after deducton of a net ong-term capta
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19.117-3.
54
oss of doars, and ncome of 150|| doars after certan aowabe
deductons, not ncudng dstrbutons to benefcares. The amount
shown as dstrbutabe to the benefcares s doars, so that
the return refected a net oss of doars. In addton to the deduc-
tons camed, the trust had a net short-term capta oss of 100a do-
ars whch was not aowabe as a deducton.
Secton 117(e) of the Interna Revenue Code, as amended by sec-
ton 212 of the Revenue ct of 1939, provdes n part that f a ta -
payer (other than a corporaton) sustans n any ta abe year begn-
nng after December 31, 1937, a net short-term capta oss, such oss
(n an amount not n e cess of the net ncome for such year) sha be
treated n the succeedng ta abe year as a short-term capta oss,
wth an e cepton not here matera. The queston presented s,
therefore, whether the net short-term capta oss of IOO| doars
sustaned by the M Trust n the caendar year 1938 may be carred
forward as a short-term capta oss for the caendar year 1939. s
secton 117(e) of the Interna Revenue Code, as amended, mts
the amount of the net short-term capta oss whch may be carred
forward to an amount not n e cess of the net ncome for the par-
tcuar year, t s necessary to determne the net ncome of the trust
for 1938.
Secton 19.142-1 of Reguatons 103, n defnng net. ncome for
the purpose of the requrement for the fng of a return by an estate
or trust, provdes n paragraph (b) that the net ncome sha be as
computed under secton 1 2. Secton 1 2(b) of the Interna Revenue
Code provdes that there sha be aowed as an addtona deducton
n computng the net ncome of the estate or trust the amount of the
ncome of the estate or trust for ts ta abe year whch s to be
dstrbuted currenty by the fducary to the benefcares.
It s the opnon of the ureau that the term net ncome shoud
be defned n the same manner for purposes of secton 117, secton
142, and secton 1 2. It s hed, therefore, that for the purpose of
determnng the amount of a net short-term capta oss whch may
be carred forward under secton 117(e) of the Interna Revenue
Code n the case of an estate or trust, the term net ncome, whch
s prescrbed as the mtaton on the amount whch may be carred
forward, s the net ncome after deducton of the dstrbutons to
the benefcares, as provded by secton 1 2(b).
In the case presented, nasmuch as the M Trust had no net ncome
for 1938 after deducton of the dstrbutons to the benefcares, the
trust s not entted to carry forward to 1939 any part of the net
short-term capta oss sustaned n 1938.
Secton 19.117-3: ternatve ta n case of net 1940-5-10155
ong-tenn capta gan or oss. I. T. 3345
( so Secton 23(a), Secton 19.23(o)- Secton 25,
Secton 19.25-2.)
INT RN L R NU COD .
Where a ta payer derves a net ong-term capta gan and com-
putes hs ta under secton 117(c), reatng to aternatve tn es,
the bnsc for determnng the 15 per cent mtaton on the chartabe
contrbutons deducton provded by secton 23(o) and the earned
ncome credt provded by secton 2o(a)3 s net ncome.
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55
19.117-3.
Where a ta payer sustans a net ong-term capta Iors and com-
putes hs ta under secton 117(c)2, the base for determnng the
chartabe contrbutons deducton s ordnnry net ncome, that s
net ncome pus the amount of the net ong-term capta oss, and
the base for determnng the earned ncome credt s ordnnry net
ncome as ad|usted for the chartabe contrbutons deducton.
dvce s requested wth respect to certan questons nvovng the
appcabty of the Supreme Court decson n evcnng v. ss
(293 U. S., 144. Ct. D. 884, C. . III-2, 191 (1934)) and Unted
States v. Pea ants (305 U. S., 357, Ct. D. 1379, C. . 1939-1 (Part 1),
239)) to smar cases arsng under the Interna evenue Code. The
of the Code, whch pace a mt on aowabe deductons for contrbu-
tons and earned net ncome credt, such mtaton n both cases beng
based on net ncome.
The prncpa provson of aw nvoved s secton 117(c) of the
Interna Revenue Code, whch reads as foows:
(c) ternatve Ta es.
(1) Is case of net ong-term capta gan. If for any ta abe year a ta -
payer (other than a corporaton) derves a net ong-term capta gan, there sha
be eved, coected, and pad, n eu of the ta mposed by sectons 11 and 12,
a ta determned as foows, f and ony f such ta s ess than the ta mposed
by such sectons:
parta ta sha frst be computed upon the net ncome reduced by the
amount of the net ong-term capta gan, at the rates and n the manner as f
ths subsecton had not been enacted, and the tota ta sha be the parta
ta pus 30 per centum of the net ong-term capta gan.
(2) In case of net ong-term capta oss. If for any ta abe year a ta -
payer (other than a corporaton) sustans a net ong-term capta oss, there sha
be eved, coected, and pad, n eu of the tn mposed by sectons 11 and 12, a
ta determned as foows, f and ony f such ta s greater than the ta mposed
by such sectons:
parta tu sha frst be computed upon the net ncome ncreased by the
amount of the net ong-terra capta oss, at the rates and n the manner as f
ths subsecton had not been enacted, and the tota ta sha be the parta ta
mnus 30 per centum of the ong-term capta oss.
In everng v. ss, supra, the Supreme Court hed that the ta -
payer was entted to ncude capta net gan n net ncome n deter-
mnng the base for computng the 15 per cent deducton aowabe for
chartabe contrbutons under secton 23(n) of the Revenue ct of
1928, athough the ta payer eected to be ta ed on capta net gan at a
fat rate of 2y2 per cent under the Revenue ct of 1928. The conten-
ton of the Government n that case was that the base for the deducton
shoud be ordnary net ncome after e cudng a tems of capta
gan and capta oss. The Court ponted out n ts opnon that the
base upon whch the ta was computed was the net ncome, . e.,
gross ncome mnus statutory deductons.
In Unted States v. Peasants, supra, whch arose under the Revenue
ct of 1932, the Court hed that where a ta payer sustaned a capta
net oss the base of the ta was the ordnary net ncome and that
contrbutons were aowabe under secton 23(n) of the Revenue
ct of 1932 to the e tent of 15 per cent of such ordnary ncome. s
ponted out n the atter case, there s nothng to the contrary n
the ss case.
questons have arsen by reason
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19.119-2.
5
The genera effect of the Peasants case was gven consderaton n
I. T. 3271 (C. . 1939-1 (Part 1), 105). In that case t s stated n
part as foows:
The effect of the Supreme Court decson n the Peasants case s very smar
under the Revenue cts of 1932 and 1938, and may be summarzed as foows:
In cases where the speca ta provded by secton 101(b) of the Revenue ct
of 1932 and by secton 117(c)2 of the Revenue ct of 1938 appcabe, the
15 per cent ma mum deducton whch may be taken for chartabe contrbu-
tons under secton 23(u) of the Revenue ct of 1932 and secton 23(o) of
the Revenue ct of 1938 s based upon the same net ncome upon whch
the speca ta s n fact computed and pad.
It s the opnon of ths offce that n every case where there s a net
ong-term capta gan the ta s computed on net ncome. If the
ta s computed under secton 117(c) 1 of the Interna Revenue Code,
t s computed upon both the ordnary net ncome and the net ong-
term capta gan, the two added together beng the same as the net
ncome. It foows that the base for measurng the chartabe con-
trbutons where there s a net ong-term capta gan s net ncome,
regardess of whether the ta s computed under secton 117 (c)
or under sectons 11 and 12 of the Code.
Where there s a net ong-term capta oss, the stuaton s dfferent.
The ta s not computed on the net ncome of the ta payer, but s
computed on ordnary ncome and such ta s reduced by 30 per cent
of the net ong-term capta oss. It woud be mpossbe n some cases,
where there s a net ong-term capta oss, to use as a base of the ta
the so-caed net ncome for the reason that the ta payer may not
have any statutory net ncome, and thus woud not be aowed a deduc-
ton for any contrbutons athough he woud be sub|ect to ta . Inas-
much as the ncome upon whch the ta s computed n such cases s
the ordnary ncome (from whch there s e cuded the net ong-term
capta oss), such ordnary ncome s the base for computng the 15 per
cent mtaton on contrbutons as we as the earned ncome credt.
It s therefore concuded that where a ta payer derves a net ong-
term capta gan and computes hs ta under secton 117(c) 1, reatng
to aternatve ta es, the base for determnng the 15 per cent mtaton
on the chartabe contrbutons deducton provded by secton 23(o)
and the earned ncome credt provded by secton 23(a)3 s net
ncome. On the other hand, where the ta payer sustans a net ong-
term capta oss and computes hs ta under secton 117(c)2, the base
for determnng the chartabe contrbutons deducton s ordnary
net ncome, that s, net ncome pus the amount of the net ong-
term capta oss, and the base for determnng the earned ncome credt
s ordnary net ncome as ad|usted for the chartabe contrbutons
deducton.
S CTION 119. INCOM ROM SOURC S WIT IN
UNIT D ST T S.
Secton 19.119-2: Interest.
INT RN L R NU COD .
Interest aowed and ncuded n |udgment for damages recovered
by nonresdent aens. (See G. C. M. 219 8, page 7.)
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57
10.131-1.
SUPPL M NT C CR DITS G INST T .
S CTION 131. T S O OR IGN COUNTRI S ND
POSS SSIONS O UNIT D ST T S.
The ta mposed by the Me can statute known as the Law of
Ta aton on cess Profts s a ta on e cess profts wthn the
scope of secton 131 of the Interna Revenue Code. The M Com-
pany, a domestc corporaton whch keeps ts books on the accrua
bass and pad such ta to Me co n 1940 for the caendar year 1939,
may cam credt for such ta accrued to Me co In the caendar
year 1939 aganst the ta due the Unted States for that year, sub-
|ect to the mtaton contaned n secton 131(b) of the Code. or
ta abe years begnnng anuary 1, 1940, and thereafter, the credt
s not avaabe as an offset to the ta Imposed under secton 102
of the Interna Revenue Code.
dvce s requested whether ta es pad n 1940 by the M Company,
pursuant to a recent Me can aw known as the Law of Ta aton
on cess Profts, consttute a proper credt aganst the 1939 ed-
era ncome ta abty of that company.
The ta payer s ncorporated under the aws of the State of Te as,
but ts operatons are confned to the cty of R, State of S, Me co.
It keeps ts books on the accrua bass and fes ts ncome ta returns
on the caendar year bass.
The Me can statute referred to was made effectve on December 28,
1939, under a decree ssued by the Presdent of Me co. rtce
13(b) of the Me can aw provdes that the profts sub|ect to cacua-
ton of e cess profts are the profts decared for the ncome ta ess
the amount of such ta . rtce 2 of the aw provdes that e cess
proft s any proft obtaned over and above 15 per cent of the net
worth as shown by the books of the company, or over 20 per cent of
the profts where there s no net worth shown on the books.
Secton 131 of the Interna Revenue Code provdes n part as
foows:
(a) owance of credt. If the ta payer sgnfes In hs return hs desre
to have the benefts of ths secton, the ta Imposed by ths chapter sha be
credted wth:
(1) Ctzen and domestc corporaton.- In the case of a ctzen of the Unted
States and of a domestc corporaton, the amount of any ncome, war-profts,
and e cess-profts ta es pad or accrued durng the ta abe year to any foregn
country or to any possesson of the Unted States .
(Secton 131(a) was amended by the Revenue ct of 1939, effectve
for ta abe years begnnng after December 31, 1939, to nsert the
words e cept the ta mposed under f octon 102 after the word
chapter. )
Secton 131(b) of the Code paces certan mtatons on the amount
of such credt.
It s hed that the ta mposed by the Me can statute, known as
the Law of Ta aton on cess Profts, s a ta on e cess profts
wthn the scope of secton 131, supra. ccordngy, the M Company,
25220 40 8
Secton 19.131-1: nayss of credt for
ta es.
1940-23-10280
I. T. 3381
INT RN L R NU COD .
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19.143-4.
58
a domestc corporaton, payng such ta to Me co n 1940 for the
caendar year 1939 may, under the provsons of secton 131, supra,
cam credt for such ta accrued to Me co n the caendar year
1939 aganst the ta due the Unted States for that year, sub|ect to
the mtatons contaned n secton 131(b). or ta abe years be-
gnnng anuary 1,1940, and thereafter, the credt s not avaabe as
an offset to the ta mposed under secton 102 of the Interna evenue
Code. (See sectons 21 (a) and 229 of the Revenue ct of 1939.)
S CTION 143. WIT OLDING O T T SOURC .
Secton 19.143-1: Wthhodng ta at source.
Payments by the Unted States under certan cts of Congress
to nonresdent aen owners of and ocated n the Unted States.
(See I. T. 3379, page 1 .)
Where Interest-bearng promssory notes were ssued by the M
Company to hoders of 10-year debenture bonds n e change for
nterest coupons coverng a 5-year perod, the fng of ownershp
certfcates w not be requred unt payments on the prncpa
amounts of the notes are made, and the hoders of notes w not
be requred to ncude the amounts thereof as ncome unt such
payments are receved. ny nterest pad on the promssory notes
pror to payment of the prncpa of the notes shoud be reported
as ncome for the year of recept.
dvce s requested wth respect to the fng of ownershp certf-
cates n connecton wth the ssuance of notes n eu of debenture
coupons under the foowng crcumstances, and whether the notes
shoud be treated as ncome n the year of recept.
The M Company, a corporaton, has outstandng 10-year debenture
bonds (wth nterest coupons attached) maturng n 1947 and bearng
nterest at per cent per annum payabe semannuay. The com-
pany s cash poston was so reduced on September 1,1939, that proms-
sory notes bearng nterest payabe annuay from September 1, 1940,
to September 1, 1944, were ssued to the hoders of the debentures n
e change for ther nterest coupons. These debentures are not sted
on any e change, and no saes thereof have been made wthn the
past two years, but there have been offers to se at a prce as ow as
20 per cent of ther par or face vaue.
It appears that at the tme the notes n queston were ssued ony
the nterest coupons due on September 1,1939, represented an e stng
obgaton, and that the transacton, nstead of effectng a substanta
satsfacton of a rea and e stng obgaton, smpy amounted to a
SUPPL M NT D. R TURNS ND P YM NT O T .
INT RN L R NU COD .
Secton 19.143-4: Ownershp certfcates for
bond nterest.
INT RN L R NU COD .
1940-3-10141
I. T. 3342
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59
19.147-3.
substtuton of notes for coupons payabe for tbe most part n future
years. The notes and coupons represented unearned nterest, and thus
the transacton consttuted, n effect, merey an e tenson of tme for
the payment of nterest coupons maturng n the future rather than
advance payment of such coupons. The notes had no far market
vaue when receved by the hoders of the debenture bonds.
Under the facts n ths case, t s hed that ownershp certfcates
shoud not be fed unt payments on the prncpa amounts of the
romssory notes are made, and that the hoders of the notes w not
e requred to ncude the amounts thereof as ncome unt such pay-
ments are receved. (See generay aron Wof son v. Reneche, 72
ed. (2d), 59 . . Merren v. Commssoner, 18 . T. ., 15 , ac-
quescence, C. . I -2, 40 (1930), affrmed on another ssue, 51 ed.
(2d), 44 Care D. Schemmer v. Unted States, 94 ed. (2d), 771
George . Menger et a., Trustees, v. Unted States, 21 ed. Supp..
9 4 and Great Southern Lfe Insurance Co. v. Commssoner, 8o
. T. ., 828, acquescence, 0. . 1938-1,13.)
ny nterest pad on the promssory notes pror to payment of the
prncpa of the notes shoud be reported as ncome for the year 01
recept.
S CTION 147. IN ORM TION T SOURC .
Secton 19.147-3: Cases where no return of 1940-9-10187
nformaton requred. I. T. 8354
INT RN L R NU COD .
mounts pad to rura ma carrers as equpment mantenance
need not be reported In returns of Informaton on orm 1009.
Secton 19.147-3(fc) of Reguatons 103 s not to be regarded as
reevng such empoyees from reportng these amounts as gross
Income In ther edera Income ta returns, even though they are
entted to deduct the e pendtures actuay made.
dvce s requested whether amounts (n addton to saares) pad
to rura ma carrers as equpment mantenance shoud be reported
n returns of nformaton on orm 1099.
Secton 19.147-3 of Reguatons 103 provdes n part as foows:
Cases Where no Rett|bn of Informaton Requred. Payments of the foowng
character, athough over 1,000, need not be reported n returns of nformaton
on orm 1099:

(fc) mounts pad by the Unted States to persons n ts servce (cv, mtary,
or nava), as an aowance for traveng e penses, ncudng an aowance for
meas and odgng, as, for e ampe, a per dem aowance n eu of subsstence,
aDd amounts pad as rembursements for traveng e penses.
mounts pad to rura ma carrers for equpment mantenance are
regarded as beng n the nature of traveng e penses. Therefore, n
accordance wth the provsons of secton 19.147-3 (k) of Reguatons
103, supra, such amounts need not be reported on orm 1099. The
foregong reguaton s not to be regarded, however, as reevng the
recpent empoyees from reportng such amounts as gross ncome n
ther edera ncome ta returns, even though they are entted to
deduct the e pendtures actuay made.
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19.148-4.
0
S CTION 148. IN ORM TION Y CORPOR TIONS.
Secton 19.148-4: Informaton respectng com- 1940-2 -10301
pensaton of offcers and empoyees n e cess I. T. 3387
of 75,000.
INT RN L R NU COD .
s the tota saary and commssons pad by the M Company to ,
Its presdent, durng the year 1939 e ceeded 75,000, the corporaton
s requred to fe Schedue - as a part of ts 1939 ucome ta
return, regardess of the fact that the commssons were gross n-
come of a busness carred on by under a saes agency contract
wth the corporaton dstnct from hs contract as presdent.
dvce s requested whether the M Company shoud fe Schedue
- (compensaton of offcers and empoyees n e cess of 75,000) n
connecton wth ts ncome ta return for the caendar year 1939 and
dscose theren the compensaton pad to ts presdent, .
The M Company s engaged n the nvestment busness and ssues
and ses to the pubc certfcates of partcpaton as a part of ts
busness operatons. s presdent of the corporaton and n 1939
receved a substanta saary n that capacty, whch, however, was
ess than 75,000. In 1938 a contract was entered nto between the
M Company and , separate and dstnct from s contract as pres-
dent of the company, for the seng of the certfcates of partcpaton
on a commsson bass. deveoped the seng of these certfcates
nto an e tensve busness. The e penses of ths busness were pad
out of the commssons whch nured to under the terms of the
above-mentoned agreement. Durng the year 1939 the gross com-
mssons receved by e ceeded 100,000, out of whch the e penses
of the busness were pad. Inasmuch as the tota amount pad to
(saary and commssons) by the M Company e ceeded 75,000, but
hs saary was ess than that amount, the queston s presented
whether Schedue - must be fed.
Secton 148(f) of the Interna Revenue Code, as amended, provdes
n part as foows:
(f) Compensaton of offcers and empoyees. Under reguatons prescrbed by
the Commssoner wth the approva of the Secretary, every corporaton sub|ect
to ta aton under ths chapter sha, n ts return, submt a st of the names
of a offcers and empoyees of such corporaton and the respectve amounts
pad to them durng the ta abe year of the corporaton by the corporaton as
saary, commsson, bonus, or other compensaton for persona servces rendered,
f the aggregate amount so pad to the ndvdua s In e cess of 75,000.
Secton 19.148-4 of Reguatons 103, reatng to secton 148(f) of
the Code, reads n part as foows:
very corporaton sub|ect to ta aton under chapter 1 whch durng any
ta abe year begnnng after December 31, 1938, has pad to any offcer or
empoyee of the corporaton, saary, commsson, bonus, or other compensaton
for persona servces rendered, n an aggregate amount n e cess of 75,000 (In
whatever form pad), sha u respect of each such ta abe year, make and fe,
n dupcate, Schedue -, as a part of Its ncome ta return, n accordance wth
the nstructons contaned n the prescrbed return.
In the present case was an offcer of the M Company durng the
year 1939 and durng that year the corporaton pad to hm saary
and commssons for persona servces rendered n an aggregate
amount n e cess of 75,000. It s hed, therefore, that the M Com-
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19.1 2-1.
pany s requred to fe Schedue - as a part of ts 1939 ncome ta
return and dscose theren the nformaton prescrbed wth respect
to the saary and commsson pad to durng that year.
SUPPL M NT . ST T S ND TRUSTS.
S CTION 1 2. N T INCOM .
Secton 19.1 2-1: Income of estates and trusts.
INT RN L R NU COD .
Net short-term capta oss carry-over. (See I. T. 33 , page 53.)
Secton 19.1 2-1: Income of estates and trusts. 1940-1 -1023
I. T. 33 7
INT RN L R NU COD .
The Income of the trust, created under the w of , for the
perod from the begnnng of the ta abe year to the date wthn
that year when a benefcary reaches the age of 30 years, and then
becomes entted to hs share of the trust Income wthout restrc-
ton, s ta abe to the benefcary.
dvce s requested whether certan ncome of a trust created
under the w of , deceased, s ta abe to the trust or to the
benefcares.
Under the w of . a trust was created for the beneft of the
testator s chdren and ther ssue. The chdren of the testator are
now deceased and ther survvng ssue are the benefcares of the
trust. The share of trust ncome of a benefcary who has reached
the age of 30 years s payabe to such benefcary wthout restrcton.
The trustees are drected pror to the tme a benefcary reaches the
age of 80 years to appy ony so much of the ncome of the trust for
the mantenance ana support of the benefcary as the trustees n ther
uncontroed dscreton sha deem best. That part of a benefcary s
share of trust ncome accumuated pror to hs reachng the age of 30
years s to be pad to the benefcary upon hs attanng such age.
of the grandchdren of the testator have reached the age of 30
years e cept one who w become 30 years od n une, 1940, and
one who w become 30 years od n May, 1941.
Inqury s made whether, where a benefcary reaches the age of 30
years durng a ta abe year, the ncome of the trust for the perod
from the begnnng of the ta abe year to the date the benefcary
reaches the age of 30 years whch has not been apped to the mante-
nance and support of the benefcary shoud be ta ed to the bene-
fcary of the trust.
It s the opnon of ths offce that where a benefcary reaches the
age of 30 years durng a ta abe year he s ta abe on hs share of
the ncome of the trust for the entre ta abe year, snce, upon reach-
ng that age, he s entted to hs share of the ncome of the trust
wthout restrcton, and such share shoud ncude any accumuated
ncome for that year up to the tme he became 30 years of age, at
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19.1 5-1-1
2
whch tme such ncome becomes currenty dstrbutabe wthn the
meanng of secton 1 2(b) of the Interna Revenue Code. (Contra,
Roebng v. Commssoner, 78 ed. (2d), 444, and Spreckes v.
Commssoner, 101 ed. (2d), 721.)
S CTION 1 5. MPLOY S TRUSTS.
Secton 19.1 5-1: mpoyees trusts. 1940- -101 5
( so Secton 22(b), Secton 19.22(b) (2)-2, I. T. 334
and Secton 23(a), Secton 19.23 (a)- .)
INT RN L R NU COD .
Status for edera ncome ta purposes of three trusts created
by the M Company for the beneft of certan empoyees of the com-
pany, and treatment of varous transactons n connecton wth the
operaton of the trusts.
dvce s requested whether the M Company penson trusts Nos. 1,
2, and 3, whch are operated for the beneft of certan of ts empoyees,
are penson trusts wthn the meanng of secton 1 5 of the Interna
Revenue Code. dvce s aso requested as to the edera ncome
ta abty of the M Company and the empoyees nvoved arsng
from the varous transactons n connecton wth the operaton of the
trusts.
The trust nstruments creatng the trusts n queston were e ecuted
by and between the M Company, a corporaton, and the N Natona
ank| trustee. The trusts cover 0 empoyees, a of whom are key
men n the operaton of the busness. The dvson of empoyees
nto groups under penson trusts Nos. 1, 2, and 3 s based upon ther
reatve mportance to the corporaton. Trust No. 1 covers 50 em-
poyees seected by the corporaton (4 of whom are eectve offcers)
trust No. 2 covers 9 empoyees seected by the corporaton (4 of whom
are eectve offcers) and trust No. 3 covers one ndvdua, the pres-
dent (eectve offcer) of the corporaton. The corporaton empoys
appro matey 25,000 persons and t s stated that the corporaton at
the present tme can not afford to ncude a empoyees n the penson
trusts. The trust nstruments are a smar n ther provsons. In
penson trust No. 1 the corporaton pays a sum equa to per cent of
the annua saary of the empoyee mto the trust fund, 50 per cent of
whch represents the contrbuton of the corporaton and 50 per cent
the contrbuton of the empoyee. In penson trust No. 2 the payment
of the corporaton s per cent of the annua saary of the empoyee
and represents a contrbuton by the corporaton and by the empoyee
to the trust fund n the same proportons as n penson trust No. 1.
In penson trust No. 3 the soe benefcary s the presdent of the cor-
poraton. The corporaton contrbutes doars each year to that
trust fund but the soe benefcary, the presdent, does not contrbute
thereto.
The purposes of the trusts so created are stated to be (1) to provde
fnanca protecton for the empoyee after attanng the age of 5,
and (2) to provde fnanca protecton for the ob|ects of the em-
poyee s bounty after death. It s provded that the tota contrbu-
tons made to the trust sha be nvested n a fe nsurance contract
and/or annuty contract ssued on the fe of such empoyee. The
corporaton s annua contrbuton to the trustee under the trusts as
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19.1 5-1.
now consttuted s appro matey a doars. Provson s made that
under no crcumstances sha any contrbuton of the corporaton or
of the empoyee ever revert or nure to the beneft of the corporaton.
If an empoyee resgns or s dscharged pror to fve years from
the date he became a party to the trust agreement, he w have no
rght or nterest as to contrbutons made for hs beneft by the cor-
poraton and w be entted ony to the funds contrbuted by hm
or any nsurance pocy on hs fe, the premums for whch have been
ad by hs contrbutons. In the event of resgnaton or dscharge
y an empoyee after fve years from the date he became a party to
the trust agreement, he w be entted to receve any funds n the
penson premum account earmarked n hs name and representng
contrbutons by the corporaton, and any nsurance pocy on hs fe,
the premums for whch have been pad from contrbutons made by
the corporaton. In penson trust No. 3 for the beneft of the pres-
dent, f hs empoyment s dscontnued at the nstance of the corpo-
raton, he w be entted to a benefts thereunder and the nsurance
poces on hs fe w be devered to hm free and cear from the
terms of the trust agreement, but f hs empoyment s dscontnued
at hs own nstance wth the ntent of acceptng a poston wth an-
other company, he w be entted to no benefts under the agreement.
Secton 1 5 of the Interna Revenue Code provdes n part that:
Sec. 1 5. mpoyees Trusts.
(a) empton feom Ta . trust formng part of a stock bonus, penson,
or proft-sharng pan of an empoyer for the e cusve beneft of some or a of
hs empoyees
(1) f contrbutons are made to the trust by such empoyer, or empoyees,
or both, for the purpose of dstrbutng to such empoyees the earnngs
and prncpa of the fund accumuated by the trust n accordance wth such
pan, and
(2) f under the trust nstrument t s mpossbe, at any tme pror to
the satsfacton of a abtes wt respect to empoyees under the trust,
for any part of the corpus or ncome to be (wthn the ta abe year or
thereafter) used for, or dverted to, purposes other than for the e cusve
beneft of hs empoyees,
sha not be ta abe under secton 1 1, but the amount actuay dstrbuted or
made avaabe to any dstrbutee sha be ta abe to hm n the year n whch
so dstrbuted or made avaabe to the e tent that t e ceeds the amounts pad
n by hm.
rtce 1 5-1 (a) of Reguatons 101 provdes that:
Pans and trusts for empoyees. stock bonus, penson, or proft-sharng
pan of an empoyer for the e cusve beneft of some or a of hs empoyees
s a defnte wrtten program and arrangement sgned by such empoyer and
communcated to such empoyees, soey desgned and apped to enabe a or a
arge percentage of the tota number of the empoyer s cerks and workmen
(as dstngushed from persons n postons of authorty) to share n the capta
or profts of such empoyer s trade or busness or to provde for the vehood
of such empoyees upon ther retrement from empoyment. trust formng
part of a stock bonus, penson, or proft-sharng pan s a trust formed and
avaed of soey to ad n the proper e ecuton of one of the pans defned n
the precedng sentence. Ths phrase does not ncude devces for payng profts
or saares to sharehoders or offcers, but a trust, apped wthout dscrmna-
ton to a the empoyees and offcers of an empoyer as one group, may be
wthn ts meanng.
Under the facts presented, t s hed:
(1) The trusts under consderaton are not suffcenty broad n
ther appcaton to empoyees of the corporaton to consttute pen-
son trusts wthn the meanng of secton 1 5 of the Interna Revenue
Code.
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19.1 5-1.
4
(2) Contrbutons to the trust, whether made by the company or
by the empoyees, are not ta abe ncome to the trust.
(3) Contrbutons made by the company to the trust are deductbe
by the corporaton to the e tent that such contrbutons when added
to the stpuated saares of the empoyees consttute reasonabe com-
pensaton for the servces rendered.
(4) To the e tent that the corporaton s share of such contrbutons
s apped toward the payment of premums on fe nsurance poces
coverng the ves of empoyees, such amounts consttute addtona
ncome to the empoyees and shoud be ncuded n ther returns for
the year or years m whch pad. In G. C. M. 8432 (C. . I -2, 114
(1930)) t s stated n part as foows:
It must be noted that generay the premums pad by corporatons on In-
dvdua fe Insurance poces taken out by or on behaf of ther offcers and
coverng ther ves consttute addtona ncome to the offcers and shoud be
ncuded n ther returns for the year or years n whch pad.
(5) To the e tent that the corporaton s share of such contrbutons
s apped toward the purchase of retrement annuty contracts for the
beneft of empoyees, such amounts are not consdered as havng been
receved by the empoyees n the year or years n whch such payments
are so apped, and are not, therefore, requred to be ncuded n ther
returns for those years. Upon retrement the entre amount of each
annuty payment w be ta abe ncome to the empoyee f he made
no contrbuton toward the. purchase of the retrement annuty. If he
made contrbutons, he w be ta ed on the annuty payments n the
manner and to the e tent provded n secton 22(b)2 of the Interna
Revenue Code and artce 22(b) (2)-2 of Reguatons 101.
( ) amounts receved by empoyees upon resgnaton or ds-
charge after fve years representng the corporaton s share of con-
trbutons are to be ncuded n the empoyees returns for the year or
years n whch receved. If, upon such termnaton of servce, an
annuty contract havng a cash surrender vaue s assgned to an
empoyee, he reazes no ta abe ncome upon the assgnment of the
annuty contract. owever, f the empoyee actuay e ercses hs
rght to receve the cash surrender vaue of the annuty contract, he
then reazes ncome to the e tent that the amount receved e ceeds
the amount pad n by hm.
Secton 19.1 5-1: mpoyees trusts. 1940-7-10172
I. T. 3350
INT RN L R NU COD ND TRIOR R NU CTS.
Under secton 1 5 of the Interna Revenue Code, as amended, pro-
fessona partnershps, composed of attorneys, physcans, etc., are
entted to the same prveges ns corporatons n the estabshment
of penson trusts for the beneft of the bona fde empoyees of such
partnershps. owever, a genera partner, as such, s not an
empoyee of the partnershp and s precuded from partcpaton n
the benefts of a trust such as s contempated by secton 1 5 of
the Interna Revenue Code, as amended, and smar provsons
of pror Revenue cts.
dvce s requested whether professona partnershps, composed
of attorneys, physcans, etc., have the same rghts as corporatons,
under secton 1 5 of the Interna Revenue Code, as amended, to estab-
sh penson trusts for ther empoyees and, f so, whether such pen-
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5
5 19.1 5-1.
son trusts may ncude the partners as benefcares as we as those
who are strcty empoyees.
Secton 1 5 of the Interna Revenue Code, as amended, provdes
that a trust formng part of a stock bonus, penson, or proft-sharng
pan of an empoyer for the e cusve beneft of some or a of hs
empoyees sha not be ta abe under secton 1 1 of the Code (the
secton mposng the ta on estates and trusts) f (1) contrbutons
are made to the trust by such empoyer, or empoyees, or both, for
the purpose of dstrbutng to uch empoyees the earnngs and prn-
cpa of the fund accumuated by the trust n accordance wth such
pan, and (2) f under the trust nstrument t s mpossbe, at any
tme pror to the satsfacton of a abtes wth respect to em-
poyees under the trust, for any part of the corpus or ncome to be
(wthn the ta abe year or thereafter) used for, or dverted to, pur-
poses other than for the e cusve beneft of such empoyees.
rtce 1 5-1 of Reguatons 101, promugated under the Revenue
ct of 1938, whch s made appcabe to secton 1 5 of the Code by
Treasury Decson 4885 (C. . 1939-1 (Part 1), 39 ), provdes n part
as foows:
bt. 1C5-1. mpoyees trusts. (a) Pans and trusts for empoyees. stock
bonus, penson, or proft-sharng pan of an empoyer for the e cusve beneft
of some or a of hs empoyees Is a defnte wrtten program and arrangement
sgned by such empoyer and communcated to such empoyees, soey desgned
and apped to enabe a or a arge percentage of the tota number of the
empoyer s cerks and workmen (as dstngushed from persons In postons
of authorty) to share n the capta or profts of such empoyer s trade or
busness or to provde for the vehood of such empoyees upon ther retre-
ment from empoyment trust formng part of a stock bonus, penson, or
proft-sharng pan s a trust formed and avaed of soey to ad n the
proper e ecuton of one of the pans defned In the precedng sentence. Ths
phrase does not Incude devces for payng profts or saares to sharehoders
or offcers, but a trust, apped wthout dscrmnaton to a the empoyees and
offcers of an empoyer as one group, may be wthn Its meanng.
rom the foregong, t appears that such professona partner-
shps are entted to the same prveges as corporatons n the estab-
shment of penson trusts for the beneft of the bona fde empoyees
of the partnershps. owever, t s the vew of the ureau that a
genera partner, as such, s not an empoyee of the partnershp and
13 precuded, under the provsons of secton 1 5 of the Interna Rev-
enue Code, as amended, from partcpatng n the benefts of a trust
such as s contempated by that secton and by smar provsons of
pror Revenue cts.
Secton 19.1 5-1: mpoyees trusts. 1940-24-10294
T. D. 4973
TITL 20 INT RN L R NU . C PT R I, SU C PT R , P RTS 9 ND
19. INCOM T .
mendng artce 1 5-1 of Reguatons 101, and secton 19.1 5-1
of Reguatons 103, reatng to empoyees trusts.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. O.
To Coectors of Interna Revenue and Others Concerned:
Paragraph (a) of artce 1 5-1 of Reguatons 101 secton 9.1 5-1,
Tte 2 , Code o edera Reguatons, 1939 Sup. and paragraph (a)
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19.211-2.

of secton 19.1 5-1 of Reguatons 103 Part 19, Tte 2 , Code of
edera Reguatons, 1940 Sup. are each amended to read as foows:
(a) Pans and trusts for empoyees. stock bonus, penson, or proft-
sharng pan of an empoyer for the e cusve beneft of some or a of hs em-
poyees s a defnte wrtten program and arrangement communcated to such
empoyees, soey desgned and apped to enabe such empoyees to share n the
capta or profts of such empoyer s trade or busness or to provde for the ve-
hood of such empoyees upon ther retrement from empoyment. trust
formng part of a stock bonus, penson, or proft-sharng pan s a trust formed
and avaed of soey to ad n the proper e ecuton of one of the pans defned
n the precedng sentence. Ths phrase Incudes ony trusts created for the e -
cusve beneft of empoyees, and does not Incude devces for dstrbutng profts
to sharehoders. the surroundng and attendng crcumstances and the
detas of the pan w be ndcatve of whether t s a bona fde stock bonus,
penson, or proft-sharng pan for the e cusve beneft of empoyees wthn the
meanng of secton 1 5.
(Ths Treasury decson s ssued under the authorty contaned n
sectons 2 and 1 5 of the Revenue ct of 1938 (52 Stat., 480, 518
2 U. S. C, Sup. 2, 1 5) and sectons 2 and 1 5 of the Interna
Revenue Code (53 Stat., 32, 7).)
Gut T. everng,
Commssoner of Interna Revenue.
pproved une 3, 1940.
ohn L. Suvan,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster une 5, 1940, 10.25 a. m.)
SUPPL M NT . NONR SID NT LI N INDI IDU LS.
S CTION 211. T ON NONR SID NT
LI N INDI IDU LS.
Secton 19.211-2: Defnton. 1940-25-1029
I. T. 338
INT RN L R NU COD .
, a sub|ect of a foregn country who entered the Unted States n
October, 1938, on a temporary vsa whch has been renewed from tme
to tme durng the contnuance of the war, has the status of a non-
resdent aen.
dvce s requested whether the e tenson of s temporary vsa
from tme to tme through the R mbassy and the fact that due to
war condtons abroad does not ntend to depart from the Unted
States unt such condtons are over have any effect on s status as
a nonresdent aen for edera ncome ta purposes. e entered the
Unted States n October, 1938.
It s stated n secton 19.211-2 of Reguatons 103, promugated
under the Interna Revenue Code, whch s appcabe to ta abe 3 ears
begnnng after December 31, 1938, that an aen whose resdence s
not wthn the Unted States s a nonresdent aen. n aen actu-
ay present n the Unted States who s not a transent s a resdent
for edera ncome ta purposes. Whether an aen s a transent s
determned by hs ntentons wth regard to the ength and nature of
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7
19.211-7.
Ms stay. mere foatng ntenton, ndefnte as to tme, to return to
another country s not suffcent to consttute hm a transent. If he
ves n the Unted States and has no defnte ntenton as to hs stay,
he s a resdent. n aen whose stay n the Unted States s mted
to a defnte perod by the mmgraton aws s not a resdent of the
Unted States wthn the meanng of secton 19.211-2 n the absence
of e ceptona crcumstances.
Inasmuch as s n the Unted States on a temporary vsa, ssued
by the ureau of Immgraton, whch has been renewed from tme
to tme durng the contnuance of the war, and hs ntenton s to
return to a foregn country as soon as war condtons w permt,
hs status s that of a nonresdent aen. Under the crcumstances o
ths case, e ceptona crcumstances do not e st wthn the meanng
of the reguatons so as to warrant s cassfcaton as a resdent or
the Unted States. The rung s, of course, appcabe ony to the
ta payer s present status.
Secton 19.211-7: Ta aton of nonresdent 1940-19-10251
aen ndvduas. G. CM.219 8
( so Secton 119 Secton 19.119-2.)
INT RN L R NU COD .
Where nonresdent aens obtaned a |udgment of 52 doars
aganst the M Company, 2 a doars thereof representng the
prncpa amount of the damages recovered and 89 doars
representng nterest aowed from the dates of saes of certan
property to the date of |udgment, the prncpa amount of the
|udgment Is not sub|ect to edera Income ta . The 89 doars
nterest aowed by the court from the dates of saes to the date
of |udgment, and the 9w doars nterest whch accrued on the
|udgment from date of rendton to date of payment, are ta abe
under secton 211(a) of the Interna Revenue Code.
n opnon s requested whether, under the crcumstances heren
set forth, any part of the payments receved by certan nonresdent
aen ndvduas as the resut of a |udgment s sub|ect to edera
ncome ta .
In anuary, 1940, a |udgment obtaned by the nonresdent aen
ndvduas aganst the M Company was pad. The amount receved,
namey, 74a doars, conssted of 5a doars pad pursuant to the
|udgment entered n 1938 and 9a doars accrued nterest on the |udg-
ment to the date of payment. The acton was one for fraud aganst
the M Company as ther agent n nducng pantffs (the nonresdent
aens) to se certan ands for an amount ess than ther true vaue.
The |udgment tsef conssted of two tems 2 a doars, whch may
be termed the prncpa amount of the |udgment, as t represented
the dfference between the vaue of the ands at the tme of the severa
saes and the amount receved therefor by the pantffs, and 39
doars, nterest computed from the dates of the saes to the date of
the |udgment.
The recpents fe returns on the cash recepts and dsbursements
bass. They are nonresdent aens not engaged n trade or busness
n the Unted States and not havng an offce or pace of busness
theren.
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19.211-7.
8
Secton 211 (a) 1( ) of the Interna Revenue Code provdes n part
as foows:
Impostkm of ta . There sha be eved, coected, and pad for each ta abe
year, n Ueu of the ta mposed by sectons 11 and 12, upon the amount receved,
by every nonresdent aen ndvdua not engaged n trade or busness wthn
the Unted States and not havng an offce or pace of busness theren, from
sources wthn the Unted States as nterest (e cept nterest on deposts wth per-
sons carryng on the bankng busness), dvdends, rents, saares, wages, pre-
mums, annutes, compensatons, remuneratons, emouments, or other f ed or
determnabe annua or perodca gans, profts, and ncome, a ta of 10 per
centum of such amount . Itacs supped.
Secton 119(a) of the Interna Revenue Code provdes n part as
foows:
Gross ncome from sources n Unted States. The foowng tems of gross
Income sha be treated as ncome from sources wthn the Unted States:
(1) Interest. Interest from the Unted States, any Terrtory, any potca
subdvson of a Terrtory, or the Dstrct of Coumba, and nterest on bonds,
notes or other nterest-bearng obgaton of resdents, corporate or otherwse,
not ncudng . Itacs supped.
It s the opnon of ths offce that the prncpa amount of the |udg-
ment, 2 a doars (. e., such porton of the |udgment as represented
the dfference between the vaue of the ands when the owners were
frauduenty nduced to se and the amounts receved by them at that
tme), does not consttute f ed or determnabe annua or perodca
gans, profts, and ncome wthn the meanng of secton 211(a)
(1)( ) of the Interna Revenue Code and s not sub|ect to edera
ncome ta when receved by the nonresdent aen ndvduas.
Wth respect to the amount of 39a doars, whch was computed from
the dates of the saes to the date upon whch |udgment was entered,
the proper treatment of that amount presents the foowng ssues:
(1) Is the 39a doars nterest, or s t but a part of a tota |udgment
for pecunary damages, the parts of whch are nseparabe for ta pur-
Soses (2) s such amount ncome from sources wthn the Unted
tates as defned n secton 119(a), supra. These two matters are ds-
cussed nfra.
(1) The decree of the court n the nstant case formay provded
for the payment of nterest by the defendant. The 39a doars was
pad n accordance wth the decree. Moreover, that amount s n sub-
stance nterest, based upon the foowng reasonng: Saes of the
propertes actuay were consummated n pror years. These saes
gave rse to a cause of acton aganst the wrongdong fducary for
tre amount of the dfference (2 a doars) between the vaue of the
propertes at the tme of the saes and the sums then receved by the
pantffs. s ndcated above, t appears that the 2G.r doars was
not the recept of annua or perodca gans, profts, and ncome con-
tempated by secton 211(a). ut the addtona sum of 39a doars,
computed by the court upon an annua bass and at a certan per cent
on the 2 ,7 doars, consttutes compensaton for the use of money
to whch the pantffs equtaby became entted when the fraud was
consummated. Compensaton tor the use of money s merey another
name for nterest. To concude that the 39a doars s an nseparabe
part of a tota |udgment for damages to the pantffs woud gnore
both the form and the substance of the decree. The substance of the
decree s that the pantffs frst became entted to resttuton n
damages, not when the |udgment was entered but when the fraud
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3 70.
was commtted, and that the pantffs are beng awarded a separate
sum as compensaton for the deay n payment of the damages. c-
cordngy, t s concuded that the 39a doars s nterest n the sense
n whch that term normay s used.
(2) The amount of 39a doars appears to consttute nterest on
nterest-bearng obgatons of resdents, corporate or other-
wse, wthn the meanng of secton 119(a), supra, and, hence, s n-
come from sources wthn the Unted States. (See evermg v.
Stockhom nskda ank, 293 U. S., 84, Ct. D. 887, C. . III-2,
299 (1934).) Coroary to the pantffs rght to resttuton n dam-
ages was a abty or obgaton on the part of the fducary.
Such an obgaton s smar to the Government s obgaton to refund
ta es egay or erroneousy coected, whch was the type of obga-
ton nvoved n the Stockhoms nskda ank case. The court s
decree n the nstant case recognzed and enforced such obgaton.
That t mght be, and actuay was, an nterest-bearng obgaton
was-aso determned by the court s decree. In ths respect, the decree
was anaogous to the e press statutory drecton to pay nterest on
the ta refunds nvoved n the Stockhoms nskda ank case,
supra.
It foows from the foregong that the 9 doars nterest whch
accrued on the |udgment to the date of payment s aso nterest n-
come from sources wthn the Unted States and s sub|ect to ta
under secton 211(a), supra.
It s the opnon o ths offce, therefore, that the part of the |udg-
ment termed the prncpa amount s not sub|ect to edera n-
come ta , but the 39a doars nterest aowed by the court from the
dates of saes to the date of the |udgment, and 9 doars nterest
accrued from the date of the |udgment to date of payment, are ta -
abe under secton 211(a) of the Interna Revenue Code.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
SU C PT R . LI N OR T S.
S CTION 3 70. PROP RTY SU CT TO LI N.
1940-G-101
I. T. 3347
INT RN L R NU COD .
The en of and O, mortgagees, on rea estate mortgaged by
does not e tend to the rents and profts fowng from the property.
n assgnment of the rents by the mortgagor to the mortgagees to
be apped to back nterest s nferor to a edera ta en recorded
pror to the assgnment.
dvce s requested reatve to the prorty of a edera ta en
for unpad ncome ta es, nterest, and penates assessed aganst
over an assgnment to the mortgagees of the rents coected from rea
estate mortgaged by .
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I 3 70.
70
In 1932 a edera ta en was fed aganst n the cerk s offce
of County, N. Y., n whch county are ocated certan propertes
beongng to . and C are mortgagees of these propertes under
mortgages recorded pror to the recordng of the ta en. There s
now due on the mortgages 18a: doars pus back nterest n the amount
of appro matey 5 doars. Durng the ast severa years, under
an ora arrangement wth , the rents have been coected and the
sum of doars has been pad each month to the coector of nterna
revenue to qudate n part s ndebtedness. On ebruary 1, 1939,
made a wrtten assgnment of rents to and C, the amounts co-
ected to be apped to back nterest and current nterest. The ques-
ton arses whether monthy payments to the coector of nterna
revenue after the assgnment consttute a preference unfar to the
mortgagees on the ground that the rghts of the Government are
nferor to those of the mortgagees.
It s the opnon of ths offce that even though the mortgage above-
mentoned was recorded before the fng of the edera notce of- ta
en, the en of the mortgage apped ony to the rea estate and not
to the rents and profts. It dd not cover and was not good as to the
atter. In ountze v. Omaha ote Co. (107 U. S.,378), the Supreme
Court sad:
In the case of a mortgage, the and Is In the nature of a pedge: and
R Is ony the and tsef the specfc thng whch Is pedged. The rents and
profts are not pedged they beong to the tenant n possesson, whether the
mortgagor or a thrd person camng under hm. The takng of the
rents and profts pror to the sae does not In|ure the mortgagee, for the smpe
reason that they do not beong to hm.
The rue s stated n Tffany s Rea Property, voume 3, second ed-
ton, secton 13, as foows: mortgagor who s n possesson of
the and s entted to receve and appy to hs own use the rents and
profts of the and and ths s so, even when the mortgage e pressy
ncudes rents and profts. In Gman v. Inos Msssspp
Teephone Co. (91 U. S., 03), the court sad that possesson draws
after t the rght to receve and appy the ncome, as f no mortgage
e sted and n mercan rdge Co. v. edebach (94 U. S., 798),
athough rents, ssues, and profts had been pedged by the mortgagor
to the payment of nterest on mortgage bonds, and defaut occurred,
nevertheess a |udgment credtor of the mortgagor prevaed over the
mortgage trustees wth respect to the rght to receve such ncome,
the court hodng that unt possesson was taken under the mortgage
or a recever apponted, the mortgagor was owner to a the word,
and entted to a the proft made.
The foregong rue was apped n reedman s Savng cf Trust Co.
v. Shepherd (127 U. S., 494). There the mortgagor had assgned a
ease of the mortgaged premses to one, Shepherd, and thereafter
pedged or assgned accrued rents to a credtor of Shepherd. In a
contest between the credtor and the mortgagee as to the rght to such
rents (subsequent to the mortgagor s defaut and before the mortgagee
took possesson of the premses), the credtor prevaed. The court
sad that even though the ncome were e pressy pedged as securty
for the mortgage debt, the mortgagee woud not be entted to t as
aganst a thrd party camant pror to takng possesson of the
property after the mortgagor s defaut.
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71 3 70.
In more y. Symonds (183 Mass., 321, 7 N. ., 314), there was
nvoved a sut by a mortgagor s trustee n bankruptcy aganst a
mortgagee to recover rents coected by the mortgagee after the
mortgagor s bankruptcy under an ora agreement by the mortgagor
before bankruptcy to pay over to the mortgagee the rents as they
accrued unt the atter was rembursed for money advanced for ta es
and mprovements. The trustee prevaed, the court hodng that
such a transfer of rents (after bankruptcy) was vod for the reason
that tte to the rents was then vested n the trustee n bankruptcy,
and that a mere agreement for such transfer before bankruptcy,
whether ora or n wrtng, made no dfference. The court sad n
part:
and t Is doubtfu whether a notce gven by a mortgagee to tenants
that they are to pay ther rent to hm, or any other net on hs part not amount-
ng to an entry or equvaent to takng possesson by hm, can defeat the rght
of a mortgagor, or those camng under hm, to take the rents and profts of
the mortgaged rea estate. ( ed v. Swan, 10 Mete, 112, 114.) Under the
facts found n ths case, the defendant stands no better under the agreement.
There was no assgnment of the rents, or even an order to the tenants to pay
to hm. efore any en can arse at aw n favor of the defendant,
t s not enough that there s an e press promse to pay from a partcuar
fund, but there must be some postve act of appropraton on the part of the
debtor, whereby he ceases to contro the fund, and the credtor, wthout hs ad
or consent, can coect the same, and appy t n payment of hs debt.
The court hed further that the defendant had no equtabe en, by
vrtue of the agreement, on the rents as they accrued, and that he was
not otherwse entted to reef n equty.
The same genera rue that a mortgagee acqures no rght to the
rents of mortgaged property, even by an assgnment of rents n the
mortgage, n the absence of entry and possesson and/or the securng
of the appontment of a recever of the rents and profts n hs behaf
under the mortgage, has been apped by the New York courts and
appears to be the accepted rue n that State. (New York Lfe Insur-
ance Co. v. uton Deveopment Corporaton, 2 5 N. Y., 348, 193
N. ., 1 9 Woman s ospta v. S ty-Seventh Street Reaty Co..
Inc., 240 pp. Dv., 33, 2 8 N. Y. Supp., 725 Dme Savngs ank of
rookyn v. o , 147 Msc., 24, 2 4 N. Y. Supp., 2 2 One- undred
orty- ght Reaty Co., Inc., v. Conrad et at., 125 Msc., 142, 210
. Y. Supp., 400 Rhneander v. Rchards, 184 pp. Dv., 7, 171
N. Y. Supp., 43 Coney v. ne, 181 pp. Dv., 75, 1 9 N. Y. Supp.,
1 2 Suvan v. Rosson, 223 N. Y., 217. 119 N ., 405 arrs v.
Lesster et a., 35 pp. Dv., 4 2, 54 N. Y. Supp., 8 4, appea dsmssed
n 159 N. Y., 533, 53 N. ., 112 .)
The foregong cases dscose that certan quafcatons upon the gen-
era rue have been recognzed by the New York courts, as where
there s an absoute and unquafed assgnment of rents ncorporated
n or separate from the mortgage ceary ntended to operate n
praesent or mmedatey upon defaut, or where a pror mortgagee
takes an assgnment of rents after defaut and before a subsequent
mortgagee takes steps to recover them, but the facts submtted n the
present case do not brng t wthn the appcaton of any of the
ad|udcated quafcatons to the usua rue. In Coney v. ne, supra,
the court sad t s a omatc that the assgnee of a nonnegotabe
chose n acton can obtan no greater rght than hs assgnor had
and n the present case a edera statutory en had attached to the
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3 90.
72
eases and to the assgnor s (ta payer s) rght to the rents under them
before the e ecuton of the assgnment to the mortgagees.
In the nstant case, by the fng of ts notce of ta en n 1932,
the Government acqured a en upon a property and rghts to
property, whether rea or persona, beongng to such person, that
s, beongng to . (Secton 318 , R. S., as amended now sectons
3 70 to 3 77, ncusve, Interna Revenue Code.) t the tme the
Government acqured ts en, the mortgagees appear to have had no
ega cam or preference of any knd to the rents of the mortgaged
property, for there seems to have been no egay recognzabe ap-
propraton of the rents to them, and when they dd take an assgn-
ment of the rents on ebruary 1, 1939, they necessary took that
assgnment sub|ect to the Government s pror en. Such en there-
fore attached to a contracts or eases for the payment of rent to
, and to hs rght to receve rent thereunder, and the coector
coud have dstraned and eved thereon to secure qudaton of
the unsatsfed ta abty. (Sectons 3187 and 3188, R. S., as
amended now sectons 3 90, 3 91, and 3 92, Interna Revenue Code.)
subsequent assgnment by the mortgagor to the mortgagees of
the contracts or eases for rent woud ceary have been nferor
to the Government s pror en thereon for ta es, and a fortor, a
subsequent assgnment of rents coud stand n no better poston.
The assgnment was merey a transfer of rents sub|ect to e stng
equtes or ens wthout otherwse affectng the mortgagor s pos-
sesson of the property and hs rghts n and to the property pror
to actua entry and takng over of possesson by the mortgagees.
It has been hed that a en for ta es s superor to a mortgage
or deed of trust e ecuted subsequent to a demand for payment
and embraces every speces of property sub|ect to ownershp. ack-
ock v. Unted States, 208 L S., 75.) It foows that a en for
ta es s superor to a subsequent assgnment of eases or rents.
It s hed under the facts presented that the rghts of the Govern-
ment under the ta en are superor to those of the mortgagees
under the assgnment.
SU C PT R C DISTR INT.
P RT I. DISTR INT ON P RSON L PROP RTY.
S CTION 3 90. UT ORITY TO DISTR IN.
1940-11-10197
L T.335
INT RN L R NU COD .
partnershp checkng account In a bank Is not sub|ect to ds-
trant to satsfy a ta assessed aganst an Indvdua partner.
owever, the Government s ta en attaches to the ta payer s n-
terest n the partnershp tsef, and that nterest may be eved
upon and sod n effectng satsfacton of the ta payer s outstandng
ta abty.
dvce s requested whether a partnershp checkng account n a
bank s sub|ect to dstrant to satsfy a ta assessed aganst an
ndvdua partner.
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73
15 3 90.
oowng servce of a notce of evy on the M ank coverng un-
pad ncome ta n the amount of 10a doars due from , the ta -
payer, for the year 1938 and assessed n March, 1939, t was dscovered
that the hank was not n possesson of any property or rghts to
property beongng to ndvduay. owever t has been ascer-
taned that the N Company, a partnershp of whch s a member,
has a checkng account n the M ank, whch account contaned 1 a
doars as of the date evy was made. Ths s a partnershp account
and checks drawn thereon requre two sgnatures, namey, and .
Secton 3 70 of the Interna Revenue Code, entted Property
sub|ect to en, formery secton 318 , R. S., as amended, provdes as
foows:
If any person abe to pay any ta negects or refuses to pay the same after
demand, the amount sha be a en n favor of the Unted States
upon a property and rghts to property, whether rea or persona, beongng
to such person.
Secton 3 90 of the Interna Revenue Code, entted uthorty
to dstran, formery secton 3187, R. S., as amended, provdes as
foows:
If any person abe to pay any ta es negects or refuses to pay the same
wthn 10 days after notce and demand, t sha be awfu for the coector
or hs deputy to coect the sad ta es, wth such nterest and other addtona
amounts as are requred by aw, by dstrant and sae, n the manner provded
n ths subchapter, of the goods, chattes, or effects, ncudng stocks, securtes,
bank accounts, and evdences of debt, of the person denquent as aforesad.
Secton 3 92 of the Interna Revenue Code, entted Levy, for-
mery secton 3188, R. S., provdes as foows:
In case of negect or refusa under secton 3 90, the coector may evy, or
by warrant may authorze a deputy coector to evy, upon a property and
rghts to property, e cept such as are e empt by the precedng secton, beong-
ng to such person, or on whch the en provded n secton 3 70 e sts, for
the payment of the sum due, wth nterest and penaty for nonpayment, and
aso of such further sum as sha be suffcent for the fees, costs, and e penses
of such evy.
Under the provsons of aw quoted above, the Government s ta
en attaches to a property and rghts to property beongng to the
ta payer, , and the coector or hs deputy may evy on such prop-
erty and rghts to property. The queston then arses whether the
partnershp checkng account, or any part thereof, s ncuded wthn
such evabe property.
In the opnon of ths offce, the answer s n the negatve for the
reason that the partnershp checkng account s an asset and property
of the partnershp and not an asset or property of the ndvdua
partner (see Unted States et a. v. aufman, Trustee, etc., 2 7 U. S.,
408, T. D. 3 89, C. . I -1, 248 (1925)), and because t s conceded
aw that one partner may not pay hs ndvdua debts out of partner-
shp assets wthout the consent of the other partner or partners, as to
do so woud be takng the money of one person to pay the debts of
another Gaagher s ppea. 114 Pa. St., 353, 7 t., 237). In
other words, the Government s rghts must be worked out through
the partner s nterest n the partnershp tsef or n ts assets, snce
the partner has no severabe nterest n any partcuar partnershp
asset n spece of whch he can ava hmsef n hs own rght for the
payment of hs prvate obgatons and debts.
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3798.
74
In the bankruptcy case of Unted States v. aufman, supra, n-
vovng the dstrbuton of the assets of a partnershp and of ts
mrtners, the equtabe rue of marshang assets was apped, and
t was hed that the Unted States was not entted to prorty of
payment out of partnershp assets for a ta due from an ndvdua
partner, e cept to the e tent of the share of such partner, f any, n
the surpus remanng after the payment of partnershp debts.
(Idem, Unted States v. ack, 8 Pet., 271.) It was aso hed n the
aufman case that the en created n favor of the Government for
unpad ta es by secton 318 , R. S., as amended (now secton 3 70,
Interna Revenue Code), supra, ncudes ony the property of the
person owng the ta , and n the case of a partner owng an ndvdua
ta , t e tends ony to hs nterest n the surpus of the partnershp
property.
It must be borne n mnd, however, that the equtabe rue as to
marshang assets appes ony where the admnstraton or dstrbu-
ton of the assets s wthn the contro of a court, as n an nsovency
or bankruptcy proceedng, and that t has no appcaton to acts
done by a partner or partnershp whe n the fu contro of hs or
ts property. Case v. eauregard, 99 U. S., 119 Gaagher s ppea,
supra.) Snce a sovent and operatng partnershp may have certan
vauabe ntangbe property rghts, such as good w, t s apparent
that a partner s dsposabe nterest n a partnershp may have a vaue
much n e cess of what the partner s nterest woud be n the surpus
remanng after the payment of partnershp debts n a qudaton
case nvovng a marshang of assets.
In the nstant case the Government s ta en attaches to the ta -
payer s nterest n the partnershp tsef (such nterest beng property
of the ta payer), and that nterest may be eved upon and sod n
effectng satsfacton of the ta payer s outstandng ta abty.
(See the statutes quoted supra see aso Case v. eauregard, supra.)
C PT R 38. MISC LL N OUS PRO ISIONS.
S CTION 3798 ( M ND D Y S CTION 40 , R NU
CT O 1939). MPTION O INSOL NT N S
ROM T .
1940-1-10134
T. D.4958
TITL 28 INT RN L R NU . C PT R I, SU C PT R D, P RT 4 4 .
INSOL NT N S.
Reguatons reatng to assessment and coecton of ta es of
nsovent banks and trust companes. Treasury Decson 4882
C. . 1939-1 (Part 1), 154 revoked.1
1 Sortons 484 .0 to 484 .14 are ssued under the authorty contaned n secton 3701
(53 Stat., Part 1 Rev. Stat, 3447: 2 U. S. C, 1891) and nterpret secton 3798 8
Stat. Part 1) secton 408 (Pubc, No. I , Seventy-s th Congress, frst sesson) :
secton 22 (20 Stat, 85) and secton 818 (52 Stat, 79 13 U. S. O, Sup. I , 570).
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75
3798.
Treasurt Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Tabe of Contents.
Secton.
4 4 .0. Introductory.
4 4 .1. ffect of statutory amendments.
4 4 .2. anks and trust companes covered.
4 4 3. Defntons.
4 4 .4. Scope of secton generay.
4 4 .5. Segregated or transferred assets.
4 4 . . Unsegregated assets.
4 4 .7. arnngs.
4 4 .8. batement and refund.
4 4 .9. stabshment of mmunty.
4 4 .10. Procedure durng mmunty.
4 4 .11. Termnaton of mmunty.
4 4 .12. Coecton of ta after termnaton of mmunty.
4 4 .13. Soca Securty ta es.
4 4 .14. ffectve date of reguatons.
Secton 4 4 .0. Introductory. .-Secton 3798 of the Interna Rev-
enue Code, approved ebruary 10, 1939 (53 Stat., Part 1 (reenactng
secton 22 of the ct of March 1, 1879, as amended by secton 818 of
the Revenue ct of 1938, 52 Stat., 579 12 U. S. C, Sup. I , 570)),
reads as foows:
Sec. 3798. empton of Insovent anks rom Ta .
(a) Whenever and after any bank or trust company, a substanta
porton of the busness of whch conssts of recevng deposts nnd
makng oans and dscounts, has ceased to do busness by reason of
nsovency or bankruptcy, no ta sha be assessed or coected, or pad
nto the Treasury of the Unted States on account of such bank, or
trust company, whch sha dmnsh the assets thereof necessary for
the fu payment of a ts depostors and such ta sha be abated from
such natona banks as are found by the Comptroer of the Currency
to be nsovent and the Commssoner of Interna Revenue, when the
facts sha appear to hm, s authorzed to remt so much of the sad
ta aganst any such nsovent banks and trust companes organzed
under State aw as sha be found to affect the cams of ther depostors.
(b) Whenever any bank or trust company, a substanta porton of
the busness of whch conssts of recevng deposts and makng oans
and dscounts, has been reeased or dscharged from Its abty to ts
depostors for any part of ther cams aganst t, and such depostors
have accepted, n eu thereof, a en upon subsequent earnngs of such
bank or trust company, or cams aganst assets segregated by such
bank or trust company or aganst assets transferred from t to an
ndvdua or corporate trustee or agent, no ta sha be assessed or
coected, or pad nto the Treasury of the Unted States on account of
such bank, or trust company, such ndvdua or corporate trustee or
such agent, whch sha dmnsh the assets thereof whch are ava-
abe for the payment of such depostor cams and whch are necessary
for the fu payment thereof.
(c) ny such ta so coected sha be deemed to be erroneousy co-
ected, and sha be refunded sub|ect to a provsons and mtatons
of aw, so far as appcabe, reatng to the refundng of ta es, but
ta so abated or refunded after May 28, 1938, sha be reassessed when-
ever t sha appear that payment of the ta w not dmnsh the assets
as aforesad. The runnng of the statute of mtatons on the makng
of assessment and coecton sha be suspended durng, and for nnety
days beyond, the perod for whch, pursuant to ths secton, assessment
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379S.
7
or coecton may not be made, and a ta whch has been abated may
be reassessed and coected durng the tme wthn whch, had there
been no abatement, coecton mght have been made.
(d) Ths secton sha not appy to any ta mposed by Subchapter
1 or Subchapter C1 of Chapter 0.
Secton 40 of the Revenue ct of 1939 (Pubc, No. 155, Seventy-
e th Congress, frst sesson) reads as foows:
Sew. 40 . Insovent anks.
(a) Secton 8798(c) of the Interna Revenue Code s amended to
read as foows:
(c) (1) ny such ta coected, whether coected before, on, or
after the date of enactment o the Revenue ct of 1938, sha be deemed
to be erroneousy coected, and sha be refunded sub|ect to a prov-
sons and mtatons of aw, so far as appcabe, reatng to the refund-
ng of ta es.
(2) ny ta , the assessment, coecton, or payment of whch s
barred under subsecton (a) of ths secton, or any such ta whch
has been abated or remtted after May 28, 1938, sha be assessed or
reassessed whenever It ha appear that payment of the ta w not
dmnsh the assets as aforesad.
(3) ny ta , the assessment, coecton, or payment of whch Is
barred under subsecton (b) of ths secton or any such ta whch
has been refunded after May 28, 1938, sha be assessed or reassessed
after fu payment of such cams of depostors to the e tent of the
remanng assets segregated or transferred as descrbed n subsec-
ton (b).
(4) The runnng of the statute of mtatons on the makng of
assessment and coecton sha be suspended, durng, and for nnety
days beyond, the perod for whch, pursuant to ths secton, assessment
or coecton may not be made, and a ta may be reassessed as provded
n paragraphs (2) and (3) of ths subsecton, and coected, durng the
tme wthn whch, had there been no abatement, coecton mght have
been made.
(b) The term agent as used n 3798(b) of the Interna Revenue
Code sha be deemed to Incude a corporaton actng as a qudatng
agent.
(c) The amendments made by ths secton sha be effectve as of
the date of enactment of the Revenue ct of 1938.
Pursuant to the authorty contaned n secton 3791 of the Interna
Revenue Code, and other provsons of the nterna revenue aws, the
foowng reguatons are hereby prescrbed:
Secton 4 4 .1. ffect of statutory amendments. The amendment of secton
22 of the ct of March 1, 1879, made by secton 818 of the Revenue ct of 1938,
was effectve on May 28, 1938, the date of enactment of the Revenue ct of 1938.
Secton 40 of the Revenue ct of 1939 n substance makes dentca amendments
of subsecton (c) of secton 22, as amended by the Revenue ct of 1938, and sec-
ton 3798(c) of the Interna Revenue Code. The amendments made by secton
40 of the Revenue ct of 1939 are effectve as of May 28, 193a Therefore secton
22, as amended, of the ct of March 1, 1879, and secton 3798 of the Interna
Revenue Code, as amended by secton 40 of the Revenue ct of 1939, n substance
consttute a contnuous secton effectve on May 28, 1938.
Sec. 4 4 .2. anks and trust companes covered. Secton 22 (as amended) of
the ct of March 1, 1879, and secton 3798 of the Interna Revenue Code, both as
amended by secton 40 of the Revenue ct of 1939. n substance appy as a con-
tnuous secton to any natona bank, or bank or trust company organzed under
State aw, a substanta porton of the busness of whch conssts of recevng
deposts and makng oans and dscounts, and whch has
(a) ceased to do busness by reason of nsovency or bankruptcy, or
( ) been reeased or dscharged from Its abty to ts depostors for any
part of ther depost cams, and the depostors have accepted In eu thereof
Repaces the Soca Securty ct n secton 818 of the Revenue ct of 1938.
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77
3798.
a en upon ts subsequent earnngs or cams aganst ts assets ether
(1) segregated and hed by t for beneft of the depostors or (2) transferred
to an ndvdua or corporate trustee or agent who qudates, hods or oper-
ates the assets for the beneft of the depostors.
Sec. 4 4 .3. Defntons. s herenafter used n these reguatons:
(a)(1) The term secton, uness otherwse ndcated by the conte t, means
secton 22 (as amended) of the ct of March 1, 1879, secton 3798 of the Interna
Revenue Code (reenactng such secton 22), and secton 3798 of the Code as
amended by secton 40 of the Revenue ct of 1939, such sectons n substance
consttutng a contnuous secton In effect on and after May 28, 1938. See sec-
ton 4 4 .1 of these reguatons.
(2) Uness otherwse ndcated, the term subsecton means a subdvson
of the secton as defned heren.
( ) The term bank, uness otherwse ndcated by the conte t, means any
natona bank, or bank or trust company organzed under State aw, wthn
the scope of the secton. See secton 4 4 .2 of these reguatons.
(c) The terms statute of mtatons and mtatons mean a appca-
be provsons of aw (ncudng the secton as heren defned) whch mpose,
change, or affect mtatons, condtons, or requrements reatve to the aow-
ance of refunds and abatements, or the assessment or coecton of ta , as
the case may be.
(d) The term segregated assets ncudes transferred or trusteed assets, or
assets set asde or earmarked, and to a or a porton of whch, or the proceeds
of whch, the depostors are absoutey or condtonay entted.
(e) The term effectve date means May 28, 1938.
If) The term Commssoner means the Commssoner of Interna Revenue.
(g) The term coector means coector of nterna revenue.
Sec. 4 4 .4. Scope of secton generay. (a) Purpose. The secton pror
to amendment by the Revenue ct of 1938 was ntended to assst depostors of
a bank whch had ceased to do busness by reason of nsovency to recover
ther deposts, by prohbtng coecton of ta es of the bank whch woud dmn-
sh the assets necessary for payment of ts depostors. y the amendments ke
assstance s gven to depostors of banks whch are n fnanca dffcutes but
whch, n certan condtons, contnue n busness.
( ) Requstes of appcaton. In order that the secton sha operate In a
case where the bank contnues busness It s necessary that the depostors sha
agree to accept, n eu of a or a part of ther depost cams as such, cams
aganst segregated assets, or a en upon subsequent earnngs of the bank, or
both. When such an agreement e sts, no ta dmnshng such assets or earn-
ngs, or both, otherwse avaabe and necessary for payment of depostors,
may be coected therefrom. If, under such an agreement, the depostors have
the rght aso to ook to the unsegregated assets of the bank for recovery, n
whoe or part, the unsegregated assets are kewse, unt they e ceed the amount
of the depostors cams chargeabe thereto, unavaabe for ta coecton.
ny ta of such a bank, or part of any ta , whch s once uncoectbe under
the sectons, can not thereafter be coected e cept from any resdue of segre-
gated assets remanng after cams of depostors aganst such assets have been
pad.
(c) Interest. or the purposes of the secton, depostors cams Incude bona
fde nterest, ether on the deposts as such, or on the cams accepted n eu of
deposts as such.
(d) Lmtatons on mmunty. The secton s not prmary ntended for the
reef of banks as such. It does not prevent ta coecton, from assets not
necessary, or not avaabe, for payment of depostors, from a bank wthn sub-
secton (a), at any tme wthn the statute of mtatons. In other words the
mmunty of such a bank s not compete, but ceases whenever, wthn the
statutory perod for coecton, It becomes possbe to make coecton wthout
dmnshng assets necessary for payment of depostors. In the case of a bank
wthn subsecton (b), any mmunty to whch the bank s entted s absoute
e cept as to segregated assets. ny ta conng wthn such mmunty may
never be coected. Wth respect to segregated assets, such a bank s sub|ect to
the same rue as a bank wthn subsecton (a), that s to say, after cams of
depostors aganst segregated assets have been pad, any surpus s sub|ect, wthn
the statute of mtatons, to coecton of any ta , due at any tme, the coecton
of whch was suspended by the secton. The secton s not for the reef of
credtors other than depostors, athough It may ncdentay operate for ther
beneft. See sectons 4 4 . and 4 4 .11( ) of these reguatons.
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3798.
78
Sec. 4 4 .5. Segregated or transferred assets. (a) Genera. In a case In-
vovng segregated or transferred assets, t s not necessary, for appcaton of
the secton, that the assets sha techncay consttute a trust fund. It s suff-
cent that segregated assets be defntey separated from other assets of the bank
and that transferred assets be defntey separated both from other assets of the
bank and from other assets hed or owned by the trustee or agent to whom
assets of the bank have been transferred that the bank be whoy or partay
reeased from abty for repayment of deposts as such and that the depos-
tors have cams aganst the separated assets. ny e cess of separated assets
over the amount necessary for payment of such depostors w be avaabe for
ta coecton after fu payment of depostors cams under the agreement
aganst such assets. ut see secton 4 4 .(o) of these reguatons.
( ) Corporate transferees. Where the segregated assets are transferred to a
separate corporate trustee or corporate agent, the assets and earnngs therefrom
are wthn the protecton of the secton, unt fu payment of depostors cams
aganst such assets and earnngs, no matter by whom the stock of such corpora-
ton s hed, and no matter whether the assets be qudated or operated or hed
for beneft of the depostors.
Property of a separate corporaton not conveyed to t by the bank pursuant to
an agreement wth depostors, s not wthn the Immunty of the secton, even
though the corporaton s stock Is owned by the bank. Ta due from a separate
corporaton to whch assets of an nsovent bank are conveyed s coectbe,
even though such ta be due to the property so conveyed, e cept n o far as
ta coecton w dmnsh assets conveyed by the bank for beneft of depostors
or the earnngs from such assets to whch the depostors are entted, and whch
are necessary for payment of the depostors cams. Other assets and earnngs
of a separate corporaton are avaabe for coecton of the ta es of such cor-
poraton even though the assets and earnngs of such corporaton f receved
by the bank woud be avaabe for satsfacton of cams of the bank s depostors
and such cams can not otherwse be pad.
Sec. 4 4 . . nsegregated assets. (a) Depostors cams aganst assets.
Cams of depostors, to the e tent that they are to be satsfed out of segre-
gated assets, w not be consdered n determnng the avaabty of unsegre-
gated assets for ta coecton. If depostors have agreed to accept payment out
of segregated assets ony, coecton of ta from unsegregated assets w not
dmnsh the assets avaabe and necessary for payment of the depostors
cams. Thus, t may be possbe to coect ta es from the unsegregated assets
of a bank athough the segregated assets are mmune under the secton.
If the unsegregated assets of the bank are sub|ect to any porton of the
depostors cams, such unsegregated assets w be wthn the Immunty of
the secton ony to the e tent necessary to satsfy the cams to whch such
assets are sub|ect. Ta es w st be coectbe from the unsegregated assets
to the e tent of the amount by whch the tota vaue of such assets e ceeds
the abty to depostors to be satsfed therefrom. Therefore, f, for e ampe,
n the case of a bank havng a ta abty, not prevousy Immune under the
secton, of 50,000, the depost cams aganst the bank are n the amount of
75,000, and the assets avaabe for satsfacton of depost cams amount to
100,000, the 50,000 ta s coectbe to the e tent of the 25,000 e cess of
assets over depost cams. Coecton s not to be postponed unt the fu
amount of the ta s coectbe.
( ) Depostors cams aganst earnngs. ven though under a bona fde
agreement a bank has been reeased from depostors cams as to unsegregated
assets, f a or a porton of ts earnngs are sub|ect to depostors cams, a
assets the earnngs from whch, n whoe or part, are charged wth the pay-
ment of depostors cams, w be Immune from ta coecton. ut see sec-
ton 4 4 .7(a) of these reguatons.
Sec. 4 4 .7. arnngs. (a) vaabty for ta coecton. arnngs of a
bank wthn subsecton ( ), whether from segregated or unsegregated assets,
whch are necessary for, appcabe to, and actuay used for, payment of de-
postors cams under an agreement, are wthn the mmunty of the secton.
If ony a porton or percentage of Income from segregated or unsegregated
assets Is avaabe and necessary for payment of depostors cams, the reman-
ng ncome Is avaabe for ta coecton. arnngs of the bank s frst fsca
year endng after the makng of the agreement not appcabe to payment of
depostors w be assumed to be appcabe for coecton of any ta due pror
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3798.
or subsequent to e ecuton of the agreement. arnngs of subsequent fsca
perods from nnsegregated assets not appcabe to depostors cams w be
assumed to be appcabe to payment of ta es as to whch Immunty under the
secton has not prevousy attached. arnngs from segregated assets are
avaabe for coecton of ta , whether prevousy uncoectbe under the sec-
ton or not, after depostors cams aganst such assets have been pad n fu.
See sectons 4 4 .5(a) and 4 4 .(o) of these reguatons.
( ) Tan computaton. The fact that earnngs of a gven year may be whoy
or party unavaabe under the secton for coecton of ta es does not e empt
the ncome for that year, or any part thereof, from ta abty. The secton
affects coectbty ony, and Is not concerned wth ta abty. ccordngy,
the ta payer s ncome ta return sha correcty compute the ta abty, even
though n the opnon of the ta payer t s Immune from ta coecton under
the secton. The ta sha be determned wth respect to the entre ta abe
ncome and not merey wth respect to the porton of the earnngs out of whch
ta may be coected. s to estabshment of mmunty from ta coecton see
secton 4 4 .9 of these reguatons.
(c) ampe. n agreement, e ecuted n the year 1938 between a bank sub-
|ect to ta under secton 14(d) of the Revenue ct of 1938 and ts depostors,
provdes (1) that certan assets are to be segregated for the beneft of the
depostors who have waved (as cams aganst unsegregated assets of the bank)
a percentage of ther deposts (2) that 00 per cent of the bank s net earnngs
for fsca years begnnng wth the fsca year endng December 81, 1938, from
unsegregated assets, sha be pad to the depostors unt the porton of ther
cams waved wth respect to unsegregated assets of the bank has been pad
and (3) that the unsegregated assets sha not be sub|ect to depostors cams.
The speca cass net Income of the bank for the caendar year 1938 s 10,000,
4,000 produced by the segregated, and ,000 produced by the unsegregated
assets, and that amount, 10,000, aso consttutes ts net earnngs for that year
before deductng edera ncome ta es. Such amount sha be consdered the
net earnngs for the purpose of these reguatons n computng the porton of
the earnngs to be pad to depostors. The bank has an outstandng ta abty
for pror years of 7,000. The ncome ta abty of the bank for 1938 s 1
per cent of 10,000, or 1, 50, makng a tota outstandng ta abty of 8, 50.
The porton of the earnngs of the bank for 1938 remanng after provson for
depostors s 2,400 ( ,000 ess 0 per cent thereof, or 3, 00). It w be as-
sumed that of the tota outstandng ta abty of 8, 50, 2,400 may be assessed
and coected, eavng ,250 to be coected from any e cess of the segregated
assets after cams of depostors aganst such segregated assets have been pad
n fu. No part of the ,250 mmune from coecton from 1938 earnngs may
be coected thereafter from unsegregated assets of the bank or earnngs there-
from, so that e cept for any possbe surpus of the segregated assets the ,250
s uncoectbe.
In the year 1989 the earnngs are agan 10,000, 4,000 from segregated and
,000 from unsegregated assets, as n the prevous year. owever, the return
fed shows ncome of 5,000 and a ta abty of 900. n nvestgaton shows
the true ncome to be 10,000, on whch the ta s 1,800. The fu 1,800 w be
assumed to be coectbe. The 00 dfference between 2,400 (the e cess of
earnngs from unsegregated assets over the amount gong to the depostors),
and the 1,800 ta for 1939, s not avaabe for coecton of the ta for pror
years, whch became mmune as descrbed above, but may be avaabe .for
coecton of ta for subsequent years.
No sgnfcance attaches to the seecton of the years 1938 and 1930 for the
e ampe. The rues Indcated by the e ampe are equay appcabe to subse-
quent or pror years not e cuded by mtatons.
Sec. 4 4 .8. batement and refund. n assessment or coecton, no matter
when made, f contrary to the secton as amended by the Revenue ct of 1938
and the Revenue ct of 1939, s sub|ect to abatement or refund wthn the
appcabe statutory perod of mtatons.
n abatement or refund after May 28, 1938, te effectve date of the amend-
ments, s equay aowabe whether assessment or coecton was erroneous be-
cause contrary to the amended secton, or because, n the case of a bank wthn
subsecton (a), the same ta had been propery abated or refunded, or n the
case of a bank wthn subsecton (b), had been propery refunded, on or before
the effectve date of the amendments, and reassessed or coected after such
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3798.
80
date. See secton 4 4 .12(b) of these reguatons. If there was a pror proper
abatement or refund n the case of a bank wthn subsecton (a), or a proper
refund In the case of a bank wthn subsecton (b), on or before the effectve
date of the amendments, a cam for abatement or refund of the same ta
reassessed or recoected after the effectve date of the amendments may be
aowed even though the second assessment or coecton was otherwse n ac-
cordance wth the amended secton. owever, In the absence of abatement
or refund In the case of a bank wthn subsecton (a), or of a refund n the
case of a bank wthn subsecton (b), on or before the effectve date of the
amendments, the mere fact that the ta was due before the effectve date of
the amendments w not be ground for aowance of a cam.
Coecton from a bank wthn subsecton (b) whch dmnshed assets neces-
sary for payment of depostors, f made pror to agreement wth depostors.
Is not contrary to the amended secton, and affords no ground for refund.
ny abatement or refund s sub|ect to e stng statutory perods of mta-
ton, whch perods are not suspended or e tended by the amended secton. In
order to secure refund of any ta es pad for any ta abe year durng the
perod of mmunty the bank must fe cam therefor.
Seo. 4 4 .9. stabshment of mmunty. The mere aegaton of nsovency,
or that depostors have cams aganst segregated or other assets or earnngs
w not of Itsef secure Immunty from ta coecton. It must be affrmatvey
estabshed to the satsfacton of the Commssoner that coecton of ta w
be contrary to the amended secton. See aso secton 4 4 .10 of these reguatons.
ny cam, by a bank, of mmunty under subsecton (b), sha be supported
by a statement, under oath or affrmaton, whch sha show: (a) the tota of
depostors cams outstandng, and ( ) separatey and n deta, the amount
of each of the foowng, and the amount of depostors cams propery charge-
abe aganst each (1) segregated or transferred assets (2) unsegregated
assets (3) estmated future average annua earnngs aud profts (4) amount
coectbe from sharehoders and (5) any other resources avaabe for pay-
ment of depostors cams. The deta sha show the fu amount of depostors
cams chargeabe aganst each of the Items (1) to (5), Incusve, even though
part or a of the amount chargeabe aganst a partcuar tem s aso charge-
abe aganst some other tem or tems. There sha aso be fed a copy of any
agreement between the bank and Its depostors, and any other agreement or
document bearng on the cam of mmunty under the secton. The statement
sha show the bass, as book, market, etc., of vauaton of the assets.
Seo. 4 4 .10. Procedure durng mmunty. (a) Statements to be fed. s
ong as, pursuant to the secton compete or parta mmunty Is camed, a
bank wthn subsecton (b) sha fe wth each ncome ta return a statement
as requred by secton 4 4 .9 of these reguatons, n dupcate, and sha aso
fe such addtona statements as the Commssoner may requre. Whether or
not addtona statements sha be requred, and the frequency thereof, w
depend on the crcumstances, ncudng the fnanca status and apparent pros-
pects of the bank, and the tme whch s avaabe for assessment and coecton.
If a copy of an agreement or document has once been fed, a copy of the same
agreement or document need not agan be fed wth a subsequent statement,
f t Is shown by the subsequent statement, when and where and wth what
return the copy was fed. In case of amendment a copy of the amendment
must be fed wth Ihe return for the ta abe year n whch the amendment Is
made.
( ) aure to fe. nure of a bank to fe any requred statement w
be treated as Indcatng that the bank s not entted to mmunty under the
secton.
Sec. 4 4 .11. Termnaton of mmunty. (a) Genera. In the case of a bank
wthn subsecton (a) mmunty w end whenever, and to the e tent that,
ta es may be assessed and coected, wthn the appcabe mtaton perods as
e tended by the secton, wthout dmnshng the assets avaabe and necessary
for payment of depostors. Immunty of a bank wthn subsecton (b) s ter-
mnated, as to segregated assets, whenever cams of depostors aganst such
assets have been pad In fu. See secton 4 4 .5 of these reguatons. s to
segregated assets, the termnaton of Immunty s compete, and any baance re-
manng after payment of depostors s avaabe, wthn statutory mtatons,
for coecton of ta due at any tme. owever, ta es of the bank w be co-
ectbe from segregated assets ony to the e tent that the bank has a ega or
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81
3798.
equtabe Interest theren. ssets as to whch there has been a compete convey-
ance for beneft of depostors, and the bank has bona fde been dvested of a
ega and equtabe nterest, are not avaabe for coecton of the bank s ta
abty.
s to unsegregated assets of a bank wthn subsecton (b), mmunty term-
nates ony as to ta es thereafter becomng due. When ta es are once mmune
from coecton, the mmunty as to unsegregated assets s absoute. ut see
the second paragraph of secton 4 4 . (a) of these reguatons.
( ) Genera credtors. Whe the mmunty from ta coecton s for pro-
tecton of depostors, and not for beneft of genera credtors, n some cases the
mmunty w not end unt the assets are suffcent to cover ndebtedness of
credtors generay. Ths stuaton w e st where under appcabe aw the
cams of genera credtors are on a party wth those of depostors, so that to
pay depostors In fu t s necessary to pay a credtors n fu.
(c) Sharehoder abty. In determnng the suffcency of the assets to
satsfy the depostors cams, sharehoders abty to the e tent coectbe
sha be treated as avaabe assets. See secton 4 4 .9 of these reguatons.
d) Depost nsurance. Depost nsurance payabe to depostors sha not
be treated as an asset of the bank and sha be dsregarded n determnng the
suffcency of the assets to meet the cams of depostors.
( ) Notce by bank. bank wthn subsecton (b), upon termnaton of
mmunty wth respect to (1) earnngs, (2) segregated or transferred assets,
or (3) unsegregated assets, sha mmedatey notfy the coector for the ds-
trct n whch the ta payer s returns were fed of such termnaton of mmunty.
See secton 4 4 .10( ) of these reguatons.
f) Payment by bank. s mmunty termnates wth respect to any assets,
t w be the duty of the bank, wthout notce from the coector, to make
payment of ta es coectbe from such assets.
Sec. 4 4 .12. Coecton of ta after termnaton of mmunty. (a) Oen-
era. If, n the case of a bank wthn subsecton (b), segregated assets (n-
cudng earnngs therefrom), n e cess of those necessary for payment of out-
standng deposts become avaabe, such e cess of segregated assets sha be
apped toward satsfacton of accumuated outstandng ta es prevousy mmune
under the secton, and not barred by the statute of mtatons. ut see secton
4 4 .5 of these reguatons. Where suffcent segregated or unsegregated assets
are avaabe, statutory Interest sha be coected wth the ta . When un-
segregated assets or earnngs therefrom prevousy mmune become avaabe
for ta coecton, they w be avaabe ony for coecton of ta es (ncudng
nterest and other addtons) becomng due after Immunty ceases. See e ampe
n secton 4 4 .7(c) of these reguatons.
( ) Ta due before the effectve date of the amendments. In the case of a
bank wthn subsecton (a), the secton does not permt assessment or reassess-
ment or coecton of ta abated or refunded, f the abatement or refund was
n accordance wth the secton pror to the amendments by the Revenue cts
of 1938 and 1939.
In the case of a bank wthn subsecton (b) the secton does not permt
assessment or reassessment of coecton, from segregated or unsegregated
assets, of ta refunded on or before May 28, 1938, f the refund was n ac-
cordance wth the secton pror to the amendments by the Revenue cts of
1938 and 1939.
Wth the e ceptons ndcated by the precedng two paragraphs, ta due
on or before May 28, 1938, and st outstandng on the sad date, s wthn
the provsons of the amended secton and coectbty s determnabe n
accordance wth the amended secton the same as n the case of ta due after
such date. ccordngy, a ta due pror to the effectve date of the amendments
and then coectbe under the secton may not be assessed or coected there-
after f such assessment or coecton woud be contrary to the secton as
amended. See secton 4 4 .8 of these reguatons.
If the statutory perod for assessment or coecton had e pred before the
effectve date of the amendments, the secton does not revve t. ccordngy,
n such stuaton the ta s not coectbe under the amended secton, regardess
of other crcumstances.
Sec. 4 4 .13. Soca securty ta es. These reguatons do not reate to
soca securty ta es, snce the mmunty granted by the amended secton
does not appy to ta es mposed by the Soca Securty ct.
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22(b), rt. 22(b) (2)-2.
82
Sec. 4 4 .14. ffectve date of reguatons. These reguatons are effectve as
of May 28, 1938, the effectve date of the amendments made by secton 818 of
the Revenue ct of 1938, and secton 40 of the Revenue ct of 1939. Treasury
Decson 4S82 (O. . 1939-1 (Part 1), 154) (Part 4 4, Tte 2 , Code of edera
Reguatons), Is hereby revoked as of the date of ts approva.
Gut T. everng,
Commssoner of Interna Revenue.
pproved December 2 , 1939.
ohn W. anes,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster December 28, 1939, 12.22 p. m.)
. R NU CT O 1938.
SU TITL . G N R L PRO ISIONS.
P RT II. COMPUT TION O N T INCOM .
S CTION 22(a). GROSS INCOM : G N R L
D INITION.
rtce 22(a)-3: Compensaton pad other than n cash.
R NU CT O 1938.
Reguatons 101 amended. (See T. D 49 5, page 13.)
rtce 22(a)-7: Gross ncome of farmers.
R NU CT O 1938.
Payments by the Unted States under certan cts of Congress
to nonresdent aen owners of and ocated n the Unted States.
(See I. T. 3379, page 1 .)
S CTION 22(b). GROSS INCOM : CLUSIONS
ROM GROSS INCOM .
rtce 22(b) (2)-2: nnutes. 1940-2-10138
G. C. M. 2171
R NU CT O 1938.
Certan combned fe nsurance and annuty contracts, caed
Lfe nnuty wth Death eneft contracts, ssued by the M Com-
pany are not fe nsurance or annuty contracts wthn the mean-
ng of secton 22(b)2 of the Revenue ct of 1938, but consttute
contracts for the payment of nterest or earnngs on a certan fund.
G. C. M. G395 (C. . III-1, 7 (1929)) revoked.
n opnon s requested regardng the method of determnng the
amount to be reported by the M Company on orm 1099 wth respect
to amounts pad durng the year 1938 to who hods one o ts
Lfe nnuty wth Death eneft contracts, the provsons of
whch are heren set forth.
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83
22(b), rt. 22(b) (2)-2
Pror to the year 1938 the company ssued a Lfe nnuty wth
Death eneft contract to n the prncpa amount of 25,000, the
purchase prce, 2 ,250, beng dstrbuted as foows:
nnuty consderaton 14,110. 25
Snge premum Lfe nsurance 12,139. 75
Tota purchase prce 2 ,250.00
The contract provded for an annua payment of 875 (Sy2 per cent
of 25,000), to whch amount woud be added such addtona dv-
dends as the company mght decare. The contract provded that the
prncpa sum ( 25,000) woud be pad upon the death of the annutant,
and a further provson permtted the annutant to take as a surrender
vaue ether a part or the whoe of such prncpa sum. The reguar
annua payment was made n 1938 and the annutant, decdng to reduce
hs contract by 50 per cent, took a parta surrender vaue of 12,500.
Inasmuch as the orgna purchase prce was aocated between the
annuty and fe nsurance features of the contract, the purchase prce
of the remanng porton of the contract has been reaocated, pro-
ratng the orgna aocaton n ne wth the percentage of wthdrawa,
as foows:
Prncpa sum 12, 500. CO
nnuty consderaton 7, 055.125
Snge premum Lfe nsurance , 0 9. 875
Reaocated purchase prce 13,125. 00
nnua annuty payment 437. 50
The aggregate of the annua payments made has not yet equaed the
orgna cost of the annuty porton of the contract, eavng what mght
be termed a free baance of 3,025, 7 , and the queston presented s
whether n appyng secton 22(b)2 of the Revenue ct of 1938 n the
ght of G. C. M. 395 (C. . III71 7 (1929)) the 3 per cent mta-
ton shoud be based upon the orgna annuty cost or the orgna
cost reduced to refect the canceaton of one-haf thereof as of the
date the canceaton was effectve.
It s the vew of the ureau that the concuson reached n G. C. M.
395 shoud be modfed by reason of the decson of the oard of Ta
ppeas n the case of Od Coony Trust Co. et a., ecutors of the
WU of verett Morss, v. Commssoner (37 . T. .,, 435), affrmed on
appea by the Crcut Court of ppeas, rst Crcut (102 ed. (2d),
380), and that of the Supreme Court of Oregon n the case of dou v.
sher (154 Ore., 548, 1 Pac. (2d), 423).
In the former case the oard of Ta ppeas hed that the sum
payabe at death under a contract substantay dentca wth the
contract nvoved n the nstant case was not nsurance under poces
taken out by the decedent upon hs own fe wthn the meanng of
secton 302(g) of the Revenue ct of 192 .
In the case of aou v. sher, supra, the Oregon Supreme Court
hed that a contract dentca wth the one here nvoved was not an
annuty contract. The queston before the Oregon court n that case
was the method of treatment, under the Oregon Intangbes Income
Ta ct of 1931, of the perodc payments made pursuant to such a
contract. Ths statute mposed a ta wth respect to the ta payer s
net ncome . The specfc provsons of the statute there
nvoved are substantay dentca wth the provsons of the edera
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8 22(b), rt. 22rb)(2)-2.
84
Income Ta cts here nvoved. (Compare secton 8(2)b, ch. 335,
page 57 , Oregon Laws of 1931, and secton 22(b)2 of the Revenue
ct of 1938 and the correspondng sectons of pror Revenue cts.) In
dsposng of the queston presented the Oregon Supreme Court sad:
It Is practcay Immatera what cognomen we attach to these contracts. The
aw w ook behnd the name of the contracts. We are Incned to the beef that
dscusson of the e act knd of poces or combnaton of poces does not assst In
sovng the probem nvoved. We thnk, however, that the contracts wth the
Penn Mutua Lfe Insurance Co., under whch pantff receved the payments In
queston, are not fe nsurance or annuty contracts wthn the meanng of sec-
ton 8, ch. 335 (page 57 ), Oregon Laws of 1931.

Under the provsons of these favorabe contracts evdencng the Investments,
the pantff receved a cash Income whch eft hs prncpa unmpared. The
recepts were ncome to hm n every sense of the word. e had the beneft of
the protecton of the State and ts aws, and t s entrey approprate that he
shoud contrbute by a ta upon the recepts n queston.
Under the contracts n the nstant case the nsurer agrees to pay a
stated sum per annum. owever, ths sum s based on the presumed
nterest to be earned on the net premum and s ncreased by such dv-
dends as may be aotted by the company out of ts surpus earnngs.
Therefore, the sum payabe under the contracts s not f ed n any rea
sense but s contngent upon the earnngs of the company. These
perodc payments do not e haust the capta or consderaton for the
contract. On the contrary, a sum equa to the consderaton s payabe
to the fe benefcary on reasonabe demand durng hs fe, or to a
person named by hm on hs death. urthermore, the fe benefcary
under ths contract does not surrender any substanta rghts when he
renqushes hs contract for the surrender vaue thereof, as s the case
of the nsured under an ordnary fe nsurance contract. Ths s so
for the reason that the consderaton for the contract does not change
notwthstandng an ncrease n age of the fe benefcary. or these
reasons t s beeved that the surrender vaue of such contract s un-
quafedy sub|ect to the demand of the fe benefcary to the same
e tent that a savngs bank depost s sub|ect to the demand of the
depostor.
Consderng the substance of the obgaton of the company ssung
the contracts and the rghts of the benefcares thereunder, t s the
opnon of ths offce that the contracts n queston are contracts for
the payment of the nterest or earnngs on a certan fund, and are not
fe nsurance or annuty contracts wthn the meanng of the prov-
sons of the Revenue ct of 1938 referred to heren and the corre-
spondng provsons of pror Revenue cts.
The nformaton returns, orm 1099, requred to be fed by nsur-
ance companes showng amounts pad to benefcares under the con-
tracts n queston shoud, therefore, show the entre amount of the
perodc payments receved by the benefcares thereunder.
In reachng the above concuson ths offce has gven consderaton
to the recent decson of the Unted States Crcut Court of ppeas
for the Thrd Crcut n the case of odne v. Commssoner (103 ed.
(2d), 982), certorar dened October 9, 1939. In that case the court
concuded that the amount receved upon the surrender of a contract of
the type here nvoved was receved under a fe nsurance
or annuty contract wthn the meanng of secton 22(b) 2 of the
Revenue ct of 1932 and that the resutnggan was ta abe as ord-
nary ncome. though the Od Coony Trust Co. case, supra, n-
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85 22(b), rt. 22(b) (4)-.
voved the status of a smar contract for edera estate ta purposes,
t s beeved that the decsons must be taken as representng confct-
ng vews by the two courts wth respect to the nature of these con-
tracts. Ths offce s of the opnon that the decson n the Od Coony
Trust Co. case represents the sounder constructon of such contracts
and shoud be foowed rather than the decson n the odne case.
G, C. M. 395 (C. . III-1, 7 (1929)) s revoked.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
rtce 22(b) (4)-: Interest upon State 1940-13-10213
obgatons. G. C. M. 21890
R NU CT O 1938.
There nterest-bearng State bonds were purchased by at a
dscount and, pursuant to provsons contaned n the bonds, they
were redeemed n 1938 at a premum and accrued nterest pror to
maturty, the accrued nterest and the dscount receved upon re-
dempton of the bonds consttute nterest upon the obgatons of a
State and are e empt from edera ncome ta under secton 22(b)4
of the Revenue ct of 1038. owever, the premum receved s not
Interest wthn the meanng of that secton but s a part of the
amount receved n e change for the bonds under secton 117(f)
of that ct.
n opnon s requested whether , the ta payer, who purchased
nterest-bearng State bonds at a dscount, the bonds provdng that
they are redeemabe at 104 and nterest on 30 days notce reazed
ta abe ncome upon the redempton of the bonds before maturty
pursuant to the terms thereof. The bonds n queston were redeemed
n 1938.
The ta payer contends that the amount of the dscount and premum
s part of the nterest n ths case, and, therefore, represents nonta abe
ncome under secton 22(b)4 of the Revenue ct of 1938, whch pro-
vdes for the e cuson from gross ncome and e empts from edera
ncome ta nterest upon the obgatons of a State.
In addton to the return of the cost upon redempton of the bonds,
the ta payer receved (1) accrued nterest, (2) dscount, and (3)
premum. The queston presented s whether such tems consttute
nterest upon the obgatons of a State.
Interest means the u amount whch one has contracted to pay for the
use of borrowed money. (Od Coony Raroad Co. v. Commssoner,
284 U. S., 552 see aso a Rver ectrc Lght Co. v. Commssoner,
23 . T. ., 1 8). The court and the oard of Ta ppeas n the
foregong cases dened the Commssoner s contenton that premum
receved by the ssung corporaton on the sae of ts bonds reduced the
effectve rate of nterest and consequenty reduced the aowabe
deducton from gross ncome of nterest on ndebtedness.
In the nstant case, the amount desgnated u nterest on the bonds
(cassfed as (1) above) whch had accrued at the date of redempton
ceary comes wthn the purvew of secton 22(b)4 and s nonta abe
ncome.
The amount desgnated dscount (cassfed as (2) above) may be
subdvded nto two casses, namey, earned dscount and unearned
dscount or, amortzed and unamortzed dscount, respectvey, were
a prvate ssung corporaton nvoved.
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122(b), rt. 22(b)(4)- .
8
The amount of dscount receved at maturty on Treasury bs
(T. D. 427 , 0. . III-2, 83 (1929)), on nonnterest-bearng State
bonds (G. C. M. 10452, C. . I-1, 18 (1932)), and on nterest-bear-
ng muncpa obgatons (I. T. 2 29, C. . I-1, 20 (1932)) s hed
to be nonta abe ncome, and each purchaser of the bond before
maturty s entted to apporton the amount of dscount at whch the
obgaton was ssued accordng to the perod of hs hodng. The
earned dscount n the present case s, therefore, nonta abe ncome
to the ta payer.
The courts have consdered the nature of dscount n cases nvovng
prvate corporatons and have hed t to be n the nature of deferred
nterest whch may be amortzed, for ncome ta purposes, over the
fe of the bonds by deductng the annua proporton thereof from the
ssung corporaton s gross ncome each year as accrued nterest.
(Western Maryand Raway Co. v. Commssoner, 83 . (2d), 95:
Chcago R. I. b P. Ry. Co. v. Commssoner, 13 . T. ., 988, affrmed
on ths pont, 47 . (2d) 990, certorar dened, 284 U. S., 18 ever-
ng v. Unon Pacfo Raroad Co., 293 U. S., 282.) On retrement of
such a bond ssue before maturty, the unamortzed dscount s de-
ductbe from gross ncome. (Great Western Power Co. of Caforna
v. Commssoner, 297 U. S., 543: San oaqun Lght Power Corpora-
ton v. McLaughn, 5 . (2d), 77 everng v. Unon Puho
Servce Co., 75 . (2d), 723.) u t the tme of redempton the bond-
hoder s pad the par vaue of the bond so that he s n effect pad
for the use of the money he ent the amount of the dscount (both
amortzed and unamortzed) . (San oaqum Lght Power
Corf oraton v. McLaughn, supra everng v. Unon Pubc Servce
Co., supra.) The nature of dscount on the purchase of bonds s not
atered by the fact that part of t may be receved by the purchaser
before the maturty of the bond ssue. Whenever pad, t s st n the
nature of deferred nterest or the amount whch one has con-
tracted to pay for the use of borrowed money. It s the opnon of
ths offce, therefore, that the unearned dscount receved by on the
redempton of the bonds s the same character of ncome as the earned
dscount and s, consequenty, nonta abe ncome.
Whe some cases have treated premum and dscount the same for
deducton purposes (ncudng San oaqun Lght Power Corf ora-
ton v. McLaughn, supra, and everng v. Unon Pubc Servce
Co., supra), there was no necessty n those cases, as there s here, to
nqure whether there were any dfferentatng characterstcs between
the two. Nevertheess, there s a vta dstncton n the nature of the
two whch has been recognzed n a case where one prvate corporaton
purchases the assets of another and assumes ts abtes. In such a
case, the successor corporaton s not permtted to deduct from ts gross
ncome the unamortzed dscount on the bonds of the predecessor
corporaton, but t may deduct a premum pad to retre such bonds,
athough the bond ndenture tsef provded for such redempton.
The reason underyng ths dfferentaton s set out n mercan Gas
ectrc Co. v. Unted States (17 . Supp., 151), wheren the court
bad n part:
The rght to a deducton on account of Its bonds havng been sod at a dscount
orgnated wth the rgnan Company the Issung corporaton tsef. It came
nto e stence when the bonds were sod, but we have hed that ths rght dd not
pass to a successor company whch acqured the property of the frst corporaton
by purchase or transfer and assumed ts abtes. On the other hand, the rght
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87
23(e), rt. 23(e)-.
to the deducton by reason of havng redeemed the bonds at a premum was not
brought nto e stence by the rgnan Company. The rght to ca the bonds at
a specfed prce was one that ran wth the bonds and beonged to any party who
assumed ther payment. It was an entrey dfferent rght from that whch arose
by reason of havng ssued the bonds at a dscount.
The rght to cam a deducton on account of havng redeemed the bonds at
a prce above par dd not come nto e stence unt the bonds were so redeemed
and, as we thnk, beonged to the corporaton makng the payment.
It s the opnon of ths offce that the premum pad to upon
redempton of the bonds by the State s not nterest wthn the
meanng of secton 22(b)4, snce t s not an amount whch one
has contracted to pay for the use of borrowed money. ad the
bonds not been redeemed pror to maturty, the ta payer woud have
receved no premum. It was pad by reason of the acton of the
State n cang the bonds before maturty and not as a sum for the
use of the money. Its payment n such case was for the renqush-
ment of the obgaton so that no further nterest need be pad
thereon rather than for the use of the borrowed money. To ncrease
the stpuated nterest n the bond contract, ncudng the dscount,
by the amount of the premum to ascertan the amount of the
nterest e empted by secton 22(b)4, supra, on the theory that
the premum must necessary be consdered to arrve at the effec-
tve rate of nterest woud be contrary to the ordnary meanng
of the word nterest as used n the statute. (Od Coony Raroad
Co. v. Commssoner, supra.)
Secton 117(f) of the Revenue ct of 1938 provdes as foows:
Retrement or onds, tc. or the purposes of ths tte, amounts receved
by the hoder upon the retrement of bonds, debentures, notes, or certfcates
or other evdences of ndebtedness ssued by any corporaton (ncudng those
ssued by a government or potca subdvson thereof), wth nterest coupons
or n regstered form, sha be consdered as amounts receved n e change
therefor.
The bonds n the present case fa under secton 117(f), supra.
The premum must, therefore, be consdered as an amount receved
n e change and, consequenty, ta abe as a capta gan rather than
as ordnary ncome.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
S CTION 23(e). D DUCTIONS ROM GROSS INCOM :
LOSS S Y INDI IDU LS.
rtce 23(e)-: Losses by ndvduas. 1940-8-10178
( so Secton 23(g), rtce 23(g)-.) I. T. 3351
R NU CT O 1938.
Where bank stock was determned to be worthess In a ta nbe
year pror to the year 1S138, and the stockhoders, who keep ther
accounts and fe ther returns on the cash recepts and dsburse-
ments bass, pad ther statutory abty (so-caed doube ab-
ty) n the year 1938, such payments consttute osses to whch
secton 23(e) of the Revenue ct of 1938 appes and not osses
wthn the purvew of secton 23(g) and secton 23(g)2 of that
ct
dvce s requested whether payments n 1938 of ther statutory
abty (so-caed doube abty) by bank stockhoders, who keep
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25, rt. 25-3.
83
ther accounts and fe ther returns on the cash recepts and dsburse-
ments bass, consttute osses to whch secton 23(e) of the Revenue
ct of 1938 appes or osses wthn the purvew of secton 23(g) 1
and secton 23(g) 2 of that ct.
The nqury reates to the stock of the M Trust Co. whch became
worthess n 1934. Deductons on account of such worthessness have
been aowed n edera ncome ta returns for 1934 under secton
23(e) of the Revenue ct of 1934.
Secton 23 of the Revenue ct of 1938 reads n part as foows:
Sec. 23. Deductons bom Gross Income.
In computng net Income there sha be aowed as deductons:

(e) Losses by Indvduas. In the ease of an Indvdua, osses sustaned
durng the ta abe year and not compensated for by nsurance or otherwse
(1) If Incurred n trade or busness or
(2) f ncurred In any transacton entered Into for proft, though not con-
nected wth the trade or busness .

(g) Capta Losses
(1) Lmtaton. Losses from saes or e changes of capta assets sha be
aowed ony to the e tent provded n secton 117.
(2) Sbcubtes eecomno wobthess. If any securtes (as defned n para-
graph (3) of ths subsecton) become worthess durng the ta abe year and are
capta assets, the oss resutng therefrom sha, for the purposes of ts tte,
be consdered as a oss from the sae or e change, on the ast day of such
ta abe year, of capta assets.
It s hed that where bank stock was determned to be worthess n
a ta abe year pror to the year 1938. payments n 1938 of ther statu-
tory abty (so-caed doube abty) by stockhoders, who keep
ther accounts and fe ther returns on the cash recepts and dsburse-
ments bass, consttute osses to whch secton 23(e) of the Revenue
ct of 1938 appes and not osses wthn the purvew of secton
23(g) 1 and secton 23(g)2 of that ct. (See I. T. 2843, C. . T -1,
77 (1935).)
S CTION 23(g). D DUCTIONS ROM GROSS
INCOM : C PIT L LOSS S.
rtce 23(g)-: Capta osses.
R NU CT O 1938.
Payments of statutory abty by bank stockhoders where stock
became worthess n pror ta abe year. (See I. T. 3351, page 87.)
S CTION 25. CR DITS O INDI IDU L
G INST N T INCOM .
rtce 25-3: mount of persona e empton aowabe.
R NU CT O 1938.
Ctzen of Unted States entted to benefts of secton 251. (See
I. T. 33 3, page 92.)
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80
181, rt. 131-1.
P RT I . CCOUNTING P RIODS ND M T ttDS O
CCOUNTING.
S CTION 44. INST LLM NT SIS.
rtce 44-5: Gan or oss upon dsposton of
nstament obgatons.
R NU CT O 1038.
Reguatons 101 amended. (See T. D. 4972, page 47.)
P RT R TURNS ND P YM NT O T .
S CTION 55. PU LICITY O R TURNS.
R NU CT O 1938.
Reguatons governng the nspecton by the Commttee on duca-
ton and Labor, Unted States Senate, of ncome, profts, and capta
rtock ta returns and returns of empoyment ta on empoyers. (See
T. D. 49 2, page 49.)
SU TITL C SUPPL M NT L PRO ISIONS.
SUPPL M NT . COMPUT TION O N T INCOM .
S CTION 114. SIS OR D PR CI TION
ND D PL TION.
rtce 114-1: ass for aowance of depredaton
and depeton.
R NU CT O 5088.
Deveopment e penses n computng depeton based on a percent-
age of ncome n the case of o and gas wes. (See G. C. M. 2192 ,
page 157.)
SUPPL M NT C CR DITS G INST T .
S CTION 131. T S O OR IGN COUNTRI S
ND POSS SSIONS O UNIT D ST T S.
rtce 131 1: nayss of credt for ta es.
R NU CT O 1938.
L T. 3288 (C. . 1939-1 (Part 1), 139) modfed. (See I. T. 3385,
page 103.)
28220 40 4
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S 102, rt. 1 2-1. 90
SUPPL M NT D. R TURNS ND P YM NT O T .
I f
S CTION 143. WIT OLDING O T T SOURC .
rtce 143-1: Wthhodng ta at source.
R NU CT O 1938.
Payments by the Unted States under certan cts of Congress
to nonresdent aen owners of and ocated n the Unted States.
(See I. T. 3379, page 1 .)
SUPPL M NT . ST T S ND TRUSTS.
S CTION 1 2. N T INCOM .
rtce 1 2-1: Income of estates and trusts. 1940-25-10297
G. C. M. 22034
R NU CT O 1938.
Dstrbutons of ncome, ncudng gans on the sae of capta
assets, to benefcares of the estate of by the e ecutor of the
estate durng the perod of admnstraton of the estate, the w
makng no provson for dstrbutons of ncome durng the perod
of admnstraton, the State aw not provdng for such dstrbuton,
and the ncome beng suffcent to cover the dstrbutons n queston,
are deductbe by the estate for edera ncome ta purposes as
ncome propery pad under the provsons of secton 2(c) of
the Revenue ct of 1038. Such ncome s ta abe to the benef-
cares. Dstrbutons of ncome by the e ecutor durng the perod
of admnstraton of the estate to testamentary trustees arc not
deductbe by the estate for edera ncome ta purposes as ncome
propery pad to any egatee, her, or benefcary under the pro-
vsons of secton 1 2(c) of the Revenue ct of 15)38. Such ncome
Is ta abe to the estate.
dvce s requested whether n the case of the estate of , whch
was n process of admnstraton durng the year 1938, the ncome,
ncudng gans on the sae of capta assets reazed and dstrbuted
by the e ecutor n the year 1938, s ta abe to the estate or to the
dstrbutees.
ded testate on pr , 1938, a resdent of the State of Ca-
forna. fter provdng for severa specfc bequests and the payment
of hs debts, the testator drected that the resdue of the estate be
dvded nto a specfed number of equa parts and dstrbuted to cer-
tan named persons. Durng the perod from pr , 1938, to De-
cember 31, 1938, the estate had a net ta abe ncome of 17a doars,
ncudng capta gans of 13a doars derved from the sae of corpus
of the estate. On November , 1938, the probate court ordered a
payment of 55. doars to resduary egatees, the order e pressy
provdng that 17a doars be pad out of ncome and the baance out
of corpus. Payments were made by checks dated November , 1938,
and on the ncome ta return fed for the estate a deducton was
camed for the amount of the payments from ncome. s w made
no provson for the dstrbuton of ncome durng the perod of ad-
mnstraton. urthermore, wth the e cepton of secton 1000 of the
Probate Code of Caforna, whch permts any her, devsee, or
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91
1 5, rt. 1 5-1.
egatee to petton for a dstrbuton after four months, the code of
the State s sent regardng the dstrbuton of ncome of an estate
durng admnstraton.
Secton 1 2(c) of the Revenue ct of 1938 provdes n part as
foows:
In the case of Income receved by estates of deceased persons durng the perod
of admnstraton or settement of the estate there sha be aowed as
an addtona deducton n computng the net ncome of the estate the
amount of the ncome of the estate for Its ta abe year, whch s prop-
ery pad or credted durng such year to any egatee, her, or benefcary, but
the amount so aowed as a deducton sha be ncuded In computng the net
Income of the egatee, her, or benefcary.
In G. C. M. 459 (C. . II-2,133 (1928)) t was hed (syabus):
Where a w s sent as to the dsposton of ncome receved durng the
perod of admnstraton, the aws of the partcuar State nvoved must be
consdered n order to determne whether current ncome or gan on saes of
property may be propery pad or credted to resduary or other egatees
durng any gven ta abe year.
It was stated n the ast paragraph of that memorandum that Un-
ess the w or the aws of the State make such payment or credt
mproper the amount pad or credted s deductbe n computng the
net ncome of the estate.
Under the facts n the present case, t s the opnon of ths offce
that the dstrbutons drecty to the benefcares of ncome, ncud-
ng capta gans, by the e ecutor of the estate of durng the perod
of admnstraton of the estate are deductbe by the estate for ed-
era ncome ta purposes as ncome propery pad under the prov-
sons of secton 1 2(c) of the Revenue ct of 193S. Such ncome s
ta abe to the benefcares.
The w of not ony drects that portons of the resduary estate
be pad drecty to certan named benefcares but t drects that a
part of such estate be pad to certan named persons n trust for the
beneft of others. Wth respect to the dstrbuton of estate ncome
to trustees, t was hed n Wege et a. v. Commssoner, 9 ed. (2d),
3S7, that the resdue of an estate, ncudng ncome, s receved by a
testamentary trustee as a bequest or devse of trust corpus and, there-
fore, the payment of such ncome s not deductbe by an estate under
the provsons of secton 102(c) of the Revenue ct of 1928.
ppyng the rue ad down n the Wege case, supra, the dstr-
butons of ncome to testamentary trustees by the e ecutor of the
estate of durng the perod of admnstraton are not deductbe by
the estate for edera ncome ta purposes as ncome propery pad
to any egatee, her, or benefcary under the provsons of secton
1 2(c) of the Revenue ct of 1938. Such ncome s ta abe to the
estate.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
S CTION 1 5. MPLOY S TRUSTS.
rtce 1 5-1: mpoyees trusts.
R NU CT O 1938.
Partnershps of attorneys, physcans,etc. (SeeI. T. 3350,page 4.)
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251, rt. 251-1.
92
rtce 1 5-1: mpoyees trusts.
,, R NU CT OP 1938.
Reguatons 101 amended. (See T. D. 4973, page 5.)
SUPPL M NT . POSS SSIONS O T UNIT D ST T S.
S CTION 251. INCOM ROM SOURC S WIT IN
POSS SSIONS O UNIT D ST T S.
rtce 251-1: Ctzens of the Unted States 1940-14-10219
and domestc corporatons dervng ncome I. T. 33 3
from sources wthn a possesson of the
Unted States.
( so Secton 25, rtce 25-3.)
R NU CT O 1938.
Where no benefts are conferred by secton 2 1 of the Revenue
ct of 1038, the ta payer s entted to fe hs edera ncome ta
return and compute the ta thereon wthout regard to that secton.
I. T. 3327 (C. . 1939-2, 173) revoked.
Reconsderaton as been gven to I. T. 3327 (C. . 1939-2, 173),
n whch t was hed that the provsons of secton 251(f) of the
Revenue ct of 1938 precude the aowance to a ctzen of the Unted
States entted to the benefts of secton 251 of a persona e emp-
ton of more than 1,000, and that a ta payer entted to the bene-
fts of secton 251 of the Revenue ct of 1938 may not wave such
benefts n order to obtan credt for the persona e empton pre-
scrbed n secton 25(b) of that ct.
In the case on whch I. T. 3327, supra, was based, the ta payer s
ncome for two months of the year met the rec|urements of secton
251 of the Revenue ct of 1938, and he was entted to the beneft of
e empton from edera ncome ta on hs saary for that perod. If
he had reported hs entre ncome for the year receved from sources
both wthn and wthout the Unted States as ta abe ncome and
camed the fu persona e empton aowed by secton 25(b) of the
Revenue ct of 1938, the ta woud have been ess than the ta due
by camng the benefts of secton 251.
Secton 251 of the Revenue ct of 1938 provdes n part as foows:
(a) Genera Rue. In the case of ctzens of the Unted States or domestc
corporatons, satsfyng the foowng condtons, gross ncome means ony gross
ncome from sources wthn the Unted States
(1) If 80 per centum or more of the gross ncome of such ctzen or
domestc corporaton (computed wthout the beneft of ths secton), for the
3-year perod mmedatey precedng the cose of the ta abe year (or for
such part of such perod mmedatey precedng the cose of such ta abe
year as may be appcabe) was derved from sources wthu a possesson
of the Unted States and

(3) If, n case of such ctzen, 50 per centum or more of hs gross n-
come (computed wthout the beneft of ths secton) for such perod or
such part thereof was derved from the actve conduct of a trade or bus-
ness wthn a possesson of the Unted States ether on hs own account
or as an empoyee or agent of another.

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5 251, rt. 251-2.
(f) Credts ganst Net Income. ctzen of the Unted States entted to
the benefts of ths secton sha be aowed a persona e empton of ony 1,C00
and sha not be aowed the credt for dependents provded In secton 2o(u) (2).
The rung pubshed as I. T. 8327 was based on the concuson
that the provsons of secton 251(f), supra, are mandator -. That
concuson -was reached by a tera nterpretaton of the statute, . e.,
f a ctzen satsfes the condtons of secton 251(a), then he s
entted to the benefts of the secton and, hence, s entted to a
persona e empton of ony 1,000. It shoud be noted, however, that
n order for secton 251(f) to appy, the ctzen must be entted to
the benefts of the secton. To satsfy the condtons of sec-
ton 251(a) s not necessary to become entted to benefts. In
order for secton 251(f) to appy, t may propery be sad that the
ta payer must be entted to some actua beneft by reason of the
provsons of secton 251. ven a tera nterpretaton of the secton
does not compe the concuson that because a ta payer satsfes the
condtons of secton 251(a) he becomes sub|ect to the provsons of
secton 251(f). though secton 251(a) provdes that gross ncome
means ony gross ncome from sources wthn the Unted States as to
ctzens satsfyng certan condtons, and upon ts face permts of no
eecton, secton 251(f) ndcates that secton 251(a) s ntended to
confer benefts, and where no benefts are thereby conferred, t s
reasonabe to concude that secton 251(a) does not necessary
operate.
Upon reconsderaton of the queston, t s hed that where no
benefts are conferred by secton 251 of the Revenue ct of 1938, the
ta payer s entted to fe hs edera ncome ta return and compute
the ta thereon wthout regard to that secton. ccordngv,
I. T. 3327 (C. . 1939-2, 173) s revoked.
rtce 251-2: Income receved wthn the 1940- -101 7
Unted States. I. T. 3348
R NU CT O 1938.
Pay due offcers of the Unted States rmy actuay In the
Phppne Isands does not become ncome receved wthn the
Unted States merey because, Instead of beng pad to the offcer
In the Phppne Isands, t s, for convenence, upon order of the
payee, transmtted drect by the fnance offcer n the Phppne
Isands to a bank or nsurance company n the Unted States to be
credted to the account of the payee.
dvce s requested whether, under the crcumstances heren set
forth, certan portons of the pay of , an offcer n the Unted States
rmy statoned n the Phppne Isands, shoud be treated as havng
been receved wthn the Unted States for the purposes of secton
251 of the Revenue ct of 1938.
s gross ncome for 1938 conssted of a saary of 48.r doars for
servces rendered n the Phppne Isands to the Unted Sates
rmy. The saary was payabe n the Phppnes n monthy nsta-
ments. Under the reguatons of the War Department, the ta payer
was entted to have hs saary, or any part thereof, pad by check
of the dsbursng offcer to a desgnated bank n the Unted States
to be credted to hs account, or to have any specfed porton pad
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18.
94
by check drect to nsurance concerns to cover nsurance premums.
In accordance wth the ta payer s request, the Unted States Govern-
ment remtted 2 doars per month, or a tota of 24.r doars durng
1938, of hs saary to nsurance concerns n the Unted States for the
ta payer s account and doars per month to the M Natona
ank at the cty of R, ansas, for the ta payer s account. The
baance of the ta payer s saary was pad to hm n the Phppnes.
The monthy amounts remtted to the bank for the ta payer s account
were covered by checks drawn n the Phppnes. The checks were
maed by the dsbursng offcer of the Unted States rmy n the
Phppnes drect to the bank n the Unted States. The ta payer
dd not ndorse the checks nor have physca possesson of them.
Transactons of the nature referred to above are authorzed by
rmy reguatons for the convenence of the Government and offcers
concerned. Payments of ths nature are made by oca fnance offcers
or vouchers e ecuted by the offcer beng pad. Ths procedure has
been authorzed and foowed by the War Department for many years
at a statons n the Unted States and n foregn countres for the
convenence of the rmy personne.
In the nstant case, the ta payer coud have taken the cash n the
Phppnes and forwarded a check to the bank n the Unted States.
e was n the Phppnes when the money was earned and when the
payments were made, and the dsbursng offcer was aso n the Php-
pnes. s a matter of convenence for the ta payer and the Govern-
ment, the procedure adopted by the War Department was used. The
ta payer, under the procedure, authorzed the dsbursng offcer to
forward the check to the desgnated bank or to other persons. The
dsbursng offcer was carryng out hs duty of payng the offcer s
saary n accordance wth the rmy reguatons whch have been
approved by the Comptroer Genera of the Unted States. Whe
t s true that, the dsbursng offcer may not be regarded as the agent
of the rmy offcer wthn the ordnary ega concept of agency, as
between prvate persons, hs acts n the performance of hs offca
dutes wth respect to the payment of the offcer s saary amounted,
n effect, to acts of an agent n that t was the offca duty of the
dsbursng offcer to pay the saary n the manner drected by the
offcer under authorty of the rmy reguatons.
It s hed that the pay of offcers n the Unted States rmy actuay
n the Phppne Isands does not become ncome receved wthn the
Unted States merey because, upon order of the payee, t s trans-
mtted by the fnance offcer n the Phppne Isands to a bank or
nsurance company n the Unted States to be credted to the account
of the payee.
TITL . MISC LL N OUS PRO ISIONS.
S CTION 818. T S O INSOL NT N S.
R NU CT OP 1938.
Reguatons reatng to assessment and coecton of ta es of nso-
vent banks and trust companes. Treasury Decson 4882 (C. .
1939-1 (Part 1), 154) revoked. (See T. D. 4958, page 74.)
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95
14, rt. 14-1.
INCOM T RULINGS. P RT II.
R NU CTS O 1937 ND 193 .
SU TITL . G N R L PRO ISIONS.
P RT UR T S O T .
CTION 14. SURT ON UNDISTRI UT D PRO ITS.
btct e 14-1: Surta on undstrbuted profts 1940-13-10214
of corporatons. I. T. 33 1
R NU CT O 103 .
corporaton In computng Its ad|usted net Income for 193
and 1937 Is entted to a credt under secton 14(a) 1( ) of the
Revenue ct of 193 for the amount receved as nterest on bonds
of the ome Owners Loan Corporaton Issued under the ome
Owners Loan ct of 1033, as amended. L T. 2873 (O. . I -1, 51
(1935)) not appcabe.
dvce s requested whether I. T. 2873 (C. . I -1, 51 (1935)).
wheren t was hed that nterest on obgatons of the ome Owners
Loan Corporaton ssued under the ome Owners Loan ct of 1933,
as amended, s not e empt from surta , s appcabe n determnng,
under secton 14 of the Revenue ct of 193 , the undstrbuted profts
surta abty of a corporaton.
Secton 14 of the Revenue ct of 193 provdes n part as foows:
(a) Defntons. s used In ths tte
(1) The term ad|usted net Income means the net ncome mnus the
ram of

( ) The credt provded In secton 2 (a), reatng to nterest on certan
obgatons of the Unted States and Government corporatons.
Secton 2 of the ct, whch reates to credts of corporatons,
provdes n part as foows:
In the case of a corporaton the foowng credts sha be aowed to the
e tent provded n the varous sectons mposng ta
(a) Interest on obgatons of the Unted States and ts nstrumentates.
The amount receved as nterest upon obgatons of the Unted States or of
corporatons organzed under ct of Congress whch s aowed to an ndvdua
as a credt for purposes of norma ta by secton 25(a) (1) or (2).
Secton 25 of the ct, whch reates to credts of ndvduas
aganst net ncome, provdes n part as foows:
(a) Credts for norma taw ony. There sha be aowed for the purpose
of the norma ta , but not for the surta , the foowng credts aganst the
net Income:
(1) Interest on Unted States obgatons. The amount receved as Interest
upon obgatons of the Unted States whch s ncuded n gross ncome under
ecton 22.
(2) Interest on obgatons of nstrumentates of the Unted States. The
amount receved as nterest on obgatons of a corporaton organzed under
ct of Congress, f ( ) such corporaton Is an Instrumentaty of the Unted
States and ( ) such nterest s ncuded n gross ncome under secton 22
and (C) under the ct authorzng the ssue thereof, as amended and suppe-
mented, such nterest s e empt from norma ta .
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22(a), rt. 22(a)-7.
0
Secton 4( ) rtf the ome Owners Loan ct of 1933 (48 Stat,
128) drected the edera ome Loan ank oard to create a
corporaton to be known as the ome Owners Loan Corporaton,
whch sha be an nstrumentaty of the Unted States .
Secton 4(c) of the ome Owners Loan ct of 1933, supra, au-
thorzes the ome Owners Loan Corporaton to ssue bonds, and
provdes that:
The bonds Issued by the Corporaton under ths subsecton sha
be e empt, both as to prncpa and nterest, from n ta aton (e cept sur-
ta es, estate, nhertance, and gft ta es) now or hereafter mposed by the
Unted States or any Dstrct, Terrtory, dependency or possesson thereof, or
by any State, county, muncpaty, or oca ta ng authorty.
In computng the ad|usted net ncome of a corporaton for the
purpose of the surta on undstrbuted profts mposed by secton 14
of the Revenue ct of 193 , the corporaton s entted under secton
2 (a) of that ct to the same credt aowed an ndvdua under
secton 25(a) (1) and (2) of a nterest on bonds of the ome
Owners Loan Corporaton whch, under the ome Owners Loan ct
of 1933, as amended, authorzng the ssue thereof, s e empt from
norma ta .
In vew of the foregong, t s hed that a corporaton n computng
ts ad|usted net ncome for the ta abe years 193 and 1937 s
entted to a credt under secton 14(a)( ) of the Revenue ct
of 193 for the amount receved as nterest on bonds of the ome
Owners Loan Corporaton, rrespectve of the provsons of the
ome Owners Loan ct of 1933, as amended, whch does not e -
empt the nterest on such bonds from surta es. The rung pub-
shed as I. T. 2873, supra, s, therefore, not appcabe n determnng,
under secton 14 of the Revenue ct of 193 , the undstrbuted profts
surta abty of a corporaton.
P RT II. COMPUT TION O N T INCOM .
S CTION 22(a). GROSS INCOM : G N R L
D INITION.
rtce 22(a)-3: Compensaton pad other than n cash.
R NU CT O 193 .
Reguatons 94 amended. (See T. D. 49 5, page 13.)
rtce 22(a)-7: Gross ncome of farmers.
R NU CT O 1938.
Payments by the Unted States under certan cts of Congress
to nonresdent aen owners of and ocated n the Unted States.
(See I. T. 3379, page 1 .)
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97 1 t| o( ).
P RT I . CCOUNTING P RIODS ND M T ODS O CCOUNTING.
S CTION 44. INST LLM NT SIS.
rtc|: 44-5: Gan or oss upon dsposton of
nstament obgatons.
R NU CT O 1938.
Reguatons 94 amended. (See T. D. 4972, page 47.)
P RT W-R TURNS ND P YM NT O T .
S CTION 55. PU LICITY O R TURNS.
R NU CT O 193 .
Reguatons governng the nspecton by the Commttee on duca-
ton and Labor, Unted States Senate, of ncome, profts, and capta
tock ta returns and returns of empoyment ta on empoyers. (See
T. D. 49 2, page 49.)
SU TITL C SUPPL M NT L PRO ISIONS.
SUPPL M NT . R T S O T .
S CTION 101(1 ). MPTIONS ROM T
ON CORPOR TIONS.
1940-17-10240
G. CM. 21323
R NU CTS O 1934 ND 193 .
Contrbutons by the M Company to the mpoyees eneft sso-
caton, composed of empoyees of the M Company, do not consttute
amounts coected from a member, and the assocaton s not en-
tted to e empton from edera Income ta aton under the prov-
sons of secton 101(1 ) of the Revenue cts of 1934 and 193 where
ess than 85 per cent of the ncome of the assocaton conssted of
amounts coected from members.
n opnon s requested whether the mpoyees eneft ssocaton
of the M Company s entted to e empton from edera ncome ta -
aton under the provsons of secton 101(1 ) of the Revenue cts of
1934 and 193 . That secton provdes for the e empton from ncome
ta of
ountary empoyees benefcary assocatons provdng for the payment of
fe, sck, accdent, or other benefts to the members of such assocaton or ther
dependents, It ( ) no part of ther net earnngs nures (other than through such
payments) to the beneft of any prvate sharehoder or ndvdua and ( ) S5
per centum or more of the ncome conssts of amounts coected from members
for the soe purpose of makng such payments and meetng e penses.
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5 101(1 ).
OS
The mpoyees eneft ssocaton s a vountary, ncorporated
assocaton, organzed under the aws of the State of R, to admnster
a fund wthout proft and at the owest possbe cost to ts empoyee
members, and to pay dsabty benefts to them n case of sckness and
accdent, and death benefts to ther desgnated benefcares n case of
death (e cept a accdents, dsabtes, and death cams compensated
under the workmen s compensaton aws or the workmen s occupatona
dseases act). In the reguatons of the assocaton t s stated that
the mpoyees eneft ssocaton conssts of the M Company and
affated companes operatng n the Unted States and Canada and
such empoyees of those companes as eect to |on theren. The regu-
atons provde that egnnng anuary 1,193 , the M Company w
contrbute to the fund an amount equa to twenty per cent (20 ) of
a contrbutons pad by members. The management and contro of
the assocaton are f ed n a board of trustees, the trustees beng
chosen one-haf by the M Company and one-haf by the empoyee
members. The company s defned as meanng the M Company
and affated companes operatng n the Unted States and Canada,
Durng the ta abe years 1935, 193 , and 1937, the assocaton s
ncome was derved from the foowng sources:
1938
1938
1937
Contrbutons by empoyee members
Doar .
1, 037.r
:
50

Doar .
1. 4R4
144|
292
97
I
Doar .
2.3241
180
4 4
7
12
Interest
Contrbuton bv the M Company
Profts on saes of securtes
Dvdends
Tota
1. 275
1,083. 75
1. ff S
1, 98. 30
. 7
2. 53 95
85 per cent of ncome equas
It s the contenton of the assocaton that the M Company s a
member of the assocaton wthn the meanng of secton 101(10),
supra, and that the amounts pad n by that company shoud be con-
sdered as amounts coected from members wthn the meanng of
that secton and added to contrbutons by empoyee members for the
purpose of appyng the 85 per cent mtaton.
Secton 101(1 ) had ts ncepton as secton 103(1 ) of the Revenue
ct of 1928. The wordng was dentca n the Revenue ct of 1928
and a subsequent Revenue cts. The report of the Commttee on
Ways and Means on the revenue b of 1928 ( . R. Report No. 2,
December 7, 1927), at page 17, reads n part as foows:
ountary empoyees benefcary assocatons provdng for the payment of
fe, sck, accdent or other benefts to members and ther dependents are com-
mon to-day and t appears desrabe to provde specfcay for ther e empton
from the ordnary corporaton ta . Consequenty, It s provded n secton
103(15) that such assocatons sha be e empt f they provde for the payment
of fe, sck, accdent, or other benefts to members of the assocaton or ther
dependents, and f no part of ther net earnngs nures to the beneft of any
prvate sharehoder or ndvdua and f S5 per centum or more of the net ncome
s coected from the members for the purpose of payng e penses and meetng
osses.
The Commttee on nance of the Senate made a carfyng amend-
ment to the above paragraph, whch dd not, however, change the
purpose of the ouse b. (Senate Report No. 9 0, Seventeth
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99
111, rt. 114-1.
Congress, frst sesson, page 25 (1928).) (Seesecton, 101 (1 ),supra,
for the mnor dfferences n the anguage above quoted and the
anguage of the provson as fnay approved.)
It s the opnon of ths offce that the anguage used by the com-
mttees of both the ouse and Senate and the eventua wordng of
secton 101(1 ) show that Congress was assocatng the word mem-
bers wth empoyee members, that s, wth those ndvduas who
were to receve payment of fe, sck, accdent, or other benefts.
ad Congress ntended that the word members shoud appy to
empoyers aso, the word empoyers coud easy have been nserted.
urthermore, the wordng of secton 101(1 ), supra, eads to the
concuson that the same nterpretaton must be gven to members
throughout the entre secton.
In the present case there s no bass for hodng that the M Com-
pany, the empoyer, s a member of the assocaton wthn the
meanng of secton 101(1 ), supra. No benefts are ever payabe to
the company, but the empoyees of the company, who |on the assoca-
ton, receve the benefts of the assocaton as a matter of rght. They
are the ony members thereof.
It s, therefore, the opnon of ths offce that the contrbutons made
by the M Company to the mpoyees eneft ssocaton do not con-
sttute amounts coected from a member under secton 101(1 ),
supra. Such amounts, however, consttute a part of the ncome of the
assocaton wthn the meanng of that secton and must be ncuded n
determnng whether 85 per cent or more of the ncome of the
assocaton conssts of amounts coected from ts members. (See
generay ppea of Phadepha and Readng eef ssocaton,
4 . T. ., 713.)
The evdence n the-nstant case shows that durng each of the
ta abe years 1935, 193 , and 1937 ess than 85 per cent of the ncome
of the assocaton conssted of amounts coected from ts members.
Therefore, the mpoyees eneft ssocaton of the M Company s
not entted to e empton under secton 101(1 ) of the Revenue cts
of 1934 and 193 .
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
SU TITL C SUPPL M NT L PRO ISIONS.
SUPPL M NT . COMPUT TION O N T INCOM .
S CTION 114. SIS OR D PR CI TION
ND D PL TION.
rtce 114-1: ass for aowance of deprecaton
and depeton.
R NU CT O 1038.
Deveopment e penses n computng depeton based on a percent-
age of ncome n the case of o and gas wes. (See G. C. M. 2192 ,
page 157.)
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11 .
100
S CTION 11 . CLUSIONS ROM GROSS INCOM .
1940-24-10289
G. C. M. 220 5
R NU CT O 193 .
ctzen of the Unted States must be absent from the Unted
States for more than s caendar months to come wthn the e emp-
ton provded by secton 11 (a) of the Revenue ct of 19315. rac-
tona parts of months from severa trps may not be added to make
whoe caendar months, snce whoe caendar months must consst
of consecutve days of absence from the Unted States n any one
trp.
G. C. M. 121G7 (C. . II-2, 12 (1933)) modfed.
n opnon s requested whether n 1037 , a ctzen of the Unted
States, was a bona fde nonresdent of the Unted States for more
than s months durng the ta abe year wthn the meanng of
secton 11 (a) of the Revenue ct of 193 , whch provdes n part
as foows:
In addton to the tems specfed n secton 22(b), the foowng tems sha
not be ncuded In gross ncome and sha be e empt from ta aton under ths
tte:
(a) arned ncome from sources cthout Unted States. In the case of an
Indvdua ctzsn of the Unted States, a bona fde nonresdent of the Unted
States for more than s months durug the ta abe year, amounts receved
from sources wthout the Unted States f such amounts woud con-
sttute earned ncome as defned n secton 25(a) If receved from sources
wthn the Unted States .
The ta payer ( ) cams e empton under secton 11 (a), supra,
for certan portons of hs 1937 ncome as representng earnngs from
sources wthout the Unted States. e contends that be was a bona
fde nonresdent of the Unted States for more than s months
durng the ta abe year because of four absences from the Unted
States consstng of two trps to urope and two trps to Canada.
In computng the tme e was absent from the Unted States, the
ta payer has added the hours and mnutes of each perod of hs
absence. The aggregate tme of hs absence so computed e ceeds
months by 22 hours and 30 mnutes.
The specfc nqury presented n the nstant case reates to the
proper bass upon whch the -month statutory perod shoud be
computed.
Ths offce has hed that mere physca absence from the Unted
States s suffcent to consttute a ta payer a bona fde nonresdent
of the Unted States for the purposes of the e empton. (S. M.
544 , C. . -, 49 (192 ).) It has aso been hed that the absence
need not be contnuous, but may be made up of severa trps where
the perods of absence from the Unted States amount n the aggre-
gate to more than s months durng the ta abe year. (G. C. M.
9S48, C. . -2, 178 (1931).)
s prevousy ponted out, the ta payer has added hours and
mnutes of hs absence from the Unted States durng the ta abe
year n order to brng hmsef wthn the e empton provded by
secton 11 (a), supra. To crme wthn that e empton, t s neces-
sary for the ta payer to be absent from the Unted States for more
than s months durng the ta abe year. edera courts, as we as
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101
f 11 .
State courts, have consstenty hed that where the term month
s empoyed n statutes (and t does not appear to have been used
here n a dfferent sense), t denotes a caendar month, that s, a
perod termnatng wth the day of the succeedng month numer-
cay correspondng to the day of ts begnnng, ess one. (Guaranty
Trust Safe Depost Co. v. Green Cove Sprngs Merose Raroad
Con 139 U. S., 137 In re Custer, 5 ed. (2d), 718 Segeschffer v.
Penn Mut. Lfe Ins. Co. et a, 248 ed., 22 Saos v. Swft, 25 a.
pp., 148 102 S. ., 8 9.)
Ths offce s, therefore, of the opnon that to come wthn the
e empton provded by secton 11 (a) a ta payer must be absent
from the Unted States for more than s caendar months. Where
severa trps are made by a ta payer n any one year, ony fu ca-
endar months of absence from the Unted States are to be recog-
nzed n computng tme under the statute n queston. or e ampe,
f a ta payer eaves the Unted States on March 10 and returns on
pr 17, ne w be deemed to have been absent from the Unted
States for one caendar month for purposes of secton 11 (a). On
the other hand, f a ta payer eaves the Unted States on March 10
and returns on pr 5, the perod of hs absence beng ess than a
caendar month may not be used n computng the number of whoe
caendar months such ta payer was absent from the Unted States
for the purposes of the e empton provded n secton 11 (a).
Under ths vew, fractona parts of months from severa trps may
not be added to make whoe caendar months, snce whoe caendar
months must consst of consecutve days of absence from the Unted
States n any one trp.
In the nstant case. , the ta payer, took four trps durng the
ta abe year 1987. e saed to urope on May and returned on
une 8, whch perod s to be treated as a whoe caendar month for
the purposes of the e empton. The second trp e tendng from
une 1 to November 8 consttutes ony four fu caendar months.
The perod of absence from October 1 to November 8 s a frac-
tona part of a caendar month and s not, therefore, to be recog-
nzed n the computaton. The ta payer s thrd and fourth trps,
whch were to Canada and whch e tended from November 2 to
November 28 and from December 1 to December 18, respectvey,
may not be recognzed for the same reason. It foows that was
absent from the Unted States durng th3 ta abe year 1937 for fve
whoe caendar months. ccordngy, he was not a bona fde non-
resdent of the Unted States for more than s months durng the
ta abe year and so fas to come wthn the e empton provded
by secton 11 (a), supra.
G. C. M. 121 7 (0. . II-2, 12 (1933)), whch nvoves e emp-
ton under secton 11 (a) of the Revenue ct of 1928, and whch s
not consstent wth the concuson reached heren, s modfed
accordngy.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
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131, rt. 131-1.
102
SUPPL M NT C CR DITS G INST T .
S CTION 131. T S O OR IGN COUNTRI S ND
POSS SSIONS O UNIT D ST T S.
rtce 131-1: nayss of credt for ta es. 1940-19-10252
I. T. 3371
R NU CT O 193 .
The ta mposed by the Netherands upon dstrbuton by a
corporaton of ts profts, Wet op de dvdend-en tantenebeastng
1917, s aowabe as a credt under secton 131(f) of the evenue
ct of 193 .
dvce s requested whether the ta mposed by the Netherands
upon dstrbuton by a corporaton of ts profts, Wet op de dv-
dend-en tantemebeastng 1917, s an aowabe credt under secton
131(f) of the Revenue ct of 193 , whch provdes n part as foows:
(f) Ta es of foregn subsdary. or the purposes of ths secton a domestc
corporaton whch owns a ma|orty of the votng stock of a foregn corpora-
ton from whch t receves dvdends n any ta abe year sha be deemed to
have pad the same proporton of any ncome, war-profts, or e cess-profts
ta es pad by such foregn corporaton to any foregn country or to any pos-
sesson of the Unted Stutes, upon or wth respect to the accumuated profts
of such foregn corporaton from whch such dvdends were pad, whch the
amount of such dvdends bears to the amount of such accumuated profts:
Provded, That the amount of ta deemed to have been pad under ths sub-
secton sha n no case e ceed the same proporton of the ta aganst whch
credt s taken whch the amount of such dvdends bears to the amount of the
entre net ncome of the domestc corporaton n whch such dvdends are
ncuded.
In oume II of Ta aton of oregn and Natona nterprses,
pubshed by the League of Natons n 1933, the ta system n the
Netherands s dscussed. Part I contans a genera descrpton of
the ncome-ta and property-ta system. The foowng statements
are made n the pubcaton referred to:
The ta on dvdends and tantemes referred to on page 334 as Wet op
de dvdend-en tantemebeastng 1917 s prncpay eved upon the net
profts of Netherands share companes, even f derved from rea property
stuated n the Netherands profts, however, are ta ed ony on dstrbuton.
(Page 332.)
oregn enterprses whch receve profts dstrbuted by Netherands com-
panes are not themseves abe to the ta on dvdends and
tantemes. (Page 355.)
It w be remembered that dvdends dstrbuted by companes the fsca
domce of whch s n the Netherands are abe to the ta on dvdends
and tantemes, whch ta s pad by the company dstrbutng the dvdends,
that company havng no cam for ta aganst the persons to whom these
dvdends accrue. (Page 35 .)
It s hed that the Netherands ta n queston s an ncome ta
wthn the meanng of secton 131(f) of the Revenue ct of 193 .
In the case of a domestc corporaton ownng the ma|orty of the
votng stock of a Netherands company whch has pad the ta , the
computaton of the credt to whch the domestc corporaton s en-
tted shoud be made under secton 131(f) of that ct.
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103
5 131, rt. 131-1.
rtce 131-1: nayss of credt for ta es. 1940-24-10290
L T. 8385
R NU CTS O 103 ND 1938.
The ta Imposed under artce 20 of the Me can aw, Ley de
Impuesto sobre a Renta, upon Interest Is an Income ta , and
credt therefor Is aowabe under secton 131 of the Revenue ct
of 193 .
L T. 8288 (C. . 1939-1 (Part 1), 189) modfed.
dvce s requested whether the ta mposed under artce 20 of
the Me can aw, Ley de Impuesto sobre a Renta, upon nterest
s an ncome ta , credt for whch s aowabe under secton 131 of
the Revenue ct of 193 , reatng to credts for ncome ta es mposed
by foregn countres, or whether L T. 3288 (C. . 1939-1 (Part 1),
139) appes.
The rung pubshed as I. T. 8288, supra, was based upon the ta
mposed by artces 20 and 21 of the Me can aw under consderaton
wth respect to the tota revenue of dstrbutors and essors of moton
pcture ms. It was hed that snce the bass for the ta s tota
revenue, the ta s n the nature of an e cse ta based on the gross
recepts of the ta payer and credt therefor s not aowabe under
secton 131 of the Revenue ct of 1938. The syabus of L T. 3288,
supra, reads as foows:
The ta Imposed under artces 20 and 21 of the Me can aw, Ley de
Impuesto sobre a Renta s not an Income ta , and credt therefor Is not
aowabe under secton 131 of the Revenue ct of 1938. The amount of such
ta , however, Is aowabe as a deducton under secton 23(c) of that ct.
The concudng paragraph of I. T. 8288, supra, contans smar
anguage.
The foowng s an e cerpt from artce 20 of the Me can aw
referred to above:
Ta payers who, normay or occasonay, receve Income from any of the
foowng sources, are ncuded under ths schedue:
I. Smpe or compound nterest on oans of a knds.
II. Interest on amounts owng as purchase or sae prce.
When the seer s abe for the ta under schedue I, Income under ths
secton from transactons of hs busness, and entered n hs books, sha not
be ta abe under ths schedue.
IIL Interest on advances on account of the prce of property or rghts of a
knd , wth the e cepton set forth n the precedng secton, f the purchaser
pays ths ta under schedue I.
I . Interest earned on current accounts.
rtce 21 of the same Me can aw provdes n part as foows:
Income ta abe under ths schedue sha be computed n ts entrety e cept
In the case of the easng of busnesses (artce 20, Secton I), when the
deductons authorzed by the reguatons sha be appcabe and the ta sha
be payabe on the tota amount of such ncome, n accordance wth the foowng
tarff
Then foows the schedue of the graduated ta rates dependng
upon the amount of the ncome.
I. T. 3288, supra, does not appy to a casses of ta es mposed
under artce 20, supra. That artce mposes ta es on varous types
of recepts or profts. ccordngy, a separate determnaton must
be made n each case to ascertan whether the ta meets the mercan
concept of an ncome ta .
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1 5.
104
Ta es mposed on nterest under artce 20 may, generay, be
camed as a credt aganst edera ncome ta . (See I. T. 2 20,
C. . I-1, 44 (1932).) s the ta whch s the sub|ect of the
present nqury s a ta on the nterest referred to n artce 20, such
ta s an ncome ta , and credt therefor s aowabe under secton
131 of the Revenue ct of 193 .
In vew of the foregong, the ast paragraph and syabus of I. T.
3288, supra, are modfed to read as foows:
The ta of 5 per cent mposed under artces 20 and 21 of the Me can aw,
Ley de Impuesto sobre a Renta, upon the tota revenue derved from the
e potaton of movng pcture ms s not an ncome ta , and credt therefor s
not aowabe under secton 131 of the Revenue ct of 1938. The amount of
such ta , however, Is aowabe as a deducton under secton 23(c) of that ct.
SUPPL M NT D. R TURNS ND P YM NT O T .
S CTION 143. WIT OLDING O T T SOURC .
rtce 143-1: Wthhodng ta at source.
R NU CT O 1038.
Payments by the Unted States under certan cts of Congress
to nonresdent aen owners of and ocated n the Unted States.
(See I. T. 3379, page 1 .)
SUPPL M NT . ST T S ND TRUSTS.
S CTION 1 5. MPLOY S TRUSTS.
R NU . CT O 193 .
Partnershps of attorneys, physcans, etc. (See I. T. 3350, page 4.)
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105
5 22(a), rt. 22(a)- .
INCOM T RULINGS. P RT I.
R NU CTS O 1935 ND 1934 OR PRIOR CTS.
SU TITL . G N R L PRO ISIONS.
P RT II. COMPUT TION O N T INCOM .
S CTION 22(a). GROSS INCOM : G N R L
D INITION.
htce 22(a)-: What ncuded n gross ncome. 1940-11-10199
Ct. D. 1444
INCOM T R NU CT O 1034 D CISION OP SUPR M COURT.
1. Irrevocabe Short Term Trust Income: Grantor Treated as
Owner of Corpus ppcabty op Secton Defnng Gross
Income.
n Indvdua estabshed an rrevocabe short term trust, re-
tanng substantay the same domnon and contro over the corpus
as he had before,, the trust nstrument provdng that the net ncome
was to be hed for the e cusve beneft of hs wfe and pad over
to her n hs absoute dscreton, and that on termnaton of the
trust the entre corpus was to go to hm and a accrued or unds-
trbuted net ncome and any proceeds from the nvestment of such
net ncome treated as property owned absoutey by the wfe.
ed: That the grantor contnued to be the owner of the corpus for
purposes of secton 22(a) of the Revenue ct of 1934, and the
ncome therefrom was ta abe to hm. Labty under secton
22(a) Is not forecosed by reason of the fact that Congress made
specfc provson n secton 1 for revocabe trusts but faed to
adopt the Treasury recommendaton that smar specfc treatment
shoud be accorded ncome from short term trusts. Such choce,
whe reevant to the scope of secton 1 , can not be sad to have
subtracted from secton 22(a) what was aready there.
2. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, ghth
Crcut (1939) (105 . (2d), 58 ), reversng memorandum opnon
of the Unted States oard of Ta ppeas (1938), reversed.
Supreme Court of the Unted States.
Guy T. cverng, Commssoner of Interna Revenue, pettoner, v. George
. Cfford, r.
309 U. S., 331.
On wrt of certorar to the Unted States Crcut Court of ppeas for the ghth Crcut
ebruary 2 , 1940.
OPINION.
Mr. ustce Dougas devered the opnon of the Court
In 1934 respondent decared hmsef trustee of certan securtes whch he
owned. net ncome from the trust was to be hed for the e cusve bene-
ft of respondent s wfe. The trust was for a term of fve years, e cept that
t woud termnate earer on the death of ether respondent or hs wfe. On
termnaton of the trust the entre corpus was to go to respondent, whe a
accrued or undstrbuted net ncome and any proceeds from the Investment
of such net ncome was to be treated as property owned absoutey by the
Wfe. Durng the contnuance of the trust respondent was to pay over to hs
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I 22(a), rt. 22(a)- .
10
Wfe the whoe or such part of the net Income as he n hs absoute dscreton
mght determne. nd durng that perod he had fu power (a) to e ercse a
otng powers Incdent to the trusteed shares of stock ( ) to se, e -
change, mortgage, or pedge any of the securtes under the decaraton of
trust whether as part of the corpus or prncpa thereof or as Investments
r proceeds and any Income therefrom, upon such terms and for such consdera-
ton as respondent In hs absoute dscreton may deem fttng ) (o) to
tnvest any cash or money In the trust estate or any Income therefrom
y oans, secured or unsecured, by deposts In banks, or by purchase of se-
curtes or other persona property wthout restrcton because of ther
specuatve character or rate of return or any aws pertanng to the
Investment of trust funds (d) to coect a Income (e) to compromse, ete.,
any cams hed by hm as trustee (/) to hod any property n the trust estate In
the names of other persons or In my own name as an ndvdua e cept as
otherwse provded. traordnary cash dvdends, stock dvdends, proceeds
from the sae of une ercsed subscrpton rghts, or any enhancement, reazed
Or not, In the vaue of the securtes were to be treated as prncpa, not ncome.
n e cupatory cause purported to protect hm from a osses e cept those
Occasoned by hs own wfu and deberate breach of dutes as trustee.
nd fnay It was provded that nether the prncpa nor any future or accrued
ncome shoud be abe for the debts of the wfe and that the wfe coud not
transfer, encumber, or antcpate any Interest n the trust or any ncome there-
from pror to actua payment thereof to her.
It was stpuated that whe the ta effects of ths trust were consdered
by respondent they were not the soe consderaton Invoved n hs decson
to set It up, as by ths and other gfts he Intended to gve securty and eco-
nomc ndependence to hs wfe and chdren. It was aso stpuated that
respondent s wfe had substanta Income of her own from other sources that
there was no restrcton on her use of the trust Income, a of whch Income was
aced In her persona checkng account, Intermnged wth her other funds,
nd e pended by her on hersef, her chdren and reatves that the trust was
not desgned to reeve respondent from abty for famy or househod
e penses and that after e ecuton of the trust he pad arge sums from hs
persona funds for such purposes.
Respondent pad a edera gft ta on ths transfer. Durng the year 1934
a ncome from the trust was dstrbuted to the wfe who ncuded It n her
Indvdua return for that year. The Commssoner, however, determned a
defcency n respondent s return for that year on the theory that ncome from
the trust was ta abe to hm. The oard of Ta ppeas sustaned that
redetermnaton (88 . T. ., 1532). The crcut court of appeas reversed
(105 . (2d), 58 ). We granted certorar because of the mportance to the
revenue of the use of such short term trusts n the reducton of surta es.
Secton 22(a) of the Revenue ct of 1934 ( 48 Stat., C80) ncudes among
gross ncome a gans, profts, and ncome derved from pro-
fessons, vocatons, trades, busnesses, commerce, or saes, or deangs n
property, whether rea or persona, growng out of the ownershp or use of or
nterest In such property aso from nterest, rent, dvdends, securtes, or the
transacton of any busness carred on for gan or proft, or gans or profts
and ncome derved from any source whatever. The broad weep of ths
anguage ndcates the purpose of Congress to use the fu measure of ts ta ng
power wthn those defnabe categores. (Cf. everng v. Mdand Mutua
Lfe Insurance Co., 300 U. S., 21 Ct. D. 120 , C. . 1937-1, 178 .) nonce our
constructon of the statute shoud be consonant wth that purpose. Technca
consderatons, ncetes of the aw of trusts or conveyances, or the ega para-
phernaa whch nventve genus may construct as a refuge from surta es
Shoud not obscure the basc ssue. That ssue s whether the grantor after
the trust has been estabshed may st be treated, under ths statutory scheme,
as the owner of the corpus. (See ar v. Commssoner, 800 U. S., 5, 12 T. D.
4141, C. . II-1, 1R0 (1928) .) In absence of more precse standards or
gudes supped by statute or approprate reguatons,1 the answer to that
queston must depend on an anayss of the terms of the trust and a the cr-
We have not consdered here artce fO-t of Treasury Repnntnns 80 pronnhrated
under secton f of the 1034 ct and In 1980 amended (T. D. 4020 C. . -1, 140
(193 ) ) so as to rest on secton 22(a) aso, snce the ta queston arose pror to that
amendment.
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107
22(a), rt. 22(a)- .
cumstances attendant on ts creaton and operaton. nd where the grantor Is
the trustee and the benefcares are members of hs famy group, speca
scrutny of the arrangement s necessary est what s n reaty but one eco-
nomc unt be mutped nto two or more by devces whch, though vad
under State aw, are not concusve so far as secton 22(a) s concerned.
In ths case we can not concude as a matter of aw that respondent ceased
to be the owner of the corpus after the trust was created. ather, the short
duraton of the trust, the fact that the wfe was the benefcary, and the reten-
ton of contro over the corpus by respondent a ead rresstby to the con-
cuson that respondent contnued to be the owner for purposes of secton 12(a).
So far as hs domnon and contro were concerned t seems cear that the
trust dd not effect any substanta change. In substance hs contro over the
corpus was In a essenta respects the same after the trust was created, as
before. The wde powers whch he retaned ncuded for n practca purposes
most of the contro whch he as an ndvdua woud have. There were, we
may assume, e ceptons, such as hs dsabty to make a gft of the corpus
to others durng the term of the trust and to make oans to hmsef. ut
ths duton n hs contro woud seem to be nsgnfcant and mmatera,
snce contro over nvestment remaned. If t be sad that such contro s the
type of domnon e ercsed by any trustee, the answer s smpe. We have
at best a temporary reaocaton of ncome wthn an ntmate famy group.
Snce the ncome remans n the famy and snce the husband retans contro
over the nvestment, he has rather compete assurance that the trust w not
effect any substanta change n hs economc poston. It s hard to magne
that respondent fat hmsef the poorer after ths trust had been e ecuted or,
f he dd, that t had any ratona foundaton n fact. or as a resut of the
terms of the trust and the ntmacy of the fama reatonshp respondent re-
taned the substance of fu en|oyment of a the rghts whch prevousy ha
had n the property. That mght not be true f ony strcty ega rghts were
consdered. ut when the benefts fowng to hm ndrecty through the
wfe are added to the ega rghts he retaned, the aggregate may be sad to
be a far equvaent of what he prevousy had. To e cude from the aggregate
those ndrect benefts woud be to deprve secton 22(a) of consderabe vtaty
and to treat as mmatera what may be hghy reevant consderatons n the
creaton of such famy trusts. or where the head of the househod has ncome
n e cess of norma needs, t may we make but tte dfference to hm
(e cept ncome-ta -wse) where portons of that ncome are routed so ong
Ss t stays n the famy group. In those crcumstances the a-mportant
factor mght be retenton by hm of contro over the prncpa. Wth that con-
tro n hs hands he woud keep drect command over a that he needed to
reman n substantay the same fnanca stuaton as before. Our pont
here s that no one fact s normay decsve but that a consderatons and
crcumstances of the knd we have mentoned are reevant to the queston of
ownershp and are approprate foundatons for fndngs on that ssue. Thus,
where, as In ths case, the benefts drecty or Indrecty retaned bend so m-
perceptby wth the norma concepts of fu ownershp, we can not say that
the trers of fact commtted reversbe error when they found that the hus-
band was the owner of the corpus for the purposes of secton 22(a). To hod
otherwse woud be to treat the wfe as a compete stranger to et mere
formasm obscure the norma consequences of famy sodarty and to force
concepts of ownershp to be fashoned out of ega ncetes whch may have
tte or no sgnfcance n such househod arrangements.
The bunde of rghts whch he retaned was so substanta that respondent
can not be heard to compan that he s the vctm of despotc power when
for the purpose of ta aton he Is treated as owner atogether. (See Dupont
v. Commssoner, 289 U. S., 85, 89 Ct. D. 87, C. . II-1, 259 (1933) .)
We shoud add that abty under secton 22(a) s not forecosed by reasou
of the fact that Congress made specfc provson n secton 1 for revocabe
trusts, but faed to adopt the Treasury recommendaton n 1934 ( evcrng v.
Wood, U. S., Ct. D. 1445, page 1 2. ths uetn , that smar specfc
treatment shoud be accorded ncome from short term trusts. Such choce,
whe reevant to the scope of secton 1 , everng v. Wood, supra, can not
be sad to have substracted from secton 22(a) what was aready there.
ee Tan. The ackground of the Revenue ct of 1937 (5 Unv. Chc. L. Rev., 41).
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22(a), rt. 22(a)- .
108
Rather, on ths evdence t must be assumed that the choce was between a
generazed treatment under secton 22(a) or specfc treatment under a separate
provson (such as was accorded revocabe trusts under secton 10 ) not be-
tween ta ng or not ta ng grantors of short term trusts. In vew of the broad
and sweepng anguage of secton 22(a), a specfc provson coverng short
term trusts mght we do no more than to carve out of secton 22(a) a defned
group of cases to whch a rue of thumb woud be apped. The faure of
Congress to adopt any such rue of thumb for that type of trust must be taken
to do no more than to eave to the trers of fact the nta determnaton of
whether or not on the facts of each case the grantor remans the owner for
purposes of secton 22(a).
In vew of ths resut we need not e amne the contenton that the trust
devce fas wthn the rue of Luca v. ar (281 U. S., I) and urnet v.
Letnnger (285 U. S., 13 ), reatng to the assgnment of future ncome or that
respondent Is abe under secton 1 , ta ng grantors on the Income of
revocabe trusts.
The |udgment of the crcut court of appeas s reversed and that of the
oard of Ta ppeas s affrmed.
It s so ordered.
rtce 22(a)-: What ncuded n gross ncome. 1940-23-10281
Ct. D. 14
INCOM T R NU CT O 1982 D CISION OP SUPR M COURT.
L Income Deterred Payment Sae or On. and Gas Propertes
Reservaton or Interest n the ee Ta abty or Gross
Proceeds rom Producton.
corporaton In 1081 entered Into a wrtten contract provdng
for the conveyance to pettoners of certan royaty Interests, fee
Interests, and deferred o payments n propertes In Okahoma, for
an agreed consderaton payabe. party n cash and party from
one-haf of the proceeds whch mght be derved from o and gas
produced from the propertes and from the sae of fee tte to any
or a of the and conveyed. The propertes were thereupon con-
veyed to pettoners, and durng 1932 one-haf of the gross pro-
ceeds derved from the producton and sae of o was dstrbuted
to the corporaton, pursuant to the contract. ed: The transac-
ton s In effect a sae wth a reservaton of an Interest In the fee
as addtona securty for the deferred payments, the corporaton
s not dependent entrey upon the producton of o for the de-
ferred payments, and the pettoners, as purchasers and owners of
the propertes, are therefore ta abe upon the gross proceeds
derved from the o producton, notwthstandng the arrangement
to pay over one-haf of such proceeds to the corporaton.
2. Case Dstngushed.
Thomat v. Perkns (801 U. S., 055, Ot D. 1237, a . 1037-1, 1 2)
dstngushed.
8. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Tenth
Crcut (1039) (107 . (2d), 450), affrmng memorandum opnon
of the Unted States oard of Ta ppeas (1938), affrmed.
s to the dsadvantage of a pecfc statutory formua over more generazed treatment
see oume I, Report. Income Ta Codfcaton Commttee (103 ), a eounttoe apponted
by the Chanceor of the chequer In 1927 In dscussng revocabe settements the
commttee stated, page 298 :
Ths and the three foowng causes reproduce ecton 20 of the nance ct, 1922,
an enactment whch has been the sub|ect of much tgaton. Is unsatsfactory In many
respects, and Is pany nadequate to fuf the apparent Intenton to prevent avodance
of abty to ta by revocabe dspostons of Income or other devces. Wo thnk tb
matter one whch s worthy of the attenton of Parament.
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109
22(a), rt. 22(a)-.
Supreme Court of the Unted States.
Steve nderson, pettoner, v. uy T. everng, Commssoner of Interna
Revenue.
L. . Prchard, pettoner, v. uy T. everng, Commssoner of Interna
Revenue.
0 S. Ct., 9. 2.
On wrts of certorar to the Unted States Crcut Court of ppeas for the Tenth Crcut.
May 20, 1940.
OPINION.
Mr. ustce Mt|bphy devered the opnon of the Court.
Okahoma Cty Co. n 1931 owned certan royaty nterests, fee nterests,
and deferred o payments n propertes n Okahoma. Durng that year t
entered nto a wrtten contract wth pettoner Prtchnrd provdng for the
conveyance to hm of these nterests for the agreed consderaton of 1GO,000,
payabe ffty thousand n cash and one hundred ten thousand from one-haf of
the proceeds receved by hm whch mght be derved from o and gas produced
from the propertes and from the sae of fee tte to any or a of the and
conveyed. Interest at the rate of per cent per annum was to be pad from
the proceeds of producton and of saes upon the unpad baance. Okahoma
Company was to have n addton a frst en and cam aganst that one-haf
of a o and gas producton and fee nterest from whch the 110,000
Is payabe, the en and cam not n any way to affect the one-haf nterest
n a o and gas producton and fee Interest or the revenue therefrom
whch t s to have and receve under ths agreement. The pro-
ceeds derved from the o and gas produced and from saes of the fee nterests
were to be pad drecty to Prtchard who was to depost one-haf of them at a
desgnated bank, at ntervas of 90 days, to the credt of Okahoma Company.
The agreement rected that Okahoma Company desred to se a of ts
rght, tte and nterest of whatsoever nature n the descrbed propertes, and
provded that a copy of the agreement and a reease be paced n escrow for
devery to Prtchard upon payment n fu of the 110,0 .0 and nterest. Im-
medatey upon the e ecuton of the contract the propertes were conveyed to
Prtchard wthout reservaton.1 In enterng nto the agreement Prtchard acted
not ony for hmsef but aso for pettoner nderson, each of them havng a
45 per cent nterest.
The gross proceeds derved from the producton and sae of o from the
propertes durng 932 amounted to some 81,000. Prtchard, upon recevng
ths sum, dstrbuted one-haf to Okahoma Company pursuant to the contract.
The queston for decson s whether the proceeds tus pad over to Okahoma
Company shoud be ncuded n the gross Income of pettoners for the ta year
1932. The rung of the oard of Ta ppeas aganst pettoners was affrmed
by the crcut court of appeas. (107 (2d), 459.) ecause of an asserted
confct wth the appcabe decsons of ths Court, we granted certorar.
(March 4, 1040.)
It s setted that the same basc Issue determnes both to whom ncome
derved from the producton of o and gas s ta abe and to whom a deducton
or depeton s aowabe. That ssue s, who has a capta nvestment n the
o and gas n pace and what s the e tent of hs nterest. ( everng v.
1 Pettoners state that the nstruments of transfer of those propertes were absoute
and unquafed assgnments and conveyances and that there was no reservaton of any
sort of nterest, much ess any ega nterest, spected n those assgnments and
conveyances.
The remanng 10 per cent nterest was acqured for one Oson, whose case was oon-
Rotdated wth those of Prtchard nnr nderson, and dsposed of n the same opnon
beow, hut who has not sought revew here.
The record does not ndcate what porton of the gross proceeds was derved from the
producton and sae of o and gas and what porton, f any, was derved from saes of
tees and from royates on eases. The Commssoner n determnng defcences aganst
Pettoners, however, added 11,270. 9 to the gross ncome of each wth the e panaton
that ths amount represented In-o payments receved In connecton wth the Patterson
Okahoma Company dea not reports by pettoners. Respondent, n vew of ths
e panaton by the Commssoner and the omsson from the record of any dscosure of
the method of computng the 11,2711.. 19 addton to gross Income, accepts pettoners state-
ment that the onv ncome from the propertes here n dspute s from o producton.
eveuue ct of 1832 (ch. 209, 47 Stat., 1 9).
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5 22(a), rt. 22(a)- .
110
ankne O Co,, 803 U. S., 3 2, 3 7 Ct. D. 1323, O. . 1938-1, 30 everng
. O Donne, 303 U. S., 370 Ct. D. 1340, C. . 1938-1, 497 everng v. be
O Co.. 303 tT. S., 372 Ct. D. 1322, C. . 1938-1, 293 Thomas v. Perkns, 301
U. S., 55, 1, 3 Ct. D. 1237, C. . 1937-1, 1 2 everng v. Twn e O
Syndcate, 293 U. S., 812, 321 Ct. D. 905, C. . I -1, 253 (1935) Pamer v.
ender, 287 U. S., 551 Ct. D. 41, C. . II-1, 235 (1935) . Compare everng
. Cfford, No. 383, October Term, 1039 Ct. D. 1444, page 105, ths uetn .)
O and gas reserves ke other mneras n pace, are recognzed as wastng
assets. The producton of o and gas, ke the mnng of ore, s treated as an
Income-producng operaton, not as a converson of capta Investment as upon
a sae, and Is sad to resembe a manufacturng busness carred on by the use
of the so. ( urnet v. arme, 287 U. S., 103, 10 -107 Ct. D. 11, C. . I-2,
210 (1932) ankers Coa Co. v. urnet, 287 U. S., 308 Ct. D. 18, C. . II-1,
272 (1C33) Unted States v. wabk Mnng Co., 247 U. S., 11 T on aum-
bach v. Sargent nd Co., 242 U. S., 503, 521, 522 Strattot s Independence v.
owbert, 231 U. S., 399, 414.) The depeton effected by producton Is kened
to the deprecaton of machnery or the usng up of raw materas n manu-
facturng. (Unted States v. Ludey, 274 U. S., 295, 302-303 T. D. 404 , C. .
I-2, 157 (1927) Lynch v. uorth-Stephens Co., 2 7 U. S., 3G4, 870 T. D.
8 90, C. . I -1, 1 2 (1925) . Compare on aumbach v. Sargent Land Co.,
supra, at 524-525.) The deducton s therefore permtted as an act of grace
and s ntended as compensaton for the capta assets consumed In the produc-
ton of Income through the severance of the mneras. ( cverng v. ankne
O Co., 303 U. S., 8 2, 3 -3 7.) The grantng of an arbtrary deducton, n
the Interests of convenence, of a percentage of the gross ncome derved from
the severance of o and gas, merey emphaszes the underyng theory of the
aowance as a ta -free return of the capta consumed n the producton of
gross ncome through severance. ( everng v. Twn e O Syndcate, 293
U. S., 312, 821 Unted States v. Dakota-Montana O Co., 288 U. S.. 459, 4 7
Ct. D. 55, C. . II-1, 243 (1933) .)
The soe owner and operator of o propertes ceary has a capta Invest-
ment In the o n pace, If anyone has, and so s ta abe on the gross proceeds
of producton and s granted a deducton from gross ncome as compensaton
for the consumpton of hs capta. (See urnet v. arme, upra. at 107-108
cverng v. Cfford, No. 883, October Term, 1939.) y an outrght sae of
hs nterest for cash, such an owner converts the form of hs capta nvestment,
severs hs connecton wth the producton of o and gas and the ncome
derved from producton, and thus renders nappcabe to hs stuaton the
reasons for the depeton aowance. The words gross ncome from the
property, as used In the statute governng the aowance for depeton, mean
gross ncome receved from the operaton of the o and gas wes- by one who
has a capta nvestment theren, not ncome from the sae of the o and gas
propertes themseves. ( everng v. be O Land Co., 803 U. S., 372,
875-37 .)
Other stuatons, fang between the two mentoned, have been put on one
de or the other as the cases arose. The hoder of the royaty nterest that
Is, a rght to receve a specfed percentage of a o and gas produced durng
the term of the ease s deemed to have an economc nterest n the o
n pace whch s depcted by severance. (Pamer v. ender, 287 U. S., 551, 557
Murphy O Co. v. urnet, 287 U. S., 299 Ct. D. 19, C. . II-1, 231 (1933)
urnet v. arme, 287 U. S., 103. See Lynch v. worth-Stephens Co., 2 7
D. S., 3 4.) Cash bonus payments, when ncuded n a royaty ease, are re-
garded as advance royates, and are gven the same ta consequences. ( urnet
v. arme, 287 U. S., 103 Murphy O Co. v. urnet, 287 U. S., 299 ankers
Pocahontas Coa Co. v. urnet. 287 U. S., 308. Compare everng v. be
O Land Co.. 303 U. S., 372, 375.) share n the net profts derved from de-
veopment and operaton, on the contrary, does not entte the hoder of such
nterest to a depeton aowance even though contnued producton Is essenta
to the reazaton of such profts. ( everng v. O Donne, 303 U. S., 370
everng v. be O Co., 303 U. S., 372.) Smary, the hoder of a favor-
abe contract to purchase wet gas at the mouth of the we Is dened a depe-
ton aowance on the dfference between the contract prce and the far market
vaue. ( everng v. ankne, O Co., 303 U. S.. 3 2.) Such an nterest has
been characterzed by us as a mere economc advantage derved from produc-
ton, through a contractua reaton to the owner. ( everng v. ankne
O Co., supra, at 3 7.)
Thomas v. Perkns (301 . S., 55), reed upon by pettoners, presented
the ssue whether the rght to o payments that Is, the rght to a specfed
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22(a), rt. 22(a)--
sum of money, payabe out of a specfed percentage of the o, or the proceeds
receved from the sae of such o, f, as and when produced shoud be treated
for ta purposes ke the rght to o royates or ke the rght to cash payments
upon a sae. In that case, the assgnment of ease provded for payments n
o ony wthout the reservaton of a royaty nterest. The queston was
whether the assgnees gross ncome shoud ncude moneys pad to the assgn-
ors by purchasers of the o. We stated (page ( OS)) : The grantng causa
n the assgnment woud be suffcent, f standng aone, to transfer a the o
to the assgnee. It does not specfcay e cept or e cude any part of the o.
ut t s quafed by other parts of the nstrument. The provsons for pay-
ment to assgnors n o ony, the absence of any obgaton of the assgnee
to pay n o or n money, and the faure of assgnors to take any securty
by way of en or otherwse unmstakaby show that they ntended to wthhod
from the operaton of the grant one-fourth of the o to be produced and saved
up to an amount suffcent when sod to yed . 395,000. Under these crcum-
stances, the moneys receved by the assgnors from the sae of the o were
deemed not to be ncome to the assgnees. (See aso Pamer v. ender, 287
T . S., 551.)
The hoder of an o payment rght, as an orgna proposton, mght be
regarded as havng no capta nvestment n the o and gas n pace. The
vaue of the rght, even though dependent upon the e tent of the o reserves,
s f ed at the moment of creaton and does not vary drecty wth the severance
of the mnera from the so. In ths sense t resembes the rght to cash
payments more cosey than the rght to royaty payments. Yet t does depend
upon the producton of o, ordnary can be reazed upon ony over a perod
of years, and permts of a smpe and convenent aocaton between essor
and essee of both the gross ncome derved from producton and the aowance
for depeton. (Compare urnet v. Uarmc, 287 U. S., 103, 10G-107.) ccord-
ngy, ths Court n Thomas v. Perkns decded that the provson n the ease
for payments soey out of o producton shoud be regarded as a reservaton
from the grantng canse of an amount of o suffcent to make the agreed
payments, and shoud be gven the same ta consequences as a provson for
o royates. The decson dd not turn upon the partcuar nstrument
nvoved, or upon the formates of the conveyancer s art, but rested upon the
practca consequences of the provson for payments of that type. (See Pamer
v. ender, 287 U. S., 551, 555-557 urnet v. artne, 287 U. S., 103, 111.)
The Government mantans that the present case s dstngushabe from
Thomas v. Perkns for the reason that the bass for decson there was that
ownershp of suffcent o to make the payments had not been conveyed to the
assgnee but remaned n the assgnor. It asserts that the terms of the con-
tract and the nstruments of conveyance here negatve any ntenton on the
part of the partes to wthhod from the operaton of the grant an amount
of o equa to the o payments. The foowng factors, among others, are
reed upon as supportng ths contenton: (1) the contract contans no quafy-
ng anguage reservng from the grant any nterest n the o and gas n pace
(2) the deferred payments of 110,000 were payabe n cash and not drecty
n o (3) the deferred payments drew Interest unt pad (4) Okahoma
Company had a frst en and cam aganst one-haf of the o and gas produc-
ton and fee nterest (5) pettoner Prtchard had the rght to se the fee
Interest covered by the contract and dscharge the deferred payments out of
the proceeds of such sae rather than out of the proceeds of the o and gas
producton.
Severa of the dstnctons urged upon us by the Government are wthout
substance. The economc consequences of the transacton are not materay
affected by the crcumstance that the provson for o payments s not phrased
In terms of a reservaton from the conveyance to Okahoma Company of an
nterest n the o and gas n pace. nd the fact that the payments to Oka-
homa Company are n cash rather than drecty n o s of no moment n
determnng the ssues presented for decson. Compare, however. Genera
Uttes Cr v. everng (29(3 U. S.. 200 TCt. D. 1055, C. . -1, 214 (193 ) ).
Smary, the retenton of a en, f t were construed as a en ony upon the
o and ga producton, and nothng more,1 woud not make Okahoma Company
any the ess dependent upon such producton for payment of the amounts
reserved.
The en here appears to cover both the o and gas producton and the fee Interest from
whch the deferred payments were to be derved.
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22(a), rt. 22(a)-13.
112
The reservaton of an nterest n the fee, In addton to the nterest n the
o producton, however, materay affects the transacton. Okahoma Company
Is not dependent entrey upon the producton of o for the deferred payments
they may be derved from saes of the fee tte to the and conveyed. It s
cear that payments derved from such saes woud not be sub|ect to an aow-
ance for depeton of the o reserves, for no o woud thereby have been
severed from the ground an aowance for depcton upon the proceeds of such
a sae woud resut, contrary to the purpose of Congress, n a doube deducton
frst, to Okahoma Company second, to the vendee-owner upon the producton
of o. ( everng v. Twn e O Syndcate, 293 T . S., 312, 321.) We are of
opnon that the reservaton of ths addtona type of securty for the deferred
payments serves to dstngush ths case from Thomas v. Perkns. It Is smar
to the reservaton n a ease of o payment rghts together wth a persona
guarantee by the essee that such payments sha at a events equa the specfed
sum. In ether case, t s true, some of the payments receved may come d-
recty out of the o produced. ut our decson n Thomas v. Perkns does not
requre that payments reserved to the transferor of o propertes sha for ta
purposes be treated dstrbutvey, and not as a whoe, dependng upon the
source from whch each doar s derved. n e tenson of that decson to
cover the case at bar woud create addtona, and n our opnon unnecessary,
dffcutes to the aocaton for ncome ta purposes of such payments and of
the aowance for depeton between transferor and transferee. In the nterests
of a workabe rue, Thomas v. Perkns must not be e tended beyond the stua-
ton n whch, as a matter of substance, wthout regard to formates of con-
veyancng, the reserved payments are to be derved soey from the producton
of o and gas. The deferred payments reserved by Okahoma Company, ac-
cordngy, must be treated as payments receved upon a sae to pettoners, not
as ncome derved from the consumpton of ts capta Investment n the
reserves through severance of o and gas.
Pettoners, as purchasers and owners of the propertes, are therefore ta -
abe upon the gross proceeds derved from the o producton, notwthstandng
the arrangement to pay over such proceeds to Okahoma Company. (See
everng v. Cfford, No. 883, October Term, 1939 Renecke v. mth, 289 D. 8.,
172, 177 Ot. D. 4, C. . II-1, 25 (1933) Od Coony Trust Co. v. Com-
mssoner, 279 U. S., 71 Ct, D. 80, O. . III-2, 222 (1929) .)
ffrmed.
rtce 22(a)-3: Compensaton pad other than n cash.
Reguatons 8 and 77 amended. (See T. D. 49 5, page 13.)
INCOM T R NU CT O 1932 D CISION O SUPR M COURT.
L Gboss Income Lease Improvements by Lessee Reazaton
of Ta abe Gan to Lessor Upon orfeture.
On uy 1, 1015, and wth budng thereon was eased for a term
of 99 years, the ease provdng that, under certan condtons, the
essee mght remove any budng, and that upon termnaton of the
ease the and wth a budngs and mprovements shoud be sur-
rendered. In 1029 the essee demoshed the e stng budng and
erected a new one havng a usefu fe of not more than 50 years.
uy 1, 1933, the ease was canceed for defaut n payment of rent
and ta es, and the essor reganed possesson. IT ed: That the
essor reazed ta abe gan In 1933 from the forfeture of the ease-
hod. In the amount of the stpuated net far market vaue of the
new budng as of uy 1, 1933. The defnton of gross Income n
secton 22(a) of the Revenue ct of 1032 s broad enough to embrace
such gan. It Is not necessary to recognton of ta abe gan that
the Improvement begettng the gan shoud be severabe from the
orgna capta.
R NU CTS O 1932 ND 1934.
rtce 22(a)-13: Improvements by essees.
1940-15-10229
Ct. D. 1450
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113
22(a), rt. 22(a)-13.
2. Decson Reversed. , r.,,
Decson of the Unted States Crcut Court of ppeas, ghth
Crcut (1939) (105 . (2d), 442), affrmng an unreported decson
of the Unted States oard of Ta ppeas (1038), reversed.
3. Decson Overbted n Prncpe.
Mer v. Gcarn (C. C. ., Nnth Crcut, 1919) (258 ed., 225)
overrued n prncpe.
4. Decsons Dstngushed.
ewtt Reaty Co. v. Commssoner (C. C. ., Second Crcut,
1935) (7 . (2d), 880) and M. . att Co. v. Unted States (1938)
(305 U. S., 207 Ct. D. 1373, C. . 1939-1 (Part 1), 221 ) ds-
tngushed.
Supbeme Court cf the Unted Statks.
On|f T. everng, Commssoner of Interna Revenue, pettoner, v. Chares .
ruun.
309 U. S., 4 1.
On wrt of certorar to the Unted State Crcut Court of ppeas for the ghth Crcut.
March 25, 1940.
opnon.
Mr. ustce Roberts devered the opnon of the Court.
The controversy had ts orgn n the pettoner s asserton that the respond-
ent reazed ta abe gan from the forfeture of a easehod, the tenant havng
erected a new budng upon the premses. The court beow hed that no
ncome had been reazed.1 Inconsstency of the decsons on the sub|ect ed ua
to grant certorar.
The oard of Ta ppeas made no Independent fndngs. The cause was
submtted upon a stpuaton of facts. rom ths t appears that on uy 1,
1915, the respondent, as owner, eased a ot of and and the budng thereon
for a term of 99 years.
The ease provded that the essee mght, at any tme, upon gvng bond to
secure rentas accrung In the two ensung years, remove or tear down any
budng on the and, provded that no budng shoud be removed or torn down
after the ease became forfeted, or durng the ast 3 4 years of the term.
The essee was to surrender the and, upon termnaton of the ease, wth a
budngs and Improvements thereon.
In 1929 the tenant demoshed and removed the e stng budng and con-
structed a new one whch had a usefu fe of not more than 50 years. uy 1,
1933, the ease was canceed for defaut n payment of rent and ta es and the
respondent reganed possesson of the and and budng.
The partes stpuated that as at sad date, uy 1, 1933, the budng whch
had been erected upon sad premses by the essee had a far market vaue of
4,245. 8 and that the unamortzed cost of the od budng, whch was
removed from the premses n 1929 to make way for the new budng, was
12,811.43, thus eavng a net far market vaue as at uy 1, 1933, of
51,434.25, for the aforesad new budng erected upon the premses by the
essee.
On the bass of these facts, the pettoner determned that n 1933 the
respondent reazed a net gan of 51,434.25. The oard overrued hs deter-
mnaton and the Crcut Court of ppeas affrmed the oard s decson.
The course of admnstratve practce and |udca decson n respect of the
queston presented has not been, unform. In 1917 the Treasury rued that the
ad|usted vaue of mprovements nstaed upon eased premses s ncome to the
essor upon the termnaton of the ease. The rung was ncorporated n two
succeedng edtons of the Treasury reguatons. In 1919 the Crcut Court
of ppeas for the Nnth Crcut hed n Mer v. Ocarn (258 ed., 225) that
the reguaton was nvad as the gan, f ta abe at a, must be ta ed as ot
the year when the mprovements were competed.4
everno v. ruun (105 . (2d). 442).
Treasury Decson 2-142 (19 Treas. Dec. Int. Rev., 25).
Reguatons 33 (1918 ed.), artce 4, paragraph 50 Reguatons 45 (2d 1919 ee.)..
artce 48.
Tu Court dened certorar (250 U. S., 807)
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22(a), rt. 22(a)-13.
114
The reguatons were accordngy amended to Impose a ta upon the gan
In the year of competon of the Improvements, measured by ther antcpated
aue at the termnaton of the ease and dscounted for the duraton of the
ease. Subsequenty the reguatons permtted the essor to spread the depre-
cated vaue of the mprovements over the remanng fe of the ease, report-
ng an aquot part each year, wth provson that, upon premature termnaton,
ta shoud be mposed upon the e cess of the then vaue of the mprove-
ments over the amount theretofore returned.
In 1935 the Crcut Court of ppeas for the Second Crcut decded In
ewtt Reaty Co. v. Commssoner (7 . (2d), 880) that a andord receved
Do ta abe ncome n a year, durng the term of the ease, n whch hs tenant
erected a budng on the eased and. The court, whe recognzng that the
essor need not receve money to be ta abe, based Its decson that no ta abe
gan was reazed n that case on the fact that the mprovement was not
portabe or detachabe from the and, and f removed woud be worthess e cept
as brcks, ron, and mortar. It sad (page 884) : The queston as we vew It
Is whether the vaue receved s emboded n somethng separatey dsposabe,
or whether t s so merged In the and as to become fnancay a part of It,
somethng whch, though t Increases ts vaue, has no vaue of Its own when
torn away.
Ths decson Invadated the reguatons then In force.
In 1938 ths Court decded If. . att Co. v. Unted States (305 U. S., 2 7
Ct D. 1373, C. . 1939-1 (Part 1), 221 ). There, n connecton wth the e ecu-
ton of a ease, andord and tenant mutuay agreed that each shoud make
certan mprovements to the demsed premses and that those made by the tenant
I houd become and reman the property of the andord. The Commssoner
vaued the mprovements as of the date they were made, aowed deprecaton
thereon to the termnaton of the easehod, dvded the deprecated vaue by the
I number of years the ease had to run, and found the andord ta abe for each
fear s aquot porton thereof. s acton was sustaned by the Court of Cams.
ffhe udgment was reversed on the ground that the added vaue coud not be
Consdered renta accrung over the perod of the ease that the facts found by
the Court of Cams dd not support the concuson of the Commssoner as to
the vaue to be attrbuted to the mprovements after a use throughout the term
Of the ease and that, In the crcumstances dscosed, any enhancement In the
vaue of the reaty n the ta year was not ncome reazed by the essor wthn
the evenue ct.
The crcumstances of the Instant case dfferentate t from the att and
ewtt cases but the pettoner s contenton that gan was reazed when the
tespondent, through forfeture of the ease, obtaned untrammeed tte, posses-
son and contro of the premses, wth the added Increment of vaue added by the
new budng, runs counter to the decson n the Mer case and to the reason-
ng n the ewtt case.
The respondent Inssts that the reaty, a capta asset at the date of the
e ecuton of the ease, remaned such throughout the term and after ts e pra-
ton that mprovements aff ed to the so became part of the reaty ndstn-
fushaby bended n the capta asset that such Improvements can not be sepa-
ratey vaued or treated as receved In e change for the mprovements whch
were on the and at the date of the e ecuton of the ease that they are, there-
fore, In the same category as mprovements added by the respondent to hs and,
or accruas of vaue due to e traneous and adventtous crcumstances. Such
added vaue, t Is argued, can be consdered capta gan ony upon the owner s
dsposton of the asset The poston Is that the economc gan consequent upon
the enhanced vaue of the recaptured asset Is not gan derved from cupta or
reazed wthn the meanng of the s teenth amendment and may not, therefore,
be ta ed wthout apportonment.
We hod that the pettoner was rght In assessng the gan as reazed In 1933.
We mght rest our decson upon the narrow ssue presented by the terms of
the stpuaton. It does not appear what knd of a budng was erected by the
tenant, or whether the budng was ready removabe from the and. It s not
stated whether the dfference In the vaue between the budng removed and
that erected n Its pace accuratey refects an ncrease n the vaue of and an
Treasury Decson 3082 (C. . 8, 109) Retaatons 45 (1920 cd.). artce 48 Regua-
tons 02. . and 9. artce 48 Reguatons 80. 94, and 101, artce 22(a)-13.
The ewtt case was foowed n genbcrg v. Unted States (21 . Supp., 403),
Stapes v. Unted States (21 . Supp., 737), and ngsh v. tgood (21 . Supp., 41).
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115
22(b), rt. 22(b) (2)-2.
budng consdered as a snge estate n and. On the facts stpuated, wthout
more, we shoud not be warranted n hodng that the presumpton of the cor-
rectness of the Commssoner s determnaton has been overborne.
The respondent nssts, however, that the stpuaton was ntended to assert
that the sum of 31,434.25 was the measure of the resutng enhancement n
vaue of the rea estate at the date of the canceaton of the ease. The pet-
toner seems not to contest ths vew. ven upon ths assumpton we thnk that
gan n the amount named was reazed by the respondent n the year of
repossesson.
The respondent can not successfuy contend that the defnton of gross n-
come n secton 22(a) of the Revenue ct of 11)32 s not broad enough to
embrace the gan n queston. That defnton foows cosey the s teenth
amendment. ssentay the respondent s poston s that the amendment does
not permt the ta aton of such gan wthout apportonment amongst the States.
e rees upon what was sad In evctt Reaty Co. v. Commssoner, supra,
and upon e pressons found n the decsons of ths Court deang wth the
ta abty of stock dvdends to the effect that gan derved from capta must
be somethng of e changeabe vaue proceedng from property, severed from the
capta, however nvested or empoyed, and receved by the recpent for hs
separate use, beneft, and dsposa. e emphaszes the necessty that the gan
be separate from the capta and separatey dsposabe. These e pressons,
however, were used to carfy the dstncton between an ordnary dvdend and
a stock dvdend. They were meant to show that n the case of a stock dv-
dend, the stockhoder s nterest n the corporate assets after recept of the dv-
dend was the same as and nseverabe from that whch he owned before the
dvdend was decared. We thnk they are not controng here.
Whe t s true that economc gan s not aways ta abe as ncome, t s
setted that the reazaton of gan need not be n cash derved from the sae
of an asset. Gan may occur as a resut of e change of property, payment of
the ta payer s ndebtedness, reef from a abty, or other proft reazed from
the competon of a transacton. The fact that the gan s a porton of the
vaue of property receved by the ta payer n the transacton does not negatve
ts reazaton.
ere, as a resut of a busness transacton, the respondent receved back hs
and wth a new budng on t, whch added an ascertanabe amount to ts
vaue. It s not necessary to recognton of ta abe gan that he shoud be abe
to sever the mprovement begettng the gan from hs orgna capta. If that
were necessary, no ncome coud arse from the e change of property whereas
such gan has aways been recognzed as reazed ta abe gan.
udgment reversed.
The Chef ustce concurs n the resut n vew of the terms of the stpuaton
of facts.
Mr. ustce McReynods took no part n the decson of ths case.
S CTION 22(b). GROSS INCOM : CLUSIONS
ROM GROSS INCOM .
rtce 22(b) (2)-2: nnutes.
R NU CTS O 192 ND 1028.
G. C. M. 395 (C. . III-1, 7 (1929)) revoked. (See G. C. M
2171 , page 82.)
Ch. 209, 47 Stat.. 1 9, 178.
Ste sner v. Macombcr 52 . 8.. 189. 207 T. D. 3010. C. . 3, 25 (1920) 1) Unte
Utc v. Phe Us (2.17 . 8., 15 , 100 Ct D. 19. C. . 5. 37 (1921)1).
Cunan v. Waker (2 2 . S.. 134 Ct. D. 32. C. . II-. 51 (1023)1) Uarr v Unte
State, (208 U. S.. 53 T. D. 3755, C. . I -2, 11 (1925) ) Od Coony Trust Co v
Commssoner (279 . S 71 Cr. D. 80. C. . III-2. 222 (1922))) Unted States v
rby Lumber Co (28 U. S.. 1 Ct. D. 420. C. . -2. 350 (1931)1) heverno v mer.
nn Chce Co. (291 U. S., 42 ICt. D. 809. C. . III-1, 2 5 (1934) ) Unted States v
ender (303 U. S., 5 4 Ct. D. 1328, C. . 1938-1. 285 ).
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5 22(b), rt. 22(b) (2)-2.
11
rtce 22(b) (2)-2: nnutes.
1940-4-10148
G. C. M. 21
R NU CT O 1934.
Where the proceeds of a snge premum endowment pocy are
payabe at maturty In 120 equa monthy nstaments, the nsta-
ments receved consttute annuty payments and are ta abe In
accordance w th artce 22(b) (2)-2, Reguatons 80.
I. T. 2380 (C. . I-2, 32 (1927)) dstngushed.
n opnon s requested as to the proper treatment for edera
ncome ta purposes of the proceeds of an endowment pocy ssued
on the fe of , payabe n 120 equa nstaments, under the crcum-
stances heren set forth.
The pocy was ssued as a snge premum endowment pocy
payabe as foows:
In monthy nstaments, 120 stpuated, as provded n opton 1 heren, to
. the nsured s wfe, f vng, otherwse the whoe or the commuted vaue of
any unpad nstaments to be pad n one sum to hs chdren, C, D, , and .
equay, or to the survvors or survvor of them, f vng, otherwse n accord-
ance wth the optona methods of settement.
The foowng ndorsement appears on the face of the pocy:
In the event of the death of the sad pror to maturty of the pocy, the
proceeds are to be payabe to the nsured at the end of the endowment perod
n monthy nstaments, 120 stpuated, as provded In opton 1 heren, f
vng, otherwse the commuted vaue of any unpad nstaments to be pad to
the nsured s chdren, C, D, , and , equay, or to the survvors or sur-
vvor of them, If vng, otherwse n accordance wth the optona methods of
settement.
Durng the year 1935 the pocy matured and n that year the com-
pany began makng monthy payments to n accordance wth the
above-quoted ndorsement. The queston has been rased whether the
amount of 11a doars, whch s the e cess of the payments to become
due n the future on the pocy pus the dvdend accumuaton thereon
over the premum pad, shoud be treated as ta abe ncome to the
nsured n the vear 1935 under the concusons reached n I. T. 2380
(C. . I-2, 32 (1927)), ssued under the Revenue cts of 1924 and
192 and reatng to the method of determnng ncome derved upon
the maturty of certan endowment nsurance poces where the n-
sured survved the endowment perod. That rdng, n effect, hed
that the settements under the poces there nvoved resuted n the
constructve recept of the proceeds of the poces at the maturty
dates and the renvestment of such proceeds n accordance wth the
terms of settement.
Pror to the enactment of the Rsvenue ct of 1934, amounts receved
under a fe nsurance endowment or annuty contract were e cuded
from gross ncome unt the annutant had receved an aggregate
amount of payments equa to the tota amount pad for the annuty.
(See secton 22(b)2 of the Revenue ct of 1932 and the correspond-
ng provsons of earer Revenue cts.) owever, n the Revenue
ct of 1934, secton 22(b)2, Congress provded as foows wth
respect to annutes:
(b) cusons from gross ncome The foowng tems sha not be ncuded
n gross ncome and sha bo e empt from ta aton under ths tte:

(2) nnutes, etc. mounts receved (other than amounts pad by reason
of the death of the nsured and nterest payments on such amounts and other
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117
15 22(b). rt. 22(b) (2) -2.
than amounts receved as annutes) under a fe nsurance or endowment con-
tract, but f such amounts (when added to amounts receved before the ta abe
year under such contract) e ceed the aggregate premums or consderaton pad
I whether or not pad durng the ta abe year) then the e cess sha be ncuded
n gross ncome. mounts receved as an annuty under an annuty or en-
dowment contract sha be ncuded n gross ncome e cept that there sha be
e cuded from gross ncome the e cess of the amount receved n the ta abe
year over an amount equa to 3 per centum of the aggregate premums or con-
sderaton pad for such annuty (whether or not pad durng such year), unt
the aggregate amount e cuded from gross ncome under ths tte or pror
ncome ta aws n respect of such annuty equas the aggregate premums or
consderaton pad for such annuty.
rtce 22(b) (2)-, Reguatons 8 , promugated under the Revenue
ct of 1934, provdes as foows:
rt. 22(b) (2)-. Lfe nsurance ndowment contracts mounts pad other
than by reason of the death of the nsured. mounts receved under a fe
nsurance or endowment pocy (other than amounts pad by reason of the death
of the nsured, nterest payments on such amounts, and amouuts receved as
annutes) are not ta abe unt the aggregate of the amounts so receved (when
added to the amounts receved before the ta abe year under such pocy) e -
ceeds the aggregate premums or consderaton pad, whether or not pad durng
the ta abe year.
rtce 22(b) (2)-2 of Reguatons 8 provdes n part that:
mounts receved as an annuty under an annuty or endowment contract
Incude amounts receved n perodca nstaments, whether annuay, sem-
annuay, quartery, monthy, or otherwse, and whether for a f ed perod, such
as a term of years, or for an ndefnte perod, such as for fe, or for fe and
a guaranteed f ed perod, and whch nstaments are payabe or may be payabe
over a perod onger than one year. If an annuty s payabe n annua nsta-
ments, there sha be ncuded n gross ncome ony such porton of the amounts
receved n any ta abe year as s equa to 3 per cent of the aggregate premums
or consderaton pad for such annuty, whether or not pad durng such year.
s soon as the aggregate of the amounts receved and e cuded from
gross ncome equas the aggregate premums or consderaton pad for such
annuty, the entre amount receved thereafter n each ta abe year must be
Incuded n gross ncome.
The change n the aw and reguatons n regard to annutes,
especay n specfyng annutes under an endowment contract, ap-
pears to govern the present case. (See artce 22(b) (2)-2, Regua-
tons S . supra.) In ths case the pocy matured as an endowment
pavabe n 120 equa monthy nstaments. It s the opnon of ths
offce that such nstaments are receved as an annuty under an
endowment contract wthn the meanng of the statute.,
n annuty has been defned as a stated sum payabe perodcay at
stated tmes durng fe, or a specfed number of years, under an
obgaton to make the payments n consderaton of a gross sum pad
for such obgaton, whch gross sum s e hausted n the makng of
the perodc payments. (See generay So. Op. 1 0, C. . III-2, 0
(1924), and cases cted theren aso Report No. Senate Com-
mttee on nance, reatng to secton 22(b)2 of the Revenue ct of
1934, C. . 1939-1 (Part 2) . 04.) The perodc payments to n the
present case meet ths defnton of an annuty.
Snce secton 22(b)2 of the Revenue ct of 1934 does not requre
the ta payer to return for the year 1935 more than 3 per cent of the
consderaton pad for the annuty, there s no bass for the appca-
ton of the prncpes of constructve recept emboded n I. T. 2380,
supra, whch was promugated under the Revenue cts of 1924 and
192 . The aw as changed n the Revenue ct of 1934 and subse-
quent Revenue cts wth respect to the ta aton of. annutes w not
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23(a), rt. 23(a)- .
118
permt the genera appcaton of the constructve recept theory em-
boded n I. T. 2380, supra. ccordngy, that rung s not ap-
pcabe to the present case arsng under the Revenue ct of 1934.
It s the opnon of ths offce that artce 22(b) (2)-2 of Regua-
tons 8 s appcabe to the nstant case, and that the nstaments
receved under the annuty contract shoud be reported for edera
ncome ta purposes n accordance wth the provsons of that artce.
. P. Wenched,
Chef Counse, ureau of Interna Revenue.
S CTION 23(a). D DUCTIONS ROM GROSS
INCOM : P NS S.
rtce 23(a)-: usness e penses. 1940-4-10149
( so Secton 23(b), rtce 23(b)-.) Ct. D. 1435
INCOM T R NU CT O 1028 D CISION OP SUPR M COURT.
1. Gross Income Deductons Payments Made as Compensaton
for Loan of Stock Ordnary penses Interest on Indebt-
edness.
The ta payer, benefca owner of a substanta porton of the
toek of the Company, In 1929 borrowed from the T Company a
suffcent number of shares of stock of the Company to dscharge
an obgaton Incurred by hm n 1919, when he had borrowed from
another corporaton, under agreement to return n knd, such stock
whch he had sod to e ecutves of the Company n order that
they mght have a fnanca nterest n the company the ta payer
havng agreed to make the sae to the e ecutves because the com-
pany had been advsed that t coud not egay do so. Pursuant to
agreement made when the 1929 oan was negotated, the ta payer
n 1931 pad to the T Company an amount equvaent to the dv-
dends receved from the Company on the borrowed shares and
the amount of edera ncome ta es mposed upon the Y Company
by reason of such payments. ed: That, n computng the ta -
payer net ncome for 1931, such payments were not deductbe as
ordnary e penses nor as nterest on ndebtedness under sectou
23 (a) or (b) of the Revenue ct of 1928.
2. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, Thrd
Crcut (1939) (103 . (2d), 257), reversng the udgment of the
Dstrct Court of the Unted States, Dstrct of Deaware (1938)
(22 . Supp., 589), reversed.
Supreme Court of the Unted States.
ear . Deputy and the Susse Trust Co., a Corporaton of the State of Deaware,
as dmnstratr and dmnstrator of the state of I vrd P. Deputy,
Deceased, Late Coector of Interna Rcccnue, pettoner, v. Perre S. du Pont.
0 S. Ct., 3 3.
On wrt of certorar to the Unted States Crcut Court of ppeas for Us Thrd Crcut.
anuary 8, 1940.1
opnon.
Mr. ustce Dougas devered the opnon of the Court.
Ths case presents the queston of whether respondent n computng hs ta abe
not ncome for the year 1931 may deduct payments of 47,711.5 made by hm
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119
23(a), rt. 23(a)-
In that year to the Deaware Reaty Investment Co. (herenafter caed the
Deaware company). The deducton Is sought ether under secton 23(a) of the
Revenue ct of 1928 (45 Stat, 791) as ordnary and necessary e penses pad or
ncurred durng the ta abe year n carryng on the trade or busness
of respondent or under secton 23(b) as nterest pad or accrued
wthn the ta abe year on Indebtedness. The Commssoner dsaowed the
deducton and determned a defcency, whch respondent pad and now seeks to
recover. It s agreed that f the deducton s aowed, respondent s entted to
|udgment for 172,301. 4. The |udgment of the dstrct court aganst respondent
(22 P. Supp., 589) was reversed by the crcut court of appeas (103 . (2d), 257).
We granted certorar been use of the asserted Inconsstency of that rung wth
Wech v. cverng (290 U. S., I Ct. D. 755. C. . II-2, 112 (1933) ), whch
construed the meanng of the words ordnary and necessary e penses and
wth urnet v. Cark (287 U. S., 410 Ct. D. 020, C. . II-1, 175 (1933) ), whch
mted such deductons to osses drecty connected wth the ta payer s busness.
Respondent s cam to the deducton arose out of the foowng transactons,
brefy summarzed. Respondent was benefca owner of about 1 per cent of
the stock of . I. du Pont de Nemours Co. (herenafter caed the du Pont
company). In 1919 the du Pont company consttuted a new e ecutve commttee
composed of nne young men. )r busness reasons, t thought t desrabe
that these men have a fnanca nterest n the company. eged ega dffcu-
tes stood n the way of the du Pont company seng them the 9,000 shares
desred.1 ccordngy, respondent undertook to se them 1,000 shares each.
ut snce he dd not have ready avaabe that amount from hs own hodngs,
he borrowed 9,000 shares of the du Pont company from Chrstana Securtes
Co.. under an agreement whereby he agreed to return the stock oaned n knd
wthn 10 years and n the nterm to pay to the ender a dvdends decared
and pad on the shares so oaned.1 Respondent thereupon sod the shares to the
nne e ecutves, the purchase prce beng furnshed by the du Pont company.
In October, 1929, when the 10-year perod was about to e pre, respondent dd
not have avaabe the number of shares whch ho was obgated to return to
Chrstana Securtes Co. Therefore, he arranged for a oan from the Dea-
ware company of the number of shares necessary to dscharge that obgaton.
Under a contract wth that company, respondent agreed to return n knd the
number of shares oaned (pus any ncrease by stock dvdend or otherwse)
s stated by the dstrct court, counse advsed that the du Tont company coud Issue
stock ony for money pad, abor performed, or rea or persona property acqured and
that f the stock were to bo ssued for cash, t must frst be offered to e stng stock-
hoders. ccordng to the fndngs the du Pont company dd not have f.nun shares of ts
stock, other than unssued stuck: that stock was not then sted on the New York Stock
change and the over-the-counter market was qute nactve. Nne thousand shares
coud not have been purchased on ths market wthout substantay rasng the prce per
share.
Respondent had avaabe ony 74 shares. e had a reversonary Interest In two trusts
whch hed 24.000 shares. nd he was the owner of 20.125 shares of common stock of
Chrstana Securtes Co. out of a tota of 75.000 shares ssued and outstandng. That
company was then the owner of 183,000 shares of common stock of the du Pont company
oat of a tota of 088,542 shares Issued and outstandng.
Supra, note 2.
s securty respondent gave Chrstana Securtes Co. 3,800 shares of ts capta stock.
dvdends on that stock were to be pad to respondent.
s These saes were made at the prce of 320 a share, that beng appro matey ther
book vaue. The du Pont company oaned to each of the nne e ecutves the ne essary
funds to purchase hs 1,000 shares. They pad respondent 2,880,000 n cash for the
t .000 shares. ccordng to respondent s bref, he turned over ths sum through transac-
tons n Genera Motors stock whch utmatey yeded hm a great proft. (See du Pont
v. Commssoner, 37 . T. ., 1198.)
y March, 1021, the stock of the du Pont company had decned In vaue and the
bargan made by the e ecutves had become a dsadvantageous one. Respondent thereupon
offered to turn over 400 shares of the Chrstana Securtes Co. (of a net vaue of
1 0,000) to be hed by the du Pont company as addtona coatera on the oan made
to these e ecutves, respondent to have the rght to redeem those 400 shares by payment
of 1 0,000 on maturty of the oan, that payment. If made, to be apped to the oan. If
respondent faed to redeem those shares, they were to become the property of the e ecu-
tve on payment of ther oans. Meanwhe dvdends on the 400 snares up to 8,000 per
annum were to go to the e e uvps. rh haunce to respondent who was. however, to return
hs porton to the e ecutves If he dd not redeem the stock. Ths offer was accepted by
the e ecutves. Respondent when he pro w sed t. stnted that he dd so as a arge stock-
hoder, and. perhaps, the one to be most benefted by the recovery n vaue of the company s
shares. e aso stated that he wanted the e ecutves to be free of worry over the
tme pended outcome of the stock purchase pnn.
Due to stock dvdends and spt-ups respondent was obgated to return to Chrstana
Securtes Co. 142.212 shares to repace the 9.000 shares whch he had borrowed.
Respondent was not a stockhoder of the Deaware company, athough It appears that
bs brother was one of ts e ecutve offcers.
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523(a), rt. 2 0(0-1.
120
wthn 10 yea : to pay to the Deaware company an amonnt equvaent to a
dvdends deefar d and pad on the borrowed shares unt returned and to
remburse the Deaware company for a ta es accrung aganst t by reason
of the agreement.
Pursuant to that agreement respondent pad the Deaware company n 1931,
the sum of 5 7, 48, beng an amount equvaent to the dvdends receved by
hm durng that perod from the du Pont company on the borrowed shares and
the sum of 80,0 3.5 , beng the amount of the edera ncome ta mposed
upon the ender by reason of the foregong payments whch t had receved
from respondent. These are the e pendtures camed as a deducton n the
present sut.
The dstrct court concuded, on the bass of respondent s arge and dversfed
nvestment hodngs and hs wde fnanca and busness nterests, that hs
busness was prmary that of conservng and enhancng hs estate. The
pettoners chaenge that concuson, assertng that respondent s actvtes n
connecton wth conservng and enhancng hs estate dd not consttute a
trade or busness wthn the meanng of secton 23(a) of the ct.
ut as we vew the case t Is unnecessary for us to pass on that contenton
and to make the decate dssecton of admnstratve practce whch that woud
enta. or we are of the opnon that the deductons are not permtted ether
Wthn the rue of urnet v. Cark or Wech v. everng, supra, even though
we were to assume that the actvtes of respondent consttuted a busness, as
found by the dstrct court
There Is no ntmaton n the record that the transactons whereby the stock
was borrowed were not n good fath or were entered nto for any reason
e cept a bona fde busness purpose. Nor s there any suggeston that the
transactons were cast n that form for purposes of ta avodance. nd t s
true that as respects the dvdends receved by respondent and pad over to
the Deaware company, he was tte more than a condut. ut aowance of
deductons from gross ncome does not turn on genera equtabe consderatons.
It depends upon egsatve grace and ony as there s cear provson therefor
can any partcuar deducton be aowed. (.New Coona Ice Co., Inc., v.
rverng, 292 U. S., 435, 440 Ct. D. 841, C. . I-1, 104 (1034) .) nd
when t comes to constructon of the statutory provson under whch the
deducton Is sought, the genera rue that popuar or receved mport of words
furnshes the fefeTa rue for the nterpretaton of pubc aws, Maard r.
Laurence (1 ow., 251, 2 1), s appcabe.
y those standards the camed deducton fas for two reasons. In the
frst pace, the payments n queston do not meet the test enuncated n orn-
hauser v. Unted States (27C D. S., 145 T. D. 4222, O. . I1-2, 2 7 (1928) ).
snce they pro matey resut not from the ta payer s busness but from the
busness of the du Pont company. The orgna transactons had ther orgn
n an effort by that company to Increase the effcency of ts management by
eng ts stock to certan of ts key e ecutves. The respondent undertook
to furnsh the necessary stock Ony after the company had been advsed that
It coud not egay do so. In that posture of the case these payments are no
more deductbe than were the payments made by the stockhoder n urnet
. Cark, supra, as a resut of hs Indorsements of the obgatons of hs cor-
poraton. Those payments were dsaowed as deductons from hs gross ncome
though they arose out of transactons whch were ntended to preserve hs n-
vestment n the corporaton. Smar payments were dsaowed n Dnton v.
ower (287 U. S.. 404). ence, the fact that the transacton out of whch
the carryng charges here n queston arose mght beneft respondent does not
brng It wthn the ambt of hs aeged busness of conservng and enhancng
hs estate. The we estabshed decsons of ths Court do not permt any such
bendng of the corporaton s busness wth the busness of Its stockhoders.
ccordngy, the payments made under the 1919 agreement woud certany not
be deductbe. nd the fact that a new and dfferent ar angement was made
n 1929 wth the Deaware company does not ater the concuson, for t s
the orgn of the abty out of whch the e pense accrues whch s matera.
Otherwse carryng charges on any short sae whether or not reated to the
busness of the ta payer woud be aowabe as deductbe e penses. That can
not be f the noton of pro mate resut Impct n the statutory words
e penses pad or ncurred n carryng on any trade or busness s
to have any vtaty.
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121
23(a), rt. 23(a)-.
In the second pace, these payments were not ordnary ones for the conduct
of the knd of busness n whch, we assume arguendo, respondent was engaged.
The dstrct court hed that they were beyond the norm of genera and
accepted busness practce and were In fact so e traordnary as to occur n
the res of ordnary busness men not at a and n the fe of the respondent
but once. 8 Certany there are no norms of conduct to whch we have been
referred or of whch we are cognzant whch woud brng these payments
wthn the meanng of ordnary e penses for conservng and enhancng an
estate. We do not doubt the correctness of the dstrct court s fndng that
respondent embarked on ths program to the end that hs benefca stock
ownershp In the du Pont company mght be conserved and enhanced. ut
that does not make the cost to hm an ordnary e pense wthn the meanng
of the ct. Ordnary has the connotaton of norma, usua, or customary.
To be sure, an e pense may be ordnary though It happen but once n the ta -
payer s fetme. (Cf. ornhauser v. Unted States, supra.) Yet the transac-
ton whch gves rse to t must be of common or frequent occurrence n the
type of busness nvoved. (Wech v. Itererng, supra, 114.) ence, the fact
that a partcuar e pense woud be an ordnary or common one n the course
of one busness and so deductbe under secton 28fa) does not necessary
make t such n connecton wth another busness. Thus, t has been hed that
one who was an actve trader n securtes mght take as deductons carryng
charges on short saes snce seng short was common n that busness.9 ut
the carryng charges on respondent s short sae n ths case can not be accorded
the same prvege under secton 23(a). The record does not show that
respondent was n the busness of tradng n securtes. Nor does t show
that a stockhoder engaged n conservng and enhancng hs estate ordnary
makes short saes or smary asssts hs corporaton n fnancng stock pur-
chase pans for the beneft of ts e ecutves. s stated n Wech v. ercrng,
supra, pages 113-114 . What s ordnary, though there must aways
be a stran of constancy wthn t. s none the ess a varabe affected by tme
and | ace and crcumstance. One of the e tremey reevant crcumstances
s the nature and scope of the partcuar busness out of whch the e pense
n queston accrued. The fact that an obgaton to pay has arsen s not
suffcent. It s the knd of transacton out of whch the obgaton arose and
ts normacy n the partcuar busness whch are cruca and controng.
Revew of the many decded cases s of tte ad snce each turns on ts
speca facts. ut the prncpe s cear. nd on appcaton of that prncpe
tf. these facts, t seems evdent that the payments n queston can not be paced
n the category of those tems of e pense whch a conservator of an estate, a
custodan of a portfoo, a supervsor of a group of nvestments, a manager of
wde fnanca and busness nterests, or a substanta stockhoder n a corpora-
ton engaged n conservng and enhancng hs estate woud ordnary ncur.
We can not assume that they are embraced wuhn the norma overhead or
operatng costs of such actvtes. There s no evdence that stockhoders or
nvestors, n furtherance of enhancng and conservng ther estates, ordnary
or fp-quenty end such assstance to empoyee stock purchase pans of ther
corporatons. nd n absence of such evdence there s no bass for an assump-
ton, n e perence or common knowedge, that these payments are to be paced
In the same category as typcay ordnary e penses of such actvtes, e. g.,
renta of safe depost bo es, cost of nvestment counse or of nvestment servces,
saares of secretares and the ke. Rather these payments seem to us to
represent most e traordnary e penses for that type of actvty. Therefore,
the cam for deducton fas, as dd the cam of an offcer of a corporaton
who pad ts debts to strengthen hs own standng and credt. (Wech v. I e-
terng, supra.) nd the fact that the payments mght have been neeessary
h the sense that consummaton of the transacton wth the Deaware company
was benefca to respondent s estate s of no ad. or Congress has not decree
22 . Supp.. r 8n, 537.
Dart v. Commngonrr (74 . (2d), 845). Cf. Trrhe v. Cnmm noner (2f n. T. .,
44. affd 71 . (2d), 1017), where such carryng charges were dsaowed as deductons.
The oard of Ta ppeas sad, page 45. We have ony the stpuated facts and there
Is no suggeston n those facts that the decedent was engaged In the busness of makng
hort saes or In deang In securtes generay.
252208 40 5
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23(b), rt. 23(b)- .
122
that n necessary e penses may be deducted. Though pany necessary they
can not be aowed uness they are aso ordnary. (Wech v. crerng, supra.)
We concude then on ths phase of the case that as the dstrct court, on a
correct nterpretaton of the ct, found that these payments dd not pro matey
resut from, and were not ordnary e penses for the conduct of, respondent s
aeged busness, It was error for the crcut court of appeas to reverse the
udgment for pettoners. (McCaughn v. Rea state Land Tte t Trust Co.,
297 U. S., 0 .)
There remans respondent s contenton that these payments are deductbe
under secton 23(b) as nterest pad or accrued on Indebtedness.
Ceary respondent owed an obgaton to the Deaware company. ut athough
an ndebtedness s an obgaton, an obgaton Is not necessary an ndebted-
ness wthn the meanng of secton 23(b). Nor are a carryng charges
nterest. In Od Coony Raroad Co. v. Commssoner (284 U. S., 552 Ct. D.
45 , C. . I-1, 274 (1932) ) ths Court had before t the meanng of the word
nterest as used n the comparabe provson of the 1921 ct (42 Stat., 227).
It sad, page 5 0, as respects nterest, the usua mport of the
term s the amount whch one has contracted to pay for the use of borrowed
money. It there re|ected the contenton that t meant effectve nterest
wthn the theory of accountng or that Congress used the word havng n mnd
any concept other than the usua, ordnary and everyday meanng of the term.
(Page 5 1.) It refused to assume that the Congress used the term wth
reference to some esoterc concept derved from subte and theoretc anayss.
(Page 5 1.)
We kewse refuse to make that assumpton here. It Is not enough, as urged
by respondent, that nterest or ndebtedness n ther orgna cassca
conte t may have permtted ths broader meanng.10 We are deang wth
the conte t of a Revenue ct and words whch have to-day a we-known
meanng. In the busness word nterest on ndebtedness means compen-
saton for the use or forbearance of money. In absence of cear evdence to
the contrary, we assume that Congress has used these words n that sense.
In sum, we can not sacrfce the pan, obvous and ratona meanng of the
statute even for the e gency of a hard case. (See Ltmch v. hcorth-
Stephens Co., 2 7 U. S., 3 4, 370 T. D. 3 90, C. . I -1,1 2 (1925) .)
Pettoners throughout have referred to these payments by respondent ns
beng capta n nature. (Cf. onwt Teer d Co. v. Commssoner, 53 .
(2d). 381 utton v. Commssoner, 39 . (2d), 4.19 Ct. D. 249, C. . I -2. 353
(1930) ng v. Ueverng, 7 P. (2d), 941.) What approprate treatment may
be accorded these tems of cost under other provsons of the ct we do not
undertake to say, as that ssue s not here.
The |udgment of the crcut court of appeas s reversed and that of the
dstrct court s fffrmed.
It s so ordered.
S CTION 23(b). D DUCTIONS ROM GROSS
INCOM : INT R ST.
rtce 23(b)-1: Interest.
R NU CT O 1028.
Payments made as compensaton for oan of stock. (See Ct. D.
1435, page 118.)
Respondent refers to the mutnum In Roman aw. Lede s Sohm a Insttutes of
Roman Law (2d. ed.), page 31)5 are, The Law of Contracts, page 73.
11 Ths makes rreevant other nes of authorty cted by respondent where nterest
In a dfferent conte t has been used to descrbe damages or compensaton for the detenton
or use of money or of property. See Unted States v. orth Carona (13 U. 8., 211, 210)
New York Genera usness Law. secton 370, whch provdes, The rate of Interest upon
the oan or forbearance of any money, goods, or thngs, In acton sha be s
doars upon oue hundred doars, for one year, .
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123
23(c), rt. 23(c)-.
S CTION 23(c). D DUCTIONS ROM GROSS
INCOM : T S G N R LLY.
rtce 23(c)-1: Ta es. 1940-2 -10302
G. C. M. 22113
R NU CT O 1034.
Deductbty of New ersey rea property ta es where a con-
veyauce s made after the annua assessment of such ta es.
n opnon s requested as to the e tent of the appcaton of the
decson of the Crcut Court of ppeas for the Thrd Crcut n
Commssoner v. Mnne M. Coward (110 . (2d), 725, Ct. D. 1458
beow ), reatng to the deducton for edera ncome ta purposes
of New |ersey rea property ta es n cases where there s a con-
veyance of reaty subsequent to the annua assessment of such ta es.
The court n the Coward case hed that as between grantor and
grantee n such cases there shoud be an apportoned deducton for
edera ncome ta purposes under secton 23(c) of the Revenue
ct of 1934. It hed that the purchaser of reaty n New ersey s
entted to deduct that proporton of the ta es for the entre caendar
year whch the ength of tme he owned the property durng such
year bears to the entre caendar year, even though assessment there-
for had been made whe the seer hed the property.
Snce the concuson reached by the court n the Coward case s
based upon statutes pecuar to New ersey, the appcaton of that
decson w be confned to cases nvovng New ersey rea property
ta es. The ureau poston reatng to the genera queston of ac-
crua of such ta es, set forth n G. C. M. 15305 (C. . I -2, 80
(1935)), s not dsturbed by the decson n the Coward case, snce
the court s rung s appcabe ony where there has been a con-
veyance of the assessed reaty.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
rtce 23(c)-: Ta es. 1940-20-10303
Ct. D. 1458
ncome ta revenue act of 1934 decson of court.
Deducton Ta es Pad ob cckued Wthn Ta abe Yeab Ta es
on Rea state New e|sey Law.
ta payer who pad 1934 rea estate ta es to the State of New
ersey on propertes acqured on October 10, 1933, and anuary 8,
1934. s entted, under secton 23(c) of the Revenue ct of 1034,
to a deducton from gross ncome n the amount of ta es so pad,
e cept as to eght three hundred and s ty-ffths of the ta pad
on the property acqured on anuary 8, 1034, such fractona part
not beng deductbe In vew of the oca aw whch provded, as
to themseves aone, for apportonment of ta es between seer and
buyer on the bass of the tme property was hed by each durng
the caendar year. though under the oca aw rea estate ta es
are assessed on October 1 of each year to the owner thereof wth
reference to the amount then owned, such ta es consttute a a-
bty n rem the pree stence of whch dots not deprve a purchaser
who ater dscharges t of the beneft of a deducton for edera
ncome ta purposes.
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23(c), rt. 23(c)-.
124
Unted States Crcut Court op ppeas fob the Trd Cr tcrr.
Commssoner of Interna Revenue, pettoner, v. Mnne 31. Coward, respondent.
110 . (2d), 723.
Petton for revew from te Unted States oard of Ta ppeas.
efore nes, C- rk, and ones, Crcut udges.
ebruary 23, 1010.
OPINION.
Cautc, Crcut udge: The controversy at bar centers about the ong standng
provson for te deducton from gross ncome of ta es pad or accrued wthn
the ta abe year (2 U. S. C. ., secton 23(c)). The enactment s smpe:
ts appcaton s. n our crcumstance, an thng but smpe. We must strugge
frst, wth the perpe ng ntrcaces of the New ersey scheme of rea estate
ta aton, and second, n order to apprase the pertnent edera decsons wth
the equay perpe ng dverstes e stng between that and other oca ta
systems. (See Pau, The ffect on edera Ta aton of Loca Rues of Property,
Seected Studes n dera Ta aton, 1, 23-24.)
On October 1 of each year a property n the State of New ersey Is assessed
to the owner thereof wth reference to the amount then owned.1 In the year
1933, that property ncuded two parces of mproved ncome producng rea
estate owned by one . ut wthn a few months respondent had acqured
(presumaby by purchase) these parces from , one on October 1 , 1933, the
other on anuary 8, 1934. Then on anuary 10, 1934, the st of assessments
whch had been n the course of preparaton snce the 1st of October prevous
was fed wth the county board of ta aton. ThereDon the board consdered
the revson of assessments and the amount of revenue to be rased durng the
current year (1934) for schoo, State, and oca, purposes. It f ed the oca
ta rate on March 10, 1934, and by pr 1, 1934, a revsed and corrected dup-
cate st of assessments certfed as a true (and pubc) record of the ta es
assessed was devered to the coector. Meanwhe however, and on ebruary
1, 1934, the frst nstament of the 1934 ta es had become payabe (the amount
beng estmated wth reference to the ta es for the prevous year). The second
nstament (kewse estmated) became payabe on May 1, 1934, and the thrd
and fourth (ad|usted to the estmates so as to tota the by then determned
amount of the 1934 ta ) on ugust and November 1, 1931, respectvey. Re-
spondent pad each nstament of the 1934 ta on her propertes wthout deay.
If she had not done so, a en for them woud have attached on December 1,
1934.
rom ths weter of chronoogy, the Commssoner deduces that respondent,
who keeps her books on the cash bass, s not entted to deduct from her gross
ncome for 1934 the rea estate ta es pad by her n 1934. s he reasons, the
sums pad were not ta es at a, but, rather part of the cost of the two parces.
The argument s founded on precedent rather than prncpe, and proceeds
syogsteay as foows. Ma|or premse: one who purchases rea estate upon
whch oca ta es have accrued may not deduct the ater payment of those ta es
as ta es pad. Mnor premse: New ersey rea estate ta es had aready
accrued (at the date of assessment, October 1, 1933) on respondent s propertes
by the tme she acqured them (October 1 , 1933, anuary 8, 1934). Concu-
son: Respondent s not entted to her deducton.
The oard denes the mnor premse and hence reaches an opposte con-
cuson. Yet n dong so t does not ook behnd the mseadng termnoogy
of accrua empoyed n bot premses. s a consequence a concerned succumb
to the nfuence of a ne of cases whch, we thnk, are competey besde the
2 Cum. Supp. (1024) Conp. Stat., secton 208-COd (20 ).
2 Cum. Supp. (n 4) Comp. Stat.. ecton 0 M d ( () ).
2 Cmn Supp. (1024) Comp. Stat., secton L S-Ofd (507).
2 Cum. Snp. (1P24) Comp. Stat., secton 20.3-ORd (50: ).
2 Cum. Supp. (1024) Comp. Stat., secton 208-fOd (.104).
2 Cum. Supp. (1 24) Comp Stat., secton 20 -O d (508).
Cum. Supp. (19 . 4 Comp. Stat., secton 20S OGd (50 ).
P. L. 10: 3. ch. 200. 710.
2 Cum. Supp. (1924) Comp. Stat., secton 20S. 44a (0).
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125
23(c), rt. 23(c)-.
pont. These have to do wth the nterpretaton of the word accrued. That
Interpretaton, as Is e pressy provded by statute (20 U. S. C. ., 48), es
n the fed of accountancy on the accrua bass. The decsons are accordngy
drected to the partcuar pont of tme when accounts payabe (ncudng ta es)
may be sted on the ta payer s books offsettng accounts recevabe so as to
farv refect the ta paver s net Income. (See Unted States v. nderson, 2 9
C. S., 422 (T. D. 3823, C. . -, 179 (192 ) 3 Pau Mortens, Law of edera
Income Ta aton 23, 33.) ere, on the other hand, the word under constructon
s ta es not accrued. We must determne whether a gven payment Is a
forced contrbuton to the e pense of government, or whether t s somethng
ese a vountary capta e pendture, for e ampe. Its souton must e n a
cose anayss of the transacton of payment. It can not, n our |udgment, be
soved by any rue of thumb that a property owner s payment Is not one of a
ta on hs property because a pror owner (on the accrua bass) mght have been
permtted to accrue t. or that permsson to accrue may depend on technca
e gences of accountng uttery foregn to the ater owner s economc poston
n actuay makng the payment. That beng so, our decson may be nether
framed wthn the Commssoner s syogsm, nor guded by the accrua bass
cases.
Turnng then, to the decsons whch have actuay come to grps wth the
probem at bar, we fnd them suggestng two and ony two types of trans-
actons where rea estate ta es are not ta es wthn the meanng of the
statute. In the frst, property s sod and the buyer promses the seer to pay
certan ta es on the property. There, by e press contract, the payment of
ta es s part of the consderaton for the sae, and not a payment qua ta es.
ak Corporaton v. Commssoner, CO . (2d), 201 (C. C. . 7).) It Is aso
possbe that such a contract mght be mped n fact f the seer were per-
sonay abe for the ta , for t woud be dffcut otherwse to account for the
buyer s munfcence n payng t. (See Wash McGure Co. v. Commssoner, 97
. (2d), 983 (C. C. . ).) The second transacton s the purchase of prop-
erty to whch a ta en has attached. That property has n a sense two
owners, the seer, and, through the en, the State. ence Its fu acquston
entas two payments, the nomna purchase prce, and the ta es represented by
the en. oth have been treated ake as capta e pendtures.10 Where, on
the other hand, the ta payment fas nto nether of these two categores
where t nether dscharges (by contract, e press or mped) the persona
abty of another, nor what was orgnay a ta en on another s property
the deducton has been permtted. (Commssoner v. Pestschecff, 100 . (2d),
2 (C. C. . ) Ct. D. 1410, C. . 1939-2, 200 .)
Tested by these authortes, respondent s payment to the New ersey ta co-
ector In 1934 s ceary one of ta es. There Is no ndcaton of any e press
contract for ther payment, Mr. , from whom she purchased, was not personay
abe for them,u and the property was not sub|ect to any en for then when
she acqured t Indeed no such en was possbe unt a year or so after tte
passed to her (see mpress Mfg. Co. v. Newark, 109 N. . L., 131, 133, 1 0 ., 388,
389). Those authortes, however, do not dea wth the New ersey ta system and
are not n strctness, appcabe for t. It s necessary, then, to consder the
effect of one of the features of that system whch s not stressed n the cases
arsng from other States.
Respondent s two parces were, n theory, aready abe for the 1934 ta es
when she purchased them. That Is to say, nothng whch occurred after the
assessment of October 1, 1933, coud ater the fact that the and tsef must
utmatey yed those ta es ether drecty through the eventua forecosure of a
ta en, or ndrecty through the medum of ts then or subsequent owner s
pocketbook. If, for Instance, the and assumed a ta e empt status on October
2, 1933, t woud, nevertheess, bear ts fu share of 1934 ta .11 The presence of
-.. mwUmrr (OR . (2d), 0R (C. C. . f ). certorar dened. 805 D. S C2,
t, 3Z rtneS 30G r S 18 tCt 1400. C. . 1030-2. 10811 : rherng v. Mssour
SR fc tMM tmt ffts v SW
1 0 .. 832) : orough of Wrghtstown v. Savaton rmy (07 N. . L,., 80, M ., OT)
cS v. MonMe TovmMp (84 N. . L..48. W.|W/| -ff
91 ., 1009) Unted States v. Mayor and Counc of oooken, W. . 29 (2a) 9.S2,
940) and fe. Ytmno Men s Chrstan ssocaton y. OrawetZ . Msc.. 404. 128
80) Lanoport . amberger Seashore ome (01 N. . L., 330. 10.2 ., . .S), nn tte or
oy nges v. ort Lee (80 N. . L., 545. 77 .. 1035).
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23(c), rt. 23(c)-. 12
ths abty n rem may we afford a bass for accrung the ta n the account-
ng sense. ut does ts prce stence deprve the purchaser who ater dscharges
t of hs ncome ta deducton
We thnk not. New ersey statute provdes that n the absence of an e press
agreement to the contrary the buyer of rea estate may hod the seer abe
for such proporton of the current year s ta es as the tme between anuary 1
and the date of the deed bears to the fu caendar year (2 Cum. Supp. (1929)
Comp. Stat., secton 2G3-C d (514)). Ths statute does not affect the en for
unpad ta es the crystazaton of the and s abty n rem. So the fact that
the property has been assessed pror to sae, does not n the eyes of the New
ersey Legsature, mean that the ta resutng from that assessment s to be
borne by the seer. It s aways borne by the and n the frst nstance. ut as
between buyer and seer t s apportoned on the bass of the caendar year.
In other words, t s consdered far that the owner of aud n any gven year
sha be caed upon to contrbute to the year s revenues ony a sum commen-
surate wth the ength of tme the and has been hed In that year e cept of
course, n the rare case of the pror owner s nsovency. Such a contrbuton s,
n our |udgment, a ta n every sense of the word. nd that, wth the e cepton
of eght three hundred s ty-ffths of the ta on the parce acqured on auuary
8, 1934, s what respondent pad here.
We may say that any other concuson tends to work a hardshp on the ta -
payer hardy contempated by the broad anguage of the statute. In ths cass
of cases too great an nsstence upon assessment or, ndeed, upon the en when
t reates back to the tme of assessment, w often ead to puzzng anomaes.
If a Ihe property n one State were to change hands mmedatey after assess-
ment, ta es eved on that assessment woud, presumaby, be pad by the new
owners. The ta es so coected woud be used by the State to defray the e penses
of government. Yet shoud none of the nhabtants of that State he permtted
a edera ncome ta deducton for ta es pad nay, we observe that
respondent s ta abe ncome for 1934 was for the most part derved from her rea
estate. Wth the e cepton, agan, of eght three hundred s ty-ffths of the
ta on the parce acqured anuary 8, 1934 that parce yeded respondent no
ncome for the frst eght days of the ta year one can not magne a cearer
economc case for the deducton.
s Indcated by our reasonng, however, respondent shoud not be permtted
to deduct a sma fracton (eght three hundred s ty-ffths) of the ta on one of
her hodngs. Indeed for aught that appears n the record she coud proceed
under the New ersey apportonment statute and recover that sum. It foows
that a sght error was commtted n aowng respondent to deduct the fu
amount camed n her return for ta es. The cause Is accordngy remanded
to the oard of Ta ppeas for further proceedngs In conformty wth the
vews e pressed In ths opnon.
u Genera Counse s memorandum so hods, sayng:
(he ureau has never taken the poston that In so far as the accrua of
rea property ta es s concerned the owner must be personay abe for such ta es

In the norma course of events the owner of rea property n New ersey on October
1 of anv Rven year w pay the ta es eved as of thnt date. Ths s suffcent for the
purpose of accrua. (G. C. M. 15305. C. . I -2 (1935), 80-83.)
Ths rung s not n harmony wth the theory, generay announced, that rea estate
ta es accrue In the absence of persona abty at the tme the ta en takes efrWt
(see eMmme v. Commssoner, 39 . T. ., 989, 993, and eases there cted (Income ta_
Thomson et a. v. Unted States, 8 . (2d), 175 (estate ta ). arborne v. Comm sn,, rr
40 . T. ., 721, 732 (estate ta ). Peopes Water rf Oas Co. v. Cty of Yaneouver 1
(2d), 909 (C. C. . 9) ( accrued used n contract)), tnke many |ursdctons how
ever, the attachment of the ta en occurs n New ersey as the ast rather than the
frst step n the ta cyce. Snce there s no use accrung ta es whch nre nrendv -
tnquent. the Genera Counse s faure to foow the genera theory s ready uners tuv
abe. s poston, on the other hand, s open to the practca ob|ecton that no ew
ersey ta payer knows what amount to accrue between October 1 (date of assessment Tw
December 31 (the end of the edera ta year) ( s, Deductons for ccrued Tas |
Ta Mag., 1471). ut f the accrua date Is shfted hack to the tme the amount of tn
has been f ed, two nstaments w have aready become denquent. We recte th
demma n order to reemphasze the dvergence n approach and prncpe between v.2.
accrua bass cases aDd the case at bar. e
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127
23(e), rt. 23(e)-.
S CTION 23(e). D DUCTIONS ROM GROSS
INCOM : LOSS S Y INDI IDU LS.
rtce 23(e)-: Losses by ndvduas. 1940-4-10150
Ct. D. 1434
INCOM T R NU CT O 1932 D CISION O SUPR M COURT.
1. Gross Income Deducton Loss on Sae of Stock by Ind-
vdua to Whoy Owned Corporaton.
ta payer, whoy ownng a corporaton and drectng Its trans-
actons whch were restrcted argey to operatons n buyng
securtes from or seng them to the ta payer, s not entted,
under secton 23(e) of the Revenue ct of 1932, to deduct a oss
arsng n 1932 from the sae of securtes to the corporaton at a
prce ess than ther cost to hm.
2. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, Second
Crcut (1939) (102 . (2d), 45 ), reversed.
Supreme Court of the Unted States.
oseph T. ggns, Coector of Interna Revenue for the Thrd Dstrct of New
York, pettoner, v. ohn Thomas Smth.
0 S. Ct, 305.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Second Crcut.
anuary 8, 1940.
opnon.
Mr. ustce Reed devered the opnon of the Court.
Certorar was aowed1 from the udgment of the Crcut Court of ppeas
for the Second Crcut on account of an asserted confct between the decson
beow and that of the Crcut Court of ppeas for the Seventh Crcut n
Commssoner v. rffths.
The ssue consdered here s whether a ta payer under the crcumstances
of ths case Is entted to -deduct a oss arsng from the sae of securtes
to a corporaton whoy owned by the ta payer. The statute Invoved s secton
23(e) of the Revenue ct of 1932.
The Innsfa Corporaton was whoy owned by the ta payer, Mr. Smth.
It was organzed n 192 under the aws of New ersey. The offcers and
drectors of the corporaton were subordnates of the ta payer. Its trans-
actons were carred on under hs drecton and were restrcted argey to
operatons n buyng securtes from or seng them to the ta payer. Whe
Its accounts were kept competey separate from those of the ta payer, there
s no doubt that Innsfa was hs corporate sef. s deangs by a corporaton
offered opportuntes for ncome and estate ta savngs, Innsfa was created
to gan these advantages for ts stockhoder. One of ts frst acts was to
take over an opton beongng to the ta payer for the acquston by e change
308 U. S.. .
102 . (2d). 4.r .
103 . (2d), 110. affrmed nom. rffths v. CommUsoner (308 U. S., ), No. 49
October term 1039. decded December 18, 1939.
M7 Stat., 1C9, 179-180:
Sec 23. Deductons from Onoss Income.
In computng net ncome there shn be aowed as deductons :
(e) Lowes oy ndvduas. Sub|ect to the mtatons provded In subsecton (r) of
ths secton, In the case of an ndvdua, osses sustaned durng the ta abe year and
not compensated for by nsurance or otherwse
(1) f ncurred n trade or busness: or
(2) f ncurred n any transacton entered nto for proft, though not connected wth
the trade or busness .
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23(e), rt. 23(e)- .
12S
of a bock of Chryser common stock. Through mutua transactons In buyng
and seng securtes, and recevng dvdends, the baance of accounts be-
tween Innsfa and the ta payer resuted, on December 2(), 1932, n an n-
debtedness from hm to Innsfa of neary 70,000. On that date, as a parta
payment on ths ndebtedness, a number of shares of stock were sod to the
corporaton by the ta payer at market. The securtes sod had cost the
ta payer more than the prce charged to the corporaton, and n carryng out
the transacton the ta payer had In mnd the ta consequences to hmsef.
In computng hs net ta abe ncome for 1032, the ta payer deducted as a
oss the dfference between the cost of these securtes and ther sae prce
to hs whoy owned corporaton. The Commssoner of Interna Revenue
rued aganst the cam, whereupon respondent pad the ta and brought
ths sut for refund n the Unted States Dstrct Court for the Southern
Dstrct of New York. The case was tred before a |ury and the verdct
was adverse to the ta payers cam that the purported saes of these secur-
tes to Innsfa marked the reazaton of oss on ther purchase. On appea
the |udgment was reversed and the case remanded to the dstrct court for
a new tra. It was the opnon of the court of appeas that the facts as
detaed above, as a mutter of aw, estabshed the transfer of the securtes
to Innsfa as an event determnng oss.
Under secton 23(e) deductons are permtted for osses sustaned durng
the ta abe year. The oss s sustaned when reazed by a competed transac-
ton determnng ts amount. In ths case the |ury was nstructed to fnd
whether these saes by the ta payer to Innsfa were actua transfers of prop-
erty out of Mr. Smth and nto somethng that e sted sepaate and apart
from hm or whether they were to be regarded as smpy a transfer by
Mr. Smth s eft hand, beng hs ndvdua hand, nto hs rght hand, beng
hs corporate hand, so that n truth and fact there was no transfer at a.
The |ury ag .eed the atter stuaton e sted. There was suffcent evdence of
the ta payer s contnued domnaton and contro of the securtes, through stock
ownershp n the Innsfa Corporaton, to support ths verdct, even though
ownershp n the securtes hnd passed to the corporaton n whch the ta payer
was the soe stockhoder. Indeed ths domnaton and contro s so obvous
n a whoy owned corporaton as to requre a peremptory nstructon that no
oss In the statutory sense coud occur upon a sae by a ta payer to such
an entty.
It s cear an actua corporaton e sted. Numerous transactons were car-
red on by t over a perod of years. It pad ta es, State and Natona,
franchse and ncome. ut the e stence of an actua corporaton s ony
one ncdent necessary to compete an actua sae to t under the Revenue ct.
Tte, we sha assume, passed to Innsfa but the ta payer retaned the
contro. Through the corporate forms he mght manpuate as he chose the
e ercse of sharehoder s rghts n the varous corporatons, ssuers of the
securtes, and command the dsposton of the securtes themseves. There
s not enough of substance n such a sae nay to determne a oss.
The Government urges that the prncpe underyng Gregory v. Teverng
fnds e presson n the rue cang for a reastc approach to ta stuatons.
s so broad and unchaenged a prncpe furnshes ony a genera drecton,
t s of tte vaue n the souton of ta probems. If, on the other hand,
the Gregory case s vewed as a precedent for the dsregard of a transfer of
assets wthout a busness purpose but soey to reduce ta abty, t gves
support to the natura concuson that transactons, whch do not vary con-
tro or change the fow of economc benefts, are to be dsmssed from con-
sderaton. There s no uson about the payment of a ta e acton. ach
ta , accordng to a egsatve pan, rases funds to carry on government. The
purpose here s to ta earnngs and profts ess e penses and osses. If one or
the other factor n any cacuaton s unrea, t dstorts the abty of the par-
tcuar ta payer to the detrment or advantage of the entre ta payng group.
The ta payer ctes urnet v. Commonweath Improvement Co. as a precedent
for treatng the ta payer and hs soey owned corporaton as separate enttes.
urnett v. uff (2S8 . R.. 150. f).
3 U S 415 IC t D. C. . I -1. 103 (1035)1.
Tf Ztvnc v. Whte (301 U. S. 332. 537 ICr. I 1232, C. . 1937-1, 224 ).
287 U. S.. 415 ICt. D. 22. C. . II-1. 277 (1033) .
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129
23(e), rt. 23(e)-.
In that case the corporaton sod stock to the soe stockhoder, the estate of
P. . . Wdener. The transacton showed a book proft and the corporaton
sought a rung that a sae to ts soe stockhoder coud not resut n a ta -
abe proft. Ths Court concuded otherwse and hed the dentty of cor-
poraton and ta payer dstnct for purposes of ta aton. In the Common-
weath Improvement Co. case, the ta payer, for reasons satsfactory to tsef
vountary had chosen to empoy the corporaton n ts operatons. ta -
payer s free to adopt such organzaton for hs affars as he may choose and
havng eected to do some busness as a corporaton, he must accept the ta
dsadvantages.1
On the other hand, the Government may not be requred to acquesce n
the ta payer s eecton of that form for dong busness whch s most ad-
vantageous to hm. The Government may ook at actuates and upon de-
termnaton that the form empoyed for dong busness or carryng out the
chaenged ta event s unrea or a sham may sustan or dsregard the effect
of the fcton as best serves the purposes of the ta statute. To hod other-
wse woud permt the schemes of ta payers to supersede egsaton n the de-
termnaton of the tme and manner of ta aton. It s command of ncome and
ts benefts whch marks the rea owner of property.
Such a concuson, urges the respondent, s nconsstent wth the pror nter-
pretatons of the ncome ta aws and consequenty unfar to hm. e ponts
to the decsons of four courts of appeas whch have hed osses determned
by saes to controed corporatons aowabe and further cas attenton to
the fact that the oard of Ta ppeas has consstenty reached the same con-
cuson.14 ut ths |udca and admnstratve constructon has no sgnfcance
for the respondent. The ureau of Interna Revenue has nsstenty urged
nce ebruary IS, 1930, the date of the oard of Ta ppeas decson n
one v. erernff, that a transfer from a ta payer to a controed corporaton
was neffectve to cose a transacton for the determnaton of oss. very
case cted by respondent n the courts of appeas and before the oard of Ta
ppeas found the Government supportng that contenton. The oard s rung
n the ones case was standng unreversed at the tme of the transacton here
nvoved, December 29, 1932. It was ony after the transactons here nvoved
and after the reversa of the oard n the ones case on pr 23, 1934, or ths
Court s refusa of certorar on October 8, 1934, that the oard of Ta ppeas
and the courts of appeas, over Government protests, rued n ne wth the
opnon of the Court of ppeas of the Dstrct of Coumba n the ones case.
If the ureau s stand n the ones case represented a change n admnstratve
practce, there can be no doubt that the change operated vady at east from
1930 on.1 fter the ones defeat the Government sought reef n Congress
and after the |udgment In Commssoner v. Grffth , supra, certorar here on
a confct n prncpe between crcuts. Certany there was no acquescence
by the Government whch woud |ustfy the ta payer n reyng upon pror
nterpretatons of the aw.
See aro en v. oard of Supervsors (282 U. S., 10) : oton v. owers (287 T . S.,
404) : urnet v. Cark (287 U. S., 410 Ct. D. 20. C. . II-1. 175 (1033) 1).
MCf. dcard v. Che Copper Co. (270 U. S., 452, 400 T. 1 . 3S57, C. . -, 410
(192C) ).
Lucas v. ar (281 U. S., I) : Corss v. owers (281 T . S., 370 Ct. D. 188, C. .
I -1, 254 (1030) ) Grffths v. Commssoner (308 U. S., , No. 40, October term 1930,
decded December 18, 1930).
ones v. ererng (71 . (2d), 214) ( pr 23, 1034. reversng 18 . T. ., 1225,
decded ebruary 18, 1930), certorar dened. October 8. 1034 (203 U. S., 583) Comms-
soner v. drdye (70 . (2d). 29) (November 4, 1935, affrmng OT. a., 1322
934)
memo:
T. (2d), 1301 ( pr 18, 1038. affrmng . T. . memorandum
decded uy 31. 1934) Commssoner v. Uc reery (83 . (2d), 8171 (May : 103
affrmng . T. . memorandum opnon of une 19. 103 )) : oster v. Commssoner (9U
-- -morandum opnon of December 23,
1(135) Commssoner v. ohnson (104 . (2d), 140) ( une 1, 103O. nUrmns 37 . T. .,
155, decded anuary 21. 1938), affrmed by an equay dvded Court (30S U. S.. ),
No. 317. October term 1030, decded December 11. 1030.
Davd Stetrart v. Commssoner (17 . T. , 004) Corrado t Gaard, Inc., v. Com-
mssoner (22 . T. ., 847) dward Securtes Corporaton v. Commssoner (30 . T. .,
818) Raph ochstettcr v. Commssoner (34 . T. ., 701) ohn Thomas Smth v.
Commssoner, supra (40 . T. ., 387).
18 . T. ., 1225, a rehearng affrmed May 20, 1032, unpubshed.
everng v. Irsftre O Co. (308 T . S., ), No. 1, October term 1939, decded
November . 1039.
Cf. Sanford v. Commssoner (308 U. S., ), No. 34, October term 1939. decded
Notembcr . 1939.

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23(e), rt. 23(e)- .
130
Respondent makes the further pont that the pnssage of secton 24(a)0 of
the Revenue ct of 1334 whch e pcty forbds any deducton for osses
determned by saes to corporatons controed by the ta payer s convncng
proof that the aw was formery otherwse. Ths does not foow. t most
t s evdence that a ater Congress construed the 1032 ct to recognze sepa-
rabe ta abe denttes between the ta payer and hs whoy owned corporaton.
s the new provson goes much further than the former decsons n dsre-
gardng transfers between members of the famy t may we have been passed
to e tend as we as carfy the e stng rue. The suggeston s not suffcenty
persuasve to gve vtaty to a fute transfer.
The ta payer has preserved two ob|ectons to the dstrct udge s rungs
on the evdence. e cams that evdence as to transactons between the ta -
payer and the corporaton whch took pace pror to the sae here nvoved
was remote and hghy pre|udca. We thnk t apparent that ths evdence
was entrey reevant to the present ssue: the hstory of the ta payer s rea-
tons wth the corporaton shed consderabe ght on the actua effect of the
sae n queston. The second contenton s that the dstrct |udge charged the
|ury to gve ess effect to the book entres of Smth and the corporaton than
they were entted to under the appcabe book entry statute. The aeged
departure from the statute has but dubous support n the record, restng on
a snge statement of the |udge fted from ts conte t as part of an e tended
cooquy wth counse. In the crcumstances there s no mert n the cam of
pre|udce to the ta payer.
The |udgment of the crcut court of appeas s reversed and that of the
dstrct court affrmed.
Reversed.
utce 23(e)-: Losses by ndvduas. 1940-1 -10237
G. C. M. 219G
R NU CTS O 1932 ND 1934.
Tn vew of the decson n Commssoner v. eckman Wnthrop
(08 ed. (2d), 74), G. C. M. 14207 (C. R I -1, OS (193.3)),
reatng to the ta abe year n whch the stockhoders of the M
Company sustaned a oss due to qudaton of that corporaton,
s revoked.
Recommended that nonacquescence n IScecman Wnthrop v. Com-
mssoner (38 . T. ., 314, nonacquescence. C. . 1937-2, 53) be
wthdrawn.
dvce s requested whether, n vew of the decson of the Crcut
Court of ppeas for the Second Crcut n Commssoner v. Ieekman
Wnthrop (98 ed. (2d),74), G. C. M. 14207 (C. . I -1,(58 (1935))
shoud be revoked.
G. C. M. 14207, supra, nvoved the queston whether stockhoders
of the M Company who sustaned osses upon the qudaton of that
company coud deduct such osses n the year 1932 or n the year 1934.
The facts upon whch the rung was based are as foows:
In 1932 the assets of the M Company conssted of bonds of another company
and cash. Pursuant to the pan of qudaton, the stockhoders n that year
surrendered ther stock and receved from the corporaton the bonds of the
17 48 Stat., fso. r,m :
Sue. 24. Itkms Not Dedcctbk.
(a) Genera rue. In computng net ucome no deducton sha n any case be aowed
n respect of

(0) Loss from saes or e changes of property, drecty or ndrecty. ( ) between
members of a famy, or ( ) e cept n the case of dstrbutons n qudaton, between
an Indvdua an a corporaton n whch such ndvdua owns, drecty or ndrecty, more
than 50 per centum n vaue of the outstandng stock. or the purpose of (hs para-
graph (( ) an ndvdua sha e consdered as ownng the stock owned, drecty or
ndrecty, by hs famy: and (D) the famy of an ndvdua sha Incude ony hs
brothers and ssters (whether by the whoe or haf bood), spouse, ancestors, and nea
descendants.
49 Stat., 1501 (28 . S. C, secton 093).
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131
23(1), rt. 23()- .
other company together wth partcpaton certfcates enttng the stockhoders
to proportonate nterests n fna dstrbuton. It was estmated that the amount
of cents per share woud be pad to hoders of the partcpaton certfcates
and that amount was pad on anuary , 1934.
It was concuded that the stockhoders coud not deduct ther osses
unt the year 1934 notwthstandng the fact that cash of ony a few
cents per share (ess than 1 per cent of the company s assets) repre-
sented the ony remanng asset of the M Company after the surrender
of stock by the stockhoders n 1932 and the dstrbuton to them by
the M Company of bonds of another corporaton and partcpaton
certfcates enttng the stockhoders to a further, cash dstrbuton
whch was accuratey determnabe n 1932.
In Commssoner v. eecman Wnthrop, upra, nvovng ke
facts, the Crcut Court of ppeas for the Second Crcut, n affrm-
ng the decson of the oard of Ta ppeas ( eek nan Wnthrop v.
Commssoner, 3 . T. ., 314, nonacquescenee, C. . 1937-2, 5 ),
hed that the oss was sustaned n 1932 and was deductbe for that
year. Under the partcuar facts nvoved, ths offce s of the opnon
that the decson of the court, affrmng the decson of the oard,
s correct.
The decson n the Wnthrop case s dstngushabe from the dec-
son of the Court of Cams n Dresser et a. v. Unted States (55 ed.
(2d), 499, certorar dened, 287 U. S., 35, Ct. D. 503, C, . I-1,
2 7 (1932)). The corporaton n that case had remanng, after the
nta dstrbuton, vauabe tangbe assets, the amount of whch was
not then determnabe.
In vew of the foregong, G. C. M. 14207, supra, s revoked, and t s
recommended that nonacquescenee n the decson of the oard n
cekman Wnthrop v. Commssoner, supra, be wthdrawn. (See
page 5, ths uetn.)
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
S CTION 23(1). D DUCTIONS ROM GROSS
INCOM : D PR CI TION.
btce 23()- : Obsoescence. 1940-5-1015
Ct. D. 1437
INCOM T R NU CT O 1928 D CISION O SOI R M COURT.
1. Deducton Obso|sscence Storage or Property Not Needed
n usness.
company whch acqured two tte search pants as the resut of a
statutory consodaton or merger of tte companes s not entted to
a deducton for obsoescence of one of the pants whch t stored n
order to effect economes of operaton. More than nonuse or dsuse
s necessary to estabsh obsoescence wthn the meanng of secton
23(k) of the evenue ct of 192S and artce 20 of Reguatons 74
obsoescence connotes functona deprecaton and requres that the
operatve cause of the present or growng useessness arse from
e terna forces whch make t desrabe or mperatve that the
property he repaced. The pant was dscarded ony as a pro mate
resut of the company s vountary acton n acqurng e cess capacty.
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23(1), rt. 23()- .)
132
2. Sut C, m for Refund ass.
In a sut for refund of ta es based soey upon a cam for deduc-
ton on account of obsoescence under secton 23(k) of the Revenue
ct of 1928, the pettoner s precuded from changng the bass of ts
cam to osses sustaned under secton 23(f), In the absence of a
proper amendment or of facts estabshng a waver by the Govern-
ment.
3. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Thrd
Crcut (1939) (102 . (2d), 582), amrmed.
Supreme Court of the Unted States.
The Rea state-Land Tte d Trust Co., pettoner, v. The Unted States of
merca.
309 U. S., 13.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Thrd Crcut.
anuary 15, 1040.
opnon.
Mr. ustce Dougas devered the opnon of the Court.
Pettoner, a Pennsyvana corporaton, was formed n October, 1927, as a
resut of a statutory consodaton or merger of three companes. Two of the
consttuent companes owned tte search pants whch were among the assets
acqured by pettoner as a resut of the consodaton. Whe It was known that
two tte pants woud be acqured on the consodaton, there was at that tme
no defnte pan for ther dsposton. ut an Immedate nvestgaton was made
and t was decded to store one of the pants In order to effect economes of opera-
ton. -That was done substantay smutaneousy wth the consummaton of the
consodaton. bout two months thereafter t was decded that the pant
retaned n use was adequate and that the one n storage woud not be needed.
though for a bref perod some sght use appears to have been made of the
stored pant,1 t was not kept up to date by the addton of current recordngs.
s a resut t had ony a savage vaue by October 31, 1928. Meanwhe, nego-
tatons for ts sae had been unsuccessfu.
In ths acton pettoner seeks a refund of ncome ta es for the fsca year
ended October 31, 1928, based on the refusa of the coector of nterna revenue
to aow a deducton for obsoescence of ths pant. It had been carred on the
books of the consttuent company at 275,000 and was brought nto the consoda-
ton at S03,000. The dstrct court, however, found that ts vaue on March 1,
1913, was . 1,000,000 on October 31, 1928, 125,000 makng an actua oss of
875,000. whch that court aowed as a deducton for obsoescence for the ta abe
year 192S. It accordngy aowed a refund. That |udgment was reversed by the
crcut court of appeas (102 P. (2d), 582). We granted certorar because of
the asserted conct of that decson wth Crooks v. ansas Cty Tte Trust
Co. (40 . (2d), 92.8).
Secton 23(k) of the Revenue ct of 1928 (45 Stat., 791) aows as a deducton
from gross ncome a reasonabe aowance for the e hauston, wear and tear
of property used In the trade or busness, ncudng a reasonabe aowance for
obsoescence. dmttedy, f the deducton s aowed under ths provson t
must be for obsoescence, as there has been no e hauston, wear or tear of the
tte pant wthn the meanng of the ct. Now t s true that n the popuar
sense a thng whch s obsoete s one whch s no onger used, a meanng whch
gves coor to pettoner s cam for deducton snce there s no queston that the
tte pant here nvoved s no onger utzed to any degree whatsoever. ut the
term aowance for obsoescence, as used n the ct and n the Treasury regua-
tons, has a narrower or more technca meanng than that derved from the
common, dctonary defnton of obsoete. The Treasury reguatons1 state the
1 vdence of use subsequent to th consodaton or morscr Is qute tenuous, the ony
specfc Instances occurrng mmedatey pror to the actua consummaton of the con-
sodaton on October 31. 1027
Treasury Reguatons 74, artce 20G. promugated under the Revenue ct of 1028,
provdes n fu :
Wth res oct to physca property the whoe or any porton of whch In ceary shown
by the ta payer s beng affected by economc mndtons that w resut n Its beng
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133
23(1), rt. 23(1)- .
crcumstances nnder whch an aowance for obsoescence of physca property
may be aowed, vz, where such property s beng affected by economc cond-
tons that w resut In Its beng abandoned at a future date pror to the end of
ts norma usefu fe, so that deprecaton deductons aone are Insuffcent to
return the cost (or other bass) at the end of ts economc term of usefuness.
Ths Court, wthout undertakng a comprehensve defnton, has hed that ob-
soescence for purposes of the Revenue cts may arse from changes n the art,
shftng of busness centers, oss of trade, nadequacy, supersesson, prohbtory
aws and other thngs whch, apart from physca deteroraton, operate to cause
pant eements or the pant as a whoe to suffer dmnuton In vaue, (Unted
State Cartrdge Co. v. Unted States, 281 I . S., 511, 51G. See aso urnet v.
agara as rewng Co., 282 U. S., 0-18, 54.) Such specfc e ampes ustrate
the type of economc condtons whose effect on physca property s recognzed
as obsoescence by the Treasury reguatons. Others coud be mentoned whch
smary cause or contrbute to the reentess march of physca property to the
unk pe. ut n genera, obsoescence under the ct connotes functona de-
precaton, as t does n accountng and engneerng termnoogy. More than
odum- or dsuse s necessary to estabsh t. To be sure, reasons of economy
may cause a management to dscard a tte pant ether where It has become
outmoded by Improved devces or where It Is acqured as a dupcate and
therefore s useess. ut not every decson of management to abandon factes
or to dscontnue ther use gves rse to a cam for obsoescence. or obsoescence
under the ct requres that the operatve cause of the present or growng use-
essness arse from e terna forces whch make t desrabe or Imperatve that the
property be repaced. What those operatve causes may be w be dependent
on a wde varety of factua stuatons. New and modern methods appear
to have been one of the rea causes of abandonment of the tte pant n Crooks v.
ansas Cty Tte d Trust Co., supra. Suffce t here to say that no such e terna
causes are present, for the record shows tte more than the desre of a manage-
ment to emnate one pant whch was a needess dupcaton of another but
whch functonay was adequate. The fact that fewer empoyees were requred
to operate the one retaned than the one dscarded s nconcusve here. or
ths s not the case of acquston of a new pant to take the pace of one outmoded
or ess effcent. Rather the concuson s rresstbe that the pant was dscarded
ony as a pro mate resut of pettoner s vountary acton n acqurng e cess
capacty.
In vew of ths concuson, we do not reach respondent s further ob|ectons to
aowance of ths cam on grounds of obsoescence.
ut pettoner contends that n any event t has abandoned the pant and hence
s entted to a deducton under secton 23(f) of the 1028 ct whch aows a
corporaton to deduct osses sustaned durng the ta abe year and not com-
pensated for by nsurance or otherwse. Whether pettoner has satsfed those
requrements we do not decde, for ts cam for refund was based e cusvey
and soey on the ground that t was entted to an aownnce for obsoescence.
ence, n the absence of a waver by the Government (Tueker v. e ander, 275
. S., 228), or a proper amendment, pettoner s precuded n ths sut from
restng ts cam on another ground. (Unted States v. et d Tarrant Mfg. Co.,
3 U. S.. 2 9 Ct. D. 33 , C. . -, 431 (1931) .) There has been no amend-
ment and there are no facts estabshng a waver.
ccordngy, the |udgment of the crcut court of appeas s affrmed.
Mr. ustce Roberts and Mr. ustce Reed took no part n the consderaton
or decson of ths case.
handoned at a future date pror to the end of Its norma usefu fe, so that deprecaton
deetons aone are Insuffcent to return the cost (or other bass) at the end of ts
rrmnmc term of usefuness, a reasonabe deducton for obsoescence. In addton to
TpDreo-ton may be aowed In accordance wth the tacts obtanng wth respect to each
hem or property concernng whch a cam for obsoescence s made. No deducton for
woescencp w be permtted merey because, n the opnon of a ta payer, the property
mv become obsoete at some ater date. Ths aowance w be confned to such porton
f the property on whch obsoescence Is defntey shown to be sustaned and can not be
heM an.. ab e to an entre property uness a portons thereof are affected by the cond-
tons to whch obsoescence Is found to be due. See aso ureau of Interna Revenue
U er dvaIcedry cTOuntn: (3rd ed. 1033). ch. 10: atfed ccountng 0827),
th Saers, Deprecaton Prncpes and ppcatons (3rd cd 1030), eh. 4 eater,
Deprecaton (1924) Transactons, mer. Soc. C. .. voume 81, page 152 (1917)
Mrston ce. ngneerng auaton (103 1. pages 83 8.)
2 Pau ft Mertens, . w of edera Income Ta aton, secton 0.114.
ccordng to pettoner s own wtnesses, the dscarded pant was a more compete
rant than anv other pant n the cty and t had a background whch went a the
Ira| back to Wam Penn.
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43, rt. 43-2.
134
P RT I . CCOUNTING P RIODS ND M T ODS OP
CCOUNTING.
S CTION 43. P RIOD OR W IC D DUCTIONS
ND CR DITS T N.
rtce 43-2: When charges deductbe. 1940-15-10230
Ct. D. 1451
INCOM T R NU CT O 1932 D CISION O SUPR M COURT.
1. Deducton Loss Contract of Guaranty Payment by Note.
The ta payer, wth other stockhoders of a bank whch merged
wth another n 1920, e ecuted a contract of guaranty, and n 1931,
at the request of the bank that the guaranty be put nto bankabe
form, gave notes to the bank, wth coatera. In 1932 the bank
caed upon the ta payer to make fna settement of hs obgatons,
and he accordngy made hs note to the bank, and receved back
notes prevousy gven or ndorsed by hm. ed: That the ta -
payer, who kept hs accounts upon a cash bass, was not entted to
a deducton n 1932 under secton 23(e) of the Revenue ct of 1932
for a oss upon hs contract of guaranty, snce nether the sub-
sttuton of hs own note nor the gvng of coatera consttuted
a payment n cash or ts equvaent.
2. oard of Ta ppeas ndngs of act Lega ffect Re-
vewabe by Coubt.
The ega effect t f an entre transacton dscosed by fndngs of
the oard of Ta ppeas, n the appcaton of secton 23(e) of the
Revenue ct of 1932, as to the deducton of oss sustaned durng
the ta abe year, s revewabe by the crcut court of appeas, and
ts decson s revewabe by ths Court.
3. Decson oowed.
ckert v. urnet (1931) (283 U. S., 140 Ct. D. 325, C. . -,
241 ) foowed.
4. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, ourth
Crcut (1939) (10 . (2d), 330), reversng unreported decson
of the Unted States oard of Ta ppeas (1938), reversed.
Supreme Coubt of the Unted States.
Guy T. ererng, Commssoner of Interna Revenue, pettoner, v. uan Prce.
0 S. Ct., 73.
On wrt of certorar to the Unted States Crcut Court of ppeas for the ourth Crcut.
March 25, 1940.
OPINION.
Mr. Chef ustce ughes devered the opnon of the Court
Respondent n hs ncome ta return for 1932 camed a deducton for a oss
upon a contract of guaranty. The oard of Ta ppeas sustaned the Com-
mssoner n refusng to aow the deducton, and the crcut court of appeas
reversed. (10 . (2d), 33 .) ecause of an aeged confct wth ckert v.
urnet (283 U. S., 140 Ct. D. 325, C. . -, 241 (1931) ), enkns v. t good
(C. C. . 2) (101 . (2d), 17), and errs v. Commssoner (C. C. . 2)
(102 . (2d), 985), we granted certorar. anuary 15, 1940.
The facts as found may be thus summarzed: In 1929 the tantc ank
Trust Co. of Greensboro, N. C, was merged wth the North Carona ank
Trust Co. The atter accepted condtonay certan assets of the tantc
ank caed assets, and certan other assets, caed assets, were
pedged to that bauk wth authorty to charge aganst them any osses whch
mght be estabshed n reazng upon the assets. Respondent and three
other stockhoders of the tantc ank e ecuted an agreement of guaranty,
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135
I 43, rt. 43-2.
to the effect that If the North Carona ank faed to reaze a certan sum
from the assets wthn two years they woud make up the defcency n
an amount not e ceedng 500,000. The agreement provded that any sum
reazed from the assets were to be apped frst to any osses occurrng
n the assets and then to the rembursement of the four guarantors. The
perod for reazng upon the assets was e tended unt September, 1932.
In une, 1931, the North Carona ank advsed the guarantors that the
assets were not n such shape that the bank coud use them to the e -
tent necessary for bankng purposes and requested the guarantors to put ther
guaranty nto a bankabe form so that t coud be used by the bank to obtan
credt. Respondent accordngy gave to the bank hs note for 125,000 and
ndorsed the note of C. W. God, another guarantor, for a ke amount and as-
sgned certan securtes to the bank as coatera for the payment of hs guaran-
ty. The bank agreed that respondent s utmate abty shoud not e ceed
250,000. t the end of 1031, the guaranty agreement was st n effect. The
assets were st n the process of coecton. No demand had been made
upon respondent. Whe t was known that there woud be some oss to the
guarantors, t was not defntey known n 1931 what the oss woud be, and the
guarantors had reason to beeve that there woud be a substanta remburse-
ment from the assets of any osses.
In the eary part of 1932, fnanca condtons beng worse, the bank con-
cuded that t woud have to coect upon the guaranty and caed upon
respondent to make a fna settement of hs obgatons. ccordngy, n
March, 1932, respondent made hs note to the bank for_ 250,000 and receved
back the two notes. The oard of Ta ppeas found that both respondent
and the bank consdered ths to be a fna payment of the two notes whch had
een gven under the guaranty. The bank retaned the same coatera for the
250,000 note that t had prevousy hed, and n December, 1932, respondent
substtuted therefor certan securtes of hs own.
Respondent camed a oss n 1932 In the amount of 125,000, that s, for hs
one-haf of the guaranty. e dd not then cam a oss on the other one-haf
because he st had a cam aganst the estate of God (who had ded n 1932)
for rembursement. or that one-haf, representng God s part of the guaranty,
respondent camed a oss n 1933 and that deducton s not here nvoved.
Respondent kept hs accounts upon a cash bass. The oard of Ta p-
peas rued that respondent was not entted to the deducton of 125,000 n
1932, upon the ground that he made no outay of cash n the purported pay-
ment : he had satsfed hs abty as guarantor by a shftng of the form of
hs abty. s oss woud be deductbe n the year n whch he pays the
note.
Respondent nssts ntay that the transacton n 1932 was consdered by
the partes as consttutng a payment of respondent s abty under the
guaranty, and that ths payment s a fact found by the oard of Ta ppeas
and s not open to revew. ut the fndngs of the oard dscose the entre
transacton, and Its ega effect n the appcaton of secton 23(e) of the
Revenue ct of 1932, as to the deducton of osses sustaned durng the ta abe
year, was revewabe by the crcut court of appeas. Its decson on that pont
s revewabe here.
oth the Commssoner and the oard of Ta ppeas reed upon our
decson n ckert v. urnet, supra. In that case, the ta payer s return was
ot the cash bass, and the queston was as to a cam of deducton for the
year 1925. The ta payer and hs partner were |ont ndorsers of notes ssued
by a corporaton they had formed. In 1925, n settement of ther abty for
an ascertaned amount, they made a ont note for the amount due to the
bank that hed the corporaton s pnper, receved the od notes, marked pad,
and destroyed them. We affrmed the rung that the deducton shoud not
be aowed.
The court beow consdered that decson as defnte authorty ony for the
houng that a oss of the sort set forth was not deductbe under the bad
debt provson of the statute. That ndeed was sated n the opnon as
the ta payer s cam. ut the ta payer had aso prosened here as an ater-
natve ground the theory of a oss sustaned durng the ta abe year, a ground
whch the oard of Ta ppeas had consdered and hed to be untenabe.
(17 . T. ., 2 3. 2 5, 2 .) nd the Government argued both questons.
The Government dd not contend that the ta payer mght not at some tme
be entted to a deducton ether on account of a bad debt or for a busness
oss the soe queston In dspute was whether he was entted to the deduc-
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44, rt. 44-1.
13
ton n 1925, the year In whch hs note was gven, or n the ater year n
whch the ta payer s abty on the uote s actuay qudated by payment.
The reasonng of ths Court was broad enough to cover both aspects of the
case. We sad:
or the purpose of a return upon a cash bass, there was no oss n 1925.
s happy stated by the oard of Ta ppeas, the pettoner merey
e changed hs note under whch he was prmary abe for the corporaton s
notes under whch he was secondary abe, wthout any outay of cash or
property havng a cash vaue. deducton may be permssbe n the ta abe
year n whch the pettoner pays cash. The pettoner says that t was
defntey ascertaned n 1025 that the pettoner woud sustan the osses n
queston. So t was, f the pettoner utmatey pays hs note.
We thnk that ths decson s controng n the Instant case. s the return
was on the cash bass, there coud be no deducton n the year 1932, uness
the substtuton of respondent s note n that year consttuted a payment In
cash or ts equvaent. There was no cash payment and under the doctrne
of the ckert case the gvng of the ta payer s own note was not the equvaent
of cash to entte the ta payer to the deducton.
Respondent urges that hs note was secured, but the coatera was not pay-
ment, t was gven to secure respondent s promse to pay, and f that promse
to pay was not suffcent to warrant the deducton unt the promse was made
good by actua payment, the gvng of securty for performance dd not trans-
form the promse nto the payment requred to consttute a deductbe oss
n the ta abe year. .(See enkns v. tyood, 101 P. (2d), 17, 19.)
The |udgment of the crcut court of appeas s reversed and the decson
of the oard of Ta ppeas s affrmed.
It s so ordered.
Mr. ustce McReynods took no part n the decson of ths case.
INCOM T R NU CT OP 1032 D CISION O SUPR M COURT.
1. Income Wn N and to Whom Ta abe Dsregard of Corpo-
raton ormed as Condut Through Whch Income ready
Reazed by Ta payeb Was to he Pad to m n nnua
Instaments.
The pettoner n 1931 sod at a oss certan stock purchased n
192 , and was aowed a deducton therefor n that year. In 1933
he concuded negotatons for settement of a cam for fraud
aganst the seer n connecton wth the 1920 sae, by an arrange-
ment under whch he was to reacqure the shares, convey them to a
newy created corporaton whoy controed by hm, whch corpo-
raton n turn was to transfer the stock back to the seer for the
orgna purchase prce, such sum to be pad by the corporaton to
pettoner n annua nstaments over a perod of 40 years. The
essentas of ths scheme were carred out the transfer of the
shares to the seer beng made wthout reveang to hm the
e stence of the new corporaton, the pettoner gvng a persona
reease of a cams aganst the seer and personay recevng
the tota amount pad, whch he then turned over to the corpo-
raton. IrUI: That the pettoner havng been aowed a deducton
for the oss attrbutabe to the orgna transacton, and havng
recouped such oss through set enent of hs cam, the amount
of the settement was ta abe ncome to hm when pad n 1933,
notwthstandng the arrangement for Instament payments to hm
through the condut corporaton, and he s not entted to the
benefts of secton 44 of the Revenue ct of 1932.
S CTION 44. INST LLM NT SIS.
rtck 44-1: Sae of persona property on
nstament pan.
1940-1-10128
Ct. D. 1431
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137
44, rt. 44-1.
2. Decson ffbmkd.
Decson of the Unted States Crcut Court of ppeas, Seventh
Crcut (1039) (103 . (2(1), 110), reversng decson of the Unted
States oard of Ta ppeas (1938) (37 . T. ., 314), affrmed.
Supreme Court of the Unted States.
George T . Grffths, pettoner, v. Guy T. cverng, Commssoner of Interna
Revenue.
308 U. S., 3)5.
On wrt of certorar to the Crcut Court of ppeas for the Seventh Crcut.
December IS, 1039.
OPINION.
Mr. ustce rankfurter devered the opnon of the Court.
The case s here to revew a decson of the Crcut Court of ppeas for
the Seventh Crcut (103 . (2d), 110) reversng an order of the oard uf Ta
ppeas (37 . T. ., 314) whch had overrued a defcency assesr m nt by
the Commssoner of Interna Revenue n pettoner s ncome ta return for
1933. We granted certorar (308 U. S., ), because of an aeged confct
between the decson beow and that of the Crcut Court of ppeas for the
Second Crcut n Smth v. ggns (102 . (2d), 4.t ) (No. 140 ths term).
The facts are undsputed, and, for purposes of our decson, may be thus
abrdged: In 1920 Grffths, the pettoner, pad one Lay 100,000 for some stock.
The nvestment was unproftabe, and the upshot of a compcated seres of
transactons was aowance to Grffths by the Commssoner of a deductbe
oss of 92,500 for the year 1931 resutng from a sae of the stock by Grffths
to a famy corporaton. Thereafter, n 1932, Grffths Rot wnd of the fact
that Lay had defrauded hm n the 192 sae. Negotatons were begun for a
settement of Grffths cam aganst Lay, and by anuary, 1933, Grffths
awyer had devsed an arrangement for such a settement. The gst of the
arrangement was ths: Grffths was to reacqure the shares, convey them
to a corporaton newy created for the purpose of furtherng the scheme
and whoy controed by Grffths, whch n turn was to transfer the stock
hack to Lay for 100,000 to be pad by hm, and that sum was to be pad
over by the corporaton to Grffths n annua nstaments for 40 years, wth
nterest on the deferred payments.1 The essentas of ths scheme were
carred out. Its purpose to dsguse by ntervenng eaboratons what n
fact was a rescsson of the orgna purchase by Grffths for : U )0 was
made more manfest by these facts: Grffths personay reacqured and trans-
ferred the shares to Lay wthout reveang the e stence of the new cor-
poraton, gave Lay a persona reease of a cams aganst hm, and personay
receved from Lay the 100,000 whch he then turned over to the corporaton.
On these fndngs the Commssoner rued that Grffths, havng been aowed
a deducton for oss attrbutabe to the stock purchased from Lay and havng
now recouped that oss through settement of hs cam aganst Lay, was sub-
|ect to ta for the amount of the settement n 1933. We thnk the Comms-
soner was rght, and that the Crcut Court of ppeas propery reversed
(he oard of Ta ppeas.
The facts eave tte scope for ega e pcaton. Grffths had a cam for
fraud aganst Lay whch, when satsfed, wped out the oss for whch he had
receved an earer deducton. ad satsfacton of the cam come to hm wth-
out any condut, t woud have ndsputaby been hs ncome. The cam havng
been recognzed by Lay and cast nto a form reazabe by Grffths, a awyer s
Ingenuty devsed a techncay eegant arrangement whereby an ntrcate out-
ward appearance was gven to the smpe sae from Grffths to Lay and the
passage of money from Lay to Grffths. That was the cru of the busness to
Grffths, and that s the cru of the busness to us.
Of the tota sum pad, n,000 was to be apped by the corporaton n payment of a
persona ndebtedness owed by Grffths. Ths sum. of course, was ceary ncome to
pettoner. The remander was to be pad n nstaments by the corporaton to Grffths.
Pettoner contends that these Instaments aone are ta abe to hm as they are pad,
under the provsons of secton 44 of the Revenue ct of 1932 (ch. 12U9. 47 Stat., 1 9).
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138
We can not too often reterate that ta aton s not so much concerned wth
the refnements of tte as t s wth actua command over the property ta ed
the actua beneft for whch the ta s pad. (Corss v. owers, 281 U. S., 37 ,
878 Ct. D. 188, C. . I -1, 254 (1930) .) nd t makes no dfference that
such command may be e ercsed through specfc retenton of ega tte or
the creaton of a new equtabe but controed nterest, or the mantenance of
effectve beneft through the nterposton of a subservent agency. (Cf. Greg-
ory v. everng, 293 U. S., 4 5 Ct. D. 911, C. . I -1, 193 (1935) .)
gven resut at the end of a straght path, ths Court sad n Mnnesota Tea
Co. v. everng (302 U. S., 09, 13 Ct. D. 1305, O. . 1938-1, 288 ), s not
made a dfferent resut because reached by foowng a devous path. Legs-
atve words are not Inert, and derve vtaty from the obvous purposes at
whch they are amed, partcuary n the provsons of a ta aw ke those
governng nstament saes n secton 44 of the Revenue ct of 1932. Ta es
can not be escaped by antcpatory arrangements and contracts however sk-
fuy devsed by whch the fruts are attrbuted to a dfferent tree
from that on whch they grew. (Lucas v. ar, 281 U. S., I, 115.) What
Lay save, Grffths n reaty got, and on that he must be ta ed. The |udgment
Is affrmed.
SU TITL C SUPPL M NT L PRO ISIONS.
SUPPL M NT . R T S O T .
S CTION 101(1 ). MPTIONS ROM T
ON CORPOR TIONS.
R NU CT OP 1934.
Contrbutons by a corporaton to an empoyees beneft assocaton
composed of empoyees of te corporaton. (See G. C. M. 21323
page 97.)
SUPPL M NT . COMPUT TION O N T INCOM .
S CTION 111. D T RMIN TION O MOUNT O , ND
R COGNITION O , G IN OR LOSS.
rtce 111-1: Computaton of gan or oss. 1940-13-1021
Ct. D. 1448
INCOM T R NU CT O 028 D CISION O COURT.
1. Gan or Loss ass March 1, 1913, aue op Cemetery Prop-
erty Reta Saes Ony One ement n Dktebmn.no ab
Market aue Tota ass of Separate Sa|.es Can Not ceed
aue of Unsod Property n 1913.
In determnng the gan derved n 1931 from saes of cemetery
property acqured pror to March 1, 1913, reta saes of bura space
made pror to or durng the basc year are not concusve evdence
of the far market vaue of space unsod and avaabe n that year,
but consttute ony one eement to be consdered and weghed n
the ght of a other factors pertnent to the determnaton of vaue.
The tota of the bass for a of the separate saes n subsequent years
can not e ceed the vaue of the unsod and n 1913, and t s there-
fore mmatera whether the bass appcabe to the footage sod n
1931 be determned drecty or whether the vaue of the entre un-
sod and n 1013 be frst determned and then an aocaton made
to the space sod n 1931.
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139
I, rt. 111-1.
2. oard of Ta ppeas Determnaton of aue ndng
Concusve Upon Revew When Supported by Substanta
vdence.
It s wthn the dscreton of the oard of Ta ppeas to f an
ndependent fndng of the far market vaue of property as of March
1, 1913, after consderng a the evdence pertnent to the queston
of vauaton. Such a fndng, when supported by substanta ev-
dence, s n accordance wth aw and s concusve upon revew by
the court.
3. Decson ffrmed per curam.
Decson affrmed by per curam opnon of the Supreme Court on
ebruary 5, 1940.1
Unted States Crcut Court of ppeas for the Seventh Crcut.
Uontrose Cemetery Co., a Corporaton, pettoner, v. Commssoner of Interna
Revenue, respondent.
105 . (2d), 238.
Petton for revew of decson of the Unted States oard of Ta ppeas.
efore Sparks, Ma|or, and erner, Crcut udges.
une 21, 1939.
OPINION.
erner, Crcut udge: Ths petton for revew nvoves ncome ta es mposed
upon gans made n 1031 from the sae of bura space. The cemetery ots sod
n 1931 had been acqured pror to 1913 at a cost admttedy ess than the far
market vaue thereof on March 1, 1913, and the controversy here s over the
proper vaue of the unad|usted bass to be used n determnng the recognzed
gan n 1931.
The Commssoner of Interna Revenue (herenafter referred to as the Com-
mssoner ) f ed the vaue at 21.5 cents per square foot. The ta payer f heren-
after aso referred to as Montrose ) appeaed to the Unted States oard of
Ta ppeas (herenafter referred to as the oard ), whch determned the
vaue at 23 cents per square foot.
In 1902 one rcher, Chcago undertaker, founded the Montrose Cemetery Co.
and for 18 years unt hs death n 1920 personay managed and controed ts
operatons. In 1902 rcher purchased an 80.02-acre tract of and n the north-
west part of the cty of Chcago for the sum of 75,000, whch he mmedatey
transferred to Montrose n e change for ts entre capta sock of 300,000. In
1912 Montrose purchased an ad|acent tract of 19.485 acres for . 23,500 and a 20-
acre tract n 1918 for 20,000.
The ast two tracts of and are not consdered n ths case, because as yet they
have not been dedcated to cemetery purposes. owever, t shoud be noted that
the acquston vaues of these tracts dd not vary very much. In ths connecton,
the oheman Natona Cemetery, across the street from the Montrose Cemetery,
acqured 0.125 acres n 1902 for 00,000 and refused to buy 0 acres n 1910 for
55,000. The evdence ndcates that durng a these years the vaue of and
unmproved for cemetery purposes was around 1,200 an acre or 2.75 cents a square
foot.
y March 1, 1913 Montrose had made capta e pendtures n the sum of
77,19 .88 for budngs, furnture and f tures, horses, wagons, and toos. These
addtona capta assets were ndspensabe to the operaton of the cemetery, and
enabed t to compete wth the other 39 cemeteres n the Chcago area. Ths, of
course, factated the sae and ncreased the vaue of the unsod graves, Montrose s
man asset, mosty unreazabe on March 1, 1913.
Ths unreazabe asset on the basc date conssted of an avaabe net area
of 2,214,78 square feet of bura grounds. Of ths area 932,4 square feet were n
1 The Chef ustce on the date Indcated announced the foowng order :
No. 370, Montrose Cemetery Co., pettoner, v. Commssoner of Interna Revenue. On
wrt of certorar to the Unted States Crcut Court of ppeas for the Seventh Crcut.
Per curam : s t appears that the oard of Ta ppeas receved and consdered the
evdence pertnent to the queston of the vauaton of the cemetery ots on March 1, 1913,
we fnd no ground for dsturbng ts rung. The |udgment of the crcut court of appeas
Is affrmed.
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111, rt. 111-1.
140
Improved sectons, the mprovement cost of whch s not dscosed by the record,
and 1,282,320 square feet were to be found n unmproved sectons. It s m-
portant to add that, of the 14,993. 7 square feet of bura space sod n 1931,
4,498.10 square feet were from the mproved area In 1913 and 10,495.57 were
from the unmproved area In 1913.
On the vauaton date 932,4 square feet of bura space were mproved, but
the record faed to revea the cost of mprovement. The record, however, does
dscose fgures as to the subsequent mprovements of the unmproved area n
1913. Montrose made saes of space from and unmproved n 1913 after havng
e pended ony about 8 cents per square foot for mprovements thereto. rom
1913 to 1931 4.99 cents per square foot was e pended, and counse for Montrose
uses ths fgure n hs bref, to mprove the and unmproved as of March 1,
1913, to saabe condton n 1931. In addton, subsequent Improvements costng
8.1 cents were made, whch benefted the area Improved and unmproved at the
basc date.
In ths connecton, uswe, presdent of Montrose snce 1928, testfed that
25 cents per square foot woud meet the tota cost of mprovng and mantanng
the entre cemetery throughout Its entre fe, startng from the raw and,
gradng out road , puttng n sewers, makng tte and water nes, and pro-
vdng for a reasonabe amount of work on trees, shrubbery and awns. Lght-
foot, caed by the Commssoner, was even more conservatve, stntng that
In hs opnon the cost of mprovng each square foot of acreage from raw
and to a saabe condton and mantenance thereof to the day of the sae of
that ast grave was 30 to 35 cents.
We are mndfu that deveopment and mantenance go on over the entre fe
of a cemetery, so that on any gven date, e. g., say March 1, 1913, t s safe to
concude that the tota 25 cents had not been e pended as to every square foot
of area. In fact, some of the footage mght have been mproved and sod at a
ower fgure than 25 cents. or nstance, to take the 10,495.57 square feet of
bura space here n queston, unmproved n 1913 but saabe and sod n 1931,
the record reveas that the converson cost from raw and to saabe and was
4.99 cents per square foot. Yet, t mght be sad that upon the fna accountng,
when the ast grave has been sod, the tota cost of Improvement spread equay
over every square foot of the cemetery woud come to 25 cents or 30 to 35
cents.
round 1913 statstcs n the record ndcated that In the future Montrose
ccud hope to se appro matey 31,000 square feet of bura ground each year.
It was then competng favoraby wth 39 other cemeteres n the cty, the
popuaton was ncreasng, and t was accessbe to the pubc by cty street car
nes. In the basc year bura space n genera sod for 88.2 cents per square
foot. In partcuar, ots and seect graves sod between 1 and 1.13 per square
foot, and saes of common graves occurred at 52.95 cents per square foot. In
1904, n comparson, the reta sae prces were 33.07 cents, 32.45 cents to 93.75
cents, and 47.55 cents, respectvey. On the other hand, n 1931, reta sae
prces were 2.49, 2.41 to 2. 0, and 1.31, respectvey.
ccordng to uswe, the far market reta sae prces on the basc date.
In hs opnon, ncuded the 2.75 cents gven above as cost of the raw and, the
5 cents as cost of the entre Improvement and mantenance of the cemetery,
and a proft. Schrade, caed by Montrose, thnkng the same way, stated that
the reta sae prces refected varous ad|ustment such as those made for and
costs, ratabe dstrbuton of operatng cost, dscounts for tme requred to se
the graves, and a proft.
uswe and Schrade based ther far market vaue opnons on the reta
ees pror to and durng the basc year of 1913. Yet, snce Montrose sod
ura space to utmate users ony, and not for specuaton, t s cear that n
1913, and uswe and Schrade so admtted, there was n fact no reta market
for the baance of the footage then avaabe and unsod. It s undsputed
that many years woud pass before the ots coud be sod. In fact, the bura
apace n queston, athough avaabe n 1913, was not n pubc demand unt
931. In 1913, as n any gven year, the demand for cemetery ots was mted
by actua deaths and prospectve deaths n the communty.
In addton to seng bura space, Montrose performed varous ncdenta
ervces n 1913, from whch ncome was derved. Such servces conssted
nter aa of provdng perpetua care for graves, makng crematons and nter-
ments, settng a foundatons for stone work, seng pants and shrubbery, and
rentng the use of the chape. Pror to 1913, e ceptng the year 1910, the
Income from these sources surpassed the e penses, and n 1913 the ncome
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141
111, rt. 111-1.
margn was 3,84 .07. Moreover, n 1913, the net ncome of the cemetery was
S31.902.-48. prospectve buyer at ths tme coud reasonaby have e pected
uure earnngs around 30,000 annuay.
It shoud be noted n passng that f an ncome of 30,000 Is captazed at
per cent, a present vauaton of 000,000 based on prospectve net earnngs,
s reached. Ths vauaton s equvaent to a square foot vaue of about 27
cents. uswe and Schrade for te ta payer testfed that the far market
vaue was over 2,000,000 or over 1 per square foot. ppyng the 5 per cent
return on capta nvested, we see that an nvestment of 2,000,000 shoud receve
over 100,000 ncome annuay, whch Is grossy out of ne wth the 30,000
annua ncome a prospectve buyer of the cemetery coud e pect.
In ts ta return for 1931, Montrose used an unad|usted bass of appro -
matey 1.89 per square foot. That s, t vaued the footage sod n 1931 at
S28.3S1. . It determned that ots were worth 2 per square foot, seect
graves 1, and snge graves around 40 cents. These vaues had been used by
t n ts ta returns for the years 1917 through 1921.
It shoud be noted that n the eary ncome ta returns a bass of 8.58 cents
per square foot was used. Moreover, about 1920 Montrose had three retro-
spectve apprasas made as of 1913 for ta purposes. ach appraser gave as
bs opnon that the far market vaue on March 1, 1913, was 15 cents per square
foot for unmproved and and 25 cents for mproved and. urthermore, n
ts capta stock ta returns from 1910 to 1924 the ta payer reported the far
vaue of ts and at a hgh of 31 ,048.95, |ustfyng these reports on the ogca
ground that the tota unearned proft on future saes of unsod cemetery and
on March 1, 1913, was an unreazabe asset at that tme, reazabe ony
through the sae of ots at reta e tendng over a perod of upwards of 50
years.
The Commssoner refused to accept Montrose s ta fgures and n hs de-
fcency assessment determned that the entre cemetery and had a far market
vaue of 21.5 cents per square foot on March 1, 1913. Montrose appeaed to
the oard and contended for a vaue of 94 cents per square foot, usng a
weghted average vaue whch paced separate weght on the mproved and
unmproved footage.
Montrose s opnon wtnesses testfed that the far market vaue of the net
saabe and n the cemetery was over 2,000,000 or between 1 and 1.0 per
square foot uswe, who had no persona knowedge of the physca cond-
ton of the cemetery n 1913, dd not pace separate vaues on the mproved and
nnmproved acreage. Schrade, who was famar wth the unsod acreage In
3913. stated the mproved porton was worth between 1 and 1. , and the
nnmproved porton 75 cents. These opnons measured the vaue of the unsod
and n 1913 by reta saes of and sod pror to and durng 1913.
Commssoner s three opnon wtnesses were not famar wth the cemetery
n queston n 1913. Thomas gave a vaue of 235,000 for a of Montrose s
assets wthout pacng separate vaues thereon. Rchards testfed to a vaue
of 334, 91 or 15.1 cents per square foot, and Loekwood a vaue of 332,000
or 15 cents per square foot. These opnons measured the vaue of the unsod
and n 1013 by an anayss of saes, e penses, earnngs, and reated matters.
Upon ths evdence, the oard made ts fndng that the far market vaue
of the footage n queston was 3,448.54 or 23 cents per square foot. Montrose
now contends nter aa that the oard erred n ts determnaton, because
t dd not foow the command of mhurst Cemetery Co. v. Commssoner
(300 U. S., 37 Ct. D. 1202, C. . 1937-1, 209 ), whch, t s camed, compes
tse appcaton of an e cusve method for determnng the far market vaue
n cemetery cases, namey, that reta saes of bura space sod pror to or
durng the basc year of 1913 are concusve evdence of the vaue of the
bura space unsod and avaabe n that year. Wth ths contenton we are
nnabe to agree, as a factors havng to do wth the determnaton of vaues
must be consdered. the factors must be weghed n the ght of the
othpr facts deveoped and be gven ony such weght as may seem |ust and
reasonabe.
efore specfcay consderng Montrose s assgnment of errors, t woud be
proper to descrbe what methods of determnng vaue were actuay used.
The methods used by Montrose and Commssoner dd not fa to gve due weght to
the fact that on March 1, 1D13. the Tnsod nnd was n mproved and unmproved sec-
tons. The methods used treated a the unsod and as mproved, nnd deducted a certan
cost per square foot as the cost necessary to brng the unmproved area up to the same
tate of mprovement as the Improved area.
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111, rt. 111-1.
142
The Commssoner, Rchards, and Lockwood vaued the unsod ots and graves
n 1913 on the present-vaue method usng oskod s formua wth Interest
rate at 4 per cent and rsk rate at 8 per cent. In accord wth the present-
vaue method, the average seng prce to be receved for the unsod and
(based on the reta prces of the sod and) and the tme requred to se
the unsod and are frst antcpated. The unsod and mutped by the aver-
age prce per square foot then gves the tota e pected amount to be receved
for the unsod and over the perod of tme In queston (the e pected fe of
the cemetery). Ths unreazed amount s then dscounted to present vaue
by the use of oskod s formua. In addton, Lockwood aso apped the
reproductve apprasa method or the cost of reproducng the cemetery as t
was on March 1, 1913.
Montrose s contentons and the opnons of ts wtnesses measure the far
market vaue of the unsod ots and graves n 1913 by the reta sae of ots
and graves sod on or about the basc date. In fact, t s nssted that the
mhurst case makes reta saes the soe determnator of vaue. The Com-
mssoner, on the other hand, refuses to accept reta saes e cept n so far
as they are used n estmatng the antcpated seng prce of the unsod ots,
and nssts that the ony comparabe sae whch coud be used as a measure
of the vaue of the unsod cemetery and woud be the sae of an entre ceme-
tery smar to the one n queston. In summary, what we have here s smpy
ths: Montrose makes the seng prce the determnator of vaue: the Com-
mssoner makes the seng prce, ess dscount for years requred to reaze
the seng prce, the determnator of vaue.
The oard crtczed each sde, n effect statng that the use of the present-
vaue method aone, or the use of reta saes aone, Is not ustfed. The
oard acted on a the evdence furnshed to t and ts decson ndcates, and
we beeve correcty, that vaue after a s a queston of fact to be determned
from a the evdence. In answer to Montrose, the oard reasoned, and we
beeve ts ogc s ndsputabe, that the Supreme Court of the Unted States
dd not sancton, nor dd t prescrbe, any e cusve method for determnns
far market vaue n cemetery cases. To us t s eementary that to confer
concusveness upon evdence of reta saes n cemetery cases s to nvade
unnecessary the fed of admnstratve autonomy.
The far market vaue s a prce at whch a wng seer and a wng
buyer w trade, both havng a reasonabe knowedge of the facts. In ascer-
tanng any partcuar vaue, the purpose for whch the vauaton s made s
controng. In the nstant case the purpose of the vauaton s to provde
Montrose and the Commssoner wth a substtute ta bass, so that gan or
oss on saes of cemetery ots after 1913 can be determned.
Ordnary, the cost of the entre cemetery when acqured s the unad|usted
ta bass used n the determnaton of gan or oss from saes of bura space
theren. ere the cemetery property was acqured pror to 1913, at a cost
ess than the far market vaue thereof on March 1, 1913. In such a case
the far market vaue on March 1, 1913, Is made the statutory substtute In
pace of the usua cost bass. Such a vauaton manfesty does not contem-
pate a sae n 1913 to a buyer who ntended to use the bura space hmsef.
Pany, f Montrose had purchased the cemetery on March 1, 1913, for 2.75
cents per square foot, the unad|usted bass for the cemetery space sod n 1931
woud have been 2.75 cents per square foot and not the prce of reta saes
of comparabe and smar bura ground n 1913. Therefore, snce the vau-
aton here s to fnd a ta bass n pace of the usua cost bass, the task
Is as foows: the oard has the ob of determnng what Montrose, who
ntends to se after 1913, woud reasonaby pay for the bura space of
14,99 .f7 square feet n queston, or the entre cemetery for that matter, as
t stood on March 1, 1913.
Obvousy no buyer woud have purchased ether the partcuar footage In
queston, or the entre cemetery In 1913, at the reta prce per square foot at
whch cemetery space was seng pror to and durng 1913. e woud reasonaby
foresee that one must wat many years for a return of hs money and woud
therefore offer ess. Cemetery space can not be used for any other purpose
than for bura, and the demand for space Is mted by actua deaths and pros-
pectve deaths n the communty. In other words, the suppy of avaabe
cemetery space beng greater than the demand n the Chcago area, the stua-
ton s one of restrcted, rather than genera, market.
It s for ths reason that the prce of reta saes, ordnary the best evdence
of vaue n stuatons commandng a genera market, can not be accepted as
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143
U 111, rt. 111-1.
satsfactory. Counse for Montrose woud have ns go further, e nssts that
the mhurst case, supra, compes the oard to accept the reta prce as (he
soe determnator of vaue. We have shown that the crcumstances of ths
cemetery case make the reta prce as evdence of vaue unsatsfactory, uness
a dscountng s provded for the tme eement, the perod of hodng before
a market can be had.
The weakness of the prce of reta saes s obvous from facts and cr-
cumstances other than those aready shown. The cost of acqurng the raw
and n 1902 was around 2.75 cents a square foot. Montrose set a vaue n
1913 of 94 cents a square foot. Stated u another way. the and cost 75,000
n 19D2, and n 1913 a vaue of over 2,000,000 was camed. The partcuar
footage nvoved, . e., 14,t93. 7 square feet, cost 112.23 n (02. In 1013 a
vaue of 14,097.47 s asserted, such vaue beng based e cusvey on the prce
of reta saes pror to and durng 1913.
The e traordnary rse must have been due soey to the change n ts use
from raw and to cemetery and, for the record shows that the vaue of raw
and remaned constant from 1902 to 1013. Ths dfference between the cost
of 2.75 cents and the camed vaue of 94 cents seems nconsstent wth test-
mony of Montrose s wtnesses that set 25 cents a square foot as the converson
cost from raw and to saabe cemetery and. On ths testmony the vaue n
1913 a other thngs beng equa, mght be coser to 27.75 cents per square
foot than to 94 cents per square foot
Comparng Montrose s and Commssoner s method of determnng far market
vaue, t woud seem that Montrose s undscounted seng prce s ess equtabe
and ess ndcatve of vaue than the Commssoner s dscounted seng prce.
The vaue n 1913 of a cemetery ot mght very we be 91 cents per square
foot to a user n 1913, but the vaue of that same ot n 1013 to Montrose,
who ntended to se that ot to a user n the future, was not an undscounted
94 cents per square foot. To us It foows that the undscounted reta prce
s not satsfactory, and surey not concusve, evdence of the far market
vaue.
Ths does not mean to mpy, however, that the dscounted reta prce of
cemetery space sod pror to or at the basc date s concusve evdence of
the vaue of the baance of cemetery space unsod on the basc date. aue
at any partcuar tme s a fact. Ths fact s deduced from the appcaton
of |udgment and dscreton to a great many other facts and crcumstances,
and, as vaues are fuctuatng and changeabe, t s not easy to ay down a
genera and satsfactory rue appcabe n n cases. or ths reason any
contenton that a partcuar evdence s concusve of vaue can not stand.
The vaue reached w never be more than an appro maton, but t shoud
refect the oard s appcaton of ts |udgment to a the facts of the partcuar
case.
It s aso nssted that the oard dd not appy a correct prncpe of aw
to the facts found, and the argument s made that the correct prncpe of
aw to the facts found nvoves a determnaton based on reta saes, wth
counse statng that the oard dd not e pan the prncpe of aw used,
as t dd . n deta n the mhurst case. We have gven ths contenton
consderabe thought. We are convnced that the oard s decson s n
accordance wth the aw (Tte 20, IT. S. C. ., secton 041(c)). and that
the oard dd appv the correct rue of aw to the facts found ( creng v.
Rankn, 295 T . S., 123, 131 Ct. D. 9 , C. . IY-1, 1 0 (1935) ).
In ts mhurst decson, the oard brefy stated that the ta payer s vaua-
ton, whch was based on the reta saes prce, was reasonabe and shoud be
aowed, addng that ths prce was substanta evdence of the far market
vaue. In the oard s present decson, t refused to accept any partcuar
evdence as concusve. In essence, the oard n ths case consdered a the
evdence submtted and a the methods of vauaton advocated by the wt-
nesses, and then commented on ths evdence and on the methods used. If
Its decson means anythng, t means that the oard weghed a the evdence,
and that t vewed the methods of vauaton used by the wtnesses ns gudes
or cheers on ts |udgment and dscreton, n determnng the far market vaue
on March 1, 1913.
Reta saes consttute ony one eement to be taken nto consderaton n
the determnaton of the far market vaue of the cemetery and, and the use
of the reta prce method aone s not |ustfed. The same consderaton s
appcabe to the eement of tme requred to se the cemetery and and the
present-vaue method whch s ba ed thereon. ong wth the tme eement
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111, rt. 111-1.
144
and the reta seng prce there shoud be taken Into consderaton the cost
of acquston of the cemetery, the ocaton, age, sze and topography, the state
of deveopment, the e stence of competng cemeteres, the type of centee,
the trend of popuaton served, annua net earnngs, and other rented matters.
Consderaton of a the evdence bearng on the vaue s compance wth the
aw. The oard In ts decson ceary ndcated, and the oard s correct,
that vaue at any partcuar tme s a fact whch can ony be deduced propery
by |udgng and weghng a the pertnent evdence n the case.
We beeve aso that the oard s fndng of 23 cents as the vaue per square
foot meets the substanta evdence test. though we mght have found a
dfferent vaue had we been |udge and wegher of the facts, ths Is not the
test. Snce the determnaton of vaue nvoves a queston of dscreton, and
the e act vaue Is not n the evdence of the case, we can apprecate that no
two |udges of the same facts woud agree. t any rate, mathematca pre-
cson s mpossbe and It s gospe that the vaue reached can never be more
than an appro maton. We, of course, are bound by the rue that where there
Is substanta evdence to support the oard s fndng upon a queston of fact,
Its decson of such a queston s concusve upon revew. ( mhurst Cemetery
Co. v. Commssoner, supra Pamer v. Commssoner, 302 U. S., 3, 70 Ct. D.
1284, C. . 1987-2, 251 cverng v. natona Grocery Co., 304 U. S., 282,
294 Ct. D. 1341, C. . 1938-1, 279 .)
That there s substanta evdence to support the admnstratve fndng can
not be dsputed. The record ceary ponts to a vaue between 15 cents and
80 cents per square foot. methods of vauaton descrbed and used n the
record, e cept Montrose s undsoounted saes method, ndcate vaues rangng
from 15 cents to 30 cents. Thus, the present-vaue method gave a vaue of
15 cents, and It Is to be noted that some consderaton was gven to reta
saes. The reproductve apprasa aso Indcated a vaue of 15 cents, and
captazng net earnngs In 1912 or 1913 at 5 per cent woud have gven a vaue
between 25 cents and 30 cents.
There were other facts and crcumstances pontng to the same resut. or
Instance, the orgna transacton, n whch the raw and worth 75,000 was
e changed for the capta stock at 300,000, gave a vaue Increment over cost
of 225,000 at once. In addton, the capta stock returns showed a vaue
beow 20 cents, and the etters to the Commssoner, contanng three retro-
spectve apprasas, vaued the unmproved and at 15 cents and the mproved
and at 25 cents. Ths bref revew of the evdence, whch Is adequatey
descrbed In the statement of facts above, eads to the concuson that the
oard s fndng of 23 cents per square foot Is adequatey supported by the
evdence.
Counse for Montrose presses the argument that the Issue here Is the March 1,
1913, far market vaue of the 14,993.07 square feet of and sod In 1931 and not
the far market vaue of the baance of the cemetery and amountng to 2,214,78
square feet on hand March 1, 1913. We do not dsagree, yet we fa to see why
he rases ths contenton. s we have read the record, the bass appcabe to
the space sod n 1931 was found. The evdence by both sdes was drected
toward the ascertanment of the ta bass of the and sod In 1931, and the oard
acted on ths evdence.
Let us assume that the cemetery was acqured on March 1, 1913. Then the
acquston cost woud be aocated propery to portons of the cemetery and sod
In subsequent saes. Snce u the nstant case we are seekng a ta bass In
pace of the usua cost bass descrbed n the hypothetca case, we are under the
Impresson that the same treatment shoud be accorded n both cases. Montrose
does not suffer n|ury f n the nstant case the bass for the tota unsod acreage
Is frst found and aocaton made ater as saes therefrom are made.
Moreover, the tota of the bass for a of the separate saes of bura space
can not e ceed the vaue of the unsod and n 1913. It woud seem mmatera,
therefore, whether the bass appcabe to the footage sod n 1931 was deter-
mned drecty, or whether the vaue of the entre unsod and n 1913 wTas frst
determned and then an aocaton made to the space sod n 1931. The bass
does not vary, no matter whch way s used.
One other contenton requres consderaton. Counse for Montrose says, We
have read and reread the decson of the oard but we can not
fgure out from ts decson how t arrved at 0.23 . We mantan that
from the evdence n ths record the ony fndngs that the oard coud make
were 0.15 per square foot, 0.94 per square foot or 0.9987 per square foot and
nothng ese because those vauatons were the ony vauatons that the oard
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145
111, rt. 111-1.
bad before It . In effect, ths argument s another form of the brnnder
contenton that the oard apped au ncorrect prncpe of aw In arrvng at
ts decson.
We have aready answered the contenton n our dscusson above. In add-
ton, the court n everng v. Rankn, supra, pages 132-133, stated that even
f the oard s decson had been based on an erroneous rue of aw, that woud
not have |ustfed ts reversa, f the fndngs of fact, governed by the correct
rae of aw, were suffcent to snstnn the decson and had substanta support
n the evdence. We have aready shown that ths quoted statement s ap-
pcabe here. Nor do we know of any ega prncpe that compes the oard to
accept the e act vauatons made by the nterested pares. Surey there can be
no dspute on the proposton that the oard n the e ercse of ts |udgment
and n the weghng of the evdence may f an ndependent vaue.
It s true that the oard dd not revea n ts opnon how t arrved at ts
concuson that the vaue was 23 cents per square foot. though omsson n
ths regard s not ground for reversa I oerng v. an , n, supra, 132, 133),
we do beeve that the crtcsm s |ustfed. Our system of aw ordnary
accords admnstratve fndngs the same respect as that gven |ury verdcts,
and rghty so. Yet, the oard, a body of e perts n ta matters, usuay acts as
a |udca trbuna, and often renders opnons |ustfyng the decsons reached
theren. or ths reason, more can be e pected of t. To dscose how the
oard arrved at ts concuson s not e pectng too much from t.
We fuy apprecate counse s wrath n ths regard. We, too, have notced how
carefuy and thoroughy the oard stated the facts and how t commented on
he evdence nnd the methods of vauatons. Omsson of the way t arrved at
ts concuson, after such competeness, s ground for suspcon. We, moreover,
attach no such sacrosanctty to the process by whch a ta vaue s reached.
Counse aso suggests that the oard had f ed the vaue by captazng earn-
ngs. Ths suggeston probaby has ts brth n the suspcon engendered from
the omsson to state the method upon whch t arrved at ts concuson, as t
can not be taken from readng the oard s opnon. owever that may be,
n a case where the admnstratve fndngs are warranted by the evdence, oven
f the oard had consdered earnng power as a bass of vauaton, ths woud
not have been decared mproper, for ordnary earnng power s a very reabo
gude n the determnaton of vaue.
The decson of the oard s affrmed.
rtce 111-1: Computaton of gan or oss. 1940-14-10220
Ct. D. 14 9
INCOM T R NU CT O 1934 D CI ION O COURT.
1. Gan ob Loss Sae of Capta ssets Gor.n Content of Do-
ar Not a actor n Determnng Gan of oss.
The reducton made n the statutory god content of the doar
In 1933 s not a sgnfcant factor In determnng ta abe gan
derved n 193T from the sae of capta assets acqured durng the
perod 1931 to 1033. Such gan s to be measured by the dfference
between the cost n doars and the seng prce n doars.
2. Certorar Dened.
Petton for certorar dened on ebruary 20, 19 0.
Unted States Crcut Court of ppeas for the Seventh Crcttt.
George . ates, pantff-appeant, v. Unted States of merca, defendant-
appeee.
108 . (2d), 407.
ppea from the Dstrct Court of the Unted States for the Northern Dstrct of Inos,
astern Dvson.
December 22, 1939.
opnon.
Tkeanor, Crcut udge: Ths acton was brought n the dstrct court to
recover a refund of 7,134.17 whch appeant cams was erroneousy and 11-
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111, rt. 111-1.
14
egay coected from hm as Income ta for the caendar year of 1935. Ths
appea Is from a |udgment u favor of the appeee.
The utmate queston Is whether the pantff-appeant reazed a ta abe
gan from a sae n 1035 of certan securtes whch he had purchased durng
the perod of 1931 to 1933.
It Is unquestoned that ta payer purchased the securtes n queston for
134,4 4.01 and sod them n 1935 for 175,482.80 and that there was an ap-
parent proft of 24,515.79, whch was 0 per cent of 40,859. 5, the dfference
stated n doars between the purchase and saes prce of the securtes oss a
capta assets oss of 159.20. Pantff-appeant pad a ta of 7,134.17 on ths
returned ta abe gan.
The ta payer s cam to recover s based upon the camed consequence of the
egsatve change n the statutory god content of the doar, whch change
occurred between the dates of purchase and sae of the securtes. The con-
sequences reed upon by pantff are ceary Indcated by hs foowng
propostons of aw:
(1) The reazed gan theory of ncome s based upon a comparson of cost
In money wth seng prce In the same money or ts equvaent and changes n
the purchasng power of that money are dsregarded.
(2) Where new money supersedes the cost money after a purchase Is made by
an nvestor and the use of the od money s prohbted, there s no way In whch
a ta abe gan can be reazed.
(3) The ony bass provded for comparng purchase prces wth seng prces
In ths case s the god content of the od doar and the god content of the new
doar, and f that bass s used the appeant has not reazed a ta abe gan but
has suffered a oss.
We fnd nothng n the decsons of the Supreme Court to support the pan-
tffs proposton that the ncome consstng of gan from a sae of capta assets
must be determned by a comparson of cost n money wth seng prce n the
same money or ts equvaent, as dstngushed from a comparson of cost In
money wth seng prce In money. It s true, as stated by pantff, that the
Supreme Court frequenty has decared that gan In the money vaue of property
s not ncome wthn the consttutona meanng of that term unt transacton
has occurred whch makes the gan, as such, avaabe to the ta payer and
separabe from the money cost. ut we fnd no statements of the Court whch
go beyond the statutory method of determnng reazed gan. The statutory
defnton of gan s the e cess of the amount reazed therefrom over the ad-
usted bass (of cost) and the oss s the e cess of the ad|usted bass over the
amount reazed and the amount reazed from the sae or other dsposton
of property sha be the sum of any money receved pus the far market vaue
of the property (other than money) receved. 1
We are of the opnon that |udca decsons and statutory enactments nether
recognze, nor, by Impcaton, attach any sgnfcance to the statutory god
content of the doar as a factor n the determnaton of gan from the sae of
capta assets. The standard unt of computaton s the money doar, an abstract
or dea unt of account. Ths standard unt of money has not changed n money
.vaue throughout the e stence of our monetary system. There have been changes
from tme to tme n the form of the physca representatves of money, but awfu
money n the Unted States has been the same snce the ct of Congress of pr
2, 1702, provded that The money of account of the Unted States sha be e -
pressed n doars or unts, dmes or tenths, cents or hundredths, and ms or
thousandths, a dme beng the tenth part of a doar, a cent the hundredths part
of a doar, a m the thousandths part of a doar .
The Lega Tender Cases, supra note 2, hed that Congress had the power to
make paper money ega tender for the dscharge of money obgatons whch
had been assumed pror to the ssue of paper money. It was argued that the unt
of money vaue must possess Intrnsc vaue and that the paper doars, unke
the god con doar, possessed no Intrnsc vaue. The Supreme Court answered
the foregong contenton as foows: The Lega Tender cts do not attempt to
1 U. S. C. ., Tte 20. secton 111(b).
.. we w | notrp brefy an nrenment presented In support of the poston that
the unt of money vaue must possess ntrnsc vaue. The conage cts f ts
unt as a d )nr : but the god or sver thng we ca a doar ts. In no sense, a standard
of : doar. It s a representatve of t. (Leya Tender Cage . 12 Wa., 407,
r,3.)
Ch. 10, 1 Stat., 240. secton 20, 17. S. C. .. Tte 81, secton 371.
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147
111, rt. 111-1.
make paper a standard of vaue. We do not rest ther vadty upon the asserton
that ther emsson s conage, or any reguaton of the vaue of money nor do
we assert that Congress may make anythng whch has no vaue money. What
we do assert s, that Congress has power to enact that the Government s promses
to pay money sha be, for the tme beng, equvaent n vaue to the representa-
tve of vaue determned by the conage cts, or to mutpes thereof. (Page 553.)
It was ponted out n Norman v. . O. It. Co. that the Lega Tender cts
eft n crcuaton two knds of money, both awfu and avaabe, and con-
tracts for payment of god, one of these knds, were not dsturbed. Snce
there were n use after the passage of the Lega Tender cts two forms of money
authorzed by aw, metac and paper, and snce both were made ega tender
n payment of obgatons, t foows that a contract to pay n god was not
affected by the egsatve ct whch made paper money ega tender. ut ths
resuted from the contnuance by aw of the two forms of money each of whch
was ega tender and each of whch was crcuatng as awfu money of the
Unted States, and not from any |udca recognton that paper money, doar for
doar, was not equvaent n vaue to spece money.
In Deutsche ank v. umphrey the pantff had deposted money payabe on
demaud n a German bank n Germany. The money was not pad on demand
and a sut was fed. s stated by the Court the debt was a debt of German
marks and the queston rased on appea was whether the courts beow were
correct n hodng that the marks shoud be transated nto doars at the rate
of e change e stng when the demand was made. The Supreme Court stated that
the abty of the bank was f ed at a certan number of marks both by the terms
of the contract and by the German aw, and the Court assumed that t was
f ed n marks ony, not at the e trnsc vaue that those marks then had n com-
modtes or n the currency of another country. nd the Court added: n
obgaton n terms of the currency of a country takes the rsk of currency
fuctuatons and whether credtor or debtor profts by the change the aw takes no
account of t. Obvousy, n fact a doar or a mark may have dfferent
vaues at dfferent tmes but to the aw that estabshes t t s aways the same.
If the debt had been due here and the vaue of doars had dropped before sut
was brought the pantff coud recover no more doars on that account.
foregn debtor shoud be no worse off.
Pantff seeks to avod the force of the foregong statement of the Supreme
Court and nssts that the queston of capta gan presents an entrey dfferent
queston from that whch s presented when partes enter nto a contract whch
by ts terms s to be setted n the currency of a partcuar country and pantff
further states that n case of such a contract t s hed by the courts that the pares
have agreed to take ther chances on the changes of the currency of the country,
and, consequenty, t s hed that marks are marks and francs are francs and
doars are doars, no matter what changes may occur to affect ther vaue or
ther purchasng power, or how such changes may be made.
ut we see no way for pantff to avod the adverse force of hs own con-
structon of the reasonng and hodng n Deutsche ank v. umphrey. of
pantff s transactons were made n reference to the currency of the Unted States
and we can not fnd any bass for pantff s cam to a greater protecton aganst
tatutory changes n our aws reatng to money than one has who s the owner
of a note or bond and statutory changes have occurred between the dates of
e ecuton and maturty of the note or bond.
The recent decsons of the Unted States Supreme Court n Norman v. . t 0.
R. Co., supra, Nortz v. Unted States and Perry v. Unted States7 have estab-
shed concusvey that under our present monetary system there can be no
egay recognzed nequvaency of vaue between doars of what pantff cas
cost money and seng prce money. Pantff s proposton that the
reazed gan theory of ncome s based upon a comparson of cost In money
wth seng prce n the same money or Its equvaent s n a sense true but
the proposton gnores the equvaency, doar for doar, of cost and seng prce
money. In Perry v. Unted States, supra, the pantff was the hoder of an
obgaton of the Unted States for 10,000, known as ourth berty oans,
4 per cent god bond. The bond provded The prncpa and nterest hereof
2f4 r. S.. 240.
272 T . S.. 517. 519.
294 r. S., 317.
291 U. S 330.
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112(a), rt. 112(a)- .
148
r.ro payabe n Unted States god con of the present standard of vaue. It wu
the eonenton of the pantff that he was entted to receve n payment of the
bond 10,000 god doars each contanng 25.8 grans of god .9 fne or ts equva-
ent n god by weght, ether n the form of god con or unconed god, or. In
the aternatve, 1 ,931.25 n ega tender currency. The Unted States refused
to redeem the bond e cept by payment of 10,000 n ega tender currency nnd the
pantff sued to recover damages In the sum of 1 ,931.25, the vaue of defend-
ant s obgaton. The Supreme Court hed that the |ont resouton of une 5,
1933, nsofar as t attempted to overrde the obgaton created by the bond
n sut went beyond the congressona power but the Court further hed that
despte the breach of the obgaton of the bond by the Unted States the facts
aeged n pantff s petton dd not show a cause of acton for actua damages.
The foregong resut was requred, as ponted out by the Court, because the recent
monetary egsaton had created a domestc economy In respect to god, and
a snge monetary system wth an estabshed party n a currency and cons,
under whch 10,000 n the form of currency woud be equvaent n vaue to
10,000 of what pantff denomnates od money, whether god con money
or currency money.
y reason of the fact that god cons no onger crcuate as a medum of
e change and snce no prvate ctzen can awfuy possess god cons or god
buon, and snce, wth a few mmatera e ceptons, the ony thng that one
can do wth god or god con s to turn t n to the Unted States Treasury
and receve n e change an equvaent n currency, the equvaency beng deter-
mned on the bass of the present statutory content of the doar, It must foow
that n aw the seng prce n doars of pantff s securtes was equvaent to
the same number of doars n any one of the forms of what pantff cas cost
money.
The foowng hypothetca stuaton suggested by defendant Iustrates the
dffcuty of pantffs poston: If the ta payer had borrowed the doars ( 134,-
4 4.01) necessary to buy the securtes n queston In 1933 and pror years
and had not dscharged hs obgaton unt after he sod the securtes n 1985
the ta payer coud have used 134,4 4.01 to dscharge hs obgaton and woud
have had the e cess of 41,018.85. nd It s cear, as a matter of aw, that hs
credtor who receved the ta payer s promse to pay at a tme pror to the
changng of the god content of the doar woud have been requred to accept
n dscharge of the obgaton 134,4 4.01 of the so-caed new money, athough
the obgaton represented what pantff cas cost money.
The |udgment of the dstrct court s affrmed.
S CTION 112(a). R COGNITION O G IN OR
LOSS: G N R L RUL .
rtce 112(a)-: Saes or e changes. 1940-25-10298
G. C. M. 21915
R NU CT O 1928.
, who acqured S2|/ shares n the SI Trust for S doars, each
share representng a fractona Interest n a unt consstng of a
certan number of shares n each of 2 corporatons pus a propor-
tonate part of a reserve fund, wth prvege of convertng the trust
certfcates nto the underyng stocks, sustaned a recognzabe oss
when she e ercsed the rght of converson and receved h eu of
her trust certfcates stocks n the 2 corporatons to the vaue of
32a doars and 8r doars n cash, the cash coverng odd ots n con-
formtv wth the converson pan.
G. C. M. 10235 (C. . I-1, 8 (1932)) revoked.
n opnon s requested whether the oss sustaned by on the
converson of 82y shares of the M Trust (an nvestment trust) nto
See dscusson n ornan v. . f O. R. Co. orte v. Unted States and Perry v. Unte
States, supra.
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149
5 112(a), rt. 112(a)- .
the underyng stocks hed by the trust s recognzabe for purposes of
the edera ncome ta under the crcumstances heren set forth.
The nqury s made wth speca reference to G. C. M. 10235 (C. .
I 1, C8 (193:2)). wheren t was hed that no gan or oss resuted
for ncome ta purposes n a smar transacton.
Pror to uy , 1931, (herenafter referred to as the ta payer)
purchased 82y shares of the M Trust, a f ed nvestment trust created
dy an agreement, dated anuary , 102 ), between the N Company
(herenafter referred to as the depostor) and the O Trust Co. as
trustee. The cost of these shares was 12o doars. The trust fund
was composed of shares of stock n 2 corporatons. The certfcates
whch the ta payer receved provded that each share represented
1/4000 nterest n (1) a stock unt consstng of 4 shares of stock of
each of 2 specfed companes, and (2) the proporton of the reserve
fund whch mght be hed by the trustee from tme to tme. The
certfcate further provded as foows:
The bearer of any such certfcate or certfcates representng an aggregate of
1 shares of the M Trust or any mutpe thereof at hs opton, and upon the
e praton of such tme as the trustee sha wth reasonabe dgence requre
for the transfer of the shares of stock nvoved, upon rembursng the trustee
for ts actua e penses n connecton wth the transfer and upon such surrender
to the trustee of such certfcates wth a unmatured coupons, sha be entted
to receve such part of the deposted property hed by the trustee on the date
of surrender (not then dstrbutabe wth respect to matured coupons) as sha
bear the same proporton to a such deposted property (not then dstrbutabe
wth respect to matured coupons) as the number of shares of the M Trust
represented by such certfcate or certfcates sha bear to the tota number of
shares of the M Trust then outstandng. ny fractona nterest n securtes
or other property s to be ad|usted n cash as provded n the agreement pro-
vded, however, that f the number of M Trust shares represented by such
certfcate or certfcates sha not be eveny dvsbe by 10// the depostor sha
have the opton to purchase the certfcate or certfcates representng such
part of the stock unt and any cash and other property deverabe therewth
by payng to such bearer a sum equa to such cash and the market vaue of
such part of the stock unt and other property (as n the agreement defned).
On December , 1931, the ta payer surrendered her trust certfcates
and receved from the trustee shares of stock n the 2 corporatons
havng an aggregate market vaue of 32.r doars. She aso receved
8a: doars h cash coverng fractona shares. The ta payer deducted
n her return for the year 1931 a oss of the dfference between the
cost to her of the 82y shares of the trust and the vaue of the property
receved upon ther surrender to the trustee. Ths deducton was
dsaowed by the Commssoner upon the theory advanced n G. C. M.
10235, supra, that the surrender of certfcates of benefca nterest
n such an nvestment trust for a pro rata share of the underyng
corporate stocks representng the corpus of the trust was a merger
of the ega wth the equtabe tte and, therefore, dd not consttute
a sae, e change, or other dsposton of property whch consttuted a
ta abe transacton nvovng gan or oss for edera ncome ta
purposes.
The oard of Ta ppeas hed wth respect to a smar trust,
contrary to G. C. M. 10235, supra, that a oss upon the e change
of the trust shares for the corporate stock woud be recognzed.
(Du os Young v. Commssoner, 34 . T. ., 48, nonacquescence,
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112(a), rt. 112(a)-.
150
C. . -2, 51 (193 ).) The oard reached the same concuson n
Commssoner v. Tew (memorandum opnon dated anuary 9, 1940),
whch decson was affrmed by the Crcut Court of ppeas for the
S th Crcut (108 . (2d), 570). The court stated n part that:
We agree wth the oard, however, that the respondent receved n ths
transacton somethng dfferent from the property rght whch she surrendered.
She had possessed an undvded nterest In the entre bock of stocks owned
by the trust, whch was sub|ect to change by the trustee. She receved certan
ndvdua securtes. The trust was separate enough from the
respondent so that t was a ta abe entty . It owned the stocks,
and respondent had ony an nterest n them hence respondent s ownershp
of the certfcate was totay dfferent from her ownershp of ndvdua segre-
gated shares of stock.
Whe the respondent had an equtabe Interest In a stock owned by the
trust, she dd not have an e cusve benefca nterest theren, for she shared
her nterest wth a other certfcate hoders. Moreover, when the respondent
termnated the trust reatonshp, she surrendered her Interest n the other
shares remanng In the trust. The transacton thus effected a substanta
change In her property nterest and consttuted an e change wthn
secton 112(a) of the Revenue ct of 1928.
The court reached the concuson that n the partcuar trust n-
voved the ta payer, when she surrendered her certfcates of bene-
fca nterest and receved her pro rata share of the stocks consttut-
ng the corpus of the trust, receved somethng essentay dfferent
from what she had prevousy owned. Ths offce concurs n the
decson of the court.
Snce the concuson reached n G. C. M. 10235, supra, s contrary
to the decson n Tew v. Commssoner, supra, G. C. M. 10235 s
hereby revoked. It s aso recommended that the nonacquescence n
the decson of the oard of Ta ppeas n Du os Young v. Com-
mssoner, supra, be wthdrawn.
. P. Wenc-e,,
Chef Counse, ureau of Interna Revenue.
rtce 112(a)-: Saes or e changes. 1940-18-10247
G. C. M. 21998
R NU CTS O 192 ND 102S.
In vew of the fact that the concuson reached n G. O. M. 8038
(C. . I -1, 105 (1930)), that there was a sae of an equtabe In-
terest n certan property n the transacton there nvoved, s con-
trarv to the prncpe ad down n evertrg v. . rf R. Lazunt
Co. (308 U. S., 252, Ct. D. 1430, C. . 1939-2, 20S), that rung s
revoked.
The opnon of the Unted States Supreme Court n evermg v.
. R. Lazarus Co. (308 U. S., 252), affrmng the decson of the
Unted States Crcut Court of ppeas, S th Crcut (101 . (2d).
728), whch affrmed the decson of the oard of Ta ppeas (32
. T. ., G33), was pubshed as Court Decson 1430, C. . 1939-2,
208. The syabus reads n part as foows:
corporaton occuped and used n ts busness three budngs, the ega
tte to two of whch, and an assgnment of a 99-year ease to the thrd, were n
a bank as trustee for certan and-trust certfcate hoders. t the tme of the
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151
112(g), rt. 112(g)-2.
transfer of the propertes to the trustee bank, In 192S, a throo budngs were
eased back to the corporaton by the trustee for 90 years, wth opton to renew
and purchase. ed. That the oard of Ta ppeas |ustfaby concuded, from
a consderaton of a the evdence, that the transacton between the corporaton
and the trustee, n wrtten form a transfer of ownershp wth a ease back, was
n reaty a mortgage oan secured by the property nvoved, and that, n com-
putng ts net ta abe ncome for 1930 and 1931, the corporaton was entted to
the statutory aowance for deprecaton of budngs.
On facts substantay smar to those n eve-rng v. . R.
Lazarus Co.. supra, ths offce hed, nter aa, n G. C. M. 8098
(C. . I 1,105 (1930)) that a sae of an equtabe nterest n certan
property resuted. Snce that concuson s contrary to the prncpe
ad down n everng v. . R. Lazarus Co., supra, G. C. M.
8098, supra, s revoked. (See aso Commssoner v. The LI. .
Neghbors Reaty Co. (81 . (2d), 173).)
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
S CTION 112(p). R COGNITION O G IN OR LOSS:
D INITION O R ORG NIZ TION.
rtce 112(d)-2: Defnton of terms. 1940-3-10143
Ct. D. 1432
ncome ta revenue act of 1928 decson of streme court.
1. Reorganzaton Transfer of t. Pkopertes of One Company
fob Cash and onds of nother Company.
Pursuant to a contract between the Company, the pettoner
(ts soe stockhoder), and the Y Company, whereby t was agreed
that a the propertes owned, and to be owned, by the Company
shoud be transferred to the Y Company for cash and bonds of the
atter payabe seray over a perod of years, the pettoner turned
over to the Company certan propertes owned by hm ndvdu-
ay n e change for an ncreased ssue of the Company s stock,
the transfer agreed upon was then made, and the Company was
dssoved. ed: That the transacton dd not amount to a reor-
ganzaton wthn the meanng of secton 112() of the Revenue ct
of 1928, nasmuch as the transferor, by recevng bonds as parta
consderaton for the transfer, dd not retan any propretary Inter-
est n the enterprse but became merey a credtor of the transferee
the term of the obgatons, whether ong term bonds or short term
notes, not beng matera.
2. Cross Petton Necessty for ng n Order to ave dverse
udgment Revewed.
The Court can not afford reef to the respondent from the porton
of the |udgment beow whch was adverse to hm, snce he dd not
fe a cross petton askng for revew. respondent or an appeee
may urge any matter appearng n the record n support of a
|udgment, but he may not attack t even on grounds asserted n
the court beow, n an effort to have the Court reverse t, when he
hmsef has not sought revew of the whoe |udgment, or of that
porton whch was adverse to hm.
3. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, fth
Crcut (1939) (103 . (2d), 20), affrmed.
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112(g), rt. 112(g)-2.
152
Supreme Court of the Unted States.
. L. LeTuUc, pettoner, v. rank Scofed, Unted States Coector of Interna
Revenue for the rst Dstrct of Te as.
308 U. S., 415.
On wrt of certorar to the Unted States Crcut Court of ppeas for the fth Crcut.
anuary 2, 1940.
OPINION.
Sr. ustce Robkuts devered the opnon of the Court.
We took ths case because the petton for certorar aeged that the crcut
court of appeas had based Its decson on a pont not presented or argued by
the tgants, whch the pettoner had never had an opportunty to meet by
the producton of evdence.
The Guf Coast Irrgaton Co. was the owner of rrgaton propertes. Pet-
toner was ts soe stockhoder. e personay owned certan ands and other
rrgaton propertes. November 4, 1931, the Irrgaton company, the Guf Coast
Water Co., and the pettoner, entered n o an agreement whch rected that the
pettoner owned a of the stock of the Irrgaton company descrbed the
company s propertes, and stated that, pror to conveyance to be made pursuant
to the contract, the Irrgaton company woud be the owner of certan other
ands and rrgaton propertes. These other auds and propertes were those
whch the pettoner ndvduay owned. The contrnet caed for a conveyance
of a the propertes owned, and to be owned, by the Irrgaton company for
. )0,000 In cas and 750,000 n bonds of the Water company, payabe seray
over the perod anuary 1, 1033, to anuary 1, 1944. The pettoner |oned n
ths agreement as a guarantor of the tte of the Irrgaton company and for
the purpose of covenantng that he woud not personay enter nto the rrgaton
busness wthn a f ed area durng a specfed perod after the e ecuton of
the contract. Three days ater, at a specn meetng of stockhoders of the
Irrgaton company, the proposed reorganzaton was approved, the mnutes
statng that the ta payer, desrng aso to reorganze hs nterest n the
propertes, had consented to be a party to the reorganzaton. The capta
stock of the Irrgaton company was ncreased and thereupon the ta payer sub-
scrbed for the new stock and pnd for t by conveyance of hs ndvdua
propertes.
The contract between the two corporatons was carred out November IS, wth
the resut that the Water company became owner of a the propertes then
owned by the Irrgaton cotrnfrny ncudng the property theretofore owned by
the pettoner ndvduay. f nhf pcnty a of ts assets, ncudng the bonds
receved from the Wafer company, were dstrbuted to the pettoner. The com-
pany was then dssoved. The pettoner and hs wfe fed a ta return ns
members of a communty n whch they reported no gan as a resut of the
recept of the qudatng dvdend from the Irrgaton company. The atter
reported no gan for the ta abe year n vrtue of Its recept of bonds and cash
from the Water company. The Commssoner of Interna Revenue assessed
addtona ta es aganst the communty, as ndvdua ta payers, by reason of
the recept of the qudatng dvdend, and aganst the pettoner as transferee
of the Irrgaton company s assets n vrtue of the gan reazed by the company
o| the sae of ts property. The ta was pad and cams for refund were fed.
Pettoner s wfe havng ded he brought sut ndvduay and as her e ecutor
and representatve n the communty property aganst the respondent to recover
the amount of the addtona ta es so assessed. e aeged that the transacton
consttuted a ta -e empt reorganzaton as defned by the Revenue ct.1 The
respondent traversed the aegatons of the compants and the causes were
consodated and tred by the dstrct court wthout a ury. The respondent s
contenton that the transacton amounted merey to a sae of assets by the
pettoner and the Irrgaton company and dd not fa wthn the statutory
Secton 2() of tbe Revenue ct of 1928 (ch. 852. 43 Stat.. 791, 818).
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153
112(g), rt. 112(g)-2.
defnton of a ta -free reorganzaton was overrued by the dstrct court aud
|udgment was entered for the pettoner.
The respondent appeaed, assertng error on the part of the dstrct court n
matters not now matera aud aso assgnng as error the court s hodng that
the transacton consttuted a nonta abe reorganzaton.
The crcut court of appeas concuded that, as the Water company acqured
substantay a the propertes of the Irrgaton company, there was a merger
of the atter wthn the tera anguage of the statute, but hed that, n the ght
rf the constructon ths Court has put upon the statute, the transacton woud not
be a reorganzaton uness the transferor retaned a defnte and substanta
nterest n the affars of the transferee. It thought ths requrement was sats-
fed by the takng of the bonds of the Water company, and, therefore, agreed
wth the dstrct court that a reorganzaton had been consummated. It added,
however, We fnd a reason for reversng the |udgment whch has not been
argued. dvertng to the fact that the transfer of the pettoner s ndvdua
propertes to the Irrgaton company was for the purpose of ncudng them n
the atter s assets to be transferred n the proposed reorganzaton, the court
sad the statute dd not e tend to the reorganzaton of an ndvdua s busness
or affars, and the transacton was a reorganzaton wthn the meanng of the
Revenue ct as respects the corporaton s assets owned on November 4, 1931,
but not as respects the pettoner s ndvdua propertes ncuded n the sae.
It concuded: Ony so much of the consderaton as represents the prce of the
propertes and busness of the Irrgaton company s entted to be protected
from ta aton as arsng from a reorganzaton. It does not appear what the
proper apportonment s. The burden was upon LeTue to show not ony that
he had been egay ta ed, but how much of what was coected from hm was
ega. The atter he dd not do. The evdence does not support the |udgment
for the fu amount pad by hm. It s accordngy reversed, that further
proceedngs may be had consstent herewth.
The pettoner sought certorar assertng that the crcut court of appeas had
departed from the usua and accepted course of |udca proceedngs by decdng
the cause upon a ground not presented or argued and hence hr.d deprved the
pettoner of hs day n court. The respondent, though he had contended beow
that the transacton n queston dd not amount to a ta -free statutory re-
organzaton, dd not fe a cross petton askng for a revew of that part of the
|udgment e emptng from ta aton gan to the Irrgaton company arsng from
the transfer of ts assets owned by t on and pror to November 4, 1931, and the
part of the qudatng dvdend attrbutabe thereto.
We fnd t unnecessary to consder pettoner s contenton that the crcut
court of ap eas erred n decdng the case on a ground not rased by the pead-
ngs, not before the tra court, not suggested or argued n the crcut court of
appeas, and one as to whch the pettoner had never had the opportunty to
present hs evdence, snce we are of opnon that the transacton dd not amount
to a reorganzaton and that, therefore, the pettoner can not compan, as the
|ndgment must be affrmed on the ground that no ta -free reorganzaton was
effected wthn the meanng of the statute.
Secton 112() provdes, so far as matera:
(1) The term reorganzaton means ( ) a merger or consodaton (n-
cudng the acquston by one corporaton of at east a ma|orty of the votng
stock aud at east a ma|orty of the tota number of shares of a other casses
df stock of another corporaton, or substantay a the propertes of another
corporaton), .
s the court beow propery stated, the secton s not to be read teray, as
denomnatng the transfer of a the assets of one company for what amounts
to a cash consderaton gven by the other a reorganzaton. We have hed that
where the consderaton conssts of cash and short term notes the transfer
does not amount to a reorganzaton wthn the true meanng of the statute,
but s a sae upon whch gan or oss must be reckoned. We have sad that the
statute was not satsfed uness the transferor retaned a substanta stake In
103 . (2d), 20.
Pneas Ice Cod Storage Co. v. Commssoner (287 U. S., 4 2 Ct D. 30, C. .
III, 1 1 (1933) ).
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5 112(g), rt. 112(g)-2.1
154
the enterprse and such a stake was thought to be retaned where a arge
proporton of the consderaton was n common stock of the transferee, or
where the transferor took cash and the entre ssue of preferred stock of the
transferee corporaton. nd, where the consderaton s represented by a sub-
stanta proporton of stock, and the baance n bonds, the tota consderaton
receved s e empt from ta under secton 112(b)4 and 112(g).
In appyng our decson n the Pneas case (supra) the courts have gen-
eray hed that recept of ong term bonds as dstngushed from short term
notes consttutes the retenton of an nterest n the purchasng corporaton.
There has naturay been some dffcuty n cassfyng the securtes nvoved
In varous cases.
We are of opnon that the term of the obgatons s not matera. Where
the consderaton s whoy n the transferee s bonds, or part cash and part
such bonds, we thnk t can not be sad that the transferor retans any propre-
tary nterest n the enterprse. On the contrary, he becomes a credtor of
the transferee and we do not thnk that the fact referred to by the crcut
court of appeas, that the bonds were secured soey by the assets transferred
and that, upon defaut, the bondhoder woud retake ony the property sod,
changes hs status from that of a credtor to one havng a propretary stake,
wthn the purvew of the statute.
We concude that the crcut court of nppeas was n error n hodng that,
as respects any of the property transferred to the Water company, the trans-
acton was other than a sae or e change upon whch gan or oss must be
reckoned n accordance wth the provsons of the Revenue ct deang wth
the recognton of gan or oss upon a sae or e change.
ad the respondent sought and been granted certorar the pettoner s ta
abty woud, n the vew we have e pressed, be substantay ncreased over
the amount found due by the crcut court of appeas. Snce the respondent
has not drawn nto queston so much of the |udgment as e empts from ta a-
ton gan to the Irrgaton company arsng from transfer of ts assets owned
by t on and pror to November 4, 1931, and the part of the qudatng dvdend
attrbutabe thereto, we can not afford hm reef from that porton of the
|udgment whch was adverse to hm.
respondent or an appeee may urge any matter appearng n the record
n support of a |udgment, but he may not attack t even on grounds asserted
n the court beow, n an effort to have ths Court reverse t, when he hmsef
has not sought revew of the whoe |udgment, or of that porton whch s
adverse to hm.
The |udgment of the crcut court of appeas s affrmed and the cause s
remanded to the dstrct court wth drectons to proceed n accordance wth
the opnon and mandate of the crcut court of appeas.
So ordered.
everng v. Mnnesota Tea Co. (29 U. S., 378 Ct. D. 1000, C. . -1. 189 (1930)1).
everng v. Neson (29 . S.. 374 Ct. D. 1002. C. . -1. 274 (1930) ).
45 Stat., 810, 818. (See everng . Watts, 29 U. S., 387 Ct. D. 10 3, C. . -1,
27 (193 ) ).
Worcester Sat Co. v. Commssoner (75 . (2d). 251): Lentha v. Commssoner
80 . (2d. 411, 413) umam v. Commssoner (8 (2d), 77 Ct. U. 1245. C. .
937-2, 281 ) Commssoner v. tseman (89 . (2d), 458) Commssoner . Preund
(08 . (2d), 201) Commssoner v. Tyng (10 . (2d), 55) L. . Strn . Commt
tonrr (C. C. . 2) (decdnd November . 1939).
Langnes v. Green (282 U. S., 531, 535-537) : everng v. owran (302 T . S.. 238. 245
Ct. D. 1292, C. . 1938-1, 300 ) Tcone ank v. Sprague (303 D. 8., 40 , 410. note 3)
The Stephen Morgan (94 U. S., 599) : Mount Peasant v. erktcth (100 U. S.. 14
27) Unted States v. ackfeathcr (15) t S.. 180. 18 ) : Landram v. ordan (203 D S
5 , 2) othtce v. Unted States (254 U. S., 231, 233) Unted States v. mercan
Raway press Co. (2 3 U. S.. 425. 435) Morey Constructon ( o. v. Maryand Casuatu
Co. (300 U S 185, 191).
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155
112(g), rt. 112(g)-2.
rtce 112(g)-2: Defnton of terms. 1940- -101 8
Ct. D. 1438
ncome ta revenue act op 1928 decson of court.
Gan or Loss Reorganzaton Transf ok Corporate ssets for
Cash and Stock Opton greement for Sae of Stock.
corporaton transferred ts assets and busness n consdera-
ton of cash and shares of stock n a new corporaton, and, pursuant
to an opton agreement e ecuted pror to the recept of the stock,
receved cash therefor soon after ts assets were transferred.
the cash receved was dstrbuted among the stockhoders and the
corporaton was then ocay dssoved. ed: That, under the par-
tcuar facts, the transferor corporaton acqured no substanta
nterest n the new corporaton, hence there was no consodaton
or merger wthn the meanng of secton 112() of the Revenue ct
of 192S, and gan s to be recognzed from the transacton.
Unted States Crcut Court of ppeas for the S th Crcut.
The anner Machne Co. v. C. . Routzahn, Coector of Interna Revenue.
107 . (2d), 147.
ppea from the Unted States Dstrct Court for the Northern Dstrct of Oho, astern
Dvson.
November 9, 1939.
opnon.
en. Crcut udge: ppea from a |udgment dsmssng appeant s pet-
ton for refund of ncome ta es pad for the perod from anuary 1, 1928, to
uy 12, 1928. ury tra was waved, and the facts are stpuated. The soe
queston s whether dsposton of appeant s assets and busness on uy 12,
1928, was made pursuant to a pan of reorganzaton, merger, or consodaton,
to whch appeant was a party, as contended by appeant, or whether, as
urged by appeee, t was an outrght sae. If appeant s contenton s correct,
no gan s recognzed n the transacton under secton 112(b)4 of the Revenue
ct of 1928 ( 45 Stat.. 791).
ppeant, a manufacturer of rubber machnery and equpment, was an Oho
corporaton wth stock outstandng of 104 shares preferred and 15,000 shares
common. The ma|orty stockhoders of the corporaton agreed wth one rancs
nnn, a promoter, that unn shoud purchase appeant s assets and busness
for 500,000 cash and 4,000 shares of common stock of the Natona Rubber
Machnery Co., a corporaton to be organzed to take over the busness and
assets of appeant and three other corporatons.
The new corporaton was to be organzed wth an ssue of 152,000 shares of
common stock and 1,300,000 frst mortgage bonds. Certan of the common
stock was to be used for the converson of the bonds and to be sod to the
underwrters and promoter, and 50,000 shares were to be dstrbuted among
the four corporatons transferrng ther assets to the new corporaton. The
abtes of appeant, totang 42,230.97, were to be assumed by the new cor-
poraton. Under the transfer agreement, appeant coud not se the shares of
the Natona Rubber Machnery Co. to any other than hoders of shares In the
new corporaton for a year and a haf from the date of ssue.
The new corporaton was organzed n accordance wth the pan outned
above. unn assgned hs contracts wth the four corporatons to the new
corporaton, and a nstruments of conveyance and transfer were e ecuted by
appeant n accordance wth the contract. The transfer was competed, and
appeant receved 500,000 n cash and 4,000 shares n the new corporaton.
It dstrbuted the cash among ts stockhoders on uy 18. On uy 12 the
4,000 shares had been devered to a bank n escrow to be sod under a 0-day
opton agreement wth the underwrter, whch was accepted on behaf of appe-
ant on uy 5. The consderaton pnd for the opton was 2,000. On Sep-
tember 10. 928, the underwrter pad the escrow agent an addtona 94,000
under the terms of the opton, and ths amount was devered to appeant, whch
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112(g), rt. 112(g)-2.
15
at once dstrbuted the money among the stockhoders. The ega dssouton
of appeant corporaton foowed on October 1, 1928.
The case arses under the Revenue ct of 1028, the matera sectons of
whch are prnted n the margn.1
If, as contended by appeant, the transacton was made pursuant to a pan
of reorganzaton, merger or consodaton, no gan s recognzed n the trans-
acton under secton 112(b)4. The dstrct court hed upon the authorty of
crcrng v. Mnnesota Tea Co. (29 U. S., 378 Ct. D. 10 0, C. . -1, 189
(1030) ). that no such substanta nterest n the acqurng corporaton was
receved by appeant as woud brng t wthn the meanng of cousodaton
or merger as defned n secton 112(), and that secton 112(b)4 therefore dd
not appy.
We agree wth the dstrct court that ths transacton was not a consoda-
ton or merger wthn the defnton of the statute. In the Mnnesota Tea
Co. case, whe the Supreme Court states that the statute covers stuatons
outsde of strct merger or consodaton, t reaffrms the mtaton ad down
n Pneas Ice d Cod Storage Co. v. Commssoner (287 U. S., 4 2, 470 Ct. D.
30, C. . II-1, 1 1 (1933) ), that the mere purchase for money of the
assets of one company by another s beyond the evdent purpose of the prov-
son, and has no rea sembance to a merger or consodaton.
In substance, the nstant case presents nothng but the purchase of appe-
ant s assets. It s true that n addton to cash, stock was receved but the
purpose to reduce that stock to cash was ceary shown by the gvng of the
opton to the underwrter for the sae of the stock pror to the recept thereof.
ppeant n effect dscounted the stock for cash. The two corporatons n
fact dd not contempate a reorganzaton, merger or consodaton. ppeant,
n the etter sent to the stockhoders for the purpose of e panng the trans-
acton, stated Tour company havng sod a of ts assets and busness on
uy 12, 1928, s now n process of fna qudaton and dssouton. In the
petton for refund appeant ponts out that t s n process of qudaton.
ppeant dd not wsh to retan any nterest whatever n the new corporaton.
ppeant rees upon Mer v. Commssoner (84 ed. (2d), 415) (C. C. . ),
but ths case s not controng here. s nterpreted n the Mnnesota Tea Co.
and the Pneas Ice Cod Storage Co. cases, supra, the statute embraces
crcumstances dffcut to demt. It foows that cases arsng under ths
statute w necessary be decded upon ther pecuar facts. The Supreme
Court, n the Mnnesota Tea Co. case, went on to say that the nterest whch
woud permt a ta payer to cam e empton under ths status must be
defnte and matera t must represent a substanta part of the vaue of
the thng transferred. Ths s necessary n order that the resut accompshed
may genuney partake of the nature of merger or consodaton. ere the
nterest n the new corporaton was of the vaue of 9 ,000 as compared wth
500,000 cash receved. We do not consder that ths nterest, of whch the
corporaton mmedatey desred to dvest tsef, was so substanta a part of
1 Secton 112(a) : I pon the sne or e change of property the entre amount of the gan
or oss, determned under secton 111, sha be recognzed, e cept as herenafter provded
In ths secton.
Secton 112(b)4: No gan or oss sha be recognzed If a corporaton a party to a
reorganzaton e changes property, n pursuance of the pan of reorganzaton, soey for
tock or securtes n another corporaton a party to the reorganzaton.
Secton 112(d) : If an e change woud be wthn the provsons of subsecton (b)(4)
of ths secton f t were not for the fact that the property receved In e change conssts
not ony of stock or securtes permtted by such paragraph to be receved wthout the
recognton of gan, but aso ot other property or money, then
(1) If the corporaton recevng such other property or money dstrbutes It In
pursuance of the pan of reorganzaton, no gan to the corporaton shn be recognzed
from the e change, but
(2) If the corporaton recevng such other property or money does not dstrbute
t n pursuance of the pan of reorganzaton, the gan, f any, to the corporaton
sha be recognzed, but n an amount not n e cess of the sum of such money and
the far market vaue of such other property so receved, whch s not so dstrbuted.
Secton 112(1) : s used n ths secton and sectons 113 and 11 )
( The term reorganzaton means ( ) a merger or consodaton (ncudng the
acquston by one corporaton of at east a ma|orty of the votng stock and at east a
ma|orty of the tota number of shares of a other casses of stock of another corporaton,
or substantay a the propertes of nnother corporaton), or ( ) the transfer by a cor-
poraton of a or a part of ts assets to another corporaton If mmedatey after the
transfer the transferor or Its stockhoders or both are n contro of the corporaton to
whch the assets are transferred, or (C) a recaptazaton, or (D) a mere change n
dentty, form, or pace of organzaton, however effected.
(2) The term a party to a reorganzaton ncudes a corporaton resutng from a
reorganzaton and ncudes both corporatons In the case of an acquston by one cor-
poraton of at east a ma|orty of the votng stock and at east a ma|orty of the tota
number of shares of a other casses of stock of another corporaton.
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157
114, rt. 114-M
the vaue of the new corporaton that any genune merger or consodaton
e sted n the transacton.
The Commssoner dd not err n takng nto consderaton the entre seng
prce In ta ng the profts.
The |udgment s affrmed.
S CTION 114. SIS OR D PR CI TION
ND D PL TION.
rtce 114 1: ass for aowance of depre- 1940-11-10198
caton and depeton. G. C. M. 2192G
R NU CT O 192 ND SU S U NT R NU CTS.
The concuson reached n G. C. M. 2315 (O. . I-2, 21 (1027)),
that o and gas operators who had eected to deduct deveopment
e pendtures n computng net ncome must treat such e pendtures
as deductons n computng the mtaton (50 per cent of the net n-
come) on the depeton aowance, s propery appcabe under the
Revenue ct of 192C as we as under subsequent Revenue cts.
n opnon s requested whether, n vew of the decsons of the
Supreme Court of the Unted States n everng v. W/shre O
Co., Inc. (308 U. S., 90, Ct. D. 1424, C. . 1939-2, 213), and n . .
. O Co. v. everng (308 U. S., 104, Ct. D. 1423, C. . 1939-2,
212), G. C. M. 2315 (C. . I-2, 21 (1927) ) s sound n hodng that
o and gas operators, who had eected to deduct deveopment e -
pendtures n computng net ncome, must treat such e pendtures
as deductons n computng the mtaton (50 per cent of the net
ncome) on the depeton aowance under the Revenue ct of 192 .
Whe the above-cted cases dd not nvove years controed by
the Revenue ct of 192 , the reasonng empoyed by the Court n
sustanng the practce frst estabshed by G. C. M. 2315, supra, as
apped to years controed by the Revenue cts of 1928 and 1932,
confrms such practce for years controed by the Revenue ct of
192 .
The Court hed that the contrary practce estabshed under the
reguatons pertanng to the Revenue cts of 1921 and 1924 had
not. b subsequent reenactments of the pertnent statutory provson
wtnout change, evoved nto setted aw beyond the power of the
Commssoner to change by reguatory acton. fter revewng the
evouton of the reguatons bearng upon the pont, the Court con-
cuded that t s apparent that the demtaton mped n the per-
msson to deduct operatng e penses present under the earer
reguatons dsappeared from the 192 reguatons n case of o and
gas wes. (See footnote 10.) so that part of the te t of the
decson to whch such footnote pertans ponts out that the earer
provson of the reguatons upon whch the pror contrary practce
had been based was emnated from the reguatons under the
Revenue ct of 192 , and that the Commssoner undertook under
that ct to reverse the practce. It thus appears that the Court
recognzed a proper change n the reguatons and n practce under
the Revenue ct of 192 .
avng estabshed the proposton that the treatment of such de-
veopment e pendtures n computng the net ncome mtaton on
the percentage depeton aowance was sub|ect to reguatory change,
and havng ponted out that reguatory changes were n fact made
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131, rt. 131- .
158
under the Revenue ct of 192 as we as under the Revenue ct of
1928, the Court then consdered the queston as to whether such
changes were retroactve n character. Upon ths pont the Court
stated that such reguatory changes were not retroactve n character
merey by reason of the fact that they affected years n whch ta -
payers were bound to e pense deveopment costs by reason of an
eecton e ercsed n some pror perod. The Court then ponted
out, n effect, that n any event Treasury Decson 4025 (C. . I 1,
75 (1927)), whch durng 1927 permtted the e ercse of a new eec-
ton for years begnnng wth the year 1925, and G. C. M. 2315,
supra, whch at the same tme gave notce of the change n the prac-
tce n queston, eft the ta payer wthout |ust ground for compant
that t was nequtabe to reverse the practce after bndng hm by
hs eecton. s both the new eecton and the notce of the change
n practce were announced pror to the enactment of the Revenue
ct of 1928 and were made effectve begnnng wth the year 1925,
the frst year controed by the Revenue ct of 192 , such reasonng
supports the appcabty of G. C. M. 2315, supra, to years controed
by the Revenue ct of 192 as we as to ater years.
or the reasons stated, t s the opnon of ths offce that G. C. M.
2315, supra, shoud be apped to a years begnnng wth the year
1925.
. P. Wenchu,
Chef Counse, ureau of Interna Revenue.
S CTION 11 . CLUSIONS ROM GROSS INCOM .
R NU CT OP 1928.
G. C. M. 121 7 (C. . II-2,12 (1933)) modfed. (See G. C. M.
220 5, page 100.)
SUPPL M NT C CR DITS G INST T .
S CTION 131. T S O OR IGN COUNTRI S ND
POSS SSIONS O UNIT D ST T S.
rtce 131- : When credt for ta es may 1940-2-10139
be taken. G. C. M. 21788
R NU CT O 192 ND PRIOR R NU CTS.
The decson of the oard of Ta ppeas In Unversa Wndng
Co. v. Commssoner (39 . T. ., 1) 2, acquescence, page 5, ths
uetn) shoud be apped wth respect to the accrua of rtsh
ta es arsng under the rtsh Income Ta Law as changed by the
nance ct of 192 . The prncpes outned n G. C. M. 10 13
(C. . I-1, 173 (1932)) and n Coumban Carbon Co. v. Comms-
soner (25 . T. ., 45 , acquescence, C. . I-1, 2 (1932)) shoud
be apped ony wth respect to rtsh ncome ta es mposed uuder
the rtsh aw before ts change by the nance ct of 1928.
G. C. M. 10 13 modfed.
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159
1 2, rt. 1 2-1.
In G. C. M. 10 13 t was hed that:
rtsh ncome ta es assessabe for the rtsh year of assessment, pr -
pr 5, regardess of whether such ta es are based on the average ncome of a
3-year perod or on the ncome of the precedng year, accrue on the frst day of the
rtsh ta year of assessment, for t appears that abty for the payment of the
rtsh ta es Is dependent upon whether the ta payer contnues n busness durng
the year of assessment.
In vew of the decson of the oard of Ta ppeas n Unversa
Wndng Co. v. Commssoner (39 . T. ., 9 2, acquescence, page 5,
ths uetn), the prncpe enuncated n G. C. M. 10 13, supra,
shoud be apped ony n cases where the rtsh ncome ta es were
mposed under the rtsh aw e stng pror to the enactment of the
rtsh nance ct of 192 . In the Unversa Wndng Co. case t s
ponted out that the nance ct of 192 accompshed the foowng
changes n the rtsh aw:
(1) It aboshed the 3-year average proft provson and substtuted the fu
amount of profts or gans or ncome of the year precedng assessment.
(2) It made the ta payer sub|ect to ta even f he made no proft or had no
gans durng the year of assessment
(3) If the ta payer dscontnued busness, It rendered hm abe for a ncome
ta es chargeabe to hm whether hs accountng perod was concurrent wth or
dfferent from the year of assessment, pr to pr 5.
The oard aso ponted out that for the year n whch the busness
s dscontnued the assessment s based on the actua profts from the
th of pr of that year to the date of dscontnuance.
In vew of the foregong, the rung enuncated by the oard n the
Unversa Wndng Co. case shoud be apped wth respect to the
accrua of rtsh ta es arsng under the rtsh ncome ta aw as
changed by the nance ct of 192 . s ndcated above, the prn-
cpes outned n G. C. M. 10 13, supra, and n the Coumban Carbon
Co. case shoud be apped ony wth respect to rtsh ncome ta es
mposed under the rtsh aw before ts change by the nance ct
of 192 . G. C. M. 10 13, supra, s modfed accordngy.
. P. We che,
Chef Counse, ureau of Interna Revenue.
SUPPL M NT . ST T S ND TRUSTS.
S CTION 1 2. N T INCOM .
rtce 1 2-1: Income of estates and trusts. 1940-8-10179
G. C. M. 21799
R NU CTS O 1020 ND 1028.
Where under the terms of a trust nstrument payments of ncome
to a certan benefcary were to be made on anuary 2 and uy 2
of each year provded the benefcary was vng on those dates, the
ncome of the trust for the ast haf of the year whch was ds-
trbutabe on anuary 2 of the foowng year was ta abe to the
trust.
G. C. M. 8724 (C. . -2, 197 (1931)) and G. C. M. 15401 (O. .
I -2, 242 (1935)) revoked. Recommended that nonaequoscences
In usts v. Commssoner (30 . T. ., 820, nonacquescence, C. .
I -2, 30 (1935)) and Dean v. Commssoner (35 . T. ., 839,
nonacquescence, C. . 1937-2, 3 ) be wthdrawn, and that the
Commssoner acquesce n those cases. Recommended that I. T.
2595 (C. . -2, 353 (1931)) be revoked.
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102, rt. 1 2-1.
1G0
Ths offce has reconsdered G. C. M. 15401 (C. . T -2, 242
(1935)), whch modfed G. C. M. 8724 (C. . -2, 197 (1931)), n
vew of the decson of the Crcut Court of ppeas for the Tenth
Crcut n Commssoner v. Dean (102 . (2d), 99), affrmng Dean
v. Commssoner (35 . T. ., 839, nonacquescence, C. . 1937-2, 3 ).
G. C. M. 15401 nvoved trust ncome payabe by the trustee on
anuary 2 and uy 2 of each year to a certan benefcary (or
benefcares) of a trust who, under the terms of the trust, was re-
qured to be vng at the tme f ed for payment n order to receve
such ncome. The trustee contended that the ncome for the ast
haf of the year, that s, for the perod ended December 31, whch
was dstrbutabe on anuary 2, was ta abe to the trust, and that
the ncome of the trust dstrbutabe on uy 2 was ta abe to the
benefcary. Ths offce hed that the entre ncome was currenty
dstrbutabe to the benefcary wthn the meanng of the appcabe
ta statutes, and, therefore, was ncome ta abe to the benefcary
that the benefcary dd not become entted to such ncome unt the
tme f ed for payment and that such ncome was ta abe to the
benefcary n the year n whch t was receved by such benefcary.
The rung contaned n G. C. M. 15401, supra, was contrary to the
decson n ugustus . usts v. Commssoner (30 . T. ., 820),
nvovng trust ncome payabe on une 15 and December 15 of each
year, wheren t was hed that that part of the trust ncome whch
accrued between December 15 and December 31 each year was ncome
accumuated n trust for the beneft of unascertaned persons, and,
therefore, was ncome ta abe to the trust. In G. C. M. 15401 t
was recommended that the acquescence n the usts case (C. .
III-2, 7 (1934)) be wthdrawn, and, consequenty, nonacquescence
was pubshed n C. . I -2, 30 (1935).
The pertnent provsons of the Revenue ct of 192 , under whch
the orgna rung (G. C. M. 8724) was made, read as foows:
ST T S ND TRUSTS.
Sec. 219. (a) The ta mposed by Parts I and II of ths tte sha appy to the
Income of estates or of any knd of property hed n trust, ncudng
(1) Income accumuated n trust for the benet of unborn or unascertaned
persons or persons wth contngent nterests, and ncome accumuated or hed for
future dstrbuton under the terms of the w or trust
(2) Income whch s to be dstrbuted currenty by the fducary to the
benefcares,

(b) cept as otherwse provded n subdvsons (g) and (h), the ta
sha be computed upon the net ncome of the estate or trust, and sha be pad
by the fducary. The net ncome of the estate or trust sha be computed n the
same manner and on the same bass as provded n secton 212, e cept that

(2) There sha be aowed as an addtona deducton n computng the net
ncome of the estate or trust the amount of the ncome of the estate or trust
for Its ta abe year whch s to be dstrbuted currenty by the fducary to the
benefcares, but the amount so aowed as a deducton sha be
ncuded n computng the net ncome of the benefcares whether dstrbuted to
them or not.
(The correspondng provsons of other Revenue cts are substan-
tay the same.)
In the Dean case the trust nstrument provded for payment of
10,000 each year to a benefcary, such payment to be made on an-
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1 1
1 2, rt. 1 2-1.
uary 3 of each year. Te payments coud be made ony out of trust
ncome and ony f the benefcary was vng at the tme f ed for
payment. The Crcut Court of ppeas for the Tenth Crcut, after
referrng to the appcabe statutes, sad:
It thus s the duty of the trustee to ncude n the fducary
return the gross ncome of the trust estate, but he s aowed to deduct there-
from the amount he s requred to currenty dstrbute to the benefcary, and
the benefcary s abe for the ta on the amount currenty dstrbutabe to
hm. If no amount s currenty payabe the trustee s not entted to any deduc-
ton and the benefcary s not abe for ta on any part of the ncome. It s
ony where an amount s presenty payabe that the fducary s entted to a
deducton and the benefcary s ta abe. ( ererng v. ntcrworth, 290 U. S.,
3 5, 54 S. Ct., 221, 78 L. d., 3 . ) reuer v. everng, supra.) ut actua pay-
ment s not essenta n order for the benefcary to become abe for the ta
on the amount dstrbutabe to hm. The test under the ct Is whether he has
a present vested rght to receve the dstrbuton. If so, the statute commands
that t e treated as hs ncome and he becomes abe for the ta on t
( reuer v. everng, supra.)
ere, the trustees and the respondent made ther respectve returns on the
bass of the caendar year. It, therefore, was the duty of the trustees to ncude
n the fducary return the ncome of the trust estate at the end of each caendar
year. ut the Commssoner contends that the tem of 10,000 now n queston
was currenty dstrbutabe at the end of the caendar year that the fducary
shoud have camed a deducton n that amount and that t was ta abe to re-
spondent and was propery ncuded n computng hs net ncome, even though
not actuay pad to hm unt ater. Under the pan terms of the trust as
construed by the courts of Mssour, the trustees were not authorzed to pay any
snm to respondent at the end of the caendar year. They had no authorty
whatever to pay hn any amount unt the cose of the admnstratve year.
nd the payment authorzed at that tme coud be made ony out of net ncome.
If there was net ncome at the end of the caendar year but due to ntervenng
changes none e sted at the cose of the admnstratve year, no payment coud
be made. Lkewse, n the event of the death of respondent ntermedate the
two dates he coud not receve and recept for the dstrbuton and hs estate
woud not become entted to t. Pany, respondent dd not have a present
vested rght to the money at the end of the caendar year. e had ony a
prospectve contngent rght whch coud not rpen nto a present vested rght
before the cose of the admnstratve year. though ony three days Intervened
between the dates on whch the respectve years ended, the ncome was not cur-
renty dstrbutabe at the cose of the caendar year. It was hed at that tme
for the beneft of unascertaned persons or persons wth contngent nterests
t was hed for persons whose dentty coud not be ascertaned unt the end
of the admnstratve year.
Under the prncpe ad down n the decson n the Dean case, the
ncome of the nstant trust for the ast haf of the year whch s
dstrbutabe on anuary 2 s ta abe to the trust and not to the
benefcary snce, under the terms of the trust nstrument, such ncome
was not currenty dstrbutabe to the benefcary at the cose of the
ta abe year.
G. CM. 15401, supra, and G. C. M. 8724, supra, are accordngy
revoked. It s recommended that the nonacquescences n the usts
and Dean cases be wthdrawn and that the Commssoner acquesce n
those cases. It s further recommended that I. T. 2595 (C. . -2,
353 (1931)), whch foowed G. C. M. 8724, supra, be revoked.
. P. We che,
Chef Counse ureau of Interna Revenue.
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1 , rt. 1 -1. 1 2
rtce 1 2-1: Income of estates and trusts. 1940- -10180
I. T. 3352
R NU CT O 1918.
In vew of G. C. M. 21799 (page 159, ths uetn), I. T. 2595
(C. . -2, 353 (1931)) s revoked.
S CTION 1 5. MPLOY S TRUSTS.
R NU CT O 1934 ND RIOR R NU CTS.
Partnershps of attorneys, physcans, etc. (See L T. 3350. page 4.)
S CTION 1 . R OC L TRUSTS.
rtce 1 -1: Trusts, wth respect to the 1940-11-10200
corpus of whch, the grantor s regarded Ct. D. 1445
as remanng n substance the owner.
INCOM T R NU CT O 1934 D CISION O SLTR M COURT.
1. Irrevocabe Short Tkt.m Trust Income Nor Ta abe to
Grantor Under Secton 1 of the Revenue ct of 1934.
n rrevocabe short term trust, the net ncome of whch was
to be pad to the wfe of the grantor and the corpus to go to hm
upon termnaton of the trust, does not fa wthn the provsons of
secton 1GC of the Revenue ct of 1934, and the trust ncome s not
ta abe to the grantor under that secton.
2. Peadng Waver Rght to Cam eneft of Secton
pressy Waved n Lower Court.
The pettoner n hs bref before the ower court havng e -
pressy waved reance upon any secton other than secton 1 ,
can not be aowed the beneft of the broader provsons of secton
22(a).
3. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Second
Crcut (1939) (104 . (2d), 1013). afrmng decson of the Unted
States oard of Ta ppeas (1 38) (37 . T. ., 10 5), affrmed.
Supreme Court of the Unted States.
Guy T. everng, Comm soncr of Interna Revenue, pettoner, v. Meredth
Wood.
309 U. S., 344.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Second Crcut
ebruary 2 , 1940.
OPINION.
Sr. ustce Dougas devered the opnon of the Court.
Ths case, ke everng v. Cfford ( U. S., Ct. D. 1444, page 105, ths
uetn ) s here on certorar, the probems n the two cases beng the same n
certan essenta respects. In pr, 1931, respondent, who owned 25 shares
of stock of ook-of-the-Montb Cub, Inc., made hmsef trustee of those shares
under an agreement whch was to e pre n three years1 or earer on the death
1 In 1932 the term was e tended to fve years from pr, 1931.
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1 , rt. 1 -1.
of ether hm or hs wfe. y the trust he was to hod, Invest, and renvest
the shares, to coect the net ncome therefrom and to pay t to hs wfe.
e had the power to retan the stock or to se t or any part thereof
at such tme and on such terms as he shoud deem proper. It was
provded that hs power of nvestment or renvestment of any of the property
or moneys hed n trust was not to he restrcted by any aw governng nvest-
ments by trustees. e was aso gven power to f and determne the vaue
of the property for a purposes of the trust and to determne whether any
property or money receved or hed n trust sha be treated as capta or
ncome, and the mode n whch any e pense ncdenta to the e ecuton of
the trust s to be borne as between capta and ncome, wth the provso,
however, that stock dvdends and subscrpton rghts shoud be treated as prn-
cpa. e was prohbted from recevng any commssons wth respect to
prncpa or ncome and an e cupatory cause purported to protect hm aganst
any oss e cept that occasoned by hs wfu msconduct. e had the power
to appont a substtute trustee. On termnaton of the trust a property then
hed n trust was to go to hm. The trust contaned no power of revocaton nor
any power to revest n the grantor at any tme, pror to the date of termnaton,
tte to any part of the corpus.
Durng 1934 respondent pad over to hs wfe 8,750, whch was the entre
ncome from the trust for that year. She ncuded t n her Income ta return.
The Commssoner, beng of the opnon that the ncome was ta abe to respond-
ent, determned a defcency n hs 19.34 return. Respondent appeaed to the
oard of Ta ppeas whch hed that pettoner was n error (37 . T. .,
10 5). The crcut court of appeas afrmed (104 . (2d), 1013) on the au-
thortv of Unted Sates v. rst Natona ank of rmngham (74 .
(2d), 3 0).
Pettoner mantans that the trust Income Is ta abe to respondent ether
nnder secton 1 or secton 22(a) of the Revenue ct of 1934 ( 48 Stat, 80)
or both.
y secton 10 the ncome from a trust s ta abe to the grantor where at
any tme the power to revest n the grantor tte to any part of the corpus of the
trust s vested n hm or n any person not havng a substanta adverse
nterest n the dsposton of such part of the corpus or the ncome therefrom. 4
Pettoner has not undertaken to estabsh that under New York aw, whch
governs ths trust, respondent had the power to revoke t pror to the end of the
term. ut n hs contenton that the trust here nvoved s covered by secton
1 , pettoner ponts out that there s no practca dfference between a revocabe
trust and one certan to be termnated soon. nd he argues that t woud not
be sensbe to mpute to Congress a purpose to mpose the ta when the grantor
has an e ecutory power to revest tte n hmsef but to wthhod the ta when
the grantor, by provsons n the trust deed, has aready e ercsed that power.
Our dffcuty es not n an nabty to see the smarty of those stuatons
bat n beng abe to say that Congress treated them the same under secton
1 . power to revest or revoke may n economc fact be the equvaent of
a reverson. ut at east n the aw of estates they are by no means synony-
mous. or, generay speakng, the power to revest or to revoke an e stng
estate s dscretonary wth the donee donor a reverson s the resdue eft
In the grantor on determnaton of a partcuar estate. (See Tffany, Rea
Property (2d ed.), secton 129 et seq., secton 31 ct seq.) Congress seems to
have drawn secton 1 wth that dstncton n mnd, for mere reversons are
not specfcay mentoned. Whether as a matter of pocy such nce dstnctons
shoud be perpetuated n a ta aw by seectng one type of trust but not the
other for speca treatment s not for us. We have ony the responsbty of
Is rght to se was sub|ect to a coatera agreement, not matera here, wth one
Scherman. grantng Scherman a preemptve rght In case respondent decded to se.
No substtute trustee was, however, apponted, respondent contnung to act as trustee
unt termnaton of the trust n 103 .
Secton 1C0 reads In fu:
Where at any tme the power to revest n the grantor tte to any part of the corpus of
the trust s vested
(1) In the grantor, ether aone or n con|uncton wth any person not havng a sub-
rtanta adverse Interest In the dsposton of such part of the corpus or the ncome there-
from, or
(2) n any person not havng a substanta adverse nterest In the dsposton of such
of the corpus or the ncome therefrom,
the ncome of such part of the trust sha be ncuded In computng the net Income of
the grantor.
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1 4
carryng out the congressona mandate. nd where Congress has drawn a
dstncton, however nce, t s not proper for us to obterate t. That seems
to ns to be the case here. Whether wsey or not, Congress confned secton
1 to trusts where there was a power to revest. The probem of nter-
pretaton under secton 1 s therefore qute dfferent from that under secton
22(a). The former s narrowy confned to a speca cass the atter by broad,
sweepng anguage s u-ncusve. ( cverng v. Cfford, supra Ct. D. 1444,
page 105, ths uetn .) ccordngy, the wde range for defnton and specf-
caton under the atter s ackng under secton 1 . nd so far as secton 1
s concerned no apparent or urkng ambguty requres or permts us to dvue
a broader purpose than that e pressed. The egsatve hstory corroborates
ths concuson. When the 1934 ct was before the ouse commttee, the
Treasury recommended that ncome from short term trusts and from revocabe
trusts shoud be ta abe to the creator. The Congress adopted the atter by
an approprate amendment to secton 1 but t dd not seect the former for
speca treatment. When such cear choce of deas has been made n the
draftng of a specfc provson of the aw, ts anguage must be taken at
ts face vaue. Secton 1 s therefore not appcabe to ths trust snce
respondent s gven no power to reca the corpus. e or hs estate gets t at
the end of the term, on the death of hs wfe, or on hs own death whchever
Is the earest.
or a whoy dfferent reason, pettoner s argument based on secton 22(a)
must fa. The oard of Ta ppeas purported to pace ts decson soey on
secton 1 and secton 1 7 of the ct. Pettoner n hs assgnments of error
specfcay mentoned ony secton 10 and secton 1 7, not secton 22(a). In
s bref before the crcut court of appeas pettoner e pressy waved re-
ance upon any secton other than secton 1 . Though pettoner n hs pet-
ton for certorar reed on secton 22(a), respondent n opposton thereto
took the poston that that pont was not avaabe to pettoner here as t was
not rased beow. In vew of these facts, especay the e press waver beow,
we do not thnk that pettoner shoud be aowed to add here for the frst
tme another strng to hs bow. s we have ndcated, the ssues under secton
1 and secton 22(a) are not cotermnous. Though both dea wth concepts
of ownershp, the range of nqury under the atter s broad, under the former
confned. To open here for the frst tme and n face of the e press dscamer
an nqury nto the broader fed s not ony to deprve ths Court of the assst-
ance of a decson beow but to permt a shft to ground whch the ta payer
had every reason to thnk was abandoned n the earer stages of ths tgaton.
(See urnet v. Commonweath Improvement Co., 287 U. S., 41 , 418 TCt. D. 22.
C. . II-1, 277 (1933) .) It s not apparent why a ess strct rue Is
necessary n order adequatey to protect the revenue.
ffrmed.
Mr. ustce Robeets concurs n the resut.
Revenue revson, 1034, hearngs before the Commttee on Ways and Means. ouse of
Representatves, Seventy-thrd Congress, second Resson, page 151. The recommendaton
read : The ncome from short-term trusts and trusts whch are revocabe by the creator
at the e praton of a short perod after notce by hm shoud be made ta abe to the creator
of the trust.
Conference Report No. 1385, ouse of Representatves, Seventy-thrd Congress, second
sesson, page 24 :
I nder e stng aw. the ncome from a revocabe trust Is ta abe to the grantor ony
where such grantor (or a person not havng a substanta adverse nterest n the trust)
has the power wthn the ta abe year to revest n the grantor tte to any part of the
corpus of the trust. Tnder the terms of some trusts, the power to revoke can not be
e ercsed wthn the ta abe year, e cept upon advance notce devered to the trustee
durng the precedng ta abe year. If ths notce Is not gven wthn the precedng ta abe
year, the courts have hed that the grantor s not requred under e stng aw to ncude
the trust Income for the ta abe year In hs return. The Senate amendments requre the
Income from trusts of ths type to be reported by the grantor. The ouse recedes.
rtce 10 -1 of Treasury Reguatons 8 , orgnay promugated under secton 1 .
was not promugated under secton 22(a) unt 193 (T. D. 4 20 C. . -1, 140
(198 ) ), two years after the ta abty here In Issue occurred. ence we do not have
a case of reance by the Government on a reguaton whch durng the ta abe year In
queston rested on two egs, one of whch was secton 22(a).
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1 7, rt, 1 7-1.
S CTION 1 7. INCOM OR N IT
O GR NTOR.
rtce 1 7-1: Trusts n the ncome of whch 1940-7-10173
the grantor retans an nterest. Ct. D. 14 9
INCOM T R NU CT O 1932 D CISION O SUPR M COURT.
L Income Trust Monthy Payments to Wfe Ta abe to
usband.
Pror to dvorce and n settement of a sut for separate mante-
nance, a property and amony settement was agreed upon between
husband and wfe whereby a certan amount of trust ncome was
to be pad monthy to the wfe for fe, the baance to the husband
for hs fe, wth provson for dsposton of the trust corpus and
ncome upon the death of ether or both. The dvorce decree con-
frmed the property and amony settement. ed: That the
amounts dstrbuted to the wfe under the trust are not regarded as
ncome of the wfe but as pad n dscharge of the husband s ob-
gaton to support her, and hence are to be ncuded n hs ta abe
ncome.
2. Decson ppcabe.
The prncpe nvoved n Dougas v. Wcvts (1935) (290 U. S.,
1 Ct. D. 1041, C. . I -2, 250 (1935) ) s appcabe n the absence
of cear and convncng proof that oca aw and the amony trust
have gven the dvorced husband a fu dscharge and eave no
contnung obgaton however contngent.
3. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, ghth
Crcut (1939) (103 . (2d), 702), reversed.
Supreme Court of the Unted States.
Guy T. emng, Comm oner of Interna Revenue, pettoner, v. . . . tch.
309 U. S., 149.
On wrt of certorar to the Unted States Crcut Court of ppeas for the ghth Crcut
anuary 29, 1940.
opnon.
Mr. ustce Dougas devered the opnon of the Court.
Pettoner camed that an amount of 7,128 dstrbuted n 1933 under a so-
caed amony trust to respondent s dvorced wfe shoud have been ncuded
n respondent s ta abe ncome for that year. The oard of Ta ppeas agreed
and found a defcency (37 . T. ., 1330). The crcut court of appeas re-
versed, one |udge dssentng (103 . (2d), 702). We granted certorar because
f the asserted faure of that court correcty to appy the prncpe nvoved n
Dougas v. Wcnts (290 U. S., 1).
The so-caed amony trust n queston was created a few years before the
dvorce, whe respondent and hs wfe were separated, and n settement of
a sut brought by her for separate mantenance. Certan premses (a har
tonc factory and a ong term ease thereon) were transferred to a trustee to
hod tte, coect rents an after deducton of e penses to pay the wfe 000
a month durng her fe and the baance to respondent for hs fe.1 On the
Respondent and hs wfe separated n 1017. In 1 f0 respondent purchased a home for
hs wfe, furnshed t for her, and gave her an automobe. In the same year . W. tch
Co. was ncorporated and acqured the assets of a predecessor partnershp n e change for
2.000 of ts shares. Of these shares 1.800 were ssued to respondent and 10 to hs wfe.
She was aso an offcer and drector of the company, wth a monthy saary of 00.
When the separate mantenance sut was setted n 1 I2:1, respondent eased certan
premses, owned by hm, to the . W. tch Co. for 99 years, at an annua renta of
12,000. These premses and that ease were transferred to the trustee. Upon creaton
of the trust the wfe ceased to be an offcer and drector of . W. tch Co. and receved
no further saary from t.
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1
death of ether respondent or hs wfe the deceased s share of the ncome was
to be pad to ther chdren. The trust was to contnue at east 15 years. Ch
the death of both respondent and hs wfe the prncpa wns to be pad over
to ther chdren. The trust was rrevocabe. nd whe respondent covenanted
to pay off certan encumbrances on the trust property, he dd not underwrte
n whoe or n part the 00 monthy payments to hs wfe.
In 1925 she fed sut for a dvorce n an Iowa court. property settement
was agreed upon whch ncuded the trust agreement and, n addton, provded
for a transfer to her by respondent of certan shares of stock and cash.3 The
dvorce decree confrmed the property and amony settement.4
The genera rue s cear. mounts pad to a dvorced wfe under a decree
for amony are not regarded as ncome of the wfe but as pad n dscbarge
of the genera obgaton to support, whch s made specfc by the decree.
(Dougas v. WUcus, supra, page 8.) It s pan that there the amony trust,
whch was approved by the dvorce decree, was merey securty for a contnung
obgaton of the ta payer to support hs dvorced wfe. That was made evdent
not ony by hs agreement to make up any defcences n the 15,000 annua
sura to be pad her under the trust. It was aso confrmed by the power of
the Mnnesota dvorce court subsequenty to ater and revse ts decree and
the provsons made theren for the wfe s beneft. Lkewse consstent wth
th use of the amony trust as a securty devce was the provson that on
death of the dvorced wfe the corpus of the trust was to be transferred back
to to ta payer. Respondent nssts that n the nstant case there s no con-
tnung obgaton to whch the ncome of the amony trust s apped but rather
that the property and amony settement approved by the Iowa court effected
an absoute dscharge of any duty or obgaton on hs part to support hs
dvorced wfe. It s true that there s no covenant or guarantee to make up
any defcency n the monthy payment to hs dvorced wfe, as there was n the
Dougas case. nd unke that amony trust, the nstant one, though grantng
I e ta payer a partcpaton n the ncome, rrevocaby aenates the corpus.
Other ndca of the use of ths amony trust as a securty devce for any
contnung obgaton of respondent are aeged to be absent by reason of the
ack of power. In the Iowa court to modfy the decree confrmng the property
and amony settement.
The Iowa statute provdes: When a dvorce s decreed, the court may make
such order n reaton to the chdren, property, partes, and the mantenance
of the partes as sha be rght. Subsequent changes may be made by t n
those respects when crcumstances render them e pedent. 5
dmttedy the court under that statute has the power to modfy provsons
n the orgna decree for the contnued support and mantenance of the wfe.
nd tUkewse seems we setted by a ong ne of Iowa cases that where the
orgna decree makes no provson for amony, there s no power subsequenty
to modfy the decree so as to provde t.T nd, respondent contends, where
amony Is aowed n a ump sum or a property settement s ratfed by the
decree, the court retans no power to modfy.
Span v. Span (177 In., 249) and McCoy v. McCoy (191 a., 973), on whch
respondent and the crcut court of appeas pace reance are not n pont snce
those dvorce decrees, unke the nstant one, made no provson for amony.
In Span v. Span, supra, the Supreme Court of Iowa specfcay reserved the
queston of the power to modfy a dvorce decree nvovng a property sette-
ment. s to that t sad (pages 200-2 1) : s to an award n gross, or a d-
vson of the property, based upon an equtabe apportonment of the property
No queston of mnor chdren s here nvoved, the youngest of the four chdren
bavns become of age n 1027.
S hundred shares of stock of . W. tch Co. and 23.500.
4 It s therefore, ordered, ad|udged and decreed, that the pantff, tte S. tch, be,
and she s hereby, dvorced from the defendant, red W. tch, absoutey that
the trust agreement whch s referred to n the defendant s answer as havng been entered
nto between these partes on or about the 23d day of pr. 1023, he. and the
same s herebv ratfed and confrmed by the court nd that the property and amony
getement made bv the partes be, and It s hereby confrmed by the court.
1 Secton 10481. Iowa Code.
See Cor v. Cor (217 a., 812) : unger v. unr|er (21 a., 3 ) Roquette v. rquette
(21 a.. 000) Toneu v Tonen (213 Ta.. 398) : Mnnnon v. Iforroon (208 a., 1384).
.Span v. Span (177 a.. 2- 0 : McCoy v. McCoy (101 a., 973) and/taker v. Innrttaker
(223 a., 4 2) Duva v. Duva (215 a., 24) Dockaon y. Dockton (202 a., 489).
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of ether of the partes at the tme the dvorce s grunted, we have o occason
to speak, for that matter s not n the case.
Lkewse arsh v. arsh (190 a., 493), cted beow and urged here n
support of respondent s contenton, s of tte ad, for n spte of a strong con-
currng opnon that the court had no power to modfy an aowance of gross
or permanent amony, the ma|orty apped the statute and concuded
(page 501) Whatever the e tent of the power of the court may be to make
such ncrease, t s aways sow to e ercse such power, e cept n the presence
of e traordnary crcumstances, such as are not present here. To be sure,
there s the foowng strong statement n raft v. raft (193 a., G02, 07) :
We are ncned to the vew that, where amony s aowed n a ump sum,
as permanent amony, or where there s a dvson of the rea property of
the partes, as permanent amony, the statute does not authorze a change
theren, e cept for such reasons as woud |ustfy the settng asde or changng
of a decree n any other case that the party awarded permanent amony s
not entted to permanent amony and support both . nd n Carr
v. Carr (185 a., 1205), that court stated, page 1211: mony s aowed
n eu of dower and the pror duty of support, and a revew of the decree
awardng or refusng same can be had ony for such fraud or mstake as woud
authorze the settng asde or modfcaton of any other decree. In that case
the dvorce decree requred the husband, nter aa, to convey certan rea
estate to a trustee for the e cusve beneft of the wfe to be hed n trust for
fve years, durng whch tme the Income was to be pad over to the wfe and
at the end thereof the trustee, on demand, was to convey the property to
her. Meanwhe, the trustee had the power to se the property at not ess
than 100 an acre. Shorty before the e praton of the 5-year perod, the
dvorced husband fed a cross-petton n the dvorce sut askng for a modfca-
ton of the trust n order to protect hs former wfe from her own e travagance
and her ne perence n busness affars. pparenty the reef asked was
not based on the Iowa statute gvng the court power to make subsequent
changes n the dvorce decree when crcumstances render them e pedent.
or the court stated that the modfcaton of the decree was sought on the
grounds (1) that the donor of the trust was entted to have t carred out n
accordance wth ts terms and the rea purpose for whch t was created
and (2) that, n the aternatve, he was entted to have a guardan of the
property apponted.
owever that may be, much of the weght whch respondent accords raft
v. raft and Carr v. Carr, supra, seems to have been dsspated by McNary v.
Mcfary (20 a., 942). In that case the Supreme Court of Iowa had squarey
before t the queston of whether or not under the foregong statute a decree
of permanent amony awardng persona and rea property to the wfe coud
be atered. The court after statng that It knew of no case where such a
decree had been subsequenty modfed, added (page 94 ) : Ths queston s
not argued by the partes, and we fnd t unnecessary to make a pronounce-
ment thereon. nd, sgnfcanty, t proceeded to appy the statute and fnd-
ng that ts condtons had not been satsfed, t dened the reef asked by the
dvorced husband.
On ths statement of the Iowa authortes we can ony specuate as to the
power of the Iowa court to modfy amony awarded n a ump sum or a prop-
erty settement ratfed by a dvorce decree. To be sure, raft v. raft, supra,
nvoved some features common to the nstant case, snce the wfe was to receve
the ncome of 4,000 to be paced n trust by the husband or, unt he paced t
In trust, 5 per cent on that amount. ut the refusa to modfy that decree
was not paced squarey, or even argey, on the ack of power to do so but on
other crcumstances. urthermore, the uncertanty created by McNary v. Mc
ary, supra, makes perhaps for even greater uncertanty where an amony
trust of the knd here nvoved s concerned. t east respondent has not estab-
shed a necessary dentty n treatment of transfers of persona or rea property
on the one hand and aowance of ncome out of ths knd of amony trust on
the other. ven on the authorty of raft v. raft, supra, respondent has not
ceary shown that In Iowa dvorce aw the court has ost a |ursdcton to
ater or revse the amount of ncome payabe to the wfe from an enterprse
whch has been paced n trust. or a that we know t mght retan the
power to reaocate the Income from that property even though t acked the
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1 S
power to add to or subtract from the corpus or to tap other sources of Income.1
If It dd have such power, then t coud be snd that a decree approvng an
amony trust of the knd here nvoved merey paced upon the pree stng
duty of the husband a partcuar and specfed sancton. In that event, the
case woud be tte dfferent from one where the husband was drected to make
specfed payments to the dvorced wfe. nd we see no reason why the rue
of Dougas v. Wcuts, supra, shoud not then appy.
nough has been sad to show that respondent has not sustaned the burden
of estabshng that hs case fas outsde the genera rue e pressed n Dougas
v. Wcuts, supra. If we were to concude that ths case s an e cepton o
that rue we woud be actng argey on con|ecture as to Iowa aw. That we
can not do. or f such a resut s to obtan, t must be bottomed on cear and
convncng proof, and not on mere nferences and vague con|ectures, that oca
aw and the amony trust have gven the dvorced husband a fu dscharge and
eave no contnung obgaton however contngent. Ony n that event can
ncome to the wfe from an amony trust be treated under the Revenue cts
the same as ncome accrung from property after a debtor has transferred that
property to hs credtor n fu satsfacton of hs obgaton uness of course
Congress decdes otherwse.
The |udgment of the crcut court of appeas s reversed.
Mr. ustce Reed concurs n the resut.
Mr. ustce McReynods s of the opnon that the |udgment beow shoud
be affrmed.
INCOM T R NU CT O 10:4 D CISION OP COURT.
1. Trust Income fob eneft of Grantor Insurance Premums
Pad from Trust Income.
The ta payer estabshed two trusts the Income from whch was
to be used to pay the premums on Insurance poces coverng the
fe of her husband and of whch she was the soe benefcary. She
aone had the rght to oan or cash surrender vaues and to change
the benefcary, e cept that under one pocy te nsured aso had
such rghts. The frst trust was sub|ect to termnaton, under cer-
tan condtons, upon wrtten notce by the husband, by the ta -
payer, or by ther daughter, In whch events the accumuated
ncome was to go to the husband or to the daughter and the corpus
to the ta payer, or to her husband, or to the daughter. Under the
second trust the nsurance was made payabe to the trustee nstead
of to the ta payer, and ony the husband had the rght to ter-
mnate. In whch event the accumuated ncome was to go to the
husband and corpus to the wfe. The trusts were not otherwse
revocabe. ed: That, n contempaton of aw, the trust Income
remaned n substance that of the grantor, used to purchase prop-
erty for hersef, and was therefore ta abe to her under secton
1 7 of the Revenue ct of 1934, even though the accumuated n-
come was to be the property of the husband f the trusts were
termnated durng hs fetme.
2. Decson oowed.
Dougas v. Wcuts (29 U. S., 1 Ct. D. 1041, C. . I -2,
250 (1935) ) foowed.
3. Decson Reversed.
Decson of the Unted States oard of Ta ppeas (1938) (38
. T. ., 419) reversed.
4. Reheamng Dened.
Petton for rehearng dened ebruary 5, 1940.
rtce 1 7-1: Trusts n the ncome of whch
the grantor retans an nterest.
1940-17-10241
Ct. D. 1452
Cf. Shaw . Shao (59 III. pp., 2 8).
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1 9
15 1 7, rt. 1 7-1.
UsrTTD States Cbcutt Court of ppeas foe the Seventh Crcut.
Commssoner of Interna Revenue, pettoner, v. opha P. O. Morton,
respondent.
108 P. (2d), 1005.
Petton for revew of decson of the Unted States oard of Ta ppeas.
efore vans, Sparks, and Trk.vnor, Crcut udges.
anuary 12, 1040.
OPINION.
Sparks, Crcut udge: Ths petton for revew of a decson of the oard
of Ta ppeas presents the queston whether or not the Income for the year
1934 of two trusts was ta abe to the grantor. The oard hed that the
ncome of the trusts was not to be ncuded n computng the grantor s gross
ncome because power to revoke the trusts was n a person havng an nterest
adverse to that of the grantor so that secton 1 0 of the Revenue ct of 1934
was not appcabe, and the Income was not hed for or dstrbutabe to the
grantor wthn the meanng of secton 1 7 of the same ct.
The facts were stpuated by the partes. etween the years 1925 and 1931,
the husband of the ta payer took out a seres of eght poces nsurng hs
fe for 275,000. The ta payer was desgnated as benefcary of a of the
poces n case of hs death, and the poces aso provded that she aone had
the rght to the oan or cash surrender vaue of each, and the rght to change
the benefcary.
In ebruary, 1933, the ta payer entered nto a trust agreement wth the
ankers Trust Co. of New York Cty, for the purpose of creatng a trust fund,
the ncome of whch was to be used to pay the premums on the eght poces
on the fe of her husband. Under the terms of ths agreement, the Trust com-
pany was to act as trustee, and the trust was to termnate upon the death of
the ast survvor of her husband, her daughter, and hersef. It was aso sub-
|ect to termnaton by the husband by devery to the trustee of a wrtten
memorandum statng that he ntended to termnate on the ne t succeedng 1st
of anuary, foowed by devery by hm on that date to the trustee of a second
wrtten memorandum that he was thereby termnatng t. Upon such termna-
ton, the trustee was obgated to dever to the husband a accumuated
ncome of the trust estate and a nvestments and renvestments thereof, and
to the ta payer-grantor a the remander of the trust estate f she were then
vng, and f not. the entre trust estate was to be devered to the husband.
If the trust had not been termnated pror to the death of the husband, and
f t contnued for three years foowng hs death, then the grantor was en-
tted to termnate t at any tme thereafter, by wrtten notce to the trustee,
and after her death, the daughter was to be entted to termnate by wrtten
notce to the trustee. If the trust were termnated by the grantor, the trustee
was to dever a accumuated ncome together wth the nvestments thereof
to the daughter, and the remander of the trust estate to the ta payer. If t
were not termnated unt after the death of the grantor, then the entre trust
estate was to be devered to the daughter. The trust was not otherwse rev-
ocabe. To carry out the terms of ths agreement the ta payer devered to
the trustee certan stocks and bonds, the ncome of whch aggregated 12,171
for the year 1934.
In March, 1934, the husband created a trust smar n a respects to that
created by the ta payer e cept that the postons of the husband and wfe n
ther reaton to t were reversed. Ths trust was aso Intended to provde for
payment of premums on two poces of fe nsurance, ths tme, on the fe
of the ta payer, aggregatng 150,000, and payabe upon her death to her hus-
band, the assured under the poces nvoved n the trust n sut.
In ugust, 1934, the ta payer and the Manhattan Trust Co. entered nto a
trust agreement to provde a fund for the payment of premums on another
pocy nsurng the fe of the ta payer s husband, ths one for 50,000, then
payabe to the ta payer as benefcary. The terms of ths trust agreement
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1 7, rt. 1 7-1.
170
dffered n severa respects from the one entered Into between ta payer and
the ankers Trust the year before. It provded that the ta payer was to have
the pocy modfed by havng t made payabe to the trustee nstead of to her-
sef after payment of premums and the retenton of such remander of the
ncome as seemed advsabe to nsure payment of subsequent premums, the
trustee was to pay the baance of the ncome to the ta payer the ta payer
and/or her husband, the nsured, were entted to any cash surrender or oan
vaue of the pocy, and they reserved to themseves the rght to borrow on,
assgn or pedge the pocy, and to change the benefcary thereof, and to any
other optons whch mght e st under the pocy the trustee was authorzed
to coect the proceeds of the pocy upon Its maturty by the death of the n-
sured, whch proceeds were to be pad over to the ta payer, f she were then
vng, and f not, then to her daughter, f vng, or to the ssue of the
daughter, f any, f the daughter predeceased the ta payer, and f no Issue,
then the proceeds were to be equay dvded between Prnceton Unversty,
and the trustees of the Morton rboretum the trust was sub|ect to termna-
ton at any tme by devery of an nstrument n wrtng by the husband to
the trustee, whch was thereupon to dever to the husband any ncome of the
trust estate then on hand, and to the grantor, the prncpa of the estate and
the nsurance pocy f not so termnated by acton of the husband, the trust
was to contnue durng hs fe, and unt fve years after hs death, uness
both the ta payer and ther daughter predeceased hm, n whch event, the
trust was to termnate upon hs death upon termnaton after hs death, the
same dsposton was to be made of the trust estate as was to be made If the
trust were termnated durng hs fe, e cept that the person entted to receve
the prncpa was aso to receve the ncome. The trust was revocabe ony as
provded by the Instrument tsef. To carry out Its provsons, the ta payer
devered to the trustee certan stocks and bonds, the ncome of whch was
e pected to amount to about 2,400, appro matey the amount necessary to
cover the 2,228 annua premum due on the pocy and pay the e penses of
admnsterng the trust.
Durng the ta year In queston, the trustee coected dvdends and Interest
from the stocks and bonds In the frst trust estate amountng to 12,171, and
n addton t aso receved capta net gans of 21,88 , of whch 7,288 was
sub|ect to ncome ta . Durng that year It e pended 8,203 for premums on
the eght Insurance poces retaned 250 for ts own fees and pad 25.5
for ncome ta es for the year 1933. The baance was accumuated In accordance
wth the provsons of the trust agreement
The Commssoner contended before the oard and before ths court that the
Income from the two trusts shoud be ta ed to the grantor ether under the
provson of secton 1 of the Revenue ct of 1934, or secton 1 7 of the
same ct.1 The oard rued aganst the Commssoner as to the appcabty
of each secton. It hed that because the husband was entted to receve the
corpus of the trust estate n the event that the ta payer predeceased hm, and
because he was entted to receve the accumuated Income upon termnaton
of the trusts durng hs fetme, he dd have a substanta adverse nterest.
Sep. 1 f. Revocabe Trusts.
Where at any tme the power to revest In the grantor tte to any part of the corpus
of the trust Is vested
(1) In the grantor, ether aone or n con|uncton wth any person not havng a sub-
stanta adverse nterest n the dsposton of such part of the corpus or the ncome
therefrom, or
(2) n any person not havng a substanta adverse nterest n the dsposton of such
part of the torpus or the ncome therefrom, then the ncome of such part of the trust
sha be ncuded n computng the net Income of the grantor.
Sec. 1 7. Incomh for eneft of Grantor.
(a) Where any part nf the ncome of a trust
(1) s, or n the dscreton of the grantor or of any person not havng a substanta
adverse Interest In the dsposton of such part of the ncome may be, hed or accumuated
for future dstrbuton to the grantor or
(2) may. n the dscreton of the prantor or of any person not havng a snbatanta
adverse nterest n the dsposton of such part of the ncome, be dstrbuted to the
grantor or
(3) s. or n the dscreton of the grantor or of any person not havng a substanta
adverse nterest n the dsposton of such part of the Income may be, apped to the
payment of premums upon poces of nsurance on the fe of the grantor (e cept poces
of nsurance rrevocaby pyabe for the purposes reatng to the so-caea
chartabe contrbuton deducton) then such part of the Income of the trust sha be
ncuded n computng the net ncome of the grantor.
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171
1 7, rt. 1 7-1.
even though that nterest was contngent n nature, and that, therefore, the
grantor coud not be ta ed for the ncome of the trust.
It s obvous that the ncome of these trusts was devoted soey to the
grantor s own uses. She was the soe benefcary of the eght poces nvoved
n the frst trust she aone had the rght to change e benefcary she
aone was entted to ther cash surrender or oan vaue. Wth respect to the
second trust, her tte was somewhat ess drect, hut the pocy was, n fact,
payabe to her. even though ndrecty through the medum of the trustee
whch was obgated by the terms of the trust to pay the proceeds to her upon
coecton, f she were then vng, and f she were not. t was her dsposton
of the proceeds whch was to contro, by the terms of the trust agreement.
Thus, athough by the provsons of the two trust agreements, the ta payer
dvested hersef of the contro of the trust estate and of ts ncome, the fact
remans that that ncome was e pended soey for her own purposes, and the
property upon whch t was e pended, namey, the nsurance poces, beonged
tc ber and her aone, and, n the case of the eght covered by the frst trust,
even before ther maturty by the death of the nsured.
Secton 1 7 has been construed to make possbe the ta aton of trusts to
the grantor where the ncome was to be devoted to the dscharge of an obga-
ton of the grantor, whether such obgaton was mposed by operaton of aw
or by contract. (See Dougas v. Wcuts, 2 U. S., 1 everng v. umentha,
28 U. S., 552, reversng 70 . (2d), 507 everng v. Schwetzer, 29 U. S.,
551, reversng 75 . (2d), 702.) In the Wcuts case, the trust was rrevocabe.
owever, the Court dd not consder that fact controng. In determnng
that the grantor was ta abe on the ncome of the trust there nvoved, the
Court sad : We do not regard the provsons of the statutes as to the ta a-
ton of trusts, fducares and benefcares as ntended to appy to
cases where the ncome of the trust woud otherwse reman, by vrtue of the
nature and purpose of the trust, attrbutabe to the creator of the trust and
accordngy ta abe to hm. These provsons have approprate reference to
cases where the ncome of the trust s no onger to be regarded as that of the
settor, and we fnd no warrant for a constructon whch woud precude the
ayng of the ta aganst the one who through the dscharge of hs obgaton
en|oys the beneft of the ncome as though he had personay receved t.
Nor are the provsons of the statutes defnng nstances n whch
the grantor remans ta abe, as n case of certan reservatons for hs beneft
or provsons for the payment of premums upon poces of nsurance on bs
fe, to be regarded as e cudng nstances not specfed, where n contempa-
ton of aw the ncome remans n substance that of the grantor. No such
t euson s e pressed and we see no ground for mpyng t.
In vew of ths rung we are of the opnon that even though a tera nter-
pretaton of secton 107 mght tend to estabsh the mmunty of the grantor
from the ta , no such tera nterpretaton s to be accorded the secton. Look-
ng to the practca facts, we rnd that here the buk of the ncome dd reman,
n contempaton of aw, n substance, that of the grantor, used to purchase
property for hersef. We thnk t coud hardy be argued, In vew of the
teachng of the Wcuts case, that f the ta payer created a trust for the
purpose of payng nstaments provded for by contract on the purchase of
- house or any other property, tte to whch was taken n the name of or
for the beneft of the grantor, the ncome woud not be ta abe to the grantor.
We see no dfference n prncpe between the property rghts nvoved n the
house and n the nsurance poces.
It s aso to be noted that the reversonary Interest n the corpus of the
estate remaned In the ta payer, and even though the accumuated ncome was
to be the property of the husband, we thnk such segregaton of Income was
not enough to render the ta payer mmune from ta aton. (See Du Pont v.
Commssoner, 289 U. S., 085 Ct. D. 87, C. . II-1, 259 (1983) .)
We therefore hod that the decson of the oard of Ta ppeas must be,
and t s hereby reversed.
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